Shareholder Actions: Third Edition 9781526519979, 9781526519986, 9781526519955

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Shareholder Actions

Shareholder Actions Third Edition Andrew Charman MA (Cantab) of Lincoln’s Inn, Barrister, formerly a Solicitor Recorder, Member of the Chartered Institute of Arbitrators Johan du Toit SC BProc. LLB (UFS), LLM (Corporate Law) (cum laude), (UJ) of the Middle Temple, Barrister Advocate of the High Court of South Africa With contributions from Jakub Adamski BA, LLB/BCL (McGill), LLM (Columbia) Eile Gibson LLB, LLM (UCL), ACIS, CTA Solicitor of England and Wales Professor Michael Legg Faculty of Law & Justice, University of New South Wales Maisa Merabe B.Iuris, LLB, LLM (UFS) Advocate of the High Court of South Africa Sera Mirzabegian SC BEc (SocSc), LLB (Hons), MIL (Sydney) Barrister Angel Swan Counsel Aird Berlis LLP, Toronto Derek Wong BCom (Int Bus)/LLB (Hons 1) (UNSW), LLM (Hons 1) (Cantab) Barrister

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Preface to third edition

This third edition of Shareholder Actions updates and expands the coverage included in the second edition at a time when interest in corporate governance is stronger than ever. At the time of writing, there is much talk of the role of shareholders in holding companies and their directors to account in addressing the carbon footprint of their business and their efforts to achieve net zero. This issue has already generated a good deal of copy both in the traditional and social media. It must only be a matter of time before disagreements about what directors should be doing in this regard reach the courts. This edition includes a new chapter on interlocutory relief, prompted by requests from readers of the second edition. As we did when preparing the second edition, we also consider significant new authorities on directors’ duties and derivative actions decided since its predecessor. As always, there are many new cases where unfair prejudice and its consequences have been examined. Most notable for its facts if not its legal significance, must be Re Derbyshire Aggregates Ltd, which brought welcome colour to our reading of hundreds of decisions in which by comparison, the protagonists certainly seem rather grey: unfairly prejudicial conduct in the form of blackmailing a quasi-partner who received an MBE will be hard to beat. However, the greatest change in the law we write about has been to the ‘no reflective loss’ rule, as a result of the decision of the Supreme Court in Sevilleja v Marex Financial and the subsequent decisions applying it in the English courts and the Privy Council. This has necessitated a significant rewrite of Chapter 8. We hope that we have managed to explain clearly the changes and in most respects the simplification of the rule. We again are delighted to include chapters providing an overview and comparison of the law in other jurisdictions. We are greatly saddened to report the untimely death of Professor Bruce Welling, who wrote the Canada chapter in the first two editions. Bruce was Professor of Law at the University of Western Ontario. He was a co-author who wrote with exemplary clarity and great authority, which he combined with a great sense of humour, making it always a pleasure to speak with him. We wish we had known him better and for longer. We dedicate this edition to him. Responsibility for the Canada chapter (Chapter 17) has been taken over by Angela Swan and Jakub Adamski. We are grateful to them both for agreeing to do so. We are also grateful again to Eile for the chapter on taxation issues (Chapter 15), and to Michael, Sera, and new co-author Derek, for the chapter on the ever-influential developments in Australia (Chapter 16). We are pleased to welcome Maisa Merabe as new co-author of the South Africa chapter (Chapter 18). We again thank Andy Hill at Bloomsbury Professional for his unstinting good cheer and enthusiasm. We also thank Susan Ghaiwal, our supportive editor.

v

Preface to third edition

We have endeavoured to state the law as at 1  November 2021 in each of the jurisdictions addressed. Andrew Charman Johan du Toit SC Andrew would like to thank for the third time Rachel and Ruth for their support for this project and acceptance of the effect that the need to read so many cases in so little time has on family life. He also offers special thanks to Johan for continuing to be a delight to work with. Johan’s constant intellectual rigour combined with his uncanny ability to find gentle humour in the least promising circumstances make him the perfect co-author. Andrew I am grateful to report that the excellent working relationship between Andrew and I persisted in this edition. I find it somewhat unsettling that two minds, some 6,000 miles apart, managed to converge seamlessly without any relevant oral communication between the second and the third edition. Regrettably, what deeply separates us, is international cricket matches between South Africa and England. Ilse remained the forbearing wife and since no further grandchildren saw the light of day, this edition is dedicated to our son Ignatius on whom rests the hope for future dedications. Johan

vi

Preface to second edition

Since we wrote the first edition of Shareholder Actions, legal consequences of the financial crash of 2008 have continued to be played out in the courts, notably interlocutory skirmishes in the claim by shareholders in Lloyds Bank concerning the ill-fated acquisition of HBOS, the trial of which is underway at the time of writing; and the claims against RBS by former shareholders which have recently settled, while claims by alleged victims of its Global Restructuring Group have been put forward but are still at an early stage. Attention to directors’ conduct and especially their pay has intensified and shareholder activism has grown. An increased willingness to hold companies and their directors to account in the traditional media and the new media via the internet, combined with the more frequent banding together of relatively small shareholders to bring joint claims, make the legal rights of and remedies available to shareholders more important than ever. This edition significantly expands on the first one: • •

• •

almost 200 English judgments have been added to the formidable number of judgments referred to in the first edition; the developments in the law over the past five years, particularly in relation to directors’ duties and derivative actions are considerable. We hope that we have succeeded in providing comprehensive guidance on these important issues, and observe with some satisfaction, that in the first edition we correctly predicted the continuing applicability of the common law to double and multiple derivative claims and the survival of those causes of action following the coming into force of the 2006 Act; a new standalone chapter on procedure has been added in response to feedback from readers who requested one; we expand our contribution of other systems of law to South Africa (Chapter 17), not least because one of us practises in that jurisdiction, but because of the commercial importance of South Africa as a major trading partner of the United Kingdom and the fact that so much of the South African law (despite its own companies legislation) fruitfully borrows from English law.

We believe that the book will also have value in the many countries south of the Sahara in whose company law English law is embedded. We hope that we have succeeded in our aim of providing not only a scholarly work suitable to academics and practitioners, but also one which is easily accessible and understandable for directors, lay shareholders and students. We jointly thank Andy Hill at Bloomsbury Professional for his continuous enthusiasm and good humour, especially at times when we felt lacking in both; and Marianne Lee our supportive editor. We also repeat our thanks to our colleagues for their updated contributions on tax and on the comparable law in Australia and Canada.

vii

Preface to second edition

Revising a book is no easier than writing from scratch. Gallons of midnight oil are burned, many pleasures are foregone and much social interaction is evaded. Andrew thanks Johan for his formidable diligence and never-ending dry humour; and Rachel and Ruth for their encouragement and for their stoic forbearance of restricted summer holiday opportunities and increased weekend dog-walking obligations while he read yet more cases. Johan in turn wishes to state that it was an absolute pleasure working with Andrew, whose snap decision-making under pressure always proved to be spoton; he thanks Ilse for her understanding and support. But as a doting grandfather he dedicates this edition to Joshua, Leah, Layla, Liam and Ethan. We have endeavoured to state the law as at 1 November 2017 in all of the jurisdictions addressed. Andrew Charman Johan du Toit SC

viii

Preface to first edition

Access to electronic legal sources has become superfast: given the right key word, the relevant case law can be found in seconds. The understanding and interpretation of case law, however, cannot be achieved by shortcuts: for that purpose, textbooks are still necessary, but there is certainly pressure to make them as accessible as possible. We hope that we have achieved what we aimed for, to present the law regarding shareholder actions in a comprehensive but accessible package. Although many current causes of action are now based on relatively recent legislation, such as the Companies Act 2006 and the Financial Services and Markets Act 2000, virtually all are rooted in the historical development of English company law. A full understanding of the principles on which the current law is based requires some appreciation of its historical origins and development, and of the emergence and application over time of such fundamental principles as separate legal personality and majority rule. Such long-standing concepts have been central to the development of English company law and its influence on the development of international commerce over centuries. These concepts will form the basis of the continued development of the law relating to shareholders in England and Wales. This book is intended to be a comprehensive guide to the possible actions that shareholders may be entitled to pursue, on whichever side of the dispute a reader might be involved. Besides the usual topics of unfair prejudice and derivative actions, and the many personal actions arising from the 2006 Act, we have endeavoured to cover actions based in common law and equity, as well as actions based in other statutory law such as FSMA 2000. The rare occurrences of directors owing fiduciary duties directly to shareholders are explored – this rarity sometimes causes practitioners to be unaware of such a relationship, and to overlook important potential rights and remedies in the process. It also struck us that the ‘no reflective loss’ rule – a principle which, on the face of it, limits the remedies of prejudiced shareholders – can prevent robust action by shareholders or be used by defendants to scare off otherwise legitimate claims. Particular attention has been given to this principle, to assist the reader in forming a clear view of its scope, but also its limitations. The introduction of a statutory derivative claim by the 2006 Act means that the place of the common law derivative action, if any, is subject to debate – to which we hope we have added constructively. The statutory derivative claim is in the process of development, as we seek to explain with the benefit of the most recent judgments. The breadth and depth of the unfair prejudice petition continues to expand by application to ever more varied factual circumstances as new decisions considering it keep on coming. We have striven to keep up with them and to analyse their effect on the availability of such relief and the appropriate remedy where unfair prejudice is made out.

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Preface to first edition

Chapter  13 considers tax implications of the outcome of shareholder actions, for both the shareholders and the company. The tax implications must be taken seriously when advising clients and structuring settlements. The influence of English company law reaches far and wide. We considered that Chapters  1 to 12 should refer to judgments in other related jurisdictions when it is necessary to substantiate a submission not already fully and authoritatively addressed by English law. Scottish cases are referred to where the House of Lords or Supreme Court dealt with an issue, or where the point of law overlaps with English law. This is a book about the law of England and Wales. However, there is such a large cross-pollination between English and Australian company law (as is evidenced by references in our chapters) that we considered it desirable to include a chapter on Australian law. For comparative purposes, we have included a chapter on Canada, with its common law-based system, where a very different approach is taken. We are grateful for the contributions of: • • •

Eile Gibson of Tower Bridge Tax Practice, for Chapter  13 and other tax references elsewhere in the book; Associate Professor Michael Legg of the University of New South Wales and Sera Mirzabegian of the Sydney Bar, for Chapter 14; and Professor Bruce Welling of the University of Western Ontario, for Chapter 15.

We jointly thank Chris Owen for his initiative in bringing us and Bloomsbury Professional together and for his unstinting support; Andy Hill at Bloomsbury Professional for his continuous enthusiasm and good humour, especially at times when we felt lacking in both; and Peter Smith, our supportive editor. Andrew wishes to thank John Randall QC and Simon Clegg at St Philip’s Chambers for their support and encouragement to embark on this project and to see it through; the company lawyers at Freshfields (as it then was) in the early 1990s, for a rigorous grounding in company law; and, most of all, his wife Rachel, for her support in this, as in all things, and her tolerance of his far too frequent self-imposed exile to his study, and Ruth for her (mostly) uncomplaining tolerance of her dad’s weekend absences, and accepting with good humour going without her beloved beach holiday last summer. Johan wishes to sincerely thank his wife, Ilse, for her forbearance, as ever; and Dorette Nolte for her efficient secretarial assistance under trying circumstances. He extends his apologies to Joshua and Leah, who may grow up with the unfortunate impression that a grandfather is the immovable object affixed to a chair in front of a computer (an impression justifying active reversal); and to his favourite golf club for forfeiting his green fees over the past two years (a lamentable situation crying out for correction). We have endeavoured to state the law as at 31 October 2012. Andrew Charman Johan du Toit SC

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Contents

Preface to third edition Preface to second edition Preface to first edition Table of statutes Table of statutory instruments Table of EC and international materials Table of cases

v vii ix xix xxvii xxix xxxiii

Chapter 1 Companies’ Separate Legal Personality

1

The perpetual problem 1 Meaning of ‘company’ and ‘shareholder’ 4 Company4 Shareholder6 Separate legal personality 7 Its origin 7 Its foundation: Salomon v Salomon 11 The exception: piercing the corporate veil 12 The implications of a separate legal personality 21 Shareholders not liable for the company’s debts 21 A company makes agreements in its own name 22 Profits generated by a company are its own 25 Shareholders have no rights to the assets of a company 26 A company has the right to sue and be sued in its own name 26 Wrongs committed by a company are not chargeable to its members27 Shareholders do not owe their company a duty of care 27 Shareholders are not per se entitled to represent the company 28

Chapter 2 Directors and their Duties

29

Introduction29 The nature of the office of director 30 Who owes directors’ duties and to whom are they owed? 30 Shadow directors 31 Source of directors’ duties – the common law and Part 10 of the 2006 Act 35 Scope and nature of statutory duties 36 Duty to act within powers 36 Duty to promote the success of the company 40 Duty to report own wrongdoing 47 Duty to exercise independent judgment 48 Duty to exercise reasonable care, skill and diligence 49

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Contents

Duty to avoid conflicts of interest Duty not to accept benefits from third parties Bribery Act 2010 Duty to declare interest in proposed transaction or arrangement Civil consequences of breach of general duties Ratification of breach of duty by shareholders Can directors owe duties direct to shareholders? At common law Fiduciary duties No reflective loss Relief from liability – section 1157

Chapter 3 Shareholders’ Relationships

52 57 58 59 61 62 63 63 64 65 65

69

Purpose of the chapter 69 No fiduciary duty towards one another 71 Agreement the source 72 Dispensation before the 2006 Act 73 The 2006 Act 74 Significant changes 74 The constituent parts of the constitution under the 2006 Act 76 Interpretation91 General principles 91 Implication94 Pre-emption97 As between shareholders 98 The 2006 Act 100

Chapter 4 The Liability of Directors and Advisers of the Company Directly to Shareholders

103

Introduction103 All companies limited by shares 106 At common law 106 Breach of fiduciary duty 107 Misrepresentation Act 1967 118 Regulated companies 118 Financial Services and Markets Act 2000 119 The City Code on Takeovers and Mergers (‘the Code’) 122

Chapter 5 Who is in Control? The Rule in Foss v Harbottle 127 Introduction127 The rule in Foss v Harbottle 127 The respective powers and roles of directors and members in relation to litigation 130 Majority rule among members 132 No application to breach of shareholder’s personal rights 133 The exceptions to majority control – a derivative claim 133

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Contents

Chapter 6 Derivative Claims

135

Introduction135 The common law 136 Ultra vires acts 137 Breach of fiduciary duty or negligence by a director combined with personal benefit to the director 137 Personal benefit or equitable fraud is necessary 139 Wrongdoer control 140 Where the complainant has personally benefited from the breach of duty 142 Discretion142 ‘Double’ or ‘multiple’ derivative claims 144 Derivative claims under the 2006 Act 145 Scope and application 145 The statutory procedure – two hurdles 147 The first hurdle 147 The second hurdle 150 The court’s powers when deciding whether to give permission to continue a derivative claim 165 Company’s indemnity as to costs and the rule in Wallersteiner v Moir 165 Derivative claims and insolvent companies 167 Derivative claims and foreign companies 168

Chapter 7 Personal Claims

169

Introduction169 Personal rights conferred by statute 170 Rights relating to company registers 170 Register of members 170 Where directors refuse to register a transfer of shares in reliance on power contained in the articles 180 Procedure and costs 182 Rights relating to company meetings 182 Members’ power to require a general meeting to be held 182 The power of the court to order a meeting 185 Class rights 187 Rights relating to takeover offers 191 ‘Squeeze-out’191 ‘Sell-out’191 Shareholders opposing squeeze-out notices 192 Rights relating to the removal of directors 194 Non-statutory rights and limitations on rights: shareholders’ agreements 195 Third parties 198

Chapter 8 Reflective Loss

199

Essence of the ‘no reflective loss’ rule Prudential Marex

199 201 204

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Contents

Gore Wood and its treatment in Marex The fate of Giles v Rhind, Gardner v Parker and Perry v Day Marex – conclusions Developments after Marex Onus of proof Practical application Claim vesting in company only Claims vesting in both company and shareholder Claims vesting in shareholder to the exclusion of the company

Chapter 9 Unfair Prejudice: Section 994

206 209 212 213 215 215 216 217 219

224

Section 994 of the 2006 Act (‘section 994’) 224 Its predecessors 224 Ambit and scope of section 994 225 Objective test for construction 228 Forums for section 994 dispute resolution 230 Components for a successful claim 233 Standing233 ‘Member’ as defined by section 112 of the 2006 Act (‘section 112’) 233 Standing under section 994(2) 237 Other avenues to standing 241 No standing 246 Management of the affairs of a company 248 ‘Management’248 ‘Company’251 The ‘affairs’ of a company 268 Members’ ‘interests’ 269 Equitable rights 272 Interests affected other than as member 274 Legitimate expectation not confined to quasi-partnerships 275 ‘Unfairly prejudicial conduct’ 275 Interpretation and scope 275 Fairness277 Prejudice279 Categorisation of unfairly prejudicial conduct 281 Breach of the strict legal rules 281 Equitable considerations overriding the strict legal rules 304 Powers exceeded or exercised for an illegitimate or ulterior purpose 328 An event putting an end to the association 330 Deadlock inapplicable to section 994 331 Procedure332

Chapter 10 Setting Right Unfair Prejudice: Section 996 remedies

333

Introduction333 Wide discretion 335 Prayers and orders for relief 339

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Contents

Prayers339 Orders339 The remedies provided by section 996 342 Section 996(2)(e): buy-out 342 Section 996(2)(a): future conduct 362 Section 996(2)(b): injunctive relief 362 Section 996(2)(c): derivative action authorised 363 Section 996(2)(d): alteration of articles 364 Implementation of court’s order 364

Chapter 11 Just and Equitable Winding Up as Remedy

365

Relationship with sections 994 and 996 of the Companies Act 2006 365 Nature and scope of the ‘just and equitable’ basis for winding up 368 Standing372 General372 Contributories374 Tangible interest 379 Resolving disputes about standing 381 Availability of alternative remedies: section 125(2) 381 Application of section 122(1)(g) illustrated 385 Deadlock386 Breakdown of personal relationships: loss of confidence 387 Exclusion from management 389 Disappearance of substratum 390 Poor management 392 Circumstances preventing relief under section 122(1)(g) 393 Other bases for contributories’ petitions 394

Chapter 12 Inter-relationship of Remedies Inter-relationship between personal remedies Section 996 and internal remedies Section 996 and derivative claims Section 996 and winding up Section 996 and damages claims

Chapter 13 Procedure

395 395 396 397 400 401

403

Introduction403 Claims brought by petition 403 Unfair prejudice 403 Just and equitable winding up 406 Claims brought by issuing a claim form 408 Personal claims 408 Derivative claims 408

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Contents

Chapter 14 Availability of Interim Relief and Summary Judgment on Unfair Prejudice Petitions

411

Injunctions411 Serious issue to be tried 412 Damages an adequate remedy 412 Balance of convenience 413 Receivers413 Summary judgment 414 Striking out 414 Security for costs 416

Chapter 15 Taxation Issues

417

Background issues Shares and securities are capital assets Rights can be capital assets Capital sums derived from assets Exempt assets and exempt capital gains Capital gains issues for individuals CGT reliefs for individuals Chargeable gains issues for companies Capital losses Market value issues Distributions and dividends Tax issues on a winding up or liquidation Employment-related securities regime Purchase by unquoted trading company of its own shares falling within capital gains tax regime Taxation of damages VAT and damages Evidencing a settlement

Chapter 16 Shareholder Claims in Australia Companies, their history and constituent players Directors and their basic functions and duties Appointment, removal and powers of directors Directors’ duties and the concept of ‘officers’ Shareholders and the relationship between them Shareholder rights Shareholder personal actions Separate and distinct losses not reflective loss Fraud on the minority and limits to constitutional amendments Fiduciary duties owed by directors to shareholders Contractual claims Statutory derivative action Standing and leave Court powers

xvi

417 418 420 421 421 422 423 424 424 425 427 429 430 431 433 433 434

436 436 437 437 439 440 441 442 442 443 443 444 444 445 446

Contents

Oppression446 Grounds for granting relief 446 Forms of relief 448 Parties who may apply for relief 449 Compulsory liquidation remedies 450 Section 461(1)(e) – directors acting in their own interests 450 Section 461(1)(f) and (g) – oppressive, unfairly prejudicial or unfairly discriminatory conduct 450 Section 461(1)(k) – just and equitable 451 Other statutory claims 451 Misleading and deceptive conduct 451 Statutory right to injunctions and damages 452 Other orders 453 The minority shareholder in a listed company 454 Continuous disclosure 454 ASX Listing Rules requiring approval by general meeting 455 Remedies456 Shareholder class actions 457 Class action requirements 457 Institutional shareholders 458 Class actions and derivative suits compared 459

Chapter 17 Canada – Comparisons

461

Introduction: the nature of Canadian corporations Shareholder remedy one: compliance and restraining orders Shareholder remedy two: the statutory representative action Shareholder remedy three: the oppression remedy Shareholder remedy four: a class veto Shareholder remedy five: an appraisal remedy Unanimous shareholder agreements

461 464 465 467 469 469 470

Chapter 18 An Overview of South African Law

473

Company law origin 473 Key concepts 475 Governance476 Constitutional documents 476 Shareholders’ governance powers 476 Directors478 Director’s duties 480 Shareholders’ right: declaration of delinquency 484 Protection against unfairly prejudicial conduct – section 163 485 Section 163(1) 485 Section 163(2) – relief 490 Derivative actions – section 165 491 A codified action 491 Demand491 Setting aside the demand 492

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Contents

Investigation492 Refusal of complying with the demand 493 Court’s residual powers 494 Winding up 494

Index497

xviii

Table of Statutes

References are to paragraph numbers.

Administration of Justice Act 1985 s 50................................................ 9.29 Arbitration Act 1975......................... 9.13 Arbitration Act 1996......................... 9.13 s 9(1)............................................. 9.13 (4).......................................... 9.13, 9.15 Bovill’s Act see Partnership Law Amendment Act 1865 Bribery Act 2006............................... 2.46 s 1, 2, 6, 7...................................... 2.46 Bubble Act 1720 (6 Geo 1 c 18).... 1.10, 1.11 Chartered Companies Act 1837..... 1.11, 1.12 Companies Act 1862....... 1.4, 1.5, 1.12, 1.13, 1.14 s 2.................................................. 1.13 16................................................ 1.6 Companies Act 1926........................ 1.3, 1.12 Companies Act 1929 s 155.............................................. 7.53 Table A cl 20................................. 9.20 Companies Act 1948....... 1.3, 1.12, 2.42, 9.2, 9.67, 9.125 s 11................................................ 3.4 184.............................................. 9.153 205.............................................. 2.43 209........................................... 4.12, 7.53 210................................ 9.1, 9.2, 9.3, 9.4, 9.68, 9.83, 9.85, 9.127, 9.141, 9.153, 10.41, 11.1, 11.2, 11.6 Table A.......................................... 3.5, 5.8 art 80................................. 1.36, 5.7, 5.8 82......................................... 2.15 Companies Act 1980........................ 1.12, 9.6 s 2, 11............................................ 3.4 17................................................ 9.116 21................................................ 3.4 75........................................ 9.1, 9.3, 9.68 Sch 3 para 2......................................... 3.4 Companies Act 1985......... 1.3, 1.4, 1.5, 1.12, 3.5, 5.7, 7.9

Companies Act 1985 – contd Pt I Ch I (ss 1–24)......................... 3.5 s 1(1)–(3)....................................... 3.4 (3A)....................................... 3.4, 11.18 2(1), (5), (7)................................ 3.4 3A, 4........................................... 3.4 7(1)............................................. 3.4 8(1), (2)....................................... 3.4 9(1)............................................. 3.4 14(1)........................................... 3.4, 3.5 17................................................ 3.4 22................................................ 9.19 24................................................ 11.18 28, 43–53.................................... 3.4 75................................................ 9.83 89................................................ 9.98 121.............................................. 3.4 131.............................................. 3.20 147.............................................. 3.4 151(1)......................................... 9.119 307.............................................. 3.4 310.............................................. 2.42 317......................................... 2.49, 9.119 320.............................................. 9.119 322B........................................... 1.30 330.............................................. 9.119 371.............................................. 7.40 425.............................................. 3.4 430C........................................ 4.29, 7.60 459.............................. 3.3, 3.4, 6.17, 9.1, 9.4, 9.7, 9.31, 9.34, 9.37, 9.39, 9.44, 9.54, 9.62, 9.71, 9.77, 9.78, 9.83, 9.86, 9.88, 9.100, 9.109, 9.145, 9.151, 9.166, 9.170, 10.41, 10.44, 11.2, 11.29, 11.41, 12.5 (1)....................... 9.4, 9.7, 9.24, 9.68, 9.120, 9.121, 11.41 (2)............................ 9.19, 9.24, 9.25, 9.26, 9.27

xix

Table of Statutes Companies Act 2006 – contd s 20................................................ 11.3 (1)........................................... 3.8 21............................................. 3.11, 3.13 (1)........................................ 3.11, 3.12 22................................................ 3.13 (1)........................................... 3.13 (2).......................................... 1.5, 3.13 (3), (4)..................................... 3.13 23, 24.......................................... 3.13 25................................................ 9.20 (1), (2)..................................... 3.12 28................................................ 3.5 (2), (3)..................................... 3.5 Pt 3 Ch 3 (ss 29, 30)..................... 3.6, 3.27 s 29.................................... 2.15, 2.27, 2.31 (1).......................................... 3.6, 7.67 (a)....................................... 3.15 (b).................................... 3.16, 3.17 (c)....................................... 3.22 (d)....................................... 3.26 (e)....................................... 3.27 (2)........................................... 3.6 30................................................ 7.67 (1)........................................... 3.17 (2)........................................... 7.67 31(1)........................................... 3.5 32................................................ 7.67 33............................................. 3.18, 7.73 (1)............................ 3.1, 3.5, 3.9, 7.67 38............................................. 3.4, 11.18 Pt 4 (ss 39–52).............................. 3.5 s 39................................................ 11.45 (1)........................................... 2.15 Pt 5 (ss 53–85).............................. 3.5 Pt 6 (ss 86–88).............................. 3.5 Pt 7 (ss 89–111)............................ 3.5 s 98................................................ 3.24 Pt 8 (ss 112–144).......................... 3.5 Pt 8 Ch 1 (s 112)........................... 1.6 s 112................................... 1.6, 3.16, 6.20, 9.19, 9.26 (1)........................................ 1.7, 9.19 (2).............................. 1.7, 7.12, 7.21, 9.19, 9.21, 9.23, 11.11 Pt 8 Ch 2 (ss 112A–128).... 1.6, 3.16, 9.19, 9.20 s 113.............................. 1.6, 3.1, 3.16, 7.5, 9.19 114............................ 1.6, 3.16, 7.5, 9.19, 9.20 116–121...................................... 7.5 116............................................. 7.7, 9.20 117(1), (2)................................... 7.7

Companies Act 1985 – contd s 460.............................................. 11.2 461.............................. 3.4, 9.1, 9.5, 9.70, 10.3, 11.2, 12.8 (1).................................... 10.4, 10.41 (2)......................................... 10.41 735(1)(b), (c).............................. 1.4, 1.5 741(2)......................................... 2.4 Sch 24............................................ 1.30 Companies Act 1989......................... 9.120 s 145.............................................. 9.4, 9.7 213(2)......................................... 9.4, 9.7 Sch 19 para 11(a).................................. 9.4, 9.7 Companies Act 2006......... 1.3, 1.5, 1.8, 1.12, 1.15, 2.1, 2.5, 2.11, 2.16, 2.19, 2.34, 2.39, 2.46, 2.55, 3.4, 3.5, 3.10, 3.11, 3.18, 3.19, 3.21, 3.29, 5.1, 5.8, 5.14 6.3, 6.13, 6.16, 6.17, 6.20, 6.21, 6.22, 6.41, 6.42, 6.49, 6.50, 7.1, 7.4, 7.11, 7.17, 9.13, 11.13, 12.1, 14.1, 14.8 Pt 1 (ss 1–6).................................. 1.4, 3.5 s 1(1)............................................. 1.4, 1.5 (b)(ii).................................... 1.5 (2)(a)......................................... 1.5 (3)............................................. 1.5 2(1), (2)....................................... 3.5 3.................................................. 1.4 (1)–(3)....................................... 1.4 (4)....................................... 1.4, 1.8, 1.9 4, 6.............................................. 1.4 Pt 2 (ss 7–16)................................ 3.5 s 7.................................................. 3.7 8.................................................. 1.2 (1)............................................. 3.7 9, 10............................................ 2.7, 3.7 11................................................ 2.7 12................................................ 2.7, 3.7 12A............................................ 3.7, 9.61 13................................................ 2.7 16................................................ 1.2 (2)........................................... 1.15 (3).......................................... 1.2, 1.15 (5)........................................... 1.2, 1.7 17............................... 1.2, 2.15, 2.27, 3.6 Pt 3 (ss 18–38).............................. 1.2, 3.5 s 18................................................ 1.2 (1), (4)..................................... 3.8 19................................................ 3.8 (2)........................................... 3.8

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Table of Statutes Companies Act 2006 – contd s 117(3)............................... 7.7, 7.11, 7.13 (4)......................................... 7.13 118............................................. 7.8, 7.11 (3)......................................... 7.8 120, 121................................... 7.11, 7.19 122(3)......................................... 9.21 123.............................. 1.6, 1.30, 3.1, 3.4, 3.16, 9.19, 11.18 124(2)(b)..................................... 11.11 125................................. 3.37, 7.22, 7.24, 7.29, 7.31, 7.48, 9.20, 13.6 (1)...................................... 7.23, 7.31 (3)......................................... 7.25 127................................... 1.6, 3.16, 7.12, 7.21, 9.19, 9.20 128.............................................. 7.23 (1)......................................... 7.14 Pt 8 Ch 2A (ss 128A–128K)......... 1.6, 3.1, 3.16, 9.19, 9.20 s 128A.......................................... 3.16, 7.6 128B–128D................................ 7.6 128E........................................... 7.6, 9.28 128F............................................ 7.20 (1), (2)................................ 9.20 128G.............................. 7.23, 7.24, 7.25, 9.20, 13.6 (4)...................................... 7.25 (b).................................. 7.25 128H.......................................... 1.6, 9.20 Pt 8 Ch 3 (ss 129–135).................. 9.58 s 136........................................... 1.24, 9.20 138.............................................. 1.24 141.............................................. 1.24 (2)(b)..................................... 1.24 Pt 9 (ss 145–153).......................... 3.5 Pt 10 (ss 154–259)........ 2.9, 2.13, 3.5, 3.6, 3.28 s 154.............................................. 7.65 156A........................................... 2.3 168............................... 7.64, 9.97, 9.152, 9.153 (2), (5)................................... 7.64 169......................................... 9.97, 9.152 (1)–(4)................................... 7.64 Pt 10 Ch 2 (ss 170–181)................ 2.9 s 170.............................................. 2.9 (1)................................. 2.7, 2.55, 4.7 (2)........................................ 2.6, 2.13 (a)..................................... 2.38 (b)..................................... 2.44 (3)........................................ 2.9, 2.13 (4)...................................... 2.10, 2.13 (5)......................................... 2.4

Companies Act 2006 – contd s 171................................... 2.9, 2.14, 2.15, 2.18, 2.20, 3.28 (a), (b)................................... 2.54 172................................... 2.9, 2.19, 2.20, 2.22, 2.24, 2.25, 2.26, 2.28, 2.30, 6.29, 6.30, 6.32, 6.35, 6.38, 6.39, 6.40, 9.40, 9.101, 9.110, 11.45 (1)...................................... 2.22, 2.29 (2)......................................... 2.27 (3)...................... 2.7, 2.28, 2.29, 2.54 173............................. 2.4, 2.9, 2.31, 3.28 174................................... 2.9, 2.33, 2.34, 2.35, 2.46, 2.56 (1)......................................... 2.12 (2)......................................... 2.34 175............................ 2.6, 2.9, 2.13, 2.26, 2.31, 2.38, 2.40, 2.41, 2.43, 2.44, 2.45, 2.47, 3.26, 9.119 (2)......................................... 2.39 (3)......................................... 2.40 (4)(a)..................................... 2.39 (5)......................................... 2.39 (6)...................................... 2.39, 2.41 (7)......................................... 2.38 176............................ 2.6, 2.9, 2.13, 2.44, 2.45, 2.46, 2.47 (2)......................................... 2.44 (3), (4)................................... 2.45 177................................... 2.9, 2.40, 2.47, 2.48, 2.49, 2.50, 2.51 (2)–(4)................................... 2.49 (5), (6)................................... 2.48 178.................................... 2.9, 2.12, 2.52 (2)...................................... 2.12, 2.33 179............................................. 2.9, 2.13 180...................................... 2.8, 2.9, 2.41 (1)......................................... 2.50 (3), (4)................................... 2.43 181.............................................. 2.40 182................................. 2.40, 2.49, 2.51, 9.119 (1)......................................... 2.49 (5)......................................... 2.40 183, 184................................... 2.40, 2.51 (2)......................................... 2.40 (5)......................................... 2.41 186........................................... 2.40, 2.48 187.............................................. 2.40 Pt 10 Ch 4 (ss 188–226)............... 2.1, 2.45 s 188.............................................. 2.1 190, 197................................... 2.1, 9.119

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Table of Statutes Companies Act 2006 – contd s 200, 215...................................... 2.1 231............................................. 1.30, 3.1 (3), (6)................................... 1.30 232–238...................................... 2.42 232........................................... 2.42, 2.45 (3), (4)................................... 2.42 239.................................. 2.54, 5.11, 6.41 (6), (7)................................... 2.54 250........................................... 2.3, 11.11 251(1)......................................... 2.4 257.............................................. 3.28 (1), (2)................................... 3.6 Pt 11 (ss 260–269)....... 3.5, 6.2, 6.17, 6.18 Pt 11 Ch 1 (ss 260–264)... 6.16, 6.18, 6.24, 12.2, 12.5 s 260.............................................. 10.46 (1)–(3)................................... 6.18 (4)......................................... 6.20 (5)...................................... 6.18, 6.24 (c).................................. 6.20, 6.24 261................................. 3.39, 6.21, 6.27, 6.28, 10.46, 11.29, 12.6, 12.8 (2), (3)................................... 6.23 (4)(a), (c).............................. 6.23 262................................. 6.24, 6.26, 6.27, 6.28, 10.46, 12.8 (3), (4)................................... 6.25 (5)......................................... 6.46 263................................. 6.27, 6.28, 6.29, 6.31, 6.34, 6.49, 6.45, 6.49, 10.46, 12.8 (1)(f)..................................... 12.5 (2)............................. 6.32, 6.35, 6.39 (a)..................................... 6.33 (3)............................. 6.34, 6.37, 6.43 (a)..................................... 6.37 (b)......................... 6.33, 6.34, 6.38 (c), (d).............................. 6.41 (e)..................................... 6.42 (f).................................. 6.43, 12.7 (4)......................................... 6.44 264................................ 6.26, 10.46, 12.8 (2)–(4)................................... 6.26 (5)......................................... 6.46 Pt 11 Ch 2 (ss 265–269)............. 6.17, 6.18 s 266.............................................. 6.34 268(2)......................................... 6.34 (b)..................................... 6.34 Pt 12 (ss 270–280)........................ 3.5 Pt 13 (ss 281–361)................ 3.5, 3.6, 9.20 s 281(1)...................................... 3.17, 3.22 (2)......................................... 3.22 282.................................... 1.2, 3.6, 10.20

Companies Act 2006 – contd s 283............................ 1.2, 3.6, 3.17, 7.35, 10.20 (1)–(5)................................... 3.15 (6)(a), (b).............................. 3.15 303.............................................. 7.35 (2), (4)................................... 7.34 (5)...................................... 7.34, 7.37 (6)......................................... 7.34 304.............................................. 7.36 (1), (2)................................... 7.35 305.............................................. 7.36 (1)–(7)................................... 7.36 306................................... 3.8, 7.38, 7.39, 7.40, 12.4 (1), (2)................................... 7.38 (4), (5)................................... 7.39 312(1)......................................... 7.64 318.................................... 1.6, 3.16, 9.19 322A........................................... 3.15 338A........................................... 7.37 360C........................................ 7.33, 7.37 Pt 14 (ss 362–379)........................ 3.5 Pt 15 (ss 380–474)........................ 3.5 s 393.............................................. 2.34 423.............................................. 9.20 459(1)......................................... 11.8 Pt 16 (ss 475–539)........................ 3.5 Pt 17 (ss 540–657)........................ 3.5 s 550.............................................. 9.115 551.............................................. 9.115 (8), (9)................................... 3.26 558.............................................. 11.20 Pt 17 Ch 3 (ss 560–577)............. 3.35, 9.98 s 560............................................ 3.35 3.39 561................................. 2.17, 2.19, 3.35, 3.39 (1).................................... 3.39, 9.116 562........................................... 3.35, 3.39 563.............................................. 3.35 (2), (3)................................... 3.39 564–566................................... 3.35, 3.39 567.............................................. 3.35 (1)......................................... 3.39 568........................................... 3.359.116 569........................................... 3.359.116 (1)......................................... 3.39 570, 571..................................... 3.353.39 572–577...................................... 3.35 612.............................................. 3.20 629.............................................. 7.44 (1)......................................... 3.22 (2)...................................... 3.22, 7.44 630................................. 3.24, 3.25, 7.43, 7.50, 7.51

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Table of Statutes Companies Act 2006 – contd s 630(2)–(5)................................... 3.24 (6)...................................... 3.24, 3.25 631........................................... 7.43, 7.50 632.................................. 3.24, 7.43, 7.50 633.................................. 3.25, 7.43, 7.50 (2), (3)................................... 3.25 (4)......................................... 7.52 (a), (b).............................. 3.25 (5)...................................... 3.25, 7.52 (6)......................................... 3.25 634.............................................. 7.43 635, 637...................................... 3.25 649.............................................. 13.3 Pt 18 (ss 658–737)........................ 3.5 s 662(1)......................................... 3.26 664(1)......................................... 3.26 678, 679...................................... 9.119 701(7), (8)................................... 3.26 713–720...................................... 11.15 724.............................................. 7.51 Pt 19 (ss 738–754)........................ 3.5 Pt 20 (ss 755–767)........................ 1.4, 3.5 s 755(1)......................................... 1.7 761....................................... 11.11, 11.49 (1)......................................... 1.2 (2), (4)................................... 11.49 762.............................................. 11.49 767(1)......................................... 1.2 Pt 21 (ss 768–790)........................ 3.5 s 768(1)........................................ 1.6, 9.21 770(1), (3)................................... 9.20 771.............................................. 7.27 Pt 21A (ss 790A–790ZG)............. 3.7 Pt 22 (ss 791–828)........................ 3.5 s 793(1)......................................... 3.14 794.............................................. 3.14 797(1)–(3)................................... 3.14 820–825...................................... 3.14 Pt 23 (ss 829–853)........................ 1.32 s 847(2)......................................... 9.20 Pt 24 (ss 853A–859)...................... 3.5 Pt 25 (ss 859A–894)...................... 3.5 Pt 26 (ss 895–901).............. 3.5, 3.24, 4.30 s 899.............................................. 7.43 Pt 26A (ss 901A–901L)................ 3.24 Pt 27 (ss 902–941)........................ 3.5 Pt 28 (ss 942–992)....................... 3.5, 4.29 Pt 28 Ch 1 (ss 942–965)................ 4.29 s 943.............................................. 4.29 Pt 28 Ch 3 (ss 974–991)................ 7.53 s 974.............................................. 7.53 976–978...................................... 7.53 979................................. 7.53, 7.54, 7.59, 10.20

Companies Act 2006 – contd s 780–982................................... 7.53, 7.54 983–985................................... 7.53, 7.55 986........................................... 7.53, 7.56 (5)...................................... 7.35, 7.62 Pt 29 (s 993).................................. 3.5 Pt 30 (ss 994–999)..... 3.5, 3.24, 3.37, 9.19 s 994.............................. 1.7, 3.3, 3.37, 5.6, 6.18, 6.43, 7.1, 7.35, 7.42, 8.2, 9.1, 9.4, 9.5, 9.7, 9.8, 9.10, 9.11, 9.12, 9.14, 9.15, 9.17, 9.21, 9.31, 9.33, 9.35, 9.36, 9.37, 9.38, 9.39, 9.42, 9.43, 9.44, 9.45, 9.47, 9.50, 9.52, 9.53, 9.55, 9.65, 9.66, 9.67, 9.68, 9.73, 9.78, 9.81, 9.83, 9.84, 9.85, 9.86, 9.88, 9.90, 9.93, 9.94, 9.95, 9.96, 9.100, 9.101, 9.104, 9.116, 9.119, 9.123, 9.132, 9.151, 9.152, 9.167, 9.169, 9.170, 9.171, 9.173, 9.174, 9.175, 9.176, 10.1, 10.2, 10.3, 10.6, 10.15, 10.28, 10.34, 10.43, 11.1, 11.2, 11.3, 11.4, 11.8, 11.13, 11.16, 11.27, 11.29, 11.30, 11.35, 11.38, 11.41, 11.43, 12.1, 12.2, 12.3, 12.4, 12.5, 12.6, 12.7, 12.8, 12.9, 12.10, 13.3, 14.2, 14.5, 14.7, 14.8, 18.32 (1)....................... 9.5, 9.7, 9.19, 9.22, 9.38, 9.47, 9.99 (a).................................. 9.47, 9.67 (b).................................. 9.47, 9.49 (1A)...................................... 9.1, 9.5 (2)......................... 1.7, 3.37, 9.1, 9.5, 9.19, 9.22, 9.23, 9.24, 9.25, 9.26, 9.27, 9.38 (3)........................................ 9.5, 9.43 995........................................... 10.3, 10.6 996................................... 3.13, 3.36, 6.2, 6.17, 6.18, 6.43, 9.1, 9.5, 9.14, 9.19, 9.83, 9.88, 9.152, 10.2, 10.3, 10.5, 10.6, 10.15, 10.19, 10.21, 10.22, 10.29, 10.46, 11.1, 11.2, 11.3, 11.4, 11.29, 11.38, 11.43, 11.44, 12.2, 12.3, 12.5, 12.6, 12.8, 12.9, 12.10, 14.4, 14.5 (1)........................... 9.174, 10.1, 10.3

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Table of Statutes Companies Act 2006 – contd s 996(2)......................................... 10.1 (a)................................ 10.1, 10.44 (b)................................ 10.1, 10.45 (c)........................ 6.18, 10.1, 10.6, 10.8, 10.46, 12.5 (d)................................ 10.1, 10.47 (e)..................... 10.1, 10.12, 10.15 998, 999............................... 10.12, 10.48 Pt 31 (ss 1000–1034).................... 3.5 Pt 32 (ss 1035–1039).................... 3.5 Pt 33 (ss 1040–1043).................... 3.5 s 1040(1), (2), (4), (5)................... 1.5 Pt 34 (ss 1044–1059).................... 1.5, 3.5 Pt 35 (ss 1059A–1120).................. 3.5 s 1060............................................ 1.2 1085, 1086.................................. 3.3 Pt 36 (ss 1121–1133).................... 3.5 Pt 37 (ss 1134–1157).................... 3.5 s 1136............................................ 7.5 1146............................................ 7.34 1156............................................ 13.3 (1)(a)................................... 9.11 1157............................................ 2.59 (2)....................................... 2.59 Pt 38 (ss 1158–1174).................... 3.5 s 1159(1)–(3)................................. 9.58 1168(2)–(6)................................. 7.34 1171............................................ 1.4, 1.5 1173............................................ 9.61 Pt 39 (ss 1175–1181).................... 3.5 Pt 45 (ss 1284–1287).................... 3.5 Pt 46 (ss 12881297)...................... 3.5 Pt 47 (ss 1298–1300).................... 3.5 s 1300(2)....................................... 9.1 Sch 5 Pt 2 (paras 2–4)......................... 9.20 Sch 6.............................................. 9.58 Companies Act (Northern Ireland) 1932.......................................... 1.5 Companies Act (Northern Ireland) 1960.......................................... 1.5 Companies (Audit, Investigations and Community Enterprise) Act 2004 Pt 2 (ss 26–63).............................. 1.4, 3.5 Companies Clauses Act 1845............ 1.12 Companies (Consolidation) Act 1908.................................. 1.3, 1.5, 1.12 s 192.............................................. 9.29 Companies (Consolidation) Act 1929.......................................... 1.4, 1.5 Companies Consolidation (Consequential Provisions) Act 1985 (c 9).................................. 1.5, 3.5 Companies Acts 1948–1983............. 1.4, 1.5

Companies (Particulars as to Directors) Act 1917................... 2.4 Contracts (Rights of Third Parties) Act 1999................................. 1.33, 8.25 s 1.................................................. 8.25 (1)(b)......................................... 8.25 4.................................................. 8.25 7.................................................. 8.25 (1)............................................. 8.25 Corporation Tax Act 2009 s 6(2)............................................. 15.24 12................................................ 15.24 931A–931W............................... 15.22 Corporation Tax Act 2010 s 439.............................................. 15.3 626.............................................. 15.24 1000, 1015.................................. 15.19 1030............................................ 15.25 1033............................................ 15.2 (6)....................................... 15.28 1034–1047.................. 15.2, 15.19, 15.28 1048............................................ 15.2 1064............................................ 15.19 1136............................................ 15.19 Criminal Justice Act 1988................. 1.22 Data Protection Act 1998.................. 7.10 Deregulation Act 2015 Sch 23 para 5......................................... 9.5 Drug Trafficking Act 1994................ 1.22 Employment Rights Act 1996 s 182.............................................. 1.30 Financial Services and Markets Act 2000............................ 4.23, 4.24, 11.30 Pt VI (ss 40–55)............................ 4.24 s 79–83.......................................... 4.24 80–82, 87A, 87G........................ 4.25 90................................... 4.23, 4.24, 4.25, 4.26 (1)........................................... 4.25 (b)....................................... 4.25 (7)........................................... 4.25 (11)......................................... 4.24 90A................................ 4.23, 4.24, 4.25, 4.28 90B............................................. 4.24 90ZA............................... 4.23, 4.24, 4.27 248.............................................. 4.27 367(3)(b)..................................... 11.30 Sch 10......................................... 4.24, 4.25 para 1(2), (3)............................. 4.25 Sch 10A...................................... 4.24, 4.28

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Table of Statutes Financial Services and Markets Act 2000 – contd Sch 10A – contd para 3(1)(b)............................... 4.25 (4).................................... 4.26 4......................................... 4.24 Income Tax Act 2007 s 56(3)........................................... 15.21 Pt 5 (ss 156–257).......................... 15.12 s 809A–809Z10............................. 15.8 Income Tax (Earnings and Pensions) Act 2003.................................... 15.26 Pt 2 (ss 3–61X)........................... 1.30, 15.2 s 5............................................... 1.30, 15.2 Pt 3 (ss 62–226E)....................... 1.30, 15.2 Pt 4 (ss 227–326B)..................... 1.30, 15.2 Pt 5 (ss 327–385)....................... 1.30, 15.2 Pt 6 (ss 386–416)....................... 1.30, 15.2 Pt 7 (ss 417–554).......................... 1.30 s 67................................................ 2.5 420.............................................. 15.26 421B(3)....................................... 15.26 Income Tax (Trading and Other Income) Act 2005 s 397.............................................. 15.20 (1)......................................... 15.22 397A........................................... 15.20 751.............................................. 13.31 Insolvency Act 1986 Pt A1 (ss A1–A55)........................ 11.30 Pt I (ss 1–7B)................................ 11.11 s 5(4)(a)......................................... 11.30 74................................................ 11.11 (1)........................................... 11.14 (2)........................................... 11.14 (d), (f)................................. 11.14 76.............................. 11.14, 11.15, 11.17 79................................................ 11.14 (1)–(3)..................................... 11.14 81................................................ 11.23 (1)........................................... 11.15 82(2)........................................... 11.21 84(1)(a)....................................... 3.26 88................................................ 11.12 122.............................................. 11.12 (1)(a)..................................... 11.12 (b)..................................... 11.49 (c), (d)....................... 11.12, 11.50 (f)..................................... 11.48 (g)...................... 9.15, 9.85, 9.173, 11.1, 11.2, 11.3, 11.5, 11.12, 11.29, 11.33, 11.46, 11.48, 11.49, 12.2, 12.9, 13.4

Insolvency Act 1986 – contd s 124(1)......................................... 11.10 (2)......................................... 11.17 (a)..................................... 11.18 (b)..................................... 11.19 (3), (4)................................... 11.17 124A........................................... 11.26 125.............................................. 13.4 (2)........................ 11.9, 11.28, 11.29, 11.44, 11.47, 11.48, 12.2, 12.9, 13.3 127.............................. 11.13, 11.30, 13.4 (1)1.30............................. 11.4, 11.11 (3)......................................... 1 148(1)......................................... 7.22 155.............................................. 7.7 213.............................................. 11.14 214................................ 2.28, 2.59, 11.14 (4)...................................... 2.33, 2.35 250....................................... 11.11, 11.15 251.............................................. 2.4 Joint Stock Banking Companies Act 1857.......................................... 1.4 Joint Stock Companies Act 1844..... 1.4, 1.12 Joint Stock Companies Act 1856..... 1.4, 1.12 Joint Stock Companies Acts 1856, 1857.......................................... 1.4 Table B.......................................... 3.5 Joint Stock Companies Arrangement Act 1870.................................... 4.11 Limitation Act 1980 s 32(1)........................................... 2.30 Limited Liability Act 1855................ 1.12 Limited Liability Partnerships Act 2000.......................................... 1.8 Marine Insurance Act........................ 3.33 Matrimonial Causes Act 1973 s 24(1)(a)........................... 1.16, 1.19, 1.20 Misrepresentation Act 1967.............. 4.22 s 2(1)............................................. 4.22 Partnership Act 1890......................... 1.8, 1.9 s 5.................................................. 9.153 24(5)........................................... 9.153 Partnership Law Amendment Act 1865......................................... 1.3, 1.12 Proceeds of Crime Act 2002............. 1.23 Sale of Goods Act............................. 3.33 Sale of Foods and Drugs Act 1875... 1.33 Senior Courts Act 1981 s 35A............................................. 10.43

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Table of Statutes Small Business, Enterprise and Employment Act 2015...... 2.3, 7.6, 9.61 s 84................................................ 3.13 85(1), (2)..................................... 3.13 Sch 4 para 13....................................... 9.19 Statutory Water Companies Act 1991......................................... 9.5, 9.43 Taxation (International and Other Provisions) Act 2010 s 6(2), (9)....................................... 15.22 Taxation of Chargeable Gains Act 1992.......................................... 15.2 s 1(2)............................................. 15.13 2(1), (2)....................................... 15.8 8(6)............................................. 15.24 10A............................................. 15.9 15(2)........................................... 15.2 16................................................ 15.2 (2)........................................... 15.8 16ZA–16ZD............................... 15.8 17................................................ 15.15 21................................................ 15.2 22................................................ 15.6 (3)........................................... 15.6

Taxation of Chargeable Gains Act 1992 – contd s 24................................................ 15.18 37, 38.......................................... 15.3 51(1)........................................... 15.7 (2)...................................... 15.7, 15.31 60................................................ 1.7 115(1)......................................... 15.7 122(1).................................. 15.23, 15.25 (5)(b).............................. 15.23, 15.25 125.............................................. 15.3 126(1)......................................... 15.25 162, 162A................................... 1.28 169H–169S............................ 15.3, 15.11 169VA–169VY...................... 15.3, 15.11 209.............................................. 15.19 237.............................................. 15.7 251(1)......................................... 15.7 258, 262, 263.............................. 15.7 272, 273...................................... 15.15 286.............................................. 15.16 Sch 5B........................................... 15.12 Sch 7AC................................... 15.3, 15.13 Sch 7ZB........................................ 15.3 Trading Companies Act 1834........... 1.11 Unfair Contract Terms Act 1977....... 4.6

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Table of Statutory Instruments

References are to paragraph numbers.

Civil Procedure Rules 1998, SI 1998/3132.................... 6.16, 9.28, 13.2, 13.3, 13.4 Pt 1 r 1.1............................................ 9.28, 12.3 1.4............................................ 7.31, 9.28 Pt 3 r 3.1............................................... 14.14 3.4...............................................  13.3, 1 (2)........................... 9.34, 14.11, 14.14 (a)...................................... 9.18 (b)...................................... 14.14 Pt 7................................... 7.31, 13.5, 13.6, 13.7, 14.1 r 7.3............................................... 12.3 Pt 8................................... 7.23, 7.29, 7.30, 7.31, 7.56, 13.5, 13.6, 13.7, 14.1 r 8.1............................................... 13.7 Pt 19.............................................. 13.7 r 19.9............................................. 6.16 19.9E........................................... 6.46 19.9.......................................... 6.22, 6.46 19.9E........................................... 6.48 PD19............................................. 13.7 para 1(a).................................... 13.7 2, 4, 5................................. 13.7 PD19C para 2......................................... 6.48 Pt 20.............................................. 13.3 Pt 23.............................................. 13.7 r 23.7............................................. 14.9 Pt 24................................. 13.3, 14.1, 14.8, 14.11 r 24.2............................................. 14.8 24.3............................................. 14.8 25.1(1)(c).................................... 10.45 25.12, 25.13................................ 14.15 31.6............................................. 13.3 Pt 25.............................................. 14.1 Pt 44.............................................. 13.3

Civil Procedure Rules 1998, SI 1998/3132 – contd PD49B........................................ 11.4, 13.4 para 1......................................... 12.9 9(1).................................... 11.3 Companies Act 2006 (Amendment of Schedule 2) (No 2) Order 2009, SI 2009/1208................... 4.29 Companies Act 2006 (Commencement No 3, Consequential Amendments, Transitional Provisions and Savings) Order 2007, SI 2007/2194................................. 9.1 art 9............................................... 1.30 Sch 3 art 14......................................... 1.30 20(3)..................................... 6.2 23......................................... 3.26 Companies Act 2006 (Commencement No 5, Transitional Provisions and Savings) Order 2007, SI 2007/3495 art 9............................................... 3.26 Sch 3 para 47(3)(b)............................. 2.41 Sch 4 Pt 3 (paras 46–52) para 47(3), (4)....................... 3.26 Companies Act 2006 (Commencement No 8, Transitional Provisions and Savings) Order 2008, SI 2008/2860 art 3(a)........................................... 1.4 (c)........................................... 3.12 art 5............................................... 3.5 Sch 2 para 1......................................... 3.5 (1).................................... 3.5 4(1).................................... 3.12 42....................................... 3.26

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Table of Statutory Instruments Companies Act 2006 (Consequential Amendments, Transitional Provisions and Savings) Order 2009, SI 2009/1941 Sch 3.............................................. 11.52 Companies (Model Articles) Regulations 2008, SI 2008/3229............... 2.42, 3.8, 3.36, 5.8, 9.111 reg 2, 4.......................................... 3.8 Sch 1.............................................. 3.8 art 1........................................... 1.6 3................................. 1.36, 2.15, 5.7 5........................................... 2.15 19......................................... 9.105 28(3)..................................... 7.18 30......................................... 9.111 Sch 2.............................................. 3.8 Sch 3.............................................. 3.8 art 1........................................... 1.6 3................................. 1.36, 2.15, 5.7 5........................................... 2.15 23......................................... 9.105 70......................................... 9.111 Companies (Northern Ireland) Order 1986, SI 1986/1032 (NI 6)........ 1.5 art 131........................................... 3.20 Companies (Single Member Private Limited Companies) Regulations 1992, SI 1992/1699 reg 2(1).......................................... 11.18 Companies (Tables A to F) Regulations 1985, SI 1985/805........ 3.8, 5.7, 5.8

Table A.................................. 2.42, 3.5, 3.8 art 24......................................... 7.18 65......................................... 3.33 (1)..................................... 3.33 70............................... 1.36, 2.15, 5.7 72......................................... 2.15 84......................................... 9.105 85.................................... 2.41, 9.119 86......................................... 2.41 Companies Consolidation (Consequential Provisions) (Northern Ireland) Order 1986, SI 1986/1035 (NI 9).................. 1.5 Companies (Unfair Prejudice Applications) Proceedings Rules 2009, SI 2009/2469......... 13.3 r 2–4.............................................. 13.3 Insolvency (England and Wales) Rules 2016, SI 2016/1024 r 7.26–7.33.................................... 13.4 7.52A, 12.1................................. 13.4 Prospectus Regulations 2012, SI 2012/1538 reg 7.............................................. 4.25 Statutory Auditors and Third Country Auditors Regulations 2007, SI 2007/3494................... 9.1, 9.5 Uncertificated Securities Regulations 2001, SI 2001/3755 reg 16(2), (6)................................. 3.26

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Table of EC and international materials

References are to paragraph numbers.

AUSTRALIA COMMONWEALTH Competition and Consumer Act 2010 Sch 2.............................................. 16.32 Corporations Act 2001...................... 16.1 s 9................................... 16.1, 16.7, 16.14, 16.27 45A............................................. 16.1 53................................................ 16.28 111AD........................................ 16.35 112.............................................. 16.1 (1)......................................... 16.1 113.............................................. 16.1 119.............................................. 16.2 124(1)......................................... 16.2 125(1)......................................... 16.2 134.............................................. 16.9 135.............................................. 16.3 136(2)......................................... 16.14 140(1).................................... 16.9, 16.17 Ch 2C (ss 167A–178D)................. 16.11 s 169.............................................. 16.11 173(2)......................................... 16.11 180–183...................................... 16.7 180.............................................. 16.7 (2), (3)................................... 16.7 181–184...................................... 16.6 198A........................................ 16.2, 16.5 201A........................................... 16.3 201B(1)....................................... 16.3 201D–201H................................ 16.3 203B–203E................................. 16.4 206B(1), (3)................................ 16.4 206C–206E, 206EE, 206F.......... 16.4 Pt 2F.1 (ss 232–235).............. 16.21, 16.25 s 232............................ 16.21, 16.29, 18.27 (d), (e)................................... 16.21 233............................ 16.21, 16.25, 18.27 (1)......................................... 16.23

Corporations Act 2001 – contd s 234.............................................. 16.25 Pt 2F.1A (ss 236–242)................... 16.18 s 236.............................................. 16.18 (1), (2)................................... 16.19 237.............................................. 16.19 (3)......................................... 16.19 239.............................................. 16.19 240–242...................................... 16.20 246AA(1)(b)............................... 16.25 247A........................................... 16.37 (1)...................................... 16.11 (3)...................................... 16.19 249D(1), (2)................................ 16.10 249F, 249G, 249J, 249N............. 16.10 250E(1)....................................... 16.10 250J............................................ 16.10 251B(1)–(4)................................ 16.11 461(1)......................................... 16.27 (e).............................. 16.27, 16.28 (f), (g)........................ 16.27, 16.29 (k).............................. 16.27, 16.30 516.............................................. 16.1 588G........................................... 16.8 (2), (3)................................ 16.8 588H, 588J–588U....................... 16.8 Ch 5C (ss 601EA–601QB)............ 16.34 s 670A........................................... 16.32 (2)...................................... 16.32 670B........................................... 16.32 Ch 6CA (ss 674–678)............. 16.34, 16.35 s 674.............................................. 16.35 (2A), (2B)............................. 16.35 675.............................................. 16.35 (2A), (2B)............................. 16.35 676, 677...................................... 16.35 Ch 6D (ss 700–742)...................... 16.34 s 728.............................................. 16.32 (2)......................................... 16.32 729.............................................. 16.32 793C........................................... 16.36

xxix

Table of EC and international materials Corporations Act 2001 – contd s 798H(1)...................................... 16.34 Corporations Act 2001 – contd Pt 7.10 (ss 1040–1045A)............... 16.34 s 1041H.................................. 16.32, 16.36 1041I........................................... 16.32 1101B, 1314, 1317E................... 16.36 1317HA(1).................................. 16.36 1317J(3A)................................... 16.36 1317K......................................... 16.36 1324..................................... 16.31, 16.33 (1), (10)............................... 16.33 1325..................................... 16.31, 16.34 (5)....................................... 16.34 1362A......................................... 16.35 Corporations (Coronavirus Economic Response) Determination (No 2) 2020....... 16.35 Corporations (Coronavirus Economic Response) Determination (No 4) 2020....... 16.35 Federal Court of Australia Act 1976 Pt IVA (ss 33A–33ZJ)................... 16.40 s 33C, 33H.................................... 16.40 33N...................................... 16.40, 16.43 43(1A)........................................ 16.43 Securities and Investments Commission Act 2001 s 12BB(1)...................................... 16.32 12DA................................... 16.32, 16.36 12GF........................................... 16.32 Trade Practices Act 1974 s 52................................................ 16.32 Treasury Laws Amendment (2021 Measures No 1) Act 2021......... 16.36 s 2.................................................. 16.35 Sch 2.............................................. 16.35 Consumer Law s 18................................................ 16.32 NEW SOUTH WALES Civil Procedure Act 2005 Pt 10 (ss 155–184)........................ 16.40 Corporations (Commonwealth Powers) Act 2001...................... 16.1 QUEENSLAND Corporations (Commonwealth Powers) Act 2001...................... 16.1 SOUTH AUSTRALIA Corporations (Commonwealth Powers) Act 2001...................... 16.1

TASMANIA Corporations (Commonwealth Powers) Act 2001...................... 16.1 VICTORIA Corporations (Commonwealth Powers) Act 2001...................... 16.1 Supreme Court Act 1986 Pt 4A (ss 33A–33ZK)................... 16.40 WESTERN AUSTRALIA Corporations (Commonwealth Powers) Act 2001...................... 16.1 CANADA Alberta Business Corporations Act (RSA 2000 c B–9) s 240.............................................. 17.5 Canada Business Corporations Act (RSC 1985 c C–44)...... 17.1, 17.2, 17.3, 17.4, 17.6, 17.7 s 2(1)............................................. 17.1 6.................................................. 17.1 15(1)........................................... 17.2 102(1).................................... 17.1, 17.14 103(2), (4)................................... 17.3 105.............................................. 17.3 106(1)......................................... 17.1 107.............................................. 17.3 108.............................................. 17.14 111(3)......................................... 17.3 122.............................................. 17.3 (1)......................................... 17.3 133(1)(a).................................. 17.1, 17.3 (b)..................................... 17.3 140(1)......................................... 17.3 143.............................................. 17.3 (1)......................................... 17.3 146(1)......................................... 17.14 (5), (6)................................... 17.14 176.............................................. 17.11 176(1)......................................... 17.11 190.............................................. 17.12 (1), (2)................................... 17.12 (11)....................................... 17.13 206.............................................. 17.12 238.................................. 17.4, 17.5, 17.6 (a)–(d)................................... 17.5 239........................................... 17.6, 17.7 (2)......................................... 17.6 240........................................... 17.6, 17.7 241.............................................. 17.8 (1), (2)................................... 17.8

xxx

Table of EC and international materials Canada Business Corporations Act (RSC 1985 c C–44) – contd s 241(3)......................................... 17.10 242(1)......................................... 17.6 (2)–(4)................................... 17.7 247.............................................. 17.5 248(2)......................................... 17.9 Ontario Business Corporations Act 1970 (RSO 1970 c 53) s 99................................................ 17.6 261.............................................. 17.5 Ontario Business Corporations Act 1990 (RSO 1990 c B.16 s 246).17.6 EUROPEAN COMMUNITY Directive 85/611/EEC of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) OJ 1985 L375/3 Ch IX............................................. 4.27 Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids OJ 2004 L142/12.4.28 Art 3.1, 4.2, 5................................ 4.29 6.1–6.3.................................... 4.29 7–9, 13.................................... 4.29 Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC OJ 2004 L390/38 Art 4–6.......................................... 4.28 Directive 2007/36/EC of the European Parliament and of the Council of 11 July 2007 on the exercise of certain rights of shareholders in listed companies OJ 2007 L184/17.... 7.33 EUROPEAN COUNCIL European Convention for the Protection of Human Rights and Fundamental Freedoms 1950 Art 6, 13........................................ 8.33

European Convention for the Protection of Human Rights and Fundamental Freedoms 1950 – contd Protocol 1 art 1........................................... 8.33 SOUTH AFRICA Close Corporations Act 1984 29(1), (1A).................................. 18.15 33................................................ 18.27 47......................................... 18.15, 18.24 (9)–(12)................................... 18.15 49................................................ 18.27 Companies Act 1926......................... 18.1 Companies Act 1973.......... 18.1, 18.3, 18.21, 18.28, 18.41 s 252............................. 18.1, 18.27, 18.28, 18.29 266.............................................. 18.34 343.............................................. 18.41 344.............................................. 18.41 (h)......................................... 18.44 346, 348–353.............................. 18.41 424.............................................. 18.21 Companies Act 2008............ 18.1, 18.2, 18.3, 18.5, 18.8, 18.12, 18.13, 18.16, 18.19, 18.41 s 2(1)............................................. 18.7 (a)–(c).................................. 18.7 (2)........................................ 18.7, 18.32 (d)......................................... 18.32 4.................................................. 18.26 5(1), (2)....................................... 18.2 6(4)............................................. 18.11 7.................................................. 18.2 (e).............................................. 18.2 8(2)(b), (c).................................. 18.4 Pt B (ss 13–22).............................. 18.5 s 15(1)–(3)..................................... 18.8 (4)(b), (c)................................ 18.8 (6)........................................... 18.8 20(2).................................... 18.21, 18.30 (4), (5)..................................... 18.30 (6)........................................... 18.21 (9)........................................... 18.28 22................................................ 18.21 46, 47.......................................... 18.26 57(1)........................................... 18.4 (2)–(4)..................................... 18.12 59................................................ 18.12 60................................................ 18.12 (5)........................................... 18.12

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Table of EC and international materials Companies Act 2008 – contd s 61................................................ 18.12 (1), (3), (5), (7), (8)................. 18.9 (11)......................................... 18.10 (12)......................................... 18.9 (14)......................................... 18.9 62................................................ 18.12 (4)........................................... 18.10 63, 64.......................................... 18.12 65................................................ 18.12 (4)–(6)..................................... 18.11 (7), (9), (11)............................ 18.10 66(1)–(4), (6), (11)..................... 18.13 67(1), (2)..................................... 18.13 69.............................. 18.13, 18.14, 18.24 (1)........................................... 18.14 (4), (6)..................................... 18.15 (7)........................................... 18.14 (8)........................................... 18.15 (a)....................................... 18.24 (b)(iv)................................. 18.15 (9)–(11), (11A), (12).............. 18.15 70(2)........................................... 18.15 71................................................ 18.23 (1), (2)..................................... 18.23 (3)–(6).............................. 18.12, 18.24 (7)........................................... 18.12 (8), (9)..................................... 18.24 75......................................... 18.17, 18.21 (1)........................................... 18.21 (a) (b)................................. 18.17 (2), (4)–(8).............................. 18.17 76......................................... 18.18, 18.19 (1)........................................... 18.18 (2).................................... 18.19, 18.21 (3)........................................... 18.19 (a), (b)......................... 18.16, 18.21 (c)....................................... 18.21 (4), (5)..................................... 18.20 77................................................ 18.21 (1), (2)..................................... 18.21 (3)........................................... 18.21 (d)(vi)................................. 18.21 (e)....................................... 18.21 (7), (9), (10)............................ 18.21 78(2), (6)..................................... 18.22

Companies Act 2008 – contd Pt G (ss 79–83).............................. 18.41 s 79(1)........................................... 18.42 80................................................ 18.42 81................................................ 18.42 (1)(a)–(c)................................ 18.42 (d)....................................... 18.42 (i), (ii)............................ 18.43 (iii)................................. 18.44 (e)....................................... 18.44 157.............................................. 18.41 162........................... 18.15, 18.24, 18.25, 18.33, 18.36 (2)(a).............................. 18.25, 18.26 (3), (4)................................... 18.25 (5)(a)–(f)............................... 18.25 (6)(a)..................................... 18.25 (7)(a)..................................... 18.26 (11), (12)............................... 18.25 163........................... 18.26, 18.27, 18.28, 18.30, 18.31, 18.35 (1)............18.26, 18.27, 18.28, 18.30 (2)......................................... 18.33 165....................................... 18.25, 18.34 (1).................................... 18.1, 18.34 (2)......................................... 18.35 (a)..................................... 18.35 (3).................................. 18.36, 18.37 (4)(a)..................................... 18.37 (i)................................. 18.37 (b)..................................... 18.37 (5)......................................... 18.36 (a)..................................... 18.39 (b).............................. 18.35, 18.40 (7)......................................... 18.39 (8)(b)..................................... 18.35 (9)–(13), (15)........................ 18.40 185, 186...................................... 18.6 193, 195...................................... 18.6 218(2)......................................... 18.21 252.............................................. 18.27 Sch 5 para 9......................................... 18.3 Companies Amendment Bill (draft).. 18.3 Companies Regulations 2011, GN R351 reg 38............................................ 18.8

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Table of cases

References are to paragraph numbers.

2538520 Ontario Ltd v Eastern Platinum Ltd 2020 BCCA 313.....................................17.6 A

A & BC Chewing Gum Ltd, Re [1975] 1 WLR 579, [1975] 1 All ER 1017, (1974) 119 SJ 233...............................................................................................................11.44 ACD Tridon v Tridon Australia [2002] NSWSC 896.....................................................9.15 AE Farr Ltd v Admiralty [1953] 1 WLR 965, [1953] 2 All ER 512, [1953] 2 Lloyd’s Rep 173, QBD.........................................................................................................3.30 A-G for Hong Kong v Reid [1994] 1 AC 324, [1993] 3 WLR 1143, [1994] 1 All ER 1...........................................................................................................2.38, 2.44, 3.2, 7.71 A-G’s Reference (No 2 of 1982) [1984] QB 624, [1984] 2 All ER 216.........................1.32 AMT Coffee Ltd, Re [2018] EWHC 1562 (Ch), [2018] 6 WLUK 416. [2018] WTLR 531..........................................................................................................9.29, 9.110, 9.111 Abbey Leisure Ltd, Re see Virdi v Abbey Leisure Ltd Abbington Hotel Ltd, Re [2012] 1 BCLC 410...............................................................10.39 Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461, 23 LTOS 315, [1843–60] All ER Rep 249.......................................................................................................2.38 Abouraya v Sigmund [2014] EWHC 277 (Ch), [2015] BCC 503.........5.5, 6.7, 6.8, 6.13, 6.16, 6.44, 6.45, 6.50 Abraham v Prosoccer Ltd 1980 119 DLR 3d 167, Ont SC............................................17.6 Absolute Lofts South West London Ltd v Artisan Home Improvements Ltd [2015] EWHC 2608 (IPEC), [2017] ECDR 6....................................................................8.1 Acatos & Hutcheson plc v Watson [1995] 1 BCLC 218, [1995] BCC 446....................1.24 Acehill Investments Pty Ltd v Incitec Ltd [2002] SASC 344.........................................16.11 Adams v Cape Industries plc [1990] Ch 433, [1990] 2 WLR 657, [1991] 1 All ER 929...................................................................................................1.14, 1.18, , 1.24, 1.25 Addbins Ltd, Re [2015] EWHC 3161 (Ch)............................................9.41, 9.45, 9.90, 10.22, 10.23, 10.38 Agrotexim v Greece (1996) 21 EHRR 250, [1995] ECHR 14807/89, ECHR...............8.33 Airey v Cordell [2006] EWHC 2728 (Ch), [2007] BCC 785......................................6.14, 6.42 Albacruz v Albazero [1977] AC 774, [1976] 3 All ER 129, [1976] 2 Lloyd’s Rep 467, [1975] 3 WLR 491, [1975] 3 All ER 21, [1975] 2 Lloyd’s Rep 295..............1.24 Alexander v Automatic Telephone Co [1900] 2 Ch 56, 69 LJ Ch 428, 82 LT 400,CA..6.5 Alexander Ward & Co v Samyang Navigation Co Ltd [1975] 1 WLR 673, [1975] 2 All ER 424, [1975] 2 Lloyd’s Rep 1......................................................................5.9, 5.10 Alipour v Ary [1997] 1 WLR 534, [1997] 1 BCLC 557, [1997] BCC 377.....9.21, 9.28, 11.13, 11.16, 11.27 Allen v Atalay (1993) 11 ACSR 753, 12 ACLC 7, Victoria Sup Ct................................16.33 Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656, 69 LJ Ch 266, 82 LT 210..3.11, 3.12 Allied Business & Financial Consultants Ltd, Re [2009] EWCA Civ 751, [2009] 2 BCLC 666, [2009] All ER (D) 253 (Jul).................................................................2.39 Allmark v Burnham [2005] EWHC 2717 (Ch), [2006] 2 BCLC 437.........9.108, 9.114, 9.160, 9.164, 10.5, 10.11

xxxiii

Table of cases Allnut v Nags Head Reading Ltd [2019] EWHC 2810 (Ch), [2019] 10 WLUK 437, [2020] BCC 70...................................................................................................2.40, 9.119 Al Nehayan v Kent [2018] EWHC 614 (Comm), [2018] 3 WLUK 551........................3.2 Alpha Marine Corp v Minmetals Logistics Zhejiang Co Ltd [2021] EWHC 1157 (Comm), [2021] Bus LR 1391, [2021] 5 WLUK 11..............................................3.29 Alvona Developments Ltd v The Manhattan Loft Corp (AC) Ltd [2005] EWHC 1567 (Ch), [2006] BCC 119, [2005] All ER (D) 252 (Jul).........................6.8, 9.36, 11.33 Amalgamated Syndicate, Re [1897] 2 Ch 600, [1895–95] All Rep 340, 66 LJ Ch 783.11.45 Amdocs SA Joint Enterprise (Pty) Ltd v Kwezi Technologies (Pty) Ltd 2014 (5) SA 532 (GJ)..................................................................................................................18.36 American Cyanamid Co v Ethicon Ltd [1975] AC 396, [1975] 2 WLR 316, [1975] 1 All ER 504................................................................................................10.45, 14.2, 14.4 Amin v Amin [2009] EWHC 3356 (Ch), [2009] All ER (D) 186 (Dec).........9.87, 9.96, 9.113, 9.114, 9.160, 10.2 Ananda Marga Pracaraka Samgha Ltd v Thomas (No 6) (2013) 300 ALR 492, 94 ACSR 199...............................................................................................................16.22 Anderson v Hogg 2000 SLT 634, 2000 GWD 6-217, on appeal 2002 SC 190, 2002 SLT 354, [2002] BCC 923, CSIH........................................................................9.92, 10.8 Anglesea Colliery Co, Re (1866) 1 Ch App 555, 35 LJ Ch 809, 15 LT 127..................11.10 Anglo-Continental Produce Co Ltd, Re [1939] 1 All ER 99, 83 SJ 95..........................11.50 Anglo-Overseas Agencies Ltd v Green [1961] 1 QB 1, [1960] 3 WLR 561, [1960] 3 All ER 244, QBD....................................................................................................11.45 Angostura Bitters (Dr JGB Siegert & Sons) Ltd v Kerr [1933] AC 550, 102 LJPC 161, 149 LT 313......................................................................................................3.4 Annacott Holdings Ltd, Re, Maidment v Attwood [2012] EWCA Civ 998, [2012] WLR (D) 220, [2011] EWHC 3180 (Ch)............................................9.161, 10.22, 10.37, 10.42, 14.9 Annacott Holdings Ltd, Re [2012] EWHC 1662 (Ch)...................................................10.32 Annacott Holdings Ltd, Re [2013] EWCA Civ 119, [2013] 2 WLUK 713, [2013] 2 BCLC 46.................................................................................................................14.12 Antaios Cia Naviera SA v Salen Rederierna AB, The Antaios [1985] AC 191, [1984] 3 WLR 592, [1984] 3 All ER 229...........................................................................3.29 Antonio Gramsci Shipping Corp v Recoletos Ltd [2013] EWCA Civ 730, [2013] 4 All ER 157, [2013] 2 All ER (Comm) 781.............................................................1.20 Antigen Laboratories, Re [1951] 1 All ER 110 (Note), [1950] WN 587, 94 SJ 855......10.9 Antoniades v Wong [1997] 2 BCLC 419, [1998] BCC 58, sub nom Full Cup International Trading, Re, Antoniades v Wong [1995] BCC 682...9.174, 10.2, 10.4, 10.5, 11.3 Apcar v Aftab [2003] BCC 510...............................................................................10.15, 14.13 Apex Global Management Ltd v FI Call Ltd [2013] EWHC 1652 (Ch), [2014] BCC 286......................................................................................................9.6, 9.51, 9.66, 10.3, 10.4, 11.2, 11.24, 11.26, 11.34, 13.3 Apollo Cleaning Serrvices Ltd, Re. See Richards v Lundy Argentum Reductions (UK) Ltd, Re [1975] 1 WLR 186, [1975] 1 All ER 608, (1974) 119 SJ 97.....................................................................................................11.25 Armstrong v Gardner (1978) 20 OR 2d 648, Ont HC....................................................17.6 Armstrong v Sheppard & Short Ltd [1959] 2 QB 384, [1959] 3 WLR 84, [1959] 2 All ER 651..............................................................................................................7.9 Arnold v Britton [2015] UKSC 36, [2015] AC 1619, [2015] 2 WLR 1593.......3.10, 3.19, 3.29 Arrow Nominees Inc v Blackledge [2000] 1 BCLC 709, reversed on appeal [2000] 2 BCLC 167, [2000] TLR 528....................................................9.34, 9.54, 9.70, 9.88, 10.2 Arrow Nominees Inc v Blackledge [2000] 6 WLUK 609, [2000] CP Rep 59, [2001] BCC 591.................................................................................................................14.14 Arrow Trading & Investments Est 1920 Ltd v Edwardian Group Ltd [2004] EWHC 1319 (Ch), [2005] 1 BCLC 696.......................................................................9.149, 11.43

xxxiv

Table of cases Ashbury v Watson (1885) LR 30 ChD 376, 54 LJ Ch 985, 54 LT 27............................3.4 Ashby v Monterry Designs Ltd [2009] UKEAT 0226_08_1812 (2009) 18 December (unreported), EAT...................................................................................................1.1 Ashdown v Griffin [2018] EWCA Civ 1793, [2018] 7 WLUK 697................... 9.7, 9.86, 10.2, 11.24 Asia Pacific Joint Mining Pty Ltd v Allways Resources Holdings Pty Ltd [2018] QCA 48..............................................................................................................11.29, 12.9 Assaubayev v Michael Wilson & Partners Ltd [2014] EWCA Civ 1491, [2015] CP Rep 10, [2014] 6 Costs LR 1058............................................................................9.14 Assénagon Asset Management SA v Irish Bank Resolution Corp Ltd [2012] EWHC 2090 (Ch), [2012] WLR (D) 243...........................................................................3.6, 3.11 Associated Japanese Bank (International) Ltd v Credit du Nord SA [1989] 1 WLR 255, [1988] 3 All ER 902, (1989) 133 SJ 81, QBD................................................9.8 Associated Provincial Picture Houses Ltd v Wednesbury Corp [1948] 1 KB 223, [1947] 2 All ER 680, 45 LGR 635..........................................................................9.112 Astec (BSR) plc, Re [1998] 2 BCLC 556, [1999] BCC 59....................9.52, 9.71, 9.76, 9.123, 9.144, 9.145, 10.2, 10.44 Atkinson v Kingsley [2020] EWHC 2913 (Ch), [2020] 11 WLUK 27.......................2.26, 2.34 Atlasview Ltd v Brightview Ltd [2004] EWHC 1056 (Ch), [2004] 2 BCLC 191, [2004] BCC 542, [2004] All ER (D) 95 (Apr)..................................9.24, 9.34, 9.41, 9.81, 10.12, 11.20, 11.22, 12.10 Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 2 All ER (Comm) 1, [2009] 1 WLR 1988, [2009] 2 All ER 1127.............................3.29, 3.30, 3.34 Attorney General of the Gambia v N’jie [1961] AC 617, [1961] 2 WLR 845, [1961] 2 All ER 504............................................................................................................7.22 Audas Group Ltd, Re [2019] EWHC 2304 (Ch), [2019] 8 WLUK 160.........................9.63 Auden McKenzie (Pharma Division) Ltd v Patel [2019] EWCA Civ 2291, [2019] 12 WLUK 399, [2020] BCC 316.................................................................................2.53 Audiolux SA v Groupe Bruxelles Lambert SA (GBL) (C-101/08) [2011] BCC 814, [2009] All ER (D) 236 (Oct), ECJ..........................................................................7.55 Australian Securities & Investments Commission v ActiveSuper Pty Ltd (No 2) [2013] FCA 234......................................................................................................16.30 Australian Securities & Investments Commission v Green Pacific Energy Ltd (2006) 59 ACSR 142, [2006] FCA 1254............................................................................16.28 Australian Securities & Investments Commission v King (2020) 376 ALR 1...............16.7 Australian Securities & Investments Commission v Letten (No 10) [2011] FCA 498...16.30 Australian Securities & Investments Commission v Mauer-Swisse Securities Ltd (2002) 42 ACSR 605...............................................................................................16.33 Australian Securities & Investments Commission v Narain (2008) 66 ACSR 688, 247 ALR 659, [2008] FCAFC 120.........................................................................16.32 Australian Securities & Investments Commission v Rich (2009) 236 FLR 1, [2009] NSWSC 1229..........................................................................................................16.7 Australian Securities & Investments Commission v Stone Assets Management Pty Ltd [2012] FCA 630................................................................................................16.32 Australian Securities & Investments Commission v Wealth & Risk Management Pty Ltd [2017] FCA 477................................................................................................16.33 Australian Securities & Investments Commission v Wellington Investment Management Ltd [2008] QSC 243..........................................................................16.32 Australian Securities Commission v Multiple Sclerosis Society of Tasmania (1993) 10 ACSR 489, 11 ACLC 461..................................................................................16.25 Automatic Self-Cleansing Filter Syndicate Company Ltd v Cuninghame [1906] 2 Ch 34, 75 LJ Ch 437, [1906] WN 65...........................................................................5.8, 16.5 Avenue Road Developments Ltd v Reggiesco Ltd [2012] EWHC 1625 (Ch)................7.28 Axis Football Investments Ltd v Power [2020] EWHC 1171 (Ch), [2020] 5 WLUK 250..........................................................................................................................9.21

xxxv

Table of cases B

BC & G Care Homes Ltd, Re [2015] EWHC 1518 (Ch), [2016] BCC 615.............9.85, 9.158, 10.10, 10.41 BCA Pension Trustees Ltd, Re [2015] EWHC 3492 (Ch), [2016] 4 WLR 5, [2016] Pens LR 17..............................................................................................................3.10 BCE Inc v 1976 Debentureholders 2008 SCC 69, [2008] 3 SCR 560........................17.3, 17.9 BCCI v Ali [2001] UKHL 8, [2002] 1 AC 251, [2001] 2 WLR 735, [2001] 1 All ER 961..........................................................................................................................3.29 BCCI (Overseas) Ltd v Price Waterhouse (No 4) [1999] BCC 351...............................4.25 BCCI v Price Waterhouse (No 2) [1998] BCC 617, [1998] PNLR 564, [1998] Lloyd’s Rep Bank 85..............................................................................................4.6 BCE Inc v 1976 Debentureholders 2008 SCC 69, 2008 3 SCR 560, Can Sup Ct..........17.10 BPC Hotels Ltd v Brooke North (a firm), Brooke North LLP [2014] EWHC 2367 (TCC)......................................................................................................................8.13 BSB Holdings Ltd (No 2), Re [1996] 1 BCLC 155....................................2.22, 9.7, 9.83, 9.86, 9.88, 9.119 BTI 2014 LLC v Sequana SA [2016] EWHC 1686 (Ch), [2017] 1 BCLC 453.............2.7 BTI 2014 LLC v Sequana SA [2019] EWCA Civ 112, [2019] 2 All ER 784, [2019] BCC 631.................................................................................................................2.29 BW Estates Ltd, Re [2017] EWCA Civ 1201, [2018] Ch 511, [2018] 2 WLR 1175.....1.6, 1.7, 3.16, 9.19, 9.20, 9.21, 11.11, 11.18 Badyal v Badyal [2018] EWHC 68 (Ch), [2018] 1 WLUK 263.....................................9.155 Bahia & San Francisco Railway Co Ltd, Re (1868) 3 QB 584, 37 LJQB 176...............7.28 Bailey v NSW Medical Defence Union Ltd (1995) 184 CLR 399, 132 ALR 1...............16.9 Bairstow v Queen Moat Houses plc [2000] 1 BCLC 549..............................................2.59 Baker v Potter [2005] BCC 855................................................................9.21, 9.24, 9.34, 9.39, 9.149, 11.43, 14.4 Baku Consolidated Oil Fields Ltd, Re [1944] 1 All ER 24............................................11.48 Balaghat Gold Mining Co Ltd, Re [1901] 2 KB 665, 70 LJKB 866..............................7.7 Baltic Real Estate (No 2), Re [1993] BCLC 503, [1992] BCC 629...............................9.37 Bambi Restaurants Ltd, Re [1965] 1 WLR 750, [1965] 2 All ER 79.............................11.27 Bamford v Bamford [1970] Ch 212, [1969] 2 WLR 1107, [1969] 1 All ER 969...........5.11 Bamford v Harvey [2012] EWHC 2858 (Ch), [2012] WLR (D) 298.............................6.31 Bamrah v Waterton Precious Metals Bid 2020 BCCA 122............................................17.12 Bank Mellat v HM Treasury [2016] EWCA Civ 452, [2017] QB 67.............................8.33 Bank of Hindustan China & Japan, Re, ex p Kintrea (1869) 5 Ch App 95, 21 LT 688, [1861–73] All ER Rep Ext 1834.............................................................................7.28 Bank of Hindustan, China & Japan Ltd v Alison (1871) 6 CP 54..................................1.31 Bank of Ireland v Jaffery [2012] EWHC 1377 (Ch), [2012] All ER (D) 208 (May)......4.3 Bank of Tokyo Ltd v Karoon [1987] AC 45, [1986] 3 WLR 414, [1986] 3 All ER 468..........................................................................................................................1.24 Bank Voor Handel en Scheepvaart NV v Slatford [1953] 1 QB 248, [1951] 2 All ER 779, 95 SJ 546, reversed [1954] AC 584.................................................................1.32 Bankside Hotels Ltd, Re [2018] EWHC 1035 (Ch), [2018] 5 WLUK 151, [2018] BCC 617.................................................................................................................14.3 Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191, [1996] 3 WLR 87, [1996] 3 All ER 365.............................................................................3.33 Barbor v Middleton (1988) 4 BCC 681, 1988 SLT 288, 1988 SCLR 178.....................7.25 Barclays Bank v Kufner [2008] EWHC 2319 (Comm), [2009] 1 All ER (Comm) 1, [2008] All ER (D) 102 (Oct)...................................................................................8.30 Barclays Bank plc v Grant Thornton UK LLP [2015] EWHC 320 (Comm), [2015] 2 BCLC 537 (Comm)................................................................................................4.6 Barings plc v Coopers & Lybrand [1997] 1 BCLC 427, [1997] BCC 498, [1997] PNLR 179............................................................................................................8.35, 8.42 Barings plc (in liquidation) v Coopers & Lybrand (No 4) [2002] 2 BCLC 364.............8.43

xxxvi

Table of cases Barings plc (No 5), Re [2000] 1 BCLC 523, [1999] 1 BCLC 433..............................2.31, 2.35 Barrett v Duckett [1995] 1 BCLC 243, [1995] BCC 362............................5.6, 6.13, 6.37, 6.43 Barrowfen Properties Ltd v Patel [2021] EWHC 2055 (Ch), [2021] 7 WLUK 328..2.22, 2.28, 2.29, 2.38 Batesons Hotels, Re (1958) [2013] EWHC 2530 (Ch), [2014] 1 BCLC 507..............3.16, 9.21 Baturina v Christyakov [2014] EWCA Civ 1134, [2014] 2 CLC 209.........................8.13, 8.43 Baumler (UK) Ltd, Re [2004] EWHC 7673 (Ch), [2005] 1 BCLC 92..........9.94, 9.158, 9.174 Bayswater Trading Co Ltd, Re [1970] 1 WLR 343, [1970] 1 All ER 608, (1969) 114 SJ 29.................................................................................................................11.15, 11.23 Beattie v E&F Beattie Ltd [1938] Ch 708, [1938] 3 All ER 214....................................7.49 Beddoe, Re, Downes v Cottam [1893] 1 Ch 547, 62 LJ Ch 233, 41 WR 177................6.47 Begum v Hossain [2015] EWCA Civ 717......................................................................10.34 Belfield Furnishings Ltd, Re see Isaacs v Belfield Furnishings Ltd Bellador Silk Ltd, Re [1965] 1 All ER 667.....................................................10.2, 11.24, 11.26 Bellerby v Rowland & Marwood’s Steamship Co Ltd [1902] 2 Ch 14, [1902] WN 93.7.28 Bellman & Western Approaches Ltd, Re 1982 130 DLR 3d 193, 33 BCLR 45, BCCA......................................................................................................................17.6 Ben Hashem v Ali Shayif [2008] EWHC 2380 (Fam), [2009] 1 FLR 115, [2008] Fam Law 1179.....................................................................................................1.16, 1.17 Benfield Greig Group plc, Re [2000] 2 BCLC 488........................................................11.8 Berezovsky v Abramovich [2012] EWHC 2463 (Comm), [2012] All ER (D) 116 (Sep)........................................................................................................................3.2 Bermuda Cablevision Ltd v Colica Trust Ltd [1998] AC 198, [1998] 2 WLR 82, [1998] 1 BCLC 1.....................................................................................9.20, 9.68, 9.168, 10.44, 11.21 Bhullar v Bhullar [2003] EWCA Civ 424, [2003] 2 BCLC 241, [2003] BCC 711, [2003] WTLR 1397............................................................................2.38, 2.39, 10.6, 10.9 Bhullar v Bhullar [2017] EWHC 407 (Ch).....................................................................3.16 Bhullar v Bhullar [2015] EWHC 1943 (Ch), [2016] 1 BCLC 106...............6.3, 6.8, 6.12, 6.13, 6.16, 6.22, 6.43, 6.48, 12.8 Bilkus v King [2003] EWHC 2516 (Ch), [2003] All ER (D) 470 (Oct)........10.5, 10.17, 10.22, 10.34, 10.35, 10.37, 10.41 Bilta (UK) Ltd (in liquidation) v Nazir [2013] EWCA Civ 968, [2014] Ch 52...1.32, 2.3, 2.29 Bird Precision Bellows Ltd, Re [1986] Ch 658, [1986] 2 WLR 158, [1985] 3 All ER 523, [1984] Ch 419, [1984] 2 WLR 869, [1984] 3 All ER 444...............9.66, 9.68, 9.122, 9.133, 10.3, 10.19, 10.21, 10.22, 10.27, 10.29, 10.37, 10.41, 10.43, 10.44 Birdi v Specsavers Optical Group Ltd [2015] EWHC 2870 (Ch)...............2.26, 2.47, 9.6, 9.88 Birds Precision Bellows Ltd, Re, Company (No 003420 of 1981), Re [1984] Ch 419, [1984] 2 WLR 869, [1984] 3 All ER 444, aff’d [1986] Ch 658, [1986] 2 WLR 158, [1985] 3 All ER 523........................................................................................10.43 Bishopsgate Contracting Solutions Ltd v O’Sullivan [2021] EWHC 2103 (QB), [2021] 7 WLUK 544.....................................................................................2.4, 2.30, 2.34 Bishopsgate Investment Management Ltd v Maxwell (No 1) [1994] 1 All ER 261, [1993] BCLC 1282.................................................................................................2.31 Blackwood Hodge plc, Re [1997] 2 BCLC 650, [1997] BCC 434.....................9.57, 9.66, 9.83 Blindley Heath Investments Ltd v Bass [2015] EWCA Civ 1023, [2016] 4 All ER 490.......................................................................................................................7.28, 7.73 Blisset v Daniel (1853) 10 Hare 493, 68 ER 1022.........................................................9.153 Blue Arrow plc, Re [1987] BCLC 585, (1987) 3 BCC 618, (1988) PCC 306...........9.80, 9.97, 9.129, 9.144, 9.152, 9.157 Blue Index Ltd, Re [2014] EWHC 2680 (Ch)..............................................10.21, 10.22, 10.23 Boffo Family Holdings Ltd v Mountainview Developments Ltd 2010 BCSC 560........17.2

xxxvii

Table of cases Booth v Helliwell [1914] 3 KB 252, 83 LJKB 1548, DC...............................................1.34 Borland’s Trustee v Steel Brothers & Co Ltd [1901] 1 Ch 279, 70 LJ Ch 51, 49 WR 120,........................................................................................................1.6, 3.21, 3.36, 8.6 Borro Ltd v Aiken [2021] EWHC 1902 (Ch), [2021] 7 WLUK 165..............................14.8 Boschpoort Ondernemings (Pty) Ltd v Absa Bank Ltd 2014 (2) SA 518 (SCA)...........18.41 Boston Deep Sea Fishing & Ice Co Ltd v Ansell (1888) 39 ChD 339, [1886–90] All ER Rep 65, 59 LT 345............................................................................................2.44 Boston Trust Co Ltd v Verhoef [2021] EWCA Civ 1176, [2021] Bus LR 1557, [2021] 7 WLUK 440............................................................................6.1, 6.14, 6.16, 6.21 Boswell & Co (Steel) Ltd, Re [1988] 6 WLUK 237, (1989) 5 BCC 145.......................14.13 Boulting v Association of Cinematograph, Television & Allied Technincians [1963] 2 QB 606.................................................................................................................2.39 Bovey Hotel Ventures Ltd, Re (1981) 31 July, (unreported)...................................9.3, 9.8, 9.86 Bradcrown Ltd, Re, Official Receiver v Ireland [2001] 1 BCLC 547............................2.36 Bradford Corp v Pickles [1895] AC 587, 64 LJ Ch 759, 73 LT 353..............................9.52 Bradford Third Equitable Benefit Building Society v Borders [1941] 2 All ER 205, [1940] Ch 202, [1940] 1 All ER 302.......................................................................4.5 Braand & Harding Ltd (Co No 554589), Re [2014] EWHC 247 (Ch)...........................11.37 Brannigan v Style [2016] EWHC 512 (Ch)..................................... 6.33, 6.34, 6.38, 6.39, 6.41 Brant Investments Ltd v Keeprite Inc 1987 60 OR 2d 737, 42 DLR (4th) 15, 37 BLR (3d) 65.....................................................................................................................17.13 Brant Investments Ltd v KeepRite Inc 1991 3 OR 3d 289, 80 DLR (4th) 161, 1 BLR (2d) 225, 45 OAC 320, Ont CA..............................................................................17.9 Bratton Seymour Service Co Ltd v Oxborough [1992] BCLC 693, [1992] BCC 471, [1992] EGCS 28..........................................................................................3.10, 3.31, 3.32 Breckland Group Holdings Ltd v London & Suffolk Properties Ltd [1989] BCLC 100, (1988) 4 BCC 542, 1989 PCC 328.........................................................5.8, 5.9, 5.10 Breen v Williams (1996) 186 CLR 71, 138 ALR 259....................................................16.38 Brenfield Squash Racquets Club Ltd, Re [1996] 2 BCLC 184.........................9.64, 9.86, 10.18 Brickenden v London Loan & Savings Co [1934] 3 DLR 465......................................4.3 Bridge v Daley [2015] EWHC 2121 (Ch), [2015] 6 WLUK 555...................................6.45 Brietenfeld UK Ltd v Harrison [2015] EWHC 399 (Ch), [2015] 2 WLUK 653, [2015] 2 BCLC 275................................................................................................2.38 Brightview Ltd, Re [2004] EWHC 1056 (Ch), [2004] 4 WLUK 147, [2004] 2 BCLC 191..........................................................................................................................14.11 Bristol & West Building Society v May, May & Merrimans [1996] 2 All ER 801, [1996] PNLR 138, [1996] EGCS 69.......................................................................4.3 Bristol & West Building Society v Mothew [1998] Ch 1, [1997] 2 WLR 436, [1996] 4 All ER 698....................................................................................2.5, 3.2, 4.7, 4.18, 7.71 Bristol Joint Stock Bank, Re (1890) 44 ChD 703, 59 LJ Ch 722, 62 LT 745.........11.46, 11.47 British American Nickel Corp Ltd v MJ O’Brien Ltd [1927] AC 369...........................7.51 British Equitable Assurance Company Ltd v Baily [1906] AC 35, 75 LJ Ch 73, 94 LT 1.........................................................................................................................3.12 British Midland Tool Ltd v British Midland Tooling Ltd [2003] EWHC 466 (Ch), [2003] 2 BCLC 523................................................................................................2.30 British Murac Syndicate v Alperton Rubber Co [1915] 2 Ch 186, 84 LJ Ch 665, 59 SJ 494......................................................................................................................3.12 British Provident Life & Guarantee Association, Re, De Ruvigne’s Case (1877) 5 ChD 306..................................................................................................................3.11 Britvic plc v Britvic Pensions Ltd [2021] EWCA Civ 867, [2021] 6 WLUK 106, [2021] Pens LR 16..................................................................................................3.29 Broadcasting Investment Group Ltd v Smith [2021] EWCA Civ 912, [2021] 6 WLUK 254.............................................................................................................8.2, 8.25 Broderip v Salomon. See Salomon v Salomon & Co Ltd Brown v InnovatorOne plc [2012] EWHC 1321 (Comm)..............................................4.23

xxxviii

Table of cases Browne v la Trinidad (1887) 37 ChD 1, 57 LJ Ch 292...................................................3.9, 9.7 Brownlow v GH Marshall Ltd [2000] 2 BCLC 655, [2001] BCC 152.......9.135, 9.136, 9.162, 10.22 Brumber v Motornet Service & Repairs Ltd [2013] EWCA Civ 195, [2013] 1 WLR 2783........................................................................................................................2.35 Brunette v Legault Joly Thiffault sencrl 2018 SCC 55, [2018] 3 SCR 481....................17.6 Brunninghausen v Glavanics (1999) 46 NSWLR 538, 32 ACSR 294, NSW CA........4.7, 4.17, 16.16 Bryanston Finance Ltd v De Vries (No 2) [1976] Ch 63, [1976] 2 WLR 41, [1976] 1 All ER 25................................................................................................................11.26 Budge v Midnight Storm Investments 256 (Pty) Ltd 2012 (2) SA 28 (GSJ)..................18.44 Bugle Press Ltd, Re [1961] Ch 270, [1960] 3 WLR 956, [1960] 3 All ER 791.............7.58 Bulfin v Bebarfald’s Ltd (1932) 38 SR (NSW) 423........................................................4.8 Burberry Group plc v Fox-Davies [2017] EWCA Civ 1129...............7.7, 7.9, 7.11, 7.12, 7.18 Burland v Earle [1902] AC 83, 71 LJPC 1, 50 WR 241.................................................6.8 Burnden Group Holdings Ltd v Hint [2018] EWHC 463 (Ch), [2018] 3 WLUK 324, [2018] BCC 404......................................................................................................11.14 Burnden Holdings Ltd, Re, Burnden Holdings (UK) Ltd (in liquidation) v Fielding) [2019] EWHC 1566 (Ch), [2019] Bus LR 2878, [2019] 6 WLUK 288..............2.29, 2.59 Burnell v Trans-Tag Ltd [2021] EWHC 1457 (Ch), [2021] 5 WLUK 419..........2.4, 2.13, 2.38, 2.39 Burns v Financial Conduct Authority [2017] EWCA Civ 2140, [2018] 1 WLR 4161, [2017] 12 WLUK 613.............................................................................................2.47 Burry & Knight Ltd v Knight, Burry & Knight Ltd, Re [2014] EWCA Civ 604, [2014] 1 WLR 4046, [2015] 1 All ER 37.........................................7.11, 7.12, 7.13, 7.14, 7.16, 7.18 Burmah Steam Ship Company v Commissioners of Inland Revenue (1930) 16 TC 67, [1931] SC 156, 9 ATC 482, Ct of Sess (1 Div).................................................15.30 Bushell v Faith [1969] 2 Ch 438, [1969] 2 WLR 1067, [1969] 1 All ER 1002..........3.19, 7.47, 7.47, 7.66, 9.97 Byers v Chen [2021] UKPC 4, [2021] 2 WLUK 314, [2021] BCC 462........................3.16 C

C & MB Holdings Ltd, Re [2016] EWHC 191 (Ch), [2017] 1 BCLC 269.............11.11, 11.14 CAS (Nominees) Ltd v Nottingham Forest FC plc [2002] 1 BCLC 613, [2002] BCC 145..................................................................................................2.19, 4.19, 9.98, 9.117, 9.144 CDH Invest NV v Petrotank South Africa (Pty) Ltd 2018 (3) SA 157 (GJ)..............18.9, 18.19 CF Booth Ltd, Re [2017] EWHC 457 (Ch).............................................................9.112, 10.38 CPS v Compton [2002] EWCA Civ 1720, [2002] All ER (D) 395 (Nov)......................1.22 CPS v Nelson, sub nom CPS (Durham) v N [2009] EWCA Crim 1573, [2010] 1 QB 678, [2010] 2 WLR 788, [2010] 1 Cr App R (S) 82...............................................1.16 CVC/ Opportunity Equity Partners Ltd v Demarco Almeida [2002] UKPC 16, [2002] 2 BCLC 108, [2002] BCC 684.................................................9.161, 10.20, 10.21, 10.24, 10.26, 10.31, 10.32, 11.24, 11.44, 14.12 Caason Investments Pty Ltd v Cao (2015) 236 FCR 322...............................................16.41 Cabot Global Ltd, Re [2016] EWHC 2287 (Ch)............................................................10.39 Caleron Properties Ltd v 510207 Alberta Ltd 2000 ABQB 720, 9 BLR 3d 218, 278 AR 316, [2001] 3 WWR 323, (Alta QB)................................................................17.5 Camelot Resources Ltd v MacDonald (1994) 14 ACSR 437.........................................16.38 Campbell v Backoffice Investments Pty Ltd (2008) 66 ACSR 359, [2008] NSWCA 95............................................................................................................................16.21 Campbell v Backoffice Investments Pty Ltd (2009) 257 ALR 610, 73 ACSR 1, [2009] HCA 25.......................................................................................................16.22

xxxix

Table of cases Camping Warehouse Austali Pty Ltd v Downer EDI Ltd [2014] VSC 357....................16.41 Canadian Aero Services v O’Malley [1974] SCR 592, (1973) 40 DLR (3d) 371, 11 CPR (2d) 206, Can Sup Ct......................................................................................2.39 Cane v Jones [1980] 1 WLR 1451, [1980] 1 All ER 533, (1979) 124 SJ 542................3.16 Canterbury Travel Ltd, Re [2010] EWHC 1464 (Ch), [2010] 4 WLUK 99...................14.6 Caparo Industries v Dickman [1990] 2 AC 605, [1990] 2 WLR 358, [1990] 1 All ER 568..........................................................................................................................4.6 Capital Fire Insurance Association, Re (1882) 21 Ch D 209, 52 LJ Ch 20....................11.45 Carlock v ExxonMobil Canada Holdings UKC 202 YKCA 4........................................17.12 Central Coast Council v Norcross Pictorial Calendars Pty Ltd [2021] NSWCA 75......16.12 Central Coating Ltd, Re [2004] EWHC 3472 (Ch)...................................................11.4, 11.29 Certain Limited Partners in Henderson PFI Secondary Fund II LP v Henderson PFI Secondary Fund II LLP [2012] EWHC 3259 (Comm), [2013] QB 934................6.13 Chahuan v Euphoric Pty Ltd (2008) 65 ACSR 661........................................................16.19 Chan v Zacharia (1984) 154 CLR 178, 53 ALR 417......................................................16.38 Chandler v Cape plc [2012] EWCA Civ 525, [2012] 1 WLR 3111...............................1.25 Charit-Email Technology Partnership LLP v Vermillion International Investments Ltd [2009] EWHC 388 (Ch), [2009] BPIR 762, [2009] All ER (D) 95 (Feb)........11.25 Charlebois v Bienvenul [1967] 2 OR 635.......................................................................4.8 Charles Forte Investments Ltd v Amanda [1964] Ch 240, [1963] 3 WLR 662, [1963] 2 All ER 940............................................................................................................11.28 Charnley Davies Ltd (No 2), Re [1990] BCLC 760, [1990] BCC 605........................6.17, 12.5 Chartbrook v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101, [2009] 3 WLR 267, [2009] 4 All ER 677, [2008] EWCA Civ 183, [2008] 2 All ER (Comm) 387, [2008] All ER (D) 165 (Mar)........................................................3.10, 3.29 Charterhouse Capital Ltd, Re [2015] EWCA Civ 536, [2015] BCC 574...........3.11, 9.47, 9.85 Charterhouse Capital Ltd, Re [2014] EWHC 1410 (Ch)................................................7.58 Chen v Ng [2017] UKPC 27, [2017] 8 WLUK 203, [2018] 1 P & CR DG2.................7.26 Cherry Tree Investments Ltd v Landmain Ltd [2012] EWCA Civ 736, [2012] WLR (D) 170, [2012] All ER (D) 11 (Jun)....................................................................3.10, 3.19 Chesterfield Catering Co Ltd, Re [1977] Ch 373, [1976] 3 WLR 879, [1976] 3 All ER 294.............................................................................................................11.24, 11.25 Chez Nico (Restaurants) Ltd, Re [1992] BCLC 192, [1991] BCC 736......4.2, 4.29, 7.59, 7.60 Chilukuri v RP Explorer Master Fund [2013] EWCA Civ 1307....................................10.33 Chime Corp Ltd, Re (2004) 7 HKCFA 546...............................................................10.7, 10.46 Christensen v Scott [1996] 1 NZLR 273, NZCA........................................................8.32, 8.42 Chu v Lau [2020] UKPC 24, [2020] 1 WLR 4656, [2020] 10 WLUK 87.............11.32, 11.35, 11.38, 11.42 Ciban Management Corp v Citco (BVI) Ltd [2020] UKPC 21, [2021] AC 122, [2020] 3 WLR 705...............................................................................................2.34, 3.16 Cilliers NO v Duin & See (Pty) Ltd 2012 (4) SA 203 (WCC).......................................18.43 Cinematic Finance Ltd v Ryder [2010] EWHC 3387 (Ch), [2010] All ER (D) 283 (Oct).....................................................................................................................6.31, 6.45 Citco Banking NV v Pusser’s Ltd [2007] UKPC 13, [2007] 2 BCLC 483, [2007] BCC 205, [2007] Bus LR 960................................................................................3.11 City Equitable Fire Insurance Co Ltd, Re [1925] Ch 407, 94 LJ Ch 445, 133 LT 520..16.7 Cityspan Ltd, Re [2007] EWHC 751 (Ch), [2007] 2 BCLC 522, [2008] BCC 60.........2.28 Clark v Cutland [2003] EWCA Civ 810, [2004] 1 WLR 783, [2003] 4 All ER 733, [2003] 2 BCLC 393, CA........................................................6.3, 10.8, 10.11, 10.46, 12.8 Clark v Urquhart [1930] AC 28......................................................................................4.26 Clark Construction Initiatives Ltd, Re, Clark v Utility Consultancy Services Ltd [2009] EWHC 315 (Comm), [2009] All ER (D) 127 (Feb)....................................9.72 Clarkson v Davies [1923] AC 100..................................................................................6.49 Claygreen Ltd, Re, Romer-Ormiston v Claygreen Ltd [2005] EWHC 2032 (Ch), [2006] 1 BCLC 715, [2005] All ER (D) 112 (Sep).......................................1.6, 3.36, 7.28

xl

Table of cases Clegg v Pache (dec’sd) [2017] EWCA Civ 256..............................................................2.53 Cleveland Trust plc, Re [1991] BCLC 424, [1991] BCC 33.......................................7.21, 7.28 Clydebank Football Club Ltd v Steedman 2002 SLT 109..............................................9.40 Cobb v Becke (1854) 6 QBD 930...................................................................................2.31 Coleman v Myers [1977] 2 NZLR 225, NZ HC............................................................4.2, 4.17 Coleman Taymar Ltd v Oakes [2001] 2 BCLC 749.......................................................2.59 Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd [2003] EWHC 2748 (Ch), [2003] 2 BCLC 153, [2003] BCC 885, [2003] BPIR 1099.....2.20, 2.22, 2.26, 2.28, 2.29 Commercial & Industrial Insulations Ltd, Re [1986] BCLC 191, [1986] BCC 98901..11.25 Commissioners of Inland Revenue v Sansom [1921] 2 KB 492, 125 LT 37, 8 TC 20...1.28 Companies & Intellectual Property Commission v Cresswell [2017] ZAWCHC 38.....18.25 Company, Re a [1986] BCLC 391, [1986] BCC 99276..............................................9.24, 9.28 Company, Re a, ex p Burr [1992] BCLC 724, [1994] BCC 475....................................9.108 Company (No 002567 of 1982), Re a [1983] 1 WLR 927, [1983] 2 All ER 854, (1983) 127 SJ 508............................................................................................10.37, 11.29 Company (No 4475 of 1982), Re a [1983] Ch 178, [1983] 2 WLR 381, [1983] 2 All ER 36, [1983] BCLC 126...........................................................................9.59, 9.70, 9.77 Company (No 002612 of 1984), Re a (1985) 2 BCC 99453, sub nom Cumana Ltd [1986] BCLC 430, [1986] BCC 99495................................................9.108, 9.163, 9.164, 9.165, 10.5, 10.10, 10.13, 10.37, 10.38 Company (No 002612 of 1984), Re a [1985] 7 WLUK 321, (1985) 1 BCC 99485.......14.5 Company (No 007623 of 1984), Re a [1986] BCLC 362, [1986] BCC 99191.........9.77, 9.117 Company (No 005278 of 1985), Re a [1986] 1 WLR 281, [1986] 2 All ER 253, [1986] BCLC 68....................................................................................................9.3, 10.4 Company (No 007828 of 1985) (Direx London Ltd), Re a [1986] 2 BCC 98951......9.24, 9.25, 9.28 Company (No 008699 of 1985), Re a [1986] BCLC 382, (1986) 2 BCC 99024.......2.56, 4.14, 9.77 Company (No 00477 of 1986), Re a [1986] BCLC 376, [1986] BCC 99171............9.74, 9.77, 9.128, 9.133, 9.149, 11.43 Company (No 00596 of 1986) [1986] 4 WLUK 130, (1986) 2 BCC 99063..................14.7 Company (No 001761 of 1986), Re a [1987] BCLC 141...........................9.4, 9.47, 9.52, 9.54, 9.55, 9.57, 9.69 Company (No 003160 of 1986), Re a [1986] BCLC 391, [1986] BCC 99276..........9.26, 9.32, 9.77, 11.16, 11.20 Company (No 003843 of 1986), Re a [1987] BCLC 562, [1987] BCC 624...............9.53, 9.78 Company (No 004175 of 1986) [1987] 1 WLR 585, [1986] 11 WLUK 2, (1987) 3 BCC 41...................................................................................................................14.8 Company (No 004377 of 1986), Re a [1987] 1 WLR 102, [1987] BCLC 94, [1986] BCC 99520...........................................................................................9.159, 9.160, 9.162 Company (No 005134 of 1986), Re a, ex p Harries [1989] BCLC 383, [1989] BCC 39.............................................................................................................2.19, 9.18, 9.116, 9.142, 9.157, 9.169, 10.30, 10.37, 10.43 Company (No 005136 of 1986), Re a [1987] BCLC 82, [1986] BCC 99528............4.20, 9.89, 9.115 Company (No 007623 of 1986), Re a [1986] BCLC 362, [1986] BCC 99191...........9.6, 9.162 Company (No 00370 of 1987), Re a, ex p Glossop [1988] 1 WLR 1068, [1988] BCLC 570, (1988) 4 BCC 506.........................................................2.24, 2.26, 9.4, 9.112, 9.113, 11.8, 11.41 Company (No 00789 of 1987), Re a, ex p Shooter [1990] BCLC 384, [1990] 5 BCC 792...........................................................................................................9.8, 9.119, 9.120, 9.121, 10.4, 10.11, 10.33

xli

Table of cases Company (No 00789 of 1987), Re a, ex p Shooter (No 2) [1991] BCLC 267, sub nom Nuneaton Borough AFC Ltd (No 2), Re [1991] BCC 44..........................2.49, 10.35 Company (No 003028 of 1987), Re a [1988] BCLC 282, [1987] BCC 575..................11.32 Company (No 001363 of 1988), Re a, ex parte S-P [1989] BCLC 579, (1989) 5 BCC 18..............................................................................................................11.3, 11.4, 11.29 Company (No 002470 of 1988), Re a, ex p Nicholas [1991] BCLC 480, [1992] BCC 895, sub nom Nicholas v Soundcraft Electronic Ltd [1993] BCLC 360, [1992] BCC 895...................................................................................................9.61, 9.63, 11.24 Company (No 004502 of 1988), ex p Johnson, Re [1991] 2 WLUK 286, [1991] BCC 234, 1992] BCLC 701.............................................................................................13.4 Company (No 005685 of 1988), Re a, ex p Schwarcz (No 2), Ringtower Holdings plc, Re [1989] BCLC 427, [1989] BCC 82........................................3.37, 9.6, 9.52, 9.83, 9.134, 9.135, 9.155, 9.168, 10.2, 10.5, 11.9 Company (No 006834 of 1988), Re a, ex p Kremer [1989] BCLC 365, [1989] BCC 218.......................................................................................................9.160, 9.162, 9.175, 10.18, 14.12 Company (No 000314 of 1989), Re a, ex p Estate Acquisitions & Development Ltd [1991] BCLC 154, [1990] BCC 281.................................................9.69, 9.70, 9.74, 9.77, 9.97, 11.2 Company (No 00330 of 1991), Re a, ex p Holden [1991] BCLC 597, [1991] BCC 241...................................................................................................................11.22, 14.12 Company (No 00709 of 1992), Re a see O’Neill v Phillips Company (No 007936 of 1994), Re a [1995] BCC 705..........................................11.25, 11.33 Company (No 00836 of 1995), Re a [1996] 2 BCLC 192, [1996] BCC 432............10.2, 10.18 Company (No 002015 of 1996), Re a [1997] 2 BCLC 1................................................9.134 Company (No 004415 of 1996), Re a [1997] 1 BCLC 479...................9.109, 11.3, 11.29, 12.9 Company (No 5758 of 2003), Re a, Magi Capital Partners LLP, Re [2003] EWHC 2790 (Ch)................................................................................................................11.47 Consolidated Gold Fields of New Zealand Ltd, Re [1953] Ch 689, [1953] 2 WLR 584, [1953] 1 All ER 791........................................................................................11.14 Const v Harris (1824) Tur & Rus 496, [1824–34] All ER Rep 311................................9.153 Constable v Executive Connections Ltd [2005] EWHC 3 (Ch), [2005] 2 BCLC 638...10.45 Cook v Deeks [1916] 1 AC 554, 85 LJPC 161, [1916–17] All ER Rep 285..................6.5 Copal Varnish Co Ltd, Re [1917] 2 Ch 349, 87 LJ Ch 132, [1916–17] All ER Rep 914..........................................................................................................................7.30 Copeland & Craddock Ltd, Re [1997] BCC 294.....................................11.4, 11.29, 12.9, 13.3 Coroin Ltd, Re [2013] EWCA Civ 781, [2013] 7 WLUK 94 [2013] 2 BCLC 583....2.53, 3.18, 3.36, 9.47, 9.75, 9.86, 9.99, 9.122, 9.152, 14.8 Coroin Ltd, Re [2012] EWHC 2343 (Ch), [2012] 8 WLUK 136...................................9.86 Coroin Ltd. Re, McKillen v Misland (Cyprus) Investments [2011] EWHC 3466 (Ch).3.36 Cory v Cory [1923] 1 Ch 90...........................................................................................7.32 Cosmetic Warriors Ltd v Gerrie [2015] EWHC 3718 (Ch), aff’d [2017] EWCA Civ 324.................................................................................................3.19, 3.29, 10.20, 10.29 Cotman v Broughman [1918] AC 514, 87 LJ Ch 379, [1918–19] All ER Rep 265.......11.45 Cottrell v King [2004] EWHC 397 (Ch), [2004] 2 BCLC 413...................................3.35, 7.28 Count Gotthard SA Pilati v Witfonein Game Farm (Pty) Ltd [2013] 2 All SA 190 (GNP................................................................................................................18.27, 18.31 Cream Holdings Ltd v Davenport [2011] EWCA Civ 1287, [2012] 1 BCLC 365.....2.18, 3.37, 3.38, 10.33 Creasey v Breachwood Motors Ltd [1993] BCLC 480, [1992] BCC 638, QBD...........1.16 Criterion Properties plc v Stratford Properties LLC [2004] UKHL 28, [2004] 1 WLR 1846, [2004] BCC 570, [2004] NPC 96.................................................................2.21

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Table of cases Croly v Good [2010] EWHC 1 (Ch), [2010] 2 BCLC 569, [2011] BCC 105, [2010] All ER (D) 177 (May)...................................................  9.106, 9.112, 9.124, 9.128, 9.132 9.133, 9.139, 9.149, 9.160, 10.22, 10.36, 10.37, 10.39, 11.43 Crowley v Worley Ltd [2020] FCA 1522.......................................................................16.40 Crown Bank, Re (1890) 44 ChD 634, 59 LJ Ch 739, [1895–9] All ER Rep 1280.........11.45 Crown Dilmun v Sutton [2004] EWHC 52 (Ch), [2004] 1 BCLC 468..........................2.54 Croydon Hotel & Leisure Company Ltd (LON/93/2061A), VAT Tribunal....................15.32 Crumpton v Morrine Hall Pty Ltd (1965) 82 WN (Pt 1) (NSW) 456.............................16.14 Crystal Reef Gold Mining Co, Re [1892] 1 Ch 408, 61 LJ Ch 208, 40 WR 235...........11.14 Cullen Investments Ltd v Brown [2017] EWHC 1586 (Ch).....................2.30, 2.38, 2.47, 2.59, 6.7, 6.39, 6.43, 6.45, 12.8 Culross Global SPC Ltd v Strategic Turnaround Master Partnership Ltd Progress Property Co Ltd v Moore [2010] UKSC 55, [2011] 1 WLR 1, [2011] 2 All ER 432, [2011] Bus LR 260, SC...................................................................................9.97 Cumana Ltd, Re. See Company (No 002612 of 1984), Re a Cumberland Holdings Ltd v Washington H Soul Pattinson & Co Ltd (1977) 2 ACLR 307, 13 ALR 561.....................................................................................................16.24 Cumberland Holdings Ltd, Re (1976) 1 ACLR 361, NSW Sup Ct................................16.28 Cumbrian Newspapers Group Ltd v Cumberland & Westmorland Herald Newspaper & Printing Co [1987] Ch 1, [1986] 3 WLR 26, [1986] 2 All ER 816.......3.23, 7.45, 7.46, 7.48 Cumming’s Trustee v Glenrinnes Farms Ltd [1993] BCC 829......................................11.21 Customer Systems plc v Ranson [2012] EWCA Civ 841, [2012] IRLR 769.................2.3 Customs & Excise Commissioners v Hedon Alpha [1981] QB 818, [1981] 2 WLR 791, [1981] 2 All ER 697........................................................................................2.59 D

DR Chemicals Ltd, Re (1988) 5 BCC 39.......................................................................10.38 DUT Holdings Ltd v Bigshop.co.au Ltd (2002) 42 ACSR 378, [2002] NSWSC 571, SC (NSW)...............................................................................................................7.65 Dadourian Group International Inc v Simms [2009] EWCA Civ 169, [2009] 1 Lloyd’s Rep 601, [2009] All ER (D) 175 (Mar).....................................................4.3 Dalby v Bodilly [2004] EWHC 3078 (Ch), [2005] BCC 627.......................2.19, 9.115, 9.116, 9.169, 14.8 Daniels v Anderson (1995) 37 NSWLR 438, 16 ACSR 607..........................................16.7 Daniels v Daniels [1978] Ch 406, [1978] 2 WLR 73, [1978] 2 All ER 89........5.4, 6.5, 6.6, 6.7 Danish Mercantile Co Ltd v Beaumont [1951] Ch 680, [1951] 1 All ER 925, 95 SJ 300..........................................................................................................................5.9 Darby, Re, ex p Brougham [1911] 1 KB 95, 80 LJKB 180, 18 Mans 10.......................1.16 Data Express Ltd, Re (1987) The Times, 27 April.........................................................7.22 Davies v Ford [2020] EWHC 686 (Ch), [2020] 3 WLUK 379.......................................2.39 Davies v Ford [2021] EWHC 2250 (Ch), [2021] 9 WLUK 226.....................................2.53 Davis & Collett Ltd, Re [1935] Ch 693, 104 LJ Ch 340..............................11.33, 11.43, 11.44 Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696, [1956] 3 WLR 37, [1956] 2 All ER 145................................................................................9.170 Dawson v Bell [2016] EWCA Civ 96, [2016] 2 BCLC 59.............................................10.35 Dawson International plc v Coats Paton plc (1989) 5 BCC 405, CSIH, (1988) 4 BCC 305..........................................................................................................................4.14 Day v Cook [2001] EWCA Civ 592, [2002] 1 BCLC 1, [2003] BCC 256, [2001] PNLR 32.................................................................................................................8.37 De Bruyn v Steinhoff International Holdings NV 2020 JDR 1405 (GJ)........................18.16 Dee Valley Group plc, Re [2017] EWHC 184 (Ch)........................................................7.51 De Klerk v Ferreira 2017 (3) SA 502 (GP)................................................................18.1, 18.32 Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31, [1992] FCA 557.........................16.32

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Table of cases Denton v TH White Ltd [2014] EWCA Civ 906, [2014] 1 WLR 3926, [2015] 1 All ER 880....................................................................................................................14.14 Deputy Commissioner of Taxation v Casualife Furniture International Pty Ltd (2004) 9 VR 549, [2004] VSC 157.....................................................................................16.30 Dervyshire Aggregates Ltd, Re [2021] EWHC 2455 (Ch), [2021] 9 WLUK 138..........9.83 Dernacourt Investments Pty Ltd, Re (1990) 2 ACSR 553, (1990) 20 NSWLR 588.......9.57 Derry v Peek (1889) LR 14 App Cas 337, 58 LJ Ch 864, [1886–90] All ER Rep 1......4.5 De Sana v Nataro [2020] EWHC 1031 (Ch), [2020] 4 WLUK 399, [2021] 1 BCLC 366..........................................................................................................................4.18 De Sousa v Technology Corporate Management (Pty) Ltd 2017 (5) SA 577 (GJ)..18.1, 18.27, 18.29, 18.33 Dhillon v Siddiqui [2008] EWHC 2020 (Ch), [2008] All ER (D) 87 (Aug)..................8.40 Diamantides v JP Morgan Chase Bank [2005] EWCA Civ 1612, [2005] All ER (D) 323 (Dec)...............................................................................................................1.1, 8.31 Diamix plc, Re. See Fiske Nominees Ltd v Dwyka Diamonds Ltd, Diamix plc, Re Diamond Fuel Co, Re (1879) 13 ChD 400, 49 LJ Ch 301, 41 LT 573.........11.14, 11.46, 11.47 Diamond Rock Boring Co Ltd, Re, ex parte Shaw (1877) 2 QBD 463..........................7.28 Dickinson v NAL Realisations (Staffordshire) Ltd [2017] EWHC 28 (Ch)...................2.29 Dickinson v NAL Realisation (Staffordshire) Ltd [2019] EWCA Civ 214, [2020] 1 WLR 1122, [2020] BCC 271..................................................................................2.59 Dimbleby & Sons Ltd v National Union of Journalists [1984] 1 WLR 427, [1984] 1 All ER 751, (1984) 128 SJ 189...............................................................................1.24 Dinglis Properties Ltd, Re [2019] EWHC 1664 (Ch), [2019] Bus LR 3100, [2019] 6 WLUK 513..............................................................................................................9.110 D’Jan of London Ltd, Re, Copp v D’Jan [1994] 1 BCLC 561, [1993] BCC 646......2.33, 2.34, 2.59 Dome Resources NL v Silver (2008) 72 NSWLR 693, 68 ACSR 458, [2008] NSWCA 322...........................................................................................................16.9 Domoney v Godinho [2004] EWHC 328 (Ch), [2004] 2 BCLC 15...............................3.16 Donaldson Investments (Pty) Ltd v Anglo-Transvaal Collieries Ltd 1980 (4) SA 204 (T), confirmed on appeal 1983 (3) SA 96 (A)........................................................18.27 Donoghue v Stevenson [1932] AC 562, [1932] All ER Rep 1........................................2.12 Dorchester Finance Co Ltd v Stebbing (1977) [1989] BCLC 498..............................2.34, 2.35 Doreen Board Ltd, Re [1996] 2 WLUK 5, [1996] 1 BCLC 501....................................13.3 Dorman Long & Co Ltd, Re, Re South Durham Steel & Iron Co Ltd [1934] Ch 635, 103 LJ Ch 316, 151 LT 347.................................................................................4.12, 4.19 Doughty Hanson & Co Ltd v Roe [2007] EWHC 2212 (Ch), [2008] 1 BCLC 404.......3.36 Dovey v Cory [1901] AC 477, 70 LJ Ch 753, 85 LT 257............................................2.31, 2.36 Drumkinnon Joinery & Building Ltd v R & C Comrs [2013] UKFT 416 (TC), [2013] STI 3034......................................................................................................1.2 Duha Printers (Western) Ltd v The Queen 1998 [1998] 1 SCR 795, 159 DLR 4th 457, 39 BLR (2d), Can Sup Ct................................................................................17.14 Duncan Gilmour & Co Ltd, Re [1952] 2 All ER 871, [1952] 2 TLR 951, [1952] WN 550..........................................................................................................................3.4 Dunstans Publishing Ltd, Re [2012] BCC 515...................................................3.36, 7.28, 7.32 Duomatic Ltd, Re [1969] 2 Ch 365, [1969] 2 WLR 114, [1969] 1 All ER 161.........2.39, 2.41, 2.54, 2.56, 3.16, 3.21, 5.12 E

EAP Securities Ltd, Re, Holman v Adams Securities Ltd, Re [2010] EWHC 2421 (Ch), [2010] All ER (D) 18 (Oct)............................................................................9.131 Eastern Telegraph Co Ltd, Re [1947] 2 All ER 104, [1947] LJR 1247, 177 LT 526......11.47 Eastford Ltd v Gillespie [2009] CSOH 119....................................................................2.38 Eaton v Caulfield (No 2) [2013] EWHC 2214 (Ch), [2015] 1 BCLC 634.......9.166, 10.3, 12.1

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Table of cases Ebbw Vale Urban District Council v South Wales Traffic & Licensing Authority [1951] 2 KB 366, [1951] 1 TLR 742, sub nom R v South Wales Traffic & Licensing Authority, ex p Ebbw Vale Urban District Council [1951] 1 All ER 806..........................................................................................................................1.25 Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, [1972] 2 WLR 1289, [1972] 2 All ER 492....................................................................3.1, 9.74, 9.75, 9.88, 9.122, 9.125 9.126, 9.133, 9.148, 9.149, 9.153, 11.2, 11.6, 11.7, 11.8, 11.29, 11.33, 11.34, 11.37, 11.38, 11.42, 11.43, 11.50, 16.30, 18.1, 18.29 Eckerle v Wickeder Westfalenstahl GmbH [2013] EWHC 68 (Ch), [2014] Ch 196......7.34 Eclairs Group Ltc v JKK Oil & Gas plc [2015] UKSC 71, [2016] 1 BCLC 1, [2016] BCC 79...............................................................................................2.2, 2.15, 2.16, 2.17, 2.20, 3.14 Edennote Ltd, Re [1996] 2 BCLC 389, [1996] BCC 718, (1996) 140 SJLB 176..........2.26 Edgerley v PW Edgerley Ltd [1997] CLY 3102............................................................9.8, 9.46 Edwardian Group Ltd, Re [2018] EWHC 1715 (Ch), [2018] 7 WLUK 97, [2019] 1 BCLC 171................................................................................................2.39, 9.82, 9.110, 10.21, 10.23, 10.37 Edwards v Halliwell [1950] 2 All ER 1064, 94 SJ 803, [1950] WN 537.....5.3, 5.11, 5.13, 6.4, 7.2 Egyptian Salt & Soda Co Ltd v Port Said Salt Association Ltd [1931] AC 677.............11.46 Elder v Elder & Watson 1952 SC 49, 1952 SLT 112, Ct of Sess (1 Div)....................9.83, 17.8 Eley v Positive Government Security Life Assurance Co (1876) Ex D 20, 33 LT 743.........3.9, 7.49 Elgindata Ltd (No 1), Re [12991] BCLC 959..........................1.2, 9.10, 9.41, 9.81, 9.86, 9.90, 9.101, 9.104, 9.132, 9.134, 9.164, 10.10, 10.17, 10.30, 10.36, 10.37, 10.38 Elgindata Ltd (No 2), Re [1992] 1 WLR 1207, [1993] 1 All ER 232, [1993] BCLC 119..........................................................................................................................9.41 Ellard v Andrews [2002] EWHC 2842 (Comm), [2002] All ER (D) 133 (Nov)...........3.2, 3.21 Elliott v Planet Organic Ltd [2000] BCC 610.................................................................10.41 Ellis v Property Leeds (UK) Ltd [2002] EWCA Civ 32, [2002] 2 BCLC 175...............8.31 Ellott v Comarron UK Ltd [2017] EWHC 3872 (Ch), [2017] 12 WLUK 701...............7.22 Energenics Holdings Pte Ltd, Neuftex Ltd v Hazarika [2014] EWHC 1845 (Ch).........8.1 Enviroco Ltd v Farstad Supply AS [2011] UKSC 16, [2011] 1 WLR 921, [2011] Bus LR 1108, SC......................................................................................7.21, 9.19, 9.20, 9.21 Equitable Life Assurance Society v Bowley [2003] EWHC 2263 (Comm), [2004] 1 BCLC 180, [2003] BCC 829, [2007] Lloyd’s Rep PN 14, QBD.........................2.35, 2.36 Equitable Life Assurance Society v Hyman [2002] 1 AC 408, [2000] 3 WLR 529, [2000] 3 All ER 961, [2000] 2 WLR 798, 1999] Pens LR 297..............................3.33 Erlander v New Sombrero Phosphate Co (1878) LR 3 App Cas 1218...........................2.5 Erste Group Bank AG, London Branch v JSC (VMZ Red October) [2015] EWCA Civ 379, [2015] 4 WLUK 283, [2015] 1 CLC 706.................................................8.26 Estafnous v London & Leeds Business Centres Ltd [2011] EWCA Civ 1157, [2011] All ER (D) 155 (Oct)..............................................................................................3.29 Estate Acquisition & Development Ltd, Re [1995] BCC 338........................................9.152 Estill v Cowling Swift & Kitchin [2000] Lloyd’s Rep PN 378......................................9.34 Estmanco (Kilner House) Ltd v Greater London Council [1982] 1 WLR 2, [1982] 1 All ER 437, 80 LGR 464........................................................................................6.6 Euro Accessories Ltd, Re [2021] EWHC 47 (Ch), [2021] 1 WLUK 53, [2021] BCC 401.........................................................................................................................3.8, 3.19 Evans v Chapman (1902) 86 LT 381, [1902] WN 78.....................................................3.11 Everet v Williams (1725) Note, The Highwayman’s Case, 35 LQ Rev 197 (1893), Lindley on Partnership (15th edn) 149n.................................................................9.155

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Table of cases Evertite Locknuts, Re [1945] Ch 220, [1945] 1 All ER 401, 172 LT 378......................7.60 Exeter City AFC Ltd v Football Conference Ltd [2004] EWHC 2304 (Ch), [2004] 1 WLR 2910, [2004] 4 All ER 1179, [2005] 1 BCLC 238........................................9.13 Expanded Plugs Ltd, Re [1966] 1 WLR 514, [1966] 1 All ER 877, 110 SJ 246............11.24 Extrasure Travel Insurance Ltd v Scattergood [2003] 1 BCLC 598...............................2.26 F

F & C Alternative Investments (Holdings) Ltd v Barthelemy [2011] EWHC 1731 (Ch), [2012] 3 WLR 10, [2012] Bus LR 891, [2012] EWCA Civ 843, [2012] All ER (D) 145 (Jun)............................................................................2.38, 3.2, 7.71, 10.6 FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45........2.38, 2.52, 10.6 FM Capital Partners Ltd v Marino [2018] EWHC 1768 (Ch), [2018] 7 WLUK 219.........2.30, 2.38, 2.45, 2.49 FSC Andrews Ltd, Re [2015] EWHC 4042 (Ch)..............................................9.21, 9.38, 14.11 Fabb v Peters [2013] EWHC 296 (Ch)...........................................................................9.70 Fahey Developments Ltd, Re. See Lowe v Fahey Fairford Water Ski Club Ltd v Cohoon [2021] EWCA Cvi 143, [2021] 2 All ER (Comm) 1085, [2021] BCC 498.............................................................................2.49 Falkingham v Peninsula Kingswood Country Golf Club (2015) 318 ALR 140, [2015] VSCA 16.....................................................................................................16.23 Fanmailuk.com Ltd v Cooper [2008] EWHC 2198 (Ch), [2008] BCC 877...................6.33 Fargro Ltd v Godfroy [1986] 1 WLR 1134, [1986] 3 All ER 279, [1986] BCLC 370........6.13, 6.43, 6.51 Farnham v Fingold [1973] 2 OR 132, 33 DLR 3d 156, Ont CA....................................17.6 Farrar v Farrars Ltd (1889) LR 40 ChD 395, 58 LJ Ch 185, 60 LT 121........................1.27 Faulkner v Vollin Holdings Ltd [2021] EWHC 787 (Ch), [2021] 3 WLUK 557...........9.96 Feetum v Levy [2005] EWCA Civ 1601, [2006] Ch 585, [2006] 3 WLR 427, [2006] 2 BCLC 102............................................................................................................5.13 Fellowes & Son v Fisher [1976] QB 122, [1975] 3 WLR 184, [1975] 2 All ER 829.....14.4 Ferguson v Mclennan Salmon Co Ltd 1990 SLT 658, [1990] 2 WLUK 124, [1990] BCC 702............................................................................................................10.10, 14.9 Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688................................16.22 Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672, [2001] NSWCA 97............................................................................................................................10.14 Fiduciary Ltd v Morningstar Research Pty Ltd (2005) 53 ACSR 732, [2005] NSWSC 442............................................................................................................16.19 Fildes Bros, Re [1970] 1 WLR 592, [1970] 1 All ER 923, 114 SJ 301..........................11.44 First Independent Factors & Finance Ltd v Mountford [2008] EWHC 835 (Ch), [2008] 2 BCLC 297................................................................................................2.59 Firstrand Bank Ltd v Lodhi 5 Properties Investment CC 2013 (3) SA 212 (GNP)........18.41 Fisher v Cadman [2005] EWHC 377 (Ch), [2006] 1 BCLC 499, [2005] All ER (D) 213 (Mar)..........................................................................................9.10, 9.41, 9.42, 9.85, 9.91, 9.92, 9.93, 9.101, 9.106, 9.108, 9.120, 9.131, 9.141, 9.147, 9.163, 9.170, 11.8 Flex Associates Ltd, Re [2009] EWHC 3690 (Ch), [2010] All ER (D) 284 (Mar)...........9.151, 9.160, 10.34 Florence Land & Public Works Co, Re, Nicol’s Case, Tufnell & Ponsonby’s Case (1885) 29 ChD 421.................................................................................................11.20 Ford v Polymer Vision Ltd [2009] EWHC 945 9Ch), [2009] 2 BCLC 160...................2.21 Forrest v Australian Securities & Investments Commission (2012) 291 ALR 399, [2012] HCA 39.......................................................................................................16.36 Fortress Value Recovery Fund I LLC v Blue Skye Special Opportunities Fund LP [2013] EWHC 14 (Comm), [2013] 2 BCLC 351...................................................8.26

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Table of cases Foss v Harbottle (1843) 2 Hare 461, 67 ER 189....................................1.33, 4.10, 5.1, 5.2, 5.6, 5.7, 5.11, 5.13, 5.14, 6.1, 6.3, 6.6, 6.7, 6.9, 7.2, 7.3, 8.2, 8.9, 8.14, 8.22, 8.42, 9.36, 11.41, 12.3, 16.15, 16.18 Foster Bryant Surveying Ltd v Bryant [2007] EWCA Civ 200, [2007] Bus LR 1565, [2007] BCC 804......................................................................................................2.38 Foundry Miniatures Ltd, Re [2017] EWHC 889 (Ch).............................................9.122, 10.39 Fowler v Gruber [2009] CSOH 36, [2010] 1 BCLC 563.................................9.52, 9.70, 9.119, 9.143, 10.30 Franbar Holdings Ltd v Patel [2008] EWHC 1534 (Ch), [2009] 1 BCLC 1, [2008] All ER (D) 14 (Jul)............................................................................6.32, 6.39, 6.43, 12.8 Frank Wyatt & Sons Ltd, Re see Wyatt v Frank Wyatt & Son Ltd Fraser v NRMA Holdings Ltd (1995) 55 FCR 452, 127 ALR 543, 15 ACSR 590 (Fed CA, General Div, Full Ct)..........................................................4.7, 4.8, 16.10, 16.32 Freedom Stationery (Pty) Ltd v Hassam 2019 (4) SA 459 (SCA).................................18.33 Freshstart Australia Pty Ltd, Scuteri v Lofthouse & Cauchi (as liquidators of Fresh Start Australia Pty Ltd (in liquidation)) (2006) 59 ACSR 327................................16.19 Frobisher Ltd v Kiloran Trust [1980] 1 WLR 425, [1980] 1 All ER 488, 253 EG 1231........................................................................................................................3.30 Fulham Football Club Ltd v Cabra Estates plc [1994] 1 BCLC 363, [1992] BCC 863, (1992) 65 P&CR 284......................................................................................2.31 Fulham Football Club (1987) Ltd v Richards [2011] EWCA Civ 855, [2012] Ch 333, [2012] 2 WLR 1008, [2012] 1 All ER 414, [2010] EWHC 3111 (Ch), [2011] Ch 208, [2011] 2 WLR 1055, [2011] 2 All ER 112..............9.13, 9.14, 9.15, 10.9, 11.1, 11.2, 11.3 Full Cup International Trading, Re. See Antoniades v Wong Fuller v Cyracuse Ltd [2001] 1 BCLC 187, [2001] BCC 806.................................11.28, 11.29 Furs Ltd v Tomkies (1936) 54 CLR 583, HC Aus..........................................................16.38 G

G & G Properties Ltd, Re [2019] EWCA Civ 2046, [2020] Bus LR 762, [2020] BCC 236..........................................................................................................................13.3 GHLM Trading Ltd v Maroo [2012] EWHC 61 (Ch), [2012] All ER (D) 172 (Jan)..........2.28, 2.29, 2.30 GJ v Luxembourg (2003) 36 EHRR 40, ECHR..............................................................8.17 GO DPO EU Compliance Ltd, Re [2021] EWHC 1765 (Ch), [2021] 6 WLUK 443.....9.104 GPG (Australia Trading) Pty Ltd v GIO Australia Holdings Ltd (2001) 117 FCR 23, 40 ACSR 252, [2001] FCA 1761............................................................................16.32 Gaetano Ltd v Obertor Ltd [2009] EWHC 2653 (Ch)....................................................8.30 Gallium Funds Solutions Group Ltd [2021] EWHC 765 (Ch), [2021] 3 WLUK 563......10.20, 10.21 Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 1360, [1994] 1 All ER 16, [1994] BCC 319......................................................................................................4.6 Gamatronic UK Ltd v Hamilton [2016] EWHC 2225 (QB.........................................2.38, 2.53 Gambotto v WCP Ltd (1995) 182 CLR 432, 127 ALR 417, 16 ACSR 1.......................16.14 Gamlestaden Fastigheter AB v Baltic Partners Ltd [2007] UKPC 26, [2007] 4 All ER 164, [2007] Bus LR 1521, [2008] 1 BCLC 468...........................9.6, 9.19, 9.31, 9.45, 9.53, 9.78, 9.79, 10.6, 10.46, 12.10 Garage Door Associates Ltd, Re [1984] 1 WLR 35, [1984] 1 All ER 434, [1983] BCLC 164.................................................................................................7.29, 9.28, 11.27 Gardiner v Moore [1969] 1 QB 55, [1966] 3 WLR 786, [1966] 1 All ER 365, QBD....3.30 Gardner v Parker [2004] EWCA Civ 781, [2004] 2 BCLC 554, [2005] BCC 46........2.58, 4.4, 8.2, 8.4, 8.16, 8.20, 8.21, 8.22, 8.34, 8.43

xlvii

Table of cases Garvie v Axmith [1962] OR 65, 31 DLR (2d) 65...........................................................4.8 Gas Lighting Improvements Co Ltd v Inland Revenue Commissioner [1923] AC 723, 12 TC 503, 39 TLR 504..................................................................................1.36 Gatnom Capital v Sanders [2012] BPIR 299..................................................................1.26 Gattopardo Ltd, Re [1969] 1 WLR 619, [1969] 2 All ER 344.......................................11.21 George Fischer (Great Britain) Ltd v Multi Construction Ltd [1995] 1 BCLC 260, [1995] BCC 310...................................................................................................8.38, 8.41 George Newman & Co, Re [1895] 1 Ch 674, 64 LJ Ch 407, 72 LT 697........................1.31 Gerber Garment Technology Inc v Lectra Systems Ltd [1997] RPC 443, [1997] Masons CLR 13, (1997) 20(5) IPD 20046....................................................8.1, 8.32, 8.42 German Date Coffee Co Ltd, Re (1882) 20 ChD 169, 51 LJ Ch 564, [1881–5] All ER Rep 372......................................................................................................11.45, 11.47 Gething v Kilner [1972] 1 WLR 337, [1972] 1 All ER 1166, (1971) 116 SJ 74............4.12 Ghyll Beck Driving Range Ltd, Re [1993] BCLC 1126..............................9.149, 10.11, 10.13, 10.36, 10.37, 11.43 Ghiwala v Grancy Property Ltd 2017 (2) SA 337 (SCA)...............................................18.25 Giles v Rhind [2002] EWCA Civ 1428, [2003] Ch 618, [2003] 2 WLR 237, [2003] BCC 79.................................................................................................8.2, 8.4, 8.16, 8.17, 8.18, 8.19, 8.20, 8.22, 8.27 Gilford Motor Co Ltd v Horne [1933] Ch 935, 102 LJ Ch 212, [1933] All ER Rep 109..............................................................................................................1.15, 1.16, 1.20 Gill v Thind [2020] EWHC 2973 (Ch) ,[2020] 11 WLUK 107...................6.3, 6.8, 6.12, 6.16, 12.7 Glenn v Watson [2018] EWHC 2016 (Ch), [2018] 7 WLUK 750..................................3.2 Gognos Holdings Ltd v Australian Securities & Investments Commission [2018] QCA 181.................................................................................................................16.30 Goldex Mines Ltd v Revill [1974] 54 DLR (3d) 672, (1974) 7 OR (2d) 216, Ontario CA...........................................................................................................................4.8 Goldhar & Quebec Manitou Mines Ltd, Re (1976) 9 OR (2d) 740, 61 DLR 3d 612 (HCJ Div Ct)...........................................................................................................17.5 Goodfellow v Johnson [1966] 1 QB 83, [1965] 2 WLR 1235, [1965] 1 All ER 941, QBD........................................................................................................................1.34 Goodwin v Cook [2018] 6 WLUK 425.......................................................................6.43, 12.7 Goozee v Graphic World Group Holdings Pty Ltd (2002) 42 ASCfSR 534, 20 ACLC 1502, [2002] NSWSC 640...............................................................................16.19, 16.26 Gorwyn Holdings Ltd, Re (1985) 1 BCC 99479............................................................9.70 Gott v Hauge [2020] EWHC 1152 (Ch), [2020] 5 WLUK 112......................................10.45 Gould v Vaggelas [1985] HCA 85, (1985) 157 CLR 215, 62 ALR 527...........4.2, 16.12, 16.41 Grace v Biagioli [2005] EWCA Civ 1222, [2006] 2 BCLC 70, [2006] BCC 85.......9.10, 9.85, 9.96, 9.112, 9.155, 9.158, 9.174, 9.175, 10.2, 10.4, 10.16, 10.17 Graham v Every [2014] EWCA Civ 191.....................................................................9.47, 9.99 Gramophone & Typewriter Co Ltd v Stanley [1908] 2 KB 89, 77 LJKB 834, 99 LT 39, [1906] 2 KB 856............................................................................................1.13, 16.5 Grancy Property Ltd v Manala 2015 (3) SA 313 (SCA)........................................18.27, 18.31, 18.33 Grandactual Ltd, Re [2006] BCC 73...........................................................................9.61, 9.62 Grant-Taylor v Babcock & Brown Ltd (in liquidaton) (2016) 245 FCR 402, 330 ALR 642, [2016] FCAFC 60..................................................................................16.35 Graves v Graves [2007] EWCA Civ 660, [2007] 3 FCR 26...........................................9.8 Gray v New Augarita Porcupine Mines Ltd [1952] 3 DLR 1.........................................2.49 Grays Timber Products Ltd v Revenue & Customs Commissioners [2010] UKSC 4, [2010] 1 WLR 497, [2010] 2 All ER 1, [2010] STC 782, [2010] BTC 112, SC, [2007] STC (SCD) 466.......................................................................1.6, 3.18, 3.20, 3.21, 8.6, 15.4, 15.27

xlviii

Table of cases Greaves & Co (Contractors) Ltd v Baynham Meikle & Partners [1975] 1 WLR 1095, [1975] 3 All ER 99, [1975]2 Lloyd’s Rep 325........................................................3.30 Green v Walkling [2007] EWHC 3251 (Ch), [2008] 2 BCLC 332................................2.36 Greene, Re [1949] Ch 333, [1949] 1 All ER 167, 93 SJ 27............................................9.20 Greenhalgh v Arderne Cinemas [1946] 1 All 512..........................................................17.11 Greenhalgh v Arderne Cinemas [1951] Ch 286, [1950] 2 All ER 1120, 94 SJ 855.......3.11 Greenhalgh v Mallard [1943] 2 All ER 234....................................................................3.36 Gregor v British-Israel-World Federation (NSW) (2002) 41 ACSR 641, NSW Sup Ct.16.30 Greythorn Ltd, Re [2002] 1 BCLC 437, [2002] BCC 559..........................................7.54, 7.60 Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296, [2012] FCAFC 6...........16.7, 16.38 Grimm v Newman Chantry Vellacott DFK [2002] EWCA Civ 1621, [2003] 1 All ER 67, [2002] STC 1388...............................................................................................1.22 Growth Management Ltd v Mutafchiev [2006] EWHC 2774 (Comm), [2007] 1 BCLC 645, [2006] All ER (D) 81 (Nov)................................................................3.19 Guidezone Ltd, Re [2000] 2 BCLC 321, [2001] BCC 692...........................9.10, 9.131, 9.147, 9.149, 9.170, 11.2, 12.9 Guinness v Land Corp of Ireland (1883) LR 22 ChD 349, 52 LJ Ch 177, 47 LT 517...3.4 Guinness Peat Group plc v British Land Co plc [1999] 2 BCLC 243, [1999] BCC 536, [1998] NPC 168..............................................................................................10.34 Gunewardena v Conran Holdings Ltd [2016] EWHC 2983 (Ch), [2017] BCC 135......3.11 Gwembe Valley Development Co Ltd v Koshy (No 3) [2003] EWCA Civ 1048, [2004] 1 BCLC 131, [2004] WTLR 97................................................2.43, 2.44, 2.49, 4.3 H

HL Bolton Engineering Co Ltd, Re [1956] Ch 577, [1956] 2 WLR 844, [1956] 1 All ER 799.............................................................................................................11.12, 11.21 HIH Insurance Ltd (in liquidation), Re (2016) 335 ALR 320, [2016] NSWSC 482......16.41 HLC Environmental Projects Ltd, Re [2013] EWHC 2876 (Ch), [2014] BCC 337.....2.2, 2.26, 2.29 HNA Irish Nominee Ltd v Kinghorn [2010] FCAFC 57, 78 ACSR 553........................16.9 HNA Irish Nominees Pty Ltd v Kinghorn (No 2) (2012) 290 ALR 372........................16.21 HSBC Bank Middle East v Clarke [2006] UKPC 31, [2007] 1 LRC 544......................3.31 HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640, 211 ALR 79, [2004] HCA 54........................................................................................16.41 Hadley v Baxendale (1854) 9 Ex 341.............................................................................8.1 Hailey Group Ltd, Re [1993] BCLC 459, [1992] BCC 542..................9.45, 9.119, 10.2, 10.12 Hall v Cable & Wireless Plc [2009] EWHC 1793 (Comm), [2010] 1 BCLC 95, [2010] Bus LR D40.....................................................................................4.22, 4.23, 4.25 Halle v Trax BW Ltd [2000] BCC 1020.........................................................................6.48 Halt Garage (1964) Ltd, Re [1982] 3 All ER 1016.........................................................9.105 Halton International Inc (Holdings) Sarl v Guernroy Ltd [2006] EWCA Civ 1968, [2006] 1 BCLC 78, [2006] WTLR 1241, [2006] All ER (D) 302 (Jun), [2006] 1 BCLC 78.......................................................................................................3.2, 7.71, 9.52 Hamilton v Brown [2016] EWHC 191 (Ch), [2016] 2 WLUK 205, [2017] BCC 457......11.10, 11.11 Harborne Road Nominees Ltd v Karvaski [2011] EWHC 2214 (Ch), [2012] 2 BCLC 420...................................................................................................................9.160, 14.13 Harman v BML Group Ltd [1994] 1 WLR 893, [1994] 2 BCLC 674, [1994] BCC 502.......................................................................................................................7.41, 7.42 Harmer (HR) Ltd, Re [1959] 1 WLR 62, [1958] 3 All ER 689, 103 SJ 73....9.37, 9.141, 10.44 Harris v Microfusion 2003-2 LLP [2016] EWCA Civ 1212, [2017] 1 BCLC 305........5.4, 5.5, 6.3, 6.7 Harris v Milfull [2002] FCAFC 442, (2002) 43 ACSR 542...........................................4.2 Harrison v Thompson [1993] BCLC 784, [1992] BCC 962...........................................10.43

xlix

Table of cases Hart Investment Holdings Ltd, Re [2013] EWHC 2067 (Ch)........................................9.6 Haselgrove v Lavender Estates Pty Ltd [2009] NSWSC 1076.......................................16.26 Hastings-Bass, Re [1975] Ch 25, [1974] 2 WLR 904, [1974] 2 All ER 193..................4.21 Hateley v Morris [2004] EWHC 252 (Ch), [2004] 2 WLUK 138, [2004] 1 BCLC 582..........................................................................................................................14.14 Haven Gold Mining Co, Re (1882) 20 ChD 151, 51 LJ Ch 242, 30 WR 389................11.48 Hawkes v Cuddy. See Neath Rugby Ltd, Re, Hawkes v Cuddy Hawkes v Cuddy (No 2). See Neath Rugby Ltd, Re, Hawkes v Cuddy Hawkes v Cuddy [2007] EWHC 1789 (Ch), [2007] 7 WLUK 663, [2007] BCC 671...14.8 Hayes v Bristol Plant Hire Ltd [1957] 1 WLR 499, [1957] 1 All ER 685......................9.73 Haysport Properties Ltd v Ackerman [2016] EWHC 393 (Ch), [2016] 2 BCLC 522....2.30 Haz International v II, Il v Yesilkaya [2021] EWHC 1695 (Ch), [2021] 7 WLUK 126.11.50 Hedgehog Golf Company Ltd, Re, Lantsbury v Hauser [2010] EWHC 390 (Ch), [2010] All ER (D) 35 (May)...................................................................................10.11 Hedley Byrne & Co v Heller & Partners Ltd [1964] AC 465, [1963] 3 WLR 101, [1963] 2 All ER 575...............................................................................................2.56, 4.6 Hely-Huthinson v Brayhead Ltd [1968] 1 QB 549, [1967] 3 WLR 1408, [1967] 3 All ER 98......................................................................................................................2.15 Hemsley v Graham [2013] EWHC 2232 (Ch)................................................................2.30 Henderson v Merrett Syndicates [1995] 2 AC 145, [1994] 3 WLR 761, [1994] 3 All ER 506....................................................................................................................4.6 Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 39 FCR 546, 79 ALR 83....................................................................................................................16.32 Herman v Set-Mak Civils CC 2013 (1) SA 386 (FB).....................................................18.41 Heron International Ltd v Lord Grade [1983] BCLC 244..........................2.58, 4.2, 4.15, 4.19, 7.2, 8.13, 8.36 Heyting v Dupont [1964] 1 WLR 843, [1964] 2 All ER 273, 108 SJ 277......................7.2 Hickman v Kent or Romney Marsh Sheep Breeders’ Association [1915] 1 Ch 881, 84 LJ Ch 688, [1914–15] All ER Rep 900.............................................3.1, 3.9, 7.49, 9.73 Highgrove Homes Ltd, Re [2013] BLR 45..............................................................11.13, 11.16 Hillam v Ample Source International Ltd (No 2) (2012) 289 ALR 192.........................16.21 Hitch v Stone (Inspector of Taxes) [2001] EWCA Civ 63, [2001] STC 214, [2001] BTC 78, [2001] All ER (D) 181 (Jan).....................................................................1.16 Hitchins v Hitchins (Hatfield) Ltd [2012] 5 WLUK 781.............................................3.37, 7.28 Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] Ch 169, [1946] 1 All ER 350, 62 TLR 231.....................................................................................................9.60 Hlumisa Investment Holdings RF Ltd v Kirkinis 2019 (4) SA 569 (GP), confirmed on appeal 2020 (5) SA 419 (SCA).........................................................................18.21 Hoare & Co Ltd, Re (1933) 150 LT 374, [1933] All ER Rep 105...............................7.57, 7.60 Hogg v Cramphorn Ltd [1967] Ch 254, [1966] 3 WLR 995, [1966] 3 All ER 420....2.19, 5.11 Hoicrest Ltd, Re, Keene v Martin [2000] 1 WLR 414, [2000] 1 BCLC 194.....7.26, 7.31, 9.28 Holiday Inns (UK) Ltd v Customs & Excise Commissioners [1993] VATTR 321........15.32 Holders Investment Trust, Re [1971] 1 WLR 583..........................................................7.51 Holdyk v Adolph 2012 BCCA 37, 29 BCLR (5th) 79....................................................17.6 Hollen Australia Pty Ltd, Re [2009] VSC 95...........................................................16.23, 16.24 Holmes v Keyes [1959] Ch 199, [1958] 2 WLR 772, [1958] 2 All ER 129...................3.29 Home & Office Fire Extinguishers Ltd, Re [2012] EWHC 917 (Ch), [2012] All ER (D) 31 (May)...............................................................................................9.51, 9.86, 10.2 Homer District Consolidated Gold Mines, ex p Smith, Re (1888) 39 Ch D 546...........7.28 Homes of England Ltd v Horsham Holdings Ltd [2019] EWHC 2429 (Ch), [2019] 7 WLUK 578..............................................................................................................10.45 Homes for England v Nick Sellman (Holdings) Ltd [2020] EWHC 936 (Ch), [2020] Bis LR 1163, [2020] BCC 607...............................................................................5.5, 6.2 Hook v Sumner [2015] EWHC 3820 (Ch), [2016] BCC 220...................2.54, 6.13, 6.34, 6.37, 6.39, 6.41, 6.43, 6.48, 12.8

l

Table of cases Hopson v Chief Constable of North Wales [2002] EWHC 2430 (Admin), [2002] All ER (D) 395 (Oct)....................................................................................................1.23 Hornsby Building Information Centre Pty Ltd v v Sydney Building Information Centre Ltd (1978) 140 CLR 216, 18 ALR 639, 1B IPR 818..................................16.32 Horsley & Weight Ltd, Re [1982] Ch 442......................................................................2.54 Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41, 55 ALR 417, 4 IPR 291.......................................................................................3.2, 4.7, 7.71, 16.6 Houldsworth Village Management Co Ltd v Barton [2020] EWCA Civ 980, [2020] 4 WLR 107, [2020] BCC 953........................................................................7.11, 7.12, 7.15 House of Fraser plc v ACGE Investments Ltd [1987] AC 387, [1987] 2 WLR 1083, [1987] BCLC 478...................................................................................................7.50 Howard v Herrigel NNO 1991 (2) SA 660 (A)..............................................................18.16 Howard (RP) Ltd & Witchell v Woodman Mathews & Co (a firm) [1983] BCLC 117, [1983] Com LR 100, QBD..............................................................................4.2 Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, [1974] 2 WLR 689, [1974] 1 All ER 1126........................................................................2.16, 2.17, 2.18, 2.20, 2.21, 4.19, 4.20, 9.112 Hughes v Burley [2021] EWHC 104 (Ch), [2021] 1 WLUK 194.................... 6.18, 6.34, 6.37, 6.39 Hughes v Weiss [2012] EWHC 2363 (Ch), [2012] All ER (D) 197 (Oct)...........6.2, 6.13, 6.39, 6.43, 6.48, 12.8 Humberclyde Finance Group Ltd v Hicks [2001] EWHC 700 (Ch), [2001] All ER (D) 202 (Nov).........................................................................................................8.33 Hunter v Senate Support Services Ltd [2004] EWHC 1085 (Ch), [2005] 1 BCLC 175..............................................................................................................2.18, 2.26, 4.21 Hurley v BGH Nominees Pty Ltd (1982) 31 SASR 250, 6 ACLR 291..........................16.18 Hurst v Crampton Bros (Coopers) Ltd [2002] EWHC 1375 (Ch), [2003] 1 BCLC 304, [2003] BCC 190, [2002] 2 P&CR D21..........................................................3.1, 3.37 Hut Group Ltd, Re [2021] EWCA Civ 904, [2021] 6 WLUK 167, [2021] BCC 970....9.88 Hut Group v Zedra Trust Co (Jersey) Ltd [2017] 11 WLUK 683..................................7.11 Hydrodam (Corby) Ltd, Re [1994] 2 BCLC 180, [1994] BCC 161...............................2.4 Hydrosan Ltd, Re [1990] 10 WLUK 172, [1991] BCC 19, [1991] BCLC 418..............13.4 I

I Fit Global Ltd, Re [2013] EWHC 2090 (Ch), [2014] 2 BCLC 116........................7.25, 9.149 ICI, Re [1936] Ch 587, [1936] 4 WLUK 1.....................................................................4.13 ING Bank NV v Ros Roca SA [2011] EWCA Civ 353, [2012] 1 WLR 472, [2012] Bus LR 266.............................................................................................................3.2 IRC v Crossman [1937] AC 26, [1936] 1 All ER 762, 15 ATC 94................................1.7, 3.21 Icamera Ltd, Re [2021] EWHC 1762 (Ch), [2021] 6 WLUK 400.................................10.3 Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2011] 1 BCLC 498, [2010] BCC 420................................................................. 6.2, 6.12, 6.18, 6.22, 6.30, 6.33, 6.34, 6.37, 6.38, 6.39, 6.43, 6.44, 6.45, 6.46, 6.48, 10.46, 12.6, 12.8 Imperial Hydropathic Hotel Co, Re, Blackpool v Hampson (1882) 23 ChD 1, 31 WR 330, 49 LT 150........................................................................................................3.9 Indo China Steam Navigation Co Ltd, Re [1917] 2 Ch 100, 86 LJ Ch 723, 117 LT 212..........................................................................................................................7.22 Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443, [1972] 2 All ER 162, (1971) 116 SJ 255 (Birmingham Assize)..................................................2.39 Ingram v Singh, MSD Cash & Carry plc, Re [2018] EWHC 1325 (Ch), [2018] 5 WLUK 96, [2018] BCC 886...................................................................................2.4 Instant Access Properties (in liquidation) v Rosser [2018] EWHC 756 (Ch), [2018] 4 WLUK 156, [2018] BCC 751.................................................................................2.59 Interactive Technology Corp Ltd v Ferster [2016] EWHC 2896 (Ch)...........................9.95

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Table of cases Interactive Technology Corp Ltd v Ferster [2018] EWCA Civ 1594, [2018] 7 WLUK 89, [2021] WTLR 561.............................................................................................2.53 Intermedia Productions Ltd v Patel [2020] EWHC 473 (Ch), [2020] 3 WLUK 550, [2020] BCC 582......................................................................................................9.36 International Credit & Investment Co (Overseas) Ltd v Adham [1994] 1 BCLC 66, [1993] TLR 173......................................................................................................7.28 International Leisure Ltd v First National Trustee Co UK Ltd [2012] EWHC 1971 (Ch), [2012] PNLR 34, [2012] WLR (D) 208........................................................8.26 International Society of Auctioneers & Valuers, Re, Baillie’s Case [1898] 1 Ch 110, 67 LJ Ch 81, 77 LT 523..........................................................................................7.28 ‘International Tin Council case’. See JH Rayner (Mincing Lane) Ltd v Department of Trade & Industry Internet Investment Corp Ltd, Re [2009] EWHC 2744 (Ch), [2010] 1 BCLC 458........11.40 Investec Bank (UK) Ltd v Zulman [2009] EWHC 1590 (Comm), [2009] All ER (D) 156 (Jul), affirmed on appeal [2010] EWCA Civ 536, [2010] All ER (D) 167 (May).......................................................................................................................3.10 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, [1988] 1 All ER 98, [1988] 1 BCLC 531..............................................3.29 Irvine v Irvine (No 1) [2006] EWHC 406 (Ch), [2007] 1 BCLC 349....9.57, 9.83, 9.86, 9.109, 9.110, 9.120, 9.121, 9.145, 10.36 Irvine v Irvine (No 2) [2006] EWHC 583 (Ch), [2007] 1 BCLC 445..........10.21, 10.22, 10.30 Isaacs v Belfield Furnishings Ltd [2006] EWHC 183 (Ch), [2006] 1 WLUK 545, [2006] 2 BCLC 705................................................................................................14.13 Island Export Finance Ltd v Umunna [1986] BCLC 460, QBD....................................2.39 Isle of Wight Railway Co Ltd v Tahourdin (1883) 25 ChD 320, 53 LJ Ch 353, 50 LT 132..........................................................................................................................7.36 Item Software (UK) Ltd v Fassihi [2004] EWCA Civ 1244, [2005] 2 BCLC 91, [2004] BCC 994, [2004] IRLR 928........................................................................2.30 J

J & S Insurance & Financial Consultants Ltd [2014] EWHC 2206 (Ch)......9.76, 9.105, 9.106, 9.108, 9.133 JE Cade & Son Ltd, Re [1991] 3 WLUK 369, [1991] BCC 360, [1992] BCLC 213...9.6, 9.53, 9.77, 9.79, 11.8, 11.12, 11.28 , 12.9 JH Rayner (Mincing Lane) Ltd v Department of Trade & Industry [1990] 2 AC 418, [1989] 3 WLR 969, sub nom Maclaine Watson & Co Ltd v Department of Trade & Industry & related appeals, Maclaine Watson & Co Ltd v International Tin Council [1989] 3 All ER 523 (‘the International Tin Council case’)....1.8, 1.26, 1.27, 1.32, 1.33, 1.35 JJ Harrison (Properties) Ltd v Harrison [2001 EWCA Civ 1467, [2002] 1 BCLC 162.2.52 JN 2 Ltd, Re [1978] 1 WLR 183, [1977] 3 All ER 1104, (1977) 121 SJ 46...........11.13, 11.16, 11.20, 11.27 Jaber v Science & Information Technology Ltd [1992] BCLC 764............................9.20, 10.2 Jackson v Dear [2013] EWCA Civ 89, [2014] 1 BCLC 186..............................2.15, 2.31, 3.18 Jafari-Fini v Skillglass Ltd [2005] EWCA Civ 356, [2005] BCC 842........................6.13, 6.43 Jaybird Group Ltd v Greenwood [1986] BCLC 319......................................................6.48 Jayflex Construction Ltd, Re [2003] EWHC 2008 (Ch), [2004] 2 BCLC 145..........9.10, 9.174 Jennings v CPS [2008] UKHL 29, [2008] 1 AC 1046, [2008] 2 WLR 1148, [2008] 4 All ER 113, [2008] 2 Cr App R 29.........................................................................1.16 Jermyn Street Turkish Baths Ltd, Re [1971] 1 WLR 1042, [1971] 3 All ER 184, 115 SJ 483, [1970] 1 WLR 1194, [1970] 3 All ER 57, 114 SJ 583......9.2, 10.18, 10.22, 10.37 Jesner v Jarrad Properties Ltd 1994 SLT 83, 1993 SC 34, [1993] BCLC 1032.......9.122, 11.3, 11.39

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Table of cases John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1, 266 ALR 462, [2010] HCA 19................................................................................16.38 John Crowther Group Plc v Carpets International Plc [1990] BCLC 460......................4.14 John Foster & Sons, Ltd v The Commissioners of Inland Revenue [1894] 1 QB 516, 63 LJQB 173...........................................................................................................1.28 John Reid & Sons (Strucsteel) Ltd, Re, Reid v Reid [2003] EWHC 2329 (Ch), [2003] 2 BCLC 319..................................................................................9.69, 9.70, 9.162 John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113, 104 LJKB 549, 153 LT 245..........................................................................................................................5.9 John Smith’s Tadcaster Brewery Co Ltd, Re [1953] Ch 308, [1953] 2 WLR 516, [1953] 1 All ER 518................................................................................................7.50 Johnson v Gore Wood & Co [2002] 2 AC 1, [2001] 2 WLR 72, [2001] 1 All ER 481, [2001] BCC 820................................................................ 8.3, 8.9, 8.11, 8.15, 8.18, 8.19, 8.21, 8.22, 8.30, 8.35, 8.36, 8.43, 16.13 Johnson v Meyer, Johnson & Chieftain Industrial Contractors & Consultants Ltd (1987) 57 Sask R 161 (QB)....................................................................................17.6 Johnson Tiles Pty Ltd v Esso Australia Pty Ltd (2000) 104 FCR 564, [2000] FCA 1572........................................................................................................................16.32 Johnston v McGrath [2005] NSWSC 1183, (2005) 195 FLR 101.................................16.41 Joncas v Spruce Falls Power & Paper Co Ltd (2000) 48 OR (3d) 179, 2000 6 BLR 3d 109, 48 OR (3d) 179, aff,d 15 BLR 3d 1, 144 OAC 289, Ont CA.....................17.9 Jones v Garnett (Inspector of Taxes) [2007] UKHL 35, [2007] 1 WLR 2030, [2008] Bus LR 425, [2007] ICR 1259................................................................................3.3 Jones v Jones, Re Incasep [2002] EWCA Civ 961, [2003] BCC 226.....................9.149, 9.173 Jones v Lipman [1962] 1 WLR 832, [1962] 1 All ER 442, 106 SJ 531......................1.16, 1.20 Jordan v Roberts [2009] EWHC 2313 (Ch)....................................................................7.28 Joujou v Masri [2011] EWCA Civ 746, [2011] 2 CLC 566...........................................9.88 Jovanovic v Commonwealth Bank of Australia (2004) 87 SASR 570, [2004] SASC 61............................................................................................................................16.33 Jubilee Mines NL v Riley (2009) 226 FLR 201, [2009] WASCA 62.............................16.35 Julien v Evolving TecKnologies & Enterprise Development Co Ltd [2018] UKPC 4, [2018] 2 WLUK 391, [2018] BCC 376..................................................................2.30 K

K/9 Meat Supplies (Guildford) Ltd, Re [1966] 1 WLR 1112, [1966] 3 WLR 320, 110 SJ 348...............................................................................................................11.21 KR Hardy Estates Ltd, Re [2014] EWHC 4001 (Ch), [2016] BCC 367...................9.85, 10.38 Kaimowitz v Delahunt 2017 (3) SA 201 (WCC)............................................................18.13 Katan v Feroze [2021] 7 WLUK 390..............................................................................14.3 Kaye v Croydon Tramways Co Ltd [1898] 1 Ch 358, 67 LJ Ch 222, 78 LT 237.........2.54, 3.5, 4.10, 5.13 Kaye v Oxford House Management Co Ltd [2019] EWHC 2181 (Ch), [2019] 8 WLUK 39, [2020] BCC 117................................................................................7.34, 7.36 Kazakhstan Kagazy plc v Zhunus [201] EWCA Civ 381, [2014] 1 CLC......................8.37 Keary Developments Ltd v Tarmac Construction Ltd [1995] 3 All ER 534, [1994] 4 WLUK 55, [1995] 2 BCLC 395.............................................................................14.15 Keech v Sandford (1762) Sel Cas Ch 61, [1558–1774] All ER Rep 230, 25 ER 223....2.39 Keisner v Terrus Group Ltd [2006] EWHC 2765 (Ch), [2007] 1 BCLC 303................8.30 Keith Prowse & Co Ltd, Re [1918] 1 Ch 487, [1918–19] All ER Rep 946....................7.30 Kelly v Hussain [2008] EWHC 1117 (Ch).....................................................................9.152 Kent Coalfields Syndicate Ltd, Re [1898] 1 QB 754, 67 LJQB 500, 46 WR 453..........7.7 Kenyon Swansea Ltd, Re [1987] BCLC 514, 3 BCC 259, 1987 PCC 333.................9.69, 9.70 Keymed (Medical & Industrial Equipment) Ltd v Hillman [2019] EWHC 485 (Ch), [2019] 3 WLUK 160.........................................................................2.17, 2.18, 2.22, 2.31, 2.33, 2.39, 2.47, 2.48, 2.49

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Table of cases Khoui v Acropolis Capital Partners Ltd [2016] EWHC 2120 (Comm)..........................3.2 Kiani v Cooper [2010] EWHC 577 (Ch), [2010] 2 BCLC 427, [2010] BCC 463.....6.34, 6.39, 6.46, 6.48, 12.8 Killick v PricewaterhouseCoopers (No 1) [2001] 1 BCLC 65, [2001] Lloyd’s Rep PN 17, [2001] WTLR 699.......................................................................................4.6 King v Clear Facilities Management Ltd (unreported, 23 October 2020)......................7.22 Kings Security Systems Ltd v King [2021] EWHC 325 (Ch), [2021] 2 WLUK 260..2.9, 2.13, 2.30, 2.44, 2.46, 2.47 Kirby v Thorn EMI [1987] STC 621, [1988] 1 WLR 445, [1988] 2 All ER 947, [1987] STC 621.......................................................................................................15.5 Kirby Coaches Ltd, Re [1991] BCLC 414......................................................................2.59 Kitson & Co Ltd, Re [1946] 1 All ER 435, 175 LT 25, 90 SJ 222..........................11.46, 11.47 Kleanthous v Paphitis [2011] EWHC 2287 (Ch), [2011] All ER (D) 33 (Sep)..........6.34, 6.39, 6.40, 6.42, 6.43, 6.44, 12.5, 12.8 Kleinwort Benson v Malaysia Mining Corp Berhad [1989] 1 WLR 379, [1989] 1 All ER 785, [1989] 1 Lloyd’s Rep 556.........................................................................1.26 Knight v Frost [1999] 1 BCLC 364, [1999] BCC 819..................................................2.28, 6.3 Knight’s Quest Pty Ltd v Dalwa Can Co [2018] VSCA 349..........................................16.21 Knipe v Kameelhoek (Pty) Ltd 2014 (1) SA 52 (FB)..................................18.29, 18.30, 18.42, 18.44 Knox v Deane [2005] UKPC 25, [2005] BCC 884, [2005] All ER (D) 329...............3.37, 9.99 Kohn v Meehan [2003] 1 WLUK 727, [2003] All ER (D) 315 (Jan).............................9.38 Kokotovich Constructions Pty Ltd v Wallington (1995) 17 ACSR 478, 13 ACLC 1113.................................................................................................................16.24, 16.30 Konamaneni v Rolls Royce (Industrial Power) India Ltd [2002] 1 WLR 1269, [2002] 1 All ER 979, [2002] 1 BCLC 336......................................................................6.13, 6.51 Kranidiotes v Paschali [2001] EWCA Civ 357, [2003] BCC 353, [2001] CP Rep 81...10.34 Kregor v Hollins (1913) 109 LT 225..............................................................................2.31 Kudumane Investment Holding Ltd v Northern Cape Manganese [2012] 4 All SA 203 (GSJ)................................................................................................................18.31 Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187, [1990] 3 WLR 297, [1990] 3 All ER 404.........................................1.26, 1.32, 1.33, 1.35, 2.28 Kyle Bay Ltd (t/a Astons Nightclub) v Underwriters [2007] EWCA Civ 57, [2007] Lloyd’s Rep IR 460.................................................................................................9.8 Kyrris v Burger King Ltd [2007] EWHC 753 (Ch), [2007] All ER (D) 96 (Apr)..........4.4 L

LCM Wealth ManagementLtd, Re [2013] EWHC 3957 (Ch).....................................9.40, 9.85 LRH Services Ltd (in liquidation) v Trew [2018] EWHC 600 (Ch), [2018] 3 WLUK 506.......................................................................................................................2.22, 2.23 La Compagnie de Mayville v Whiteley [1896] 1 Ch 788, 65 LJ Ch 729, 74 LT 441.....5.9 La Générale des Carrières et des Mines v FG Hemisphere Associates LLC [2012] UKPC 27, [2012] 2 Lloyd’s Rep 443......................................................................1.17 Langley Ward Ltd v Trevor & Another, sub nom Seven Holdings Ltd, Re [2011] EWHC 1893 (Ch), [2011] All ER (D) 108 (Jun)........................................6.21, 6.43, 12.8 Larret v Coega Development Corp (Pty) Ltd 2015 (6) SA 16 (ECG)............................18.30 Larrett v Coega Development Corp (Pty) Ltd 2019 (3) SA 510 (ECG).........................18.38 Last Lion Holdings Ltd, Re [2018] EWHC 2347 (Ch), [2018] 9 WLUK 170...............9.50 Lee v Lee’s Air Farming Ltd [1961] AC 12, [1960] 3 WLR 758, [1960] 3 All ER 420......1.29, 1.30 Lee v Sheard [1956] 1 QB 192, [1955] 3 WLR 951, [1955] 3 All ER 777.................8.38, 8.42 Leedon Ltd v Hurry [2010] UKPC 27, [2011] 1 BCLC 580, [2010] All ER (D) 41 (Dec).......................................................................................................................3.37

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Table of cases Leeds United Holdings plc, Re [1996] 2 BCLC 545, [1997] BCC 131........9.47, 9.104, 9.128, 9.143, 9.145, 9.172 Legal Costs Negotiators Ltd, Re, sub nom Morris v Hateley [1999] 2 BCLC 171, [1999] BCC 547, (1999) 96(13) LSG 31, [1999] 2 BCLC 171, (1998) The Times, July 15.....................................................................................9.4, 9.37, 9.47, 9.52, 9.55, 9.66, 9.70, 9.83, 10.2, 10.4, 14.11 Lewis Group Ltd v Woollam 2017 (2) SA 547 (WCC).................................18.1, 18.16, 18.25, 18.34, 18.35, 18.36. 18.37 Lexi Holdings Ltd v Luqman [2007] EWHC 2652 (Ch), [2007] All ER (D) 265 (Nov)....................................................................................................................2.33, 2.59 Lifecare International plc, Re [1990] BCLC 222, (1989) 5 BCC 755................4.29, 7.57, 7.62 Linsen International Ltd v Humpuss Sea Transport Pte Ltd [2012] 1 BCLC 651, QB (Comm)...................................................................................................................1.25 Linton v Telnet Pty Ltd [1999] NSWCA 33, (1999) 30 ACSR 465, NSWCA...............2.29 Liquidator of West Mercia Safety Wear Ltd v Dodds [1988] BCLC 250, (1988) 4 BCC 30, 1988 PCC 212..........................................................................................2.7 Little Olympian Each-Ways Ltd, Re [1995] 1 WLR 460, [1994] 4 All ER 561, [1994] 2 BCLC 420...........................................................................9.6, 9.81, 10.46, 12.6 Little Olympian Each-Ways Ltd (No 3), Re [1995] 1 BCLC 636..............9.8, 9.10, 9.44, 9.85, 9.86, 10.6 Livingstone v Rawyards Coal Co (1850) 4 App Cas 25, 42 LT 334, 44 JP 392............7.24, 8.1 Llewellyn v Kasintoe Rubber Estates Ltd [1914] Ch 670, 84 LJ Ch 70, [1914–15] All ER Rep 558.......................................................................................................9.29 Lloyd v Casey [2002] 1 BCLC 454, [2002] Pens LR 185........................9.19, 9.28, 9.34, 9.35, 9.48 Lloyd v Popely [2000] 1 BCLC 19, [2000] BCC 338....................................................7.72 Lloyd Bank plc (LON/95/2524)......................................................................................15.32 Loch v John Blackwood Ltd [1924] AC 783, 93 LJPC 257, [1924] All ER Rep 200.......11.39, 11.41, 16.30 Lock & Trotman v The Queensland Investment & Land Mortgage Co Ltd [1896] AC 461, 65 LJ Ch 798...................................................................................................3.29 Logicrose Ltd v Southend United FC Ltd (No 2) [1988] 1 WLR 1256..........................2.44 London v Department of Transport, Roads & Public Works, Northern Cape 2019 JDR 213 (SCA).......................................................................................................18.21 London School of Electronics Ltd, Re [1986] Ch 211, [1985] 3 WLR 474, [1985] BCLC 273, (1985) 1 BCC 99, 394..........................................................9.94, 9.95, 9.133, 9.158, 10.22, 10.30, 10.37, 10.38 Lord v Maven Wealth Group Ltd [2021] EWHC 2544 (Comm), [2021] 9 WLUK 273..........................................................................................................................10.19 Lord v Sinai Securities Ltd [2004] EWHC 1764 (Ch), [2005] 1 BCLC 295, [2004] BCC 986, [2004] BPIR 1244..................................................................................2.4 Louw v Nel 2011 (2) SA 172 (SCA)..............................................................................18.32 Loveridge v Loveridge [2020] EWCA CIv 1104, [2020] 8 WLUK 179........................10.45 Loveridge Holdings Ltd v King-Pin Ltd 1992 5 BLR 2d 195........................................17.9 Lowe v Fahey, sub nom Fahey Developments Ltd, Re [1996] 1 BCLC 262, [1996] BCC 320..........................................................................................9.45, 10.6, 10.46, 12.6 Lowry (Inspector of Taxes) v Consolidated African Selection Trust Ltd [1940] AC 648, [1940] 2 All ER 545, 109 LJKB 539..............................................................9.60 Lundie Brothers Ltd, Re [1965] 1 WLR 1051, [1965] 2 All ER 692, 109 SJ 470...11.43, 11.44 Lungowe v Vedanta Rseources plc [2019] UKSC 20, [2020] AC 1045, [2019] 2 WLR 1051............................................................................................................1.25, 9.63

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Table of cases Luxor (Eastbourne) Ltd v Cooper [1941] AC 108, [1941] 1 All ER 33, 110 LJKB 131..........................................................................................................................3.33 Lyle & Scott Ltd v Scott’s Trustees [1959] AC 763, [1959] 3 WLR 133, [1959] 2 All ER 661....................................................................................................................3.37 M

MDA Investment Management Ltd, Re [2003] EWHC 2277 (Ch), [2004] 1 BCLC 217, [2005] BCC 783, [2004] BPIR 75...............................................................2.29, 2.59 McAskill v Fulton [2014] 10 WLUK 950..........................................................6.37, 6.43, 12.8 McAskill v Transatlantic Petroleum Corp 2003 5 WWR 178, 332 AR 96, 11 Alta LR (4th) 168, Alberta QB.............................................................................................17.6 Macaura v Northern Assurance Co Ltd [1925] AC 619, 94 LJPC 154, [1925] All ER Rep 51..................................................................................................................1.32, 8.15 McCarthy Surfacing Ltd, Re [2006] EWHC 832......................................9.22, 9.24, 9.34, 14.4 McCarthy Surfacing Ltd, Re [2009] 1 BCLC 622...........................................9.7, 9.106, 9.107, 9.112, 9.113, 9.142, 10.30 Maclaine Watson & Co Ltd v Department of Trade & Industry & related appeals, Maclaine Watson & Co Ltd v International Tin Council. See JH Rayner (Mincing Lane) Ltd v Department of Trade & Industry McConnel v Wright [1903] 1 Ch 546, 72 LJ Ch 347, 88 LT 431...................................4.26 MacDougall v Gardiner (No 2) (1875) 1 ChD 13, 45 LJ Ch 27, 33 LT 521..................3.9 McEneaney v Stevens [2017] 5 WLUK 10.....................................................................6.20 McGuiness v Bremner plc [1988] BCLC 673, (1988) 4 BCC 161.........7.35, 9.85, 9.86, 9.120, 9.162, 10.44 Mackay Sugar Ltd v Wilmar Sugar Australia Ltd (2016) 338 ALT 374, [2016] FCAFC 133.............................................................................................................16.21 McKillen v Misland (Cyprus) Investments Ltd [2012] EWHC 505 (Ch)......................3.38 McKillen v Misland (Cyprus) Investments Ltd [2012] EWHC 521 (Ch).....2.4, 3.2, 7.67, 13.3 McKillen v Misland (Cyprus) Investments Ltd, Coroin Ltd, Re [2012] EWHC 2343 (Ch). See Coroin Ltd, Re McKillen v Misland (Cyprus) Investments Ltd [2012] BCC 575.............3.19, 3.29, 3.34, 3.35, 3.37, 7.67, 9.75, 9.152 McMillan NO v Pott 2011(1) SA 511 (WCC).............................................10.10, 18.28, 18.29, 18.33 MacQuarie Internationale Investments Ltd v Glencore (UK) Ltd [2008] EWHC 1716 (Comm), [2008] 2 BCLC 565, [2008] 2 CLC 223.................................................4.16 Macom GmbH Ltd, Re [2021] EWHC 1661 (Ch), [2021] 6 WLUK 290.........2.15, 9.36, 9.37, 9.86 Macro (Ipswich) Ltd, Re [1994] 2 BCLC 354, [1994] BCC 781...............9.6, 9.10, 9.42, 9.83, 9.85, 9.86, 9.101, 9.103, 10.35, 10.36 Mactra Properties Ltd v Morshead Mansions Ltd [2008] EWHC 2843 (Ch), [2009] 1 BCLC 179, [2009] BCC 335..................................................................................7.28 Madoff Securities International Ltd (in liquidation) v Raven [2013] EWHC 3147 (Comm).............................................................................................2.20, 2.29, 2.31, 2.34, 3.16 Malaga Group (HK) Ltd v Jung (1996) 89 OR (3d) 36 (CA).........................................17.10 Malos v Malos (2003) 44 ACSR 511, [2003] NSWSC 118...........................................16.30 Manchester Building Society v Grant Thornton LLP [2021] UKSC 20, [2021] 3 WLR 81, [2021] 4 All ER 1....................................................................................2.56 Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, [1997] 3 All ER 352, [1997] 2 WLR 945, [1997] NPC 81..................................3.29, 3.36 Marc Rich & Co AG v Bishop Rock Marine Co Ltd [1996] 1 AC 211, [1995] 3 WLR 227, [1995] 3 All ER 307........................................................................................4.6 Maresca v Brookfield Development & Construction [2013] EWHC 3151 (Ch)............11.28

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Table of cases Marex Financial Ltd v Sevilleja see Sevilleja v Marex Financial Ltd....  Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494, 158 ALR 333, [1998] HCA 69.................................................................................................................. 16.41 Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72, [2016] AC 742...............................................................3.29, 3.30, 3.34 Marks & Spencer plc v Freshfields Bruckhaus Deringer [2004] EWCA Civ 741, [2005] PNLR 4, [2004] EWHC 1337 (Ch), [2004] 1 WLR 2331, [2004] 3 All ER 773....................................................................................................................16.38 Marren v Ingles [1980] 1 WLR 983, [1980] 3 All ER 95, [1980] STC 500...................15.5 Marsden v Tower Taxi Technology LLP [2005] EWCA Civ 1503, [2005] All ER (D) 162 (Oct).................................................................................................................11.47 Marshall’s Valve Gear Company Ltd v Manning, Wardle & Co Ltd [1909] 1 Ch 267, 78 LJ Ch 46, 100 LT 65..........................................................................................5.10 Marson v Marriage [1980] STC 177, 54 TC 59..............................................................15.5 Martin Coulter Enterprises Ltd, Re [1988] BCLC 12, (1988) 4 BCC 212..............11.24, 11.25 Martyn Rose Ltd v AGK Group Ltd [2003] EWCA Civ 375, [2003] 2 BCLC 102, [2003] All ER (D) 104 (Mar)..................................................................................1.6 Matabeleland Co Ltd v British South Africa Co (1893) 10 TLR 77 & CA....................4.9 Maud, Re [2015] EWHC 1626 (Ch)..........................................................................10.2, 11.26 Mbethe v United Manganese of Kalahari 2017 (6) SA 409 (SCA)..............18.34, 18.36, 18.39 Mea Corp Ltd, Re [2006] EWHC 1846 (Ch), [2007] 1 BCLC 618................................2.4 Mears v R Mears & Co (Holdings) Ltd [2002] 2 BCLC 1......................................9.155, 9.165 Melhado v Porto Alegre Ry Co (1874) 9 CP 503, 43 LJCP 253, 23 WR 57..................3.9 Mellor v Partridge [2012] EWHC 1415 (QB)................................................................4.4 Merchantbridge & Co Ltd v Safron General Partner 1 Ltd [2012] 2 BCLC 291, QBD (Comm)...................................................................................................................1.26 Metropolis Motorcycles Ltd, Re [2007] 1 BCLC 520, [2006] All ER (D) 68 (Mar)..........9.85, 9.113, 9.165, 9.170, 10.27 Mhanna v Sovereign Capital Ltd [2004] FCA 1040.......................................................16.19 Michaels v Harley House (Marylebone) Ltd [2000] Ch 104, [1999] 3 WLR 229, [1999] 1 All ER 356, [1999] BCC 967...................................................................9.39 Michel v Michel [2019] EWHC 1378 (Ch), [2019] 5 WLUK 501, [2020] 1 BCLC 54...................................................................................................9.86, 9.99, 9.122, 9.166 Middlesborough Assembly Rooms Co, Re (1880) 14 Ch D 104....................................11.52 Might SA v Redbus Interhouse plc [2003] EWHC 3514 (Ch), [2004] 2 BCLC 449, [2003] All ER (D) 167 (Jul)....................................................................................7.38 Migration Solutions Holdings Ltd, Re [2016] EWHC 523 (Ch)....................................9.75 Mills v Mills (1938) CLR 150........................................................................................2.20 Milton Keynes BC v Viridor (Community Recycling MK) Ltd [2017] EWHC 239 (TCC)......................................................................................................................3.10 Minera La Bambas SA v Glencore Queensland Ltd [2019] EWCA Civ 972, [2019] STC 1642, [2019] 6 WLUK 196.............................................................................3.29 Minister of Environmental Affairs v Recycling & Economic Development Initiative of South Africa NPC 2018 (3) SA 604 (QCC).......................................................18.41 Minister of Water Affairs & Forestry v Stilfontein Gold Mining Co 2006 (5) SA 333 (W)..........................................................................................................................18.20 Minrealm Ltd, Re, Bishlawi v Soliman [2012] EWHC 343 (Ch)...................................10.34 Mission Capital plc v Sinclair [2008] EWHC 1339 (Ch), [2010] 1 BCLC 304, [2008] BCC 866.................................................................................6.38, 6.43, 12.7, 14.6 Modise v Tladi Holdings (Pty) Ltd 2020 JDR 2036 (SCA)...........................................18.16 Moffatt v Farquhar (1878) 7 Ch D 591, 47 LJ Ch 355, 38 LT 18...................................5.13 Mohamed v Abelmahmoud [2018] EWCA Civ 879, [2018] Bus LR 1354, [2018] 4 WLUK 367..............................................................................................................6.45 Monnington v Easier plc [2005] EWHC 2578 (Ch), [2006] 2 BCLC 283, [2005] All ER (D) 265 (Nov)...................................................................................................7.38

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Table of cases Monsolar IQ Ltd v Woden Park Ltd [2021] EWCA Civ 961, [2021] 6 WLUK 392, [2021] L & TR 29...................................................................................................3.10 Montgold Capital LLLP v Ilska [2018] EWHC 2982 (Ch), [2018] 10 WLUK 275, [2019] BCC 309......................................................................................................6.49 Moorcock, The (1889) LR 14 PD 64, 58 LJP 73, 60 LT 654.........................................3.30 Moordene Ltd v Transglobal Chartering Ltd [2006] EWHC 1407 (Ch)........................9.63 Moore Stephens v Stone Rolls Ltd [2009] UKHL 39, [2009] 1 AC 1391, [2009] 3 WLR 455, [2009] Bus LR 1356.............................................................................1.2, 1.29 Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692..............................................18.28 Morgan v Morgan Insurance Brokers Ltd [1993] BCLC 676, [1993] BCC 145............7.30 Morgan Crucible v Hill Samuel Bank [1991] Ch 295, [1991] 2 WLR 655, [1991] 1 All ER 142..............................................................................................................4.6 Morley v Australian Securities & Investments Commission (2010) 247 FLR 140........16.7 Morris v Redland Bricks Ltd [1970] AC 652, [1969] 2 WLR 487, [1969] 2 All ER 576..........................................................................................................................10.45 Motion Picture Capital Ltd, Re [2021] EWHC 2504 (Ch), [2021] 9 WLUK 158..........9.38 Mountforest Ltd, Re [1993] 3 WLUK 424, [1993] BCC 565.........................................14.7 Mouritzen v Greystones Enterprises (Pty) Ltd 2012 (5) SA 74 (KZD)........18.34, 18.35, 18.39 Movitex Ltd v Bulfield [1988] BCLC 104, (1986) 2 BCC 99403...............................2.43, 2.49 Msimano NO v Katuliiba [2013] 1 All SA 580 (GSJ)....................................................18.25 Mthimunye-Bakoro v Petroleum Oil & Gas Corp of South Africa (SOC) Ltd [2015] JOL 33744...............................................................................................................18.20 Muller v Lilly Valley (Pty) Ltd [2012] 1 All SA 187 (GSJ)...........................................18.44 Multinational Gas & Petrochemical Co Ltd v Multinational Gas & Petrochemical Services Ltd [1983] Ch 258, [1983] 3 WLR 492, [1983] 2 All ER 563................1.27, 6.7 Mumbray v Lapper [2005] EWHC 1152 (Ch), [2005] BCC 990..............6.13, 6.14, 6.43, 6.48 Mumtaz Properties Ltd, Re [2011] EWCA Civ 610, [2012] 2 BCLC 109.....................2.4 Muniment Ltd v Priestley Homes Ltd, Priestley Homes (Bradford) Ltd, Re [2019] 7 WLUK 406..............................................................................................................5.7, 5.8 Murad v Al-Saraj [2004] EWHC 1235 (Ch), [2004] All ER (D) 463 (May) ................3.2, 7.71 Murray NO v African Global Holdings (Pty) Ltd 2020 (2) SA 93 (SCA).....................18.41 Murray’s Judicial Factor v Thomas Murray & Sons (Ice Merchants) Ltd [1993] BCLC 1437, [1992] BCC 596................................................................................9.130 Music Sales Ltd v Shapiro Bornstein & Co Inc [2005] EWHC 759 (Ch), [2006] 1 BCLC 371............................................................................................................9.85, 10.2 Musselwhite v CH Musselwhite & Son Ltd [1962] Ch 964, [1962] 2 WLR 374, [1962] 1 All ER 201................................................................................................9.39 Mutual Life Insurance Co of New York v The Rank Organisation Ltd [1985] BCLC 11............................................................................................................................9.106 N

Naneff v Con-Crete Holdings Ltd (1995) 23 OR (3d) 481, 23 BLR (2d) 286 (CA)......17.10 Nassar v Innovative Precasters Group Pty Ltd (2009) 71 ACSR 343, [2009] NSWSC 342..........................................................................................................................16.30 Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA 593 (SCA)......................................................................................................................18.2 National Australia Bank Ltd v Pathway Investments Pty Ltd [2012] VSCA 168...........16.35 National Bank of Wales, Re [1897] 1 Ch 298, 66 LJ Ch 222, 13 TLR 179...................11.12 National Dwellings Society v Sykes [1894] 3 Ch 159, [1894] 6 WLUK 139................7.36 National Exchange Pty Ltd v Australian Securities & Investments Commission (2004) 49 ACSR 369, [2004] FCAFC 90...............................................................16.32 National Savings Bank Association, Re (1866) 1 Ch App 547, 35 LJ Ch 808, 12 Jur NS 697....................................................................................................................11.10 National Trustees Co of Australasia v General Finance Co of Australia [1905] AC 373 (PC)..................................................................................................................2.59

lviii

Table of cases National Westminster Bank v Jones [2002] EWCA Civ 1541, [2002] 1 BCLC 55, [2002] BPIR 361.....................................................................................................1.16 National Westminster Bank plc v Inland Revenue Commissioners [1995] 1 AC 119, [1994] 3 WLR 159, [1994] 3 All ER 1...................................................................9.20 Nationwide Building Society v Balmer Radmore [1999] PNLR 606.............................4.3 Nationwide Building Society v Thimbleby & Co [1999] PNLR 733.............................4.3 Natural Duvet & Pillow Co Ltd v Ng, sub nom Crabtree v Ng, Ng v Crabtree [2012] EWCA Civ 333, [2011] EWHC 1834 (Ch), [2011] All ER (D) 187 (Jul).......10.33, 10.35 Neath Rugby Ltd, Re, Hawkes v Cuddy [2007] EWHC 2999 (Ch), [2008] BCC 390, confirmed on appeal (Hawkes v Cuddy (No 2) [2009] EWCA Civ 291, [2009] 2 BCLC 427, [2009] All ER (D) 42 (Apr))............................................2.8, 2.32, 9.17, 9.47, 9.49, 9.57, 9.60, 9.62, 9.83, 9.164, 9.166, 9.167, 9.168, 9.171, 9.173, 10.2, 10.4, 10.5, 10.9, 10.10, 10.14, 11.2, 11.3, 11.33, 11.45, 12.1, 12.9 Nectrus Ltd v UCP plc [2021] EWCA Civ 57, [2021] 1 WLUK 165...........................8.2, 8.23 Nesbitt v Secretary of State for Trade & Industry [2007] IRLR 847, EAT....................1.30 Netbush Pty Ltd v Fascine Developments Pty Ltd (2005) 23 ACLC 1123, [2005] WASC 73................................................................................................................16.28 Neufeld & Howe v Secretary of State for Business Enterprise & Regulatory Reform [2009] EWCA Civ 280, [2009] 3 All ER 790, [2009] IRLR 475, [2009] BPIR 909, [2009] ICR 1183............................................................................................1.1, 1.30 New Zealand Guardian Trust Co Ltd v Brooks [1995] 1 WLR 96, [1995] 2 BCLC 242, [1995] BCC 407 (NZ)..................................................................................1.35, 2.28 Newcastle International Airport Ltd v Eversheds LLP [2013[ EWCA Civ 1514, [2014] 1 WLR 3073................................................................................................2.15 Newman & Howard Ltd, Re [1962] Ch 257, [1961] 3 WLR 192, [1961] 2 All ER 495..........................................................................................................................11.25 Nicholas v Soundcraft Electronic Ltd. See Company (No 002470 of 1988), Re a, ex p Nicholas Nilon Ltd v Royal Westminster Investments SA [2015] UKPC 2, [2015] 2 BCLC 1.........7.25, 7.26, 9.23 Noble Investments Pty Ltd v Southern Cross Exploration NL (2008) 174 FCR 301, 69 ACSR 304, [2008] FCA 1963............................................................................16.21 Norcross v Georgallides [2015] EWHC 1290 (Comm)...............................................8.11, 8.43 Norglen Ltd (in Liquidation) v Reeds Rains Prudential Ltd, Mayhew-Lewis v Westminster Scaffolding Group plc, Levy v ABN AMRO Bank NV, Circuit Systems Ltd (in Liquidation) v Zuken-Redac (UK) Ltd [1999] 2 AC 1, [1997] 3 WLR 1177, [1998] 1 All ER 218............................................................................8.20 North Holdings Ltd v Southern Tropics Ltd [1999] 2 BCLC 625, [1999] BCC 746........10.34, 14.13 Northern Engineering Industries plc, Re [1994] 2 BCLC 704, [1994] BCC 618...........7.50 North-West Transportation Company Ltd v Beatty (1887) 12 App Cas 589, 56 LJPC 102, 57 LT 426........................................................................................................5.11 Norvabron Pty Ltd, Re (1986) 11 ACLR 33...................................................................9.57 Norvabron Pty Ltd (No 2), Re (1986) 11 ACLR 279.....................................................9.57 Novatrust Ltd v Kea Investments Ltd [2014] EWHC 4061 (Ch)....................................8.11 Nugent v Benfield Greig Group plc [2001] EWCA Civ 397, [2002] 1 BCLC 65, [2002] BCC 256, [2002] WTLR 769......................................................................11.8 Nuneaton Borough Association Football Club Ltd, Re [1989] BCLC 454, (1989) 5 BCC 792..............................................................................................................9.20, 9.21 Nuneaton Borough AFC Ltd (No 2), Re. See Company (No 00789 of 1987), Re a, ex p Shooter (No 2) Nurcombe v Nurcombe [1985] 1 WLR 370, [1985] 1 All ER 65, [1984] 1 BCC 99269...................................................................................................................6.37, 6.45

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Table of cases O

OBG Ltd v Allan [2007] UKHL 21, [2008] 1 AC 1, [2007] 2 WLR 920, [2007] 4 All ER 545, [2007] BPIR 746, [2007] Bus LR 1600, [2007] EMLR 325, [2007] IRLR 608, [2007] 19 EG 165, [2008] 1 All ER (Comm) 1....................................7.73 OC (Transport) Services Ltd, Re [1984] BCLC 251, (1984) 81 LS Gaz 1044......10.37, 10.38, 10.39 Oak Investment Partners XII, Limited Partnership v Boughtwood [2009] EWHC 176 (Ch), [2009] 1 BCLC 453, sub nom Boughtwood v Oak Investment Partners XII, Limited Partnership [2010] EWCA Civ 23, [2010] 2 BCLC 459, [2010] All ER (D) 188 (Jan).....................................................  9.42, 9.47, 9.57, 9.65, 9.66, 9.67, 9.102, 9.122, 10.4, 10.18, 10.30, 10.31 Oakes v Turquand (1867) 2 HL 325, [1861–73] All ER Rep 738, 36 LJ Ch 949..........7.22 O’Brien v Benson’s Hosiery (Holdings) Ltd [1980] AC 562, [1979] 3 WLR 572, [1979] STC 735, HL...............................................................................................15.5 Off-Beat Holiday Cluv v Sanbonani Holiday Spa Shareblock Ltd 2017 (5) SA 9 (CC)..................................................................................................................18.27, 18.34 Office of Fair Trading v MB Designs (Scotland) Ltd [2005] CSOH 85, 2005 SLT 691, 2005 SCLR 894..............................................................................................1.16 Office of Fair Trading v Miller [2009] EWCA Civ 34, [2009] All ER (D) 24 (Feb)......1.16 Oldham v Kyrris [2003] EWCA Civ 1506, [2004] 1 BCLC 305...................................9.70 Omar v Inhouse Venue Technical Management (Pty) Ltd 2015 (3) SA 146 (WCC).........18.17, 18.29 O’Neill v Philips, Company (No 709 of 1992), Re a [1999] 1 WLR 1092, [1999] 2 All ER 961, [1999] 2 BCLC 1..............................................................3.21, 9.3, 9.6, 9.10, 9.19, 9.30, 9.31, 9.53, 9.76, 9.79, 9.84, 9.85, 9.88 9.123, 9.125, 9.127, 9.130, 9.133, 9.146, 9.151, 9.156, 9.160, 9.170, 10.16, 10.17, 10.21, 10.22, 10.27, 10.38, 11.2, 11.8, 11.33, 11.44, 13.3, 14.12, 18.1, 18.29 Opera Photographic Ltd, Re [1989] 1 WLR 634, [1989] BCLC 763, (1989) 5 BCC 601..........................................................................................................................7.42 Ord v Belhaven Pubs Ltd [1998] 2 WLUK 260, [1998] BCC 607, [1998] 2 BCLC 447............................................................................................................1.16, , 1.24, 1.25 Otello Corp ASA v Moore Frères & Co LLC [2020] EWHC 3261 (Ch), [2020] 11 WLUK 469.......................................................................................................10.12, 10.23 Othery Construction Ltd, Re [1966] 1 WLR 69...........................................11.24, 11.25, 11.41 Ottos Kopje Diamond Mines Ltd, Re [1893] 1 Ch 618, 62 LJ Ch 166, 68 LT 138........7.24 P

Panoutsos v Raymond Hadley Corp of New York [1917] 2 KB 473, 86 LJKB 1325, 117 LT 330, KBD....................................................................................................9.93 Paramount Powders (UK) Ltd, Re [2019] EWCA Civ 1644, [2019] 10 WLUK 81, [2020] BCC 152................................................................................11.2, 11.3, 11.5, 11.6, 11.13, 11.38, 11.42, 11.50 Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191, 42 ALR 1, 1A IPR 684................................................................................................16.32 Parkinson v Eurofinance Group Ltd [2001] 1 BCLC 720, (2000) 97(27) LSG 37..9.94, 9.160, 10.33, 10.35 Parry v Bartlett [2011] EWHC 3146 (Ch)..........................................................6.30, 6.39, 6.49 Partco Group Ltd v Wragg [2002] EWCA Civ 594, [2002] 2 BCLC 323, [2002] 2 Lloyd’s Rep 343......................................................................................................4.14 Patel v Ferdinand (unreported, 11 July 2016).................................................................2.59 Pavlides v Jensen [1956] Ch 565, [1956] 3 WLR 224, [1956] 2 All ER 518.................6.7

lx

Table of cases Pearce v European Reinsurance Consultants & Run-Off Ltd [2005] EWHC 1493 (Ch), [2005] 2 BCLC 366, [2005] All ER (D) 127 (Jul).........................................8.39 Pedersen (Thameside) Ltd, Re [2017] EWHC 3406 (Ch), [2017] 12 WLUK 331, [2018] BCC 58........................................................................................................13.3 Peek v Gurney (1873) LR 6 HL 377, 43 LJ Ch 19, [1861–73] All ER Rep 116............4.25 Peel v Hamon J & C Engineering (Pty) Ltd 2013 (2) SA 331 (GSJ)...........18.27, 18.28, 18.30 Peel v London & North Western Railway Co [1907] 1 Ch 5, 76 LJ Ch 152, 95 LT 897.........................................................................................................................2.57, 4.8 Pelling v Families Need Fathers Ltd [2001] EWCA Civ 1280, [2002] 2 All ER 440, [2002] 1 BCLC 645, (2001) 151 NLJ 1284............................................................7.10 Pemstar Holdings Ltd, Re 1981 12 ACWS 2d 60...........................................................17.5 Peña v Dale [2003] EWHC 1065 (Ch), [2004] 2 BCLC 508.........................................3.16 Pender v Lushington (1877) 6 ChD 70, 46 LJ Ch 317.........................................3.9, 5.11, 5.13 Peng v Mai [2012] SCGA 55..........................................................................................3.29 Pennine Raceway Ltd v Kirklees Metropolitan Council (No 2) [1989] STC 122, 58 P&CR 482, [1989] 1 EGLR 30...............................................................................15.5 Pennyfeathers Ltd v Pennyfeathers Property Co Ltd [2013] EWHC 3530 (Ch)............10.6 People’s Department Store Inc (Trustee of) v Wise [2004] 3 SCR 68...........................17.3 Pepkor Holdings Ltd v AJVH Holdings (Pty) Ltd 2021 (5) SA 115 (SCA)...................18.28 Percival v Wright [1902] 2 Ch 421, 71 LJ Ch 846, [1902] WN 134..............................16.15 Perfectair Holdings Ltd, Re [1990] BCLC 423, (1989) 5 BCC 837........................11.34, 11.47 Perry v Day [2004] EWHC 3372 (Ch), [2005] 2 BCLC 405, [2004] All ER (D) 327 (Oct)......................................................................................................8.2, 8.4, 8.16, 8.17, 8.19, 8.22 Peskin v Anderson [2000] EWCA Civ 326, [2001] 1 BCLC 372, [2001] BCC 874....2.57, 4.7, 4.16, 4.17, 9.70 Peters’ American Delicacy Co Ltd v Heath (1939) 61 CLR 457, HC (Aus).............3.11, 16.14 Petrodel Resources Ltd v Prest [2012] EWCA Civ 1395, [2012] WLR (D) 296, [2012] All ER (D) 293 (Oct).............................................................1.16, 1.18, 1.19, 1.20, 1.23, 1.25, 1.28, 1.32 Petrodel Resources Ltd v Prest [2013] UKSC 34, [2013] 2 AC 415.............................2.54, 5.2 Peveril Gold Mines Ltd, Re [1898] 1 Ch 122, 77 LT 505..............................................11.13 Phillips v Fryer [2012] EWHC 1611 (Ch), [2012] All ER (D) 74 (Jun)...6.34, 6.43, 6.45, 12.8 Phoenix Contracts (Leicester) Ltd, Re, Shepherd v Williamson [2010] EWHC 2375 (Ch), [2010] All ER (D) 142 (Oct)...................................................................10.38, 10.39 Phoenix Office Supplies Ltd, Re [2002] EWCA Civ 1740, [2003] 1 BCLC 76, [2002] EWHC 591 (Ch), [2002] 2 BCLC 556, [2003] BCC 11............9.85, 9.122, 9.166, 10.2, 10.5, 10.28 Phoenix Oil & Transport Co Ltd, Re [1958] Ch 560, [1957] 3 WLR 633, [1957] 3 All ER 218..............................................................................................................11.10 Phoneer Ltd, Re [2002] 2 BCLC 241....................................................9.47, 9.51, 9.175, 11.50 Piccadilly Radio plc, Re [1989] BCLC 683, [1989] BCC 692.......................................7.23 Pilmer & Others v Duke Group Ltd [2001] 2 BCLC 773, [2001] 5 LRC 417, High Court of Australia..........................................................................................4.2, 4.15, 8.13 Pimlico Capital Ltd, Re [2002] EWHC 878 (Ch), [2002] 2 BCLC 544..................11.19, 11.25 Pinfield v Edge to Edge Global Investments Ltd 2014 (1) SA 206 (KZD)....................18.44 Pioneers of Mashonaland Syndicate, Re [1893] 1 Ch 731, 62 LJ Ch 507, 68 LT 163...11.41 Planet Organic Ltd, Re [2000] 1 BCLC 366, [2000] BCC 610....................10.30, 10.33, 10.43 Platt v Platt [2001] 1 BCLC 698, [1999] 2 BCLC 745................................................4.2, 10.35 Polly Peck International plc, Re [1996] 2 All ER 433, [1996] 1 BCLC 428, [1996] BCC 486..............................................................................................................1.16, 1.24 Polyresins Pty Ltd, Re (1998) 28 ACSR 671, 16 ACLC 1674.......................................16.26 Popely v Planarrive Ltd [1997] 1 BCLC 8, (1996) The Times, March 28...................7.27, 7.28 Popely v Popely [2019] EWHC 1507 (Ch), [2019] BCC 1089......................................6.16 Porritt, Re, Barnett v Rose [2011] 9 WLUK 420............................................................3.37

lxi

Table of cases Portuguese Consolidated Copper Mines Ltd, Re (1889) 42 ChD 160, 58 LJ Ch 813, 62 LT 88..................................................................................................................7.28 Posgate & Denby (Agencies) Ltd, Re [1987] BCLC 8, [1986] BCC 99353, [1987] PCC 1.............................................................................................9.97, 9.123, 9.125, 14.4 Possfund Custodian Trustee Ltd v Diamond [1996] 1 WLR 1351, [1996] 2 All ER 774, [1996] 2 BCLC 665.....................................................................................4.24, 4.25 Potts v Miller (1940) 64 CLR 282..................................................................................16.41 Praetorin Pty Ltd v TZ Ltd (2009) 76 ACSR 236, [2009] NSWSC 1237......................16.11 Practice Direction (Chancery 1/90) [1990] 1 WLR 490, [1990] 1 All ER 1056, [1990] BCLC 452................................................................................................12.9, 13.3 Premier Electronics (GB) Ltd, Re [2000] 12 WLUK 677, [2002] BCC 911, [2002] 2 BCLC 634...............................................................................................................14.3 Premier Telecommunications Group Ltd v Webb [2014] EWCA Civ 994, [2016] BCC 439.................................................................................................................10.34 PricewaterhouseCoopers Inc v Perpetual Energy Inc 2021 ABCA 16...........................17.8 Primeo Fund (in official liquidation) v Bank of Bermuda (Cayman) Ltd [2021] UKPC 22, [2021] 8 WLUK 55, [2021] BCC 1015.............................8.2, 8.22, 8.23, 8.24, 8.25 Pringle v Callard [2007] EWCA Civ 1075, , [2007] 8 WLUK 131, [2008] 2 BCLC 505..............................................................................................................7.42, 14.4, 14.6 Pritchard’s Case, Re Tavarone Mining Co (1873) 8 Ch App 956, 42 LJ Ch 768, 29 LT 363.....................................................................................................................3.9 Produce Marketing Consortium (No 1), Re [1989] 1 WLR 745, [1989] 3 All ER 1, [1989] BCLC 513...................................................................................................2.59 Profinance Trust SA v Gladstone [2002] 1 WLR 1024, [2002] 1 BCLC 141, [2002] BCC 356...............................................................................................10.37, 10.38, 10.41 Progress Property Co Ltd v Moore [2010] UKSC 55, [2011] 1 WLR 1..........1.32, 9.40, 9.105 Protcom Holdings Pty Ltd v Kent St Chambers Pty Ltd [2015] FCA 751.....................16.30 Prudential Insurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, [1982] 2 WLR 31, [1982] 1 All ER 354, [1981] Ch 257, [1980] 3 WLR 543, [1980] 2 All ER 841.....................................................................................1.32, 5.2, 5.3, 5.11, 6.4, 6.5, 6.6, 6.7, 6.8, 6.9, 6.13, 6.22, 8.4, 8.6, 8.7, 8.9, 8.10, 8.11, 8.14, 8.15, 8.21, 8.22, 8.30, 8.38, 8.41, 8.42, 16.12 Pulbrook v Richmond Consolidated Mining Co (1878) 9 ChD 610, 48 LJ Ch 65, 27 WR 377...................................................................................................................9.73 Punt v Symons & Co Ltd [1903] 2 Ch 506, 72 LJ Ch 768, 89 LT 525.......................3.12, 7.72 Puzitskaya v St Paul’s Mews (Islington) Ltd [2017] EWHC 905 (Ch).........................3.8, 7.39 Q

QIW Retailers Ltd v Davids Holding Pty Ltd (No 2) (1992) 112 ALR 683..................16.33 Quantum Survey Management Ltd, Re [2016] EWHC 3084 (Ch)...........9.10, 9.85, 9.93, 9.95, 9.131 Québec (A-G) v 9147-0732 Québec Inc 2020 SCC 32..................................................17.2 Queensland Phosphate Pty Ltd v Korda (No 2) [2019] VSCA 215................................16.30 Queens Moat Houses plc, Re [2004] EWHC 1730 (Ch), 1 BCLC 136..........................2.31 Quickdome Ltd, Re [1988] BCLC 370, [1988] BCC 296, 1989 PCC 406......9.27, 9.28, 11.20 Quin & Axtens Ltd v Salmon [1909] AC 442, 78 LJ Ch 506, 25 TLR 590.........5.8, 5.10, 9.73, 16.5 Quinlan v Essex Hinge Co Ltd [1996] 2 BCLC 417, [1997] BCC 53.........9.113, 9.122, 9.138, 9.154, 10.22, 10.40 Quinn v Leatham [1901] AC 495, 70 LJPC 76, 85 LT 289............................................7.73 R

R v Allpress [2009] EWCA Crim 8, [2009] 2 Cr App R (S) 58, [2009] Crim LR 363, [2009] Lloyd’s Rep FC 242....................................................................................1.16

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Table of cases R v Board of Trade [1965] 1 QB 603, [1964] 3 WLR 262, [1964] 2 All ER 561, QBD........................................................................................................................9.47 R v Boyle Transport (Northern Ireland) Ltd [2016] EWCA Crim 19, [2016] 4 WLR 63............................................................................................................................1.20 R v Del Basso (Luigi) [2010] EWCA Crim 1119, [2011] 1 Cr App Rep (S) 41, [2011] Lloyd’s Rep FC 25......................................................................................1.16 R v Green [2008] UKHL 30, [2008] 1 AC 1053, [2008] 2 WLR 1154, [2008] 4 All ER 119, [2007] EWCA Crim 1248, [2007] 3 All ER 751......................................1.22 R v Grubb [1915] 2 KB 683, [1914–15] All ER Rep 667, CCA....................................1.34 R v Hughes (2000) 202 CLR 535, 171 ALR 155, 34 ACSR 92, [2000] HCA 2............16.1 R v May [2008] UKHL 28, [2008] 1 AC 1028, [2008] 2 WLR 1131, [2008] 4 All ER 97............................................................................................................................1.22 R v Powell (Jacqueline) [2016] EWCA Crim 1043 (CA), [2016] 4 WLR 63................1.23 R v R [2013] EWHC 4244 (Fam)...................................................................................2.5 R v Rooney (Steven Michael) [2010] EWCA Crim 2, [2010] All ER (D) 93 (Jan).......1.16 R v Silvester [2009] EWCA Crim 2182, [2009] All ER (D) 103 (Nov).........................1.16 R v South Wales Traffic & Licensing Authority, ex p Ebbw Vale Urban District Council. See Ebbw Vale Urban District Council v South Wales Traffic & Licensing Authority R v Spens [1991] 1 WLR 624, [1991] 4 All ER 421, [1991] BCC 140..........................4.29 R v Straughan [2009] EWCA Crim 955, [2009] All ER (D) 207 (Jun)..........................1.16 R (on the application of People & Planet) v HM Treasury [2009] EWHC 3020 (Admin), LTL 10/12/2009.......................................................................................2.23 R & C Comrs v Holland [2010] UKSC 51, [2010] 1 WLR 2793, [2011] 1 All ER 430..........................................................................................................................2.4 R & H Electric Ltd v Haden Bill Electrical Ltd [1995] 2 BCLC 280, [1995] BCC 958......................................................................................................9.6, 9.30, 9.31, 9.45, 9.53, 9.78, 9.79, 9.134, 9.152, 10.10, 10.22 RA Noble & Sons (Clothing) Ltd, Re [1983] BCLC 273............................9.3, 9.8, 9.81, 9.85, 9.86, 9.94, 9.158, 9.164, 9.173, 11.2, 11.3, 11.41 RAC Motoring Services Ltd, Re [2000] 1 BCLC 307 ...................................................4.15 R-Squared Holdco Ltd, Re [2020] EWHC 23 (Ch), [2020] 1 WLUK 134.......14.3, 14.4, 14.5, 14.6 RW Peak (Kings Lynn) Ltd [1998] 1 BCLC 193, [1998] BCC 596............................3.16, 7.31 Rabinowitz v Van Graan 2013 (5) SA 315 (GSJ)...........................................................18.21 Rackind v Gross [2004] EWCA Civ 815, [2005] 1 WLR 3505, [2004] 4 All ER 735, [2005] BCC 11.....................................................................................................9.57, 9.61 Rahman v Malik [2008] EWHC 959 (Ch), [2008] 2 BCLC 403.....................9.85, 9.88, 9.106, 9.120, 9.131, 9.140, 9.160, 10.12 Rainham Chemical Works Ltd v Belvedere Fish Guano Co [1921] 2 AC 465, 90 LJKB 1252, 126 LT 70......................................................................................, 1.26, 1.28 Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900, 138 Con LR 1, [2012] 1 All ER (Comm) 1, [2011] CILL 3105,.................................................3.29 Raleigh UK Ltd v Mail Order Cycles Ltd [2011] EWHC 883 (Ch), [2011] BCC 508, [2011] All ER (D) 41 (Mar)....................................................................................1.26 Ransom v Computer Systems plc [2012] EWCA Civ 841.............................................2.12 Rasley (Singapore) Pte Ltd v Financial & Energy Exchange Ltd [2020] FCA 1462.....16.37 Ravenhart Service (Holdings) Ltd, Re [2004] EWHC 76 (Ch), [2004] 2 BCLC 376..6.8, 9.36, 9.37, 9.57 Rawnsley v Weatherall Green & Smith North Ltd [2010] 1 BCLC 658, [2010] BPIR 449..........................................................................................................................8.30 Rayfield v Hands [1960] Ch 1, [1958] 2 WLR 851, [1958] 2 All ER 194...........3.1, 7.47, 7.48

lxiii

Table of cases Rea v Wildeboer 2015 ONCA 373, 126 OR (3d) 178....................................................17.10 Recovery Partners GB Ltd v Rukhadze [2018] EWHC 2918 (Comm), [2019] Bus LR 1166, [2018] 11 WLUK 15............................................................................2.38, 2.39 Reeves v Sprecher [2007] EWHC 117 (Ch), [2007] 2 BCLC 614, [2007] All ER (D) 41 (Feb)...................................................................................................................6.51 Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, [1942] 1 All ER 378...2.2, 2.39, 5.11, 5.12, 9.39 Regentcrest plc v Cohen [2000] 5 WLUK 788, [2001] BCC 494, [2001] 2 BCLC 80..2.26 Regional Airports Ltd, Re [1999] 2 BCLC 30...............................................2.19, 9.118, 9.149, 9.163, 9.164, 9.169, 10.5, 10.13, 10.35, 10.37, 11.43 Rembert v Daniel [2018] EWHC 388 (Ch), [2018] 2 WLUK 679, [2019] BCC 167....9.47 Rentekor (Pty) Ltd v Rheeder & Berman NNO 1988 (4) SA 469.............................18.1, 18.29 Residues Treatment & Trading Co Ltd v Southern Resources Ltd (1998) 14 ACLR 375, 51 SASR 177, Sup Ct of South Australia.....................................................4.13, 4.15 Revenue & Customs Commissioners v Holland [2010] UKSC 51, [2010] 1 WLR 2793, [2011] 1 All ER 430, [2011] Bus LR 111, SC........................................1.1, 2.3, 2.4 Rhone-Poulenc Agrochimie S A v UIM Chemical Services Pty Ltd (1986) 12 FCR 477, 68 ALR 77.......................................................................................................16.32 Rica Gold Washing Co Ltd, Re (1879) 11 ChD 36, 40 LT 531, 27 WR 715.............11.8, 11.24 Richard Hunt Investments Ltd v Hunt [2017] EWHC 988 (Ch)....................................2.59 Richards v Lundy, sub nom Apollo Cleaning Serrvices Ltd, Re [2000] 1 BCLC 376, [1999] BCC 786...................................................................................9.113, 9.122, 9.133, 9.160, 10.5, 10.19, 10.22, 10.35, 10.36, 10.37 Richardson v Blackmore [2005] EWCA Civ 1356, [2006] BCC 276, [2005] All ER (D) 345 (Nov)........................................................................................9.95, 9.133, 9.149, 10.2, 11.43 Ringtower Holdings plc, Re See Company (No 005685 of 1988), Re a, ex p Schwarcz (No 2) Ritchie v Union of Construction, Allied Trades & Technicians [2011] EWHC 3613 (Ch), [2011] 11 WLUK 781........................................................................6.39, 6.43, 12.7 Roach v Winnote Pty Ltd (2006) 57 ACSR 138.............................................................16.20 Robert Glew & Denton & Co Trustees Ltd v ARPI Matossian-Rogers [2019] EWHC 3183 (Ch), [2019] 11 WLUK 384, [2020] BCC 248..................................6.34, 6.37, 6.39 Roberts v Frohlich [2011] EWHC 257 (Ch), [2011] 2 BCLC 625, [2012] BCC 407.........2.28, 2.34, 2.35 Roberts v Letter “t” Estates Ltd [1961] AC 795, [1961] 3 WLR 176, 105 SJ 525.........9.29 Robinson v Randfontein Estates Gold Mining Co Ltd 1921 AD 168.............................18.16 Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24, [2019] AC 119, [2018] 5 WLUK 292.....................................................................9.93 Rock Nominees Ltd v RCO (Holdings) plc (in liq) [2004] EWCA Civ 118, [2004] 1 BCLC 439, [2004] All ER (D) 275 (Feb), [2003] EWHC 936 (Ch), [2003] 2 BCLC 493, [2003] All ER (D) 360.................................................................9.6, 9.7, 9.34 Rodencroft Ltd, Re [2004] EWHC 862 (Ch), [2004] 1 WLR 1566, [2004] 3 All ER 56............................................................................................................................11.26 Rogers v Rogers Communications Inc 2021 BBSC 2184..............................................17.3 Rolled Steel Products (Holdings) Ltd v British Steel Corp [1986] Ch 246, [1985] 2 WLR 908, [1985] 3 All ER 1..................................................................................3.4 Roodepoort United Main Reef GM Co Ltd (in liquidation) v du Toit NO 1928 AD 66............................................................................................................................18.1 Ross v Telford [1998] 1 BCLC 82, [1997] BCC 945, (1997) 94(28) LSG 26.............7.38, 7.39 Rossendale BC v Hurstwood Properties (A) Ltd [2021] UKSC 16, [2021] 2 WLR 1125, [2021] 5 WLUK 146.....................................................................................1.20 Ross River Ltd v Waveley Commercial Ltd [2012] EWHC 81 (Ch), [2012] All ER (D) 55 (Feb)...........................................................................................................3.2, 7.71

lxiv

Table of cases Routledge v Skerrit [2019] EWHC 573 (Ch), [2019] 3 WLUK 212, [2019] BCC 812.9.114 Rowley, Holmes & Co v Barber [1977] 1 WLR 371, [1977] ICR 387, [1977] 1 All ER 801, EAT...........................................................................................................1.30 Royal Bank of Scotland Plc v Hicks [2010] EWHC 2568 (Ch), [2011] All ER (D) 66 (Jan).........................................................................................................................10.45 Rubin v Parsons [2016] EWHC 237 (Ch).......................................................................10.2 Russell v Northern Bank Development Corp Ltd [1992] 1 WLR 588, [1992] 3 All ER 161, [1992] BCLC 1016 (Northern Ireland)......................3.12, 3.20, 3.21, 7.70, 15.4 S

SA Hawken Ltd, Re [1950] 2 All ER 408, 66 TLR (Pt 2) 138, [1950] WN 357............11.24 SDI Retail Services Ltd v King [2017] EWHC 737 (Ch).........................6.22, 6.34, 6.35, 6.37, 6.39, 6.40 SNCB Holding v UBS AG [2012] EWHC 2044 (Comm), [2012] All ER (D) 259 (Jul).........................................................................................................................3.30 SSF Realisations Ltd (in liquidation) v Loch Fyne [2020] EWHC 3521 (Ch), [2020] 12 WLUK 405, [2021] BCC 354............................................................................2.59 St Piran Ltd, Re [1981] 1 WLR 1300, [1981] 3 All ER 270, (1981) 125 SJ 586...........11.49 Saatchi v Giljar [2019] EWHC 3472 (Ch), [2019] 12 WLUK 231....................6.34, 6.39, 6.43 Safeguard Industrial Investments Ltd v National Westminster Bank Ltd [1982] 1 WLR 589, [1982] 1 All ER 449, (1982) 126 SJ 205...............................................3.37 Safeway Stores Ltd v Twigger [2010] EWCA Civ 1472, [2011] 1 CLC 80, [2011] 2 All ER 841, [2011] 1 Lloyd’s Rep 462, [2011] UKCLR 339, [2011] Bus LR 1629........................................................................................................................2.53 Salomon v Salomon & Co Ltd, sub nom Broderip v Salomon [1897] AC 22, 66 LJ Ch 35, [1895–9] All ER Rep 33, [1895] 2 Ch 323, [1895] All ER Rep 33..........1.1, 1.13, 1.14, 1.15, 1.17, , 1.24, 1.26, 1.34, 16.2, 16.15, 18.1 Saltdean Estate Co Ltd, Re [1968] 1 WLR 1844............................................................7.50 Sam Weller & Sons Ltd (Company (No 823 of 1987), Re [1990] Ch 682, [1989] 3 WLR 923, [1990] BCLC 80................................................................9.4, 9.10, 9.40, 9.41, 9.101, 9.103, 9.112, 9.113, 11.8, 11.41, 18.32 Satyam Enterprises Ltd v Burton [2021] EWCA Civ 287, [2021] 3 WLUK 82, [2021] BCC 640......................................................................................................3.16 Saul D Harrison & Sons plc, Re [1995] 1 BCLC 14, [1994] BCC 475.....3.3, 5.6, 9.1, 9.2, 9.3, 9.6, 9.7, 9.9, 9.32, 9.74, 9.75, 9.83, 9.88, 9.88, 9.90, 9.108, 9.112, 9.113, 9.122, 9.123, 9.125, 9.126, 14.10, 18.29, 18.31 Schofield v Jones [2019] EWHC 803 (Ch), [2019] 3 WLUK 570, [2019] BCC 932.....7.42 Schofield v Schofield [2011] EWCA Civ 154, [2011] 2 BCLC 319, [2011] All ER (D) 274 (Feb)..........................................................................................................7.33 Scitec Group Ltd, Re. See Sethi v Patel Scott v Frank F Scott (London) Ltd [1940] Ch 794, [1940] 3 All ER 508, 163 LT 140..............................................................................................................3.10, 3.11, 3.32 Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324, [1958] 3 WLR 404, [1958] 3 All ER 66............................................................9.2, 9.49, 9.57, 9.59, 9.60, 9.66, 10.37, 10.38 Scottish Insurance Corp Ltd v Wilsons & Clyde Coal Co Ltd [1949] AC 462, [1949] 1 All ER 1068, [1949] LJR 1190............................................................................7.50 Scottish Widows Fund & Life Assurance Society v BGC International [2012] EWCA Civ 607, [2012] All ER (D) 167 (May)......................................................3.29 Scotto v Petch, Sedgefield Steeplechase Co (1927) Ltd, Re [2000] 2 BCLC 211, [2001] BCC 889......................................................................................................3.37

lxv

Table of cases Scullion v Bank of Scotland Plc (t/a Colleys) [2011] EWCA Civ 693, [2011] WLR 3212, [2011] NPC 62, [2011] 25 EG 105, [2011] BLR 449..................................4.6, 8.31 Secretary of State for Business, Energy & Industrial Strategy v Raham [2020] EWHC 2213 (Ch), [2020] 8 WLUK 116................................................................2.3 Secretary of State for Business, Enterprise & Regulatory Reform v Sullman [2008] EWHC 3179 (Ch), [2009] 1 BCLC 397, [2010] BCC 500.....................................2.36 Secretary of State for Business, Innovation & Skills v Chohan [2013] EWHC 680 (Ch), [2013] 3 WLUK 709, [2015] BCC 755.........................................................2.4 Secretary of State for Business, Innovation & Skills v World Future Ltd [2013] EWHC 723 (Ch)..............................................................................................11.25, 11.26 Secretary of State for Trade & Industry v Baker (No 1) [1998] BCC 583.....................2.36 Secretary of State for Trade & Industry v Deverell [2001] Ch 340, [2000] 2 WLR 907, [2000] 2 All ER 365, [2000] BCC 1057.........................................................2.4 Secretary of State for Trade & Industry v Tjolle [1997] 5 WLUK 67, [1998] BCC 282, [1998] 1 BCLC 333........................................................................................2.4 Sembcorp Marine Ltd v PPL Holdings Pte Ltd [2013] SGCA 43..................................3.29 Sethi v Patel, Scitec Group Ltd, Re [2011] 1 BCLC 277..............................10.2, 10.13, 10.35, 10.36, 10.41 Seven Holdings Ltd, Re. See Langley Ward Ltd v Trevor & Another Sevilleja v Marex Financial Ltd [2020] UKSC 31, [2021] AC 39, [2020] 3 WLR 255.........5.2, 5.7, 8.2, 8.3, 8.4, 8.8, 8.9, 8.13, 8.14, 8.15, 8.19, 8.20, 8.22, 8.23, 8.24, 8.25, 8.26, 8.27, 8.30, 16.12, 18.21 Shah v Shah [2005] EWHC 2237 (Ch)....................................................................11.33, 11.38 Shah v Shah [2010] EWCA Civ 1408, [2011] WTLR 519, [2010] All ER (D) 121 (Dec), [2010] EWHC 313 (Ch), [2010] All ER (D) 307 (Feb)............9.113, 9.133, 9.149, 9.158, 11.2, 11.43 Shah v Shah [2011] EWHC 1902 (Ch), [2011] All ER (D) 13 (Aug)............................10.35 Shaker v Al-Bedrawi [2002] EWCA Civ 1452, [2003] Ch 350, [2003] 2 WLR 922, [2002] 4 All ER 835, [2003] 1 BCLC 157.............................................................4.4, 8.28 Sharma v Sharma [[2013] EWCA Civ 1287, [2014] BCC 73............................2.38, 2.39, 3.17 Sharp v Blank [2017] BCC 187.............................................. 2.57, 2.58, 4.7, 4.18, 9.70, 9.115 Sharp v Blank [2019] EWHC 3096 (Ch), [2019] 11 WLUK 243...............2.36, 2.56, 4.8, 4.13 Shears v Chisholm [1994] 2 VR 535, (1992) 9 ACSR 961.............................................4.8 Sherborne Park Residents Co Ltd, Re (1986) 2 BCC 99528..........................................5.13 Sherlock Holmes Interational Society Ltd, Re [2016] EWHC 1076 (Ch)......................3.16 Shield Development Co Ltd v Snyder & Western Mines Ltd 1976 3 WWR 44, British Columbia.....................................................................................................17.6 Shirlaw v Southern Foundries (1926) Ltd [1940] AC 701, [1940] 2 All ER 445, [1939] 2 KB 206, [1939] 2 All ER 113..................................................................3.30, 9.8 Short v Treasury Commissioners [1948] AC 534, [1949] LJR 143, 64 TLR 400, [1948] 1 KB 116, [1947] LJR 1463, [1947] 2 All ER 298.....................................1.31 Shun Tak Holdings Ltd, Re [2009] 5 HKLDD 743........................................................6.17 Shuttleworth v Cox Bros & Co [1927] 2 KB 9, 96 LJKB 104, 136 LT 337...................3.11 Sidebottom v Kershaw, Leese & Co [1920] 1 Ch 154, 89 LJ Ch 113, 122 LT 325........3.11 Sidney Bolsom Investment Trust Ltd v E Karmios & Co (London) Ltd [1956] 1 QB 529, [1956] 2 WLR 625, [1956] 1 All ER 536.......................................................3.30 Sigma Finance Corp, Re [2009] UKSC 2.......................................................................3.29 Sikorski v Sikorski [2012] EWHC 1613 (Ch).......................................9.83, 9.112, 9.113, 12.1 Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA 347, [2012] Ch 453...............................................................................................2.38, 2.52, 3.2 Singh Bros Contractors (North West) Ltd, Re [2013] EWHC 2138 (Ch)......................6.30 Singularis Holdings Ltd (in official liquidation) (a Company incorporated in the Cayman Islands) v Daiwa Capital Markets Europe Ltd [2019] UKSC 50, [2020] AC 1189, [2019] 3 WLR 997..................................................................................1.29

lxvi

Table of cases Sir Henry Royce Memorial Foundation v Hardy [2021] EWHC 714 (Ch), [2021] 3 WLUK 472, [2021] BCC 705................................................................................7.9, 7.13 Sir Lindsay Parkinson & Co v Triplan Ltd [1973] QB 609, [1973] 2 WLR 632, [1973] 1 WLUK 678...............................................................................................14.15 Sivagnanam v Barclays Bank plc [2015] EWHC 3985 (Comm).................................8.30, 8.31 Smart Co Pty Ltd (in liquidation) v Clipsal Australia Pty Ltd (2011) 82 ACSR 154, [2011] FCA 35........................................................................................................16.19 Smartec Capital Pty Ltd v Centro Properties Ltd (2011) 83 ACSR 461, [2011] NSWSC 495............................................................................................................16.37 Smith v Anderson (1880) 15 ChD 247, 50 LJ Ch 39......................................................2.2 Smith v Butler [2012] EWCA Civ 314, [2012] BCC 645, [2012] All ER (D) 136 (Mar), [2012] 1 BCLC 444.........................................................................2.15, 7.40, 7.42 Smith v Charles Building Services Ltd [2006] EWCA Civ 14, [2006] BCC 334, [2006] All ER (D) 120 (Jan)...................................................................................7.28 Smith v Croft (No 2) [1988] Ch 114, [1987] 3 WLR 405, [1987] 3 All ER 909...6.8, 6.9, 6.10, 6.12, 6.44 Smith v Eric S Bush [1990] 1 AC 831, [1989] 2 WLR 790, [1989] 2 All ER 514........4.6, 8.31 Smith & Fawcett Ltd, Re [1942] Ch 304, [1942] 1 All ER 542, 111 LJ Ch 265.........2.22, 9.57 Smith Martis Cork & Rajan Pty Ltd v Benjamin Corp Pty Ltd (2004) 207 ALR 136, [2004] FCAFC 153.................................................................................................16.23 Smith New Court Securities Ltd v Citibank NA [1997] AC 254, [1996] 3 WLR 1051, [1996] 4 All ER 769......................................................................................16.41 Smiths of Smithfield Ltd, Re [2003] EWHC 568 (Ch), [2003] BCC 769...................4.13, 4.15 Smithton Ltd v Naggar [2014] EWCA CIv 939, [2015] 1 WLR 189.............................2.4 Smyth v Investex Bank Ltd 2016 (4) SA 363 (GP), aff’d on appeal 2018 (1) SA 494 (SCA)......................................................................................................................18.28 Snelling House Ltd, Re [2012] EWHC 440 (Ch), [2012] All ER (D) 54 (Mar).............2.3 Snook v London & West Riding Investments Ltd [1967] 2 QB 786, [1967] 2 WLR 1020, [1967] 1 All ER 518......................................................................................1.16 South Australia Asset Management v York Montague Ltd [1997] AC 191, [1996] 3 WLR 87, [1996] 3 All ER 365................................................................................3.29 South Llanharran Colliery Co, Re, ex p Jegan (1879) LR 12 ChD 503, 28 WR 194.....1.16 Southern Counties Fresh Foods Ltd, Re [2008] EWHC 2810 (Ch), [2008] All ER (D) 195 (Nov).......................................................................................2.8, 2.23, 2.26, 9.7, 9.17, 9.83, 9.87, 9.88, 9.91, 9.93, 11.2 Southern Counties Fresh Foods Ltd, Re [2010] EWHC 3334 (Ch), [2010] All ER (D) 225 (Dec)..........................................................................................................10.41 Speed Investment Ltd v Formula One Holdings Ltd (No 3) [2004] EWHC 3215 (Ch).3.19 Sprintroom Ltd, Re [2019] EWCA Civ 932, [2019] 6 WLUK 42, [2019] BCC 1031...10.23 Stainer v Lee [2010] EWHC 1539 (Ch), [2011] 1 BCLC 537, [2011] BCC 134.......6.19, 6.30, 6.33, 6.34, 6.35, 6.42, 6.44, 6.48, 12.5, 12.7 Standard Bank of South Africa Ltd v R-Bay Logistics CC 2013 (2) SA 295 (KZD).....18.41 Standard Chartered Bank (Hong Kong) Ltd v Independent Power Tanzania Ltd [2016] EWCA Civ 411, [2016] 2 All ER (Comm) 740..........................................1.20 Standish v Royal Bank of Scotland [2019] EWHC 3116 (Ch), [2020] 1 All ER (Comm) 814, [2020] 1 BCLC 826..........................................................................2.5 Stapp v Surge Holdings Pty Ltd (1999) 17 ACLC 896, 31 ACSR 35.............................16.30 Starlight Developers Ltd, Re [2007] EWHC 1660 (Ch), [2007] BCC 929.......7.25, 7.26, 7.29, 9.28, 11.27 Steenkamp v Central Energy Fund Soc Ltd 2018 (1) SA 311 (WCC)...........................18.25 Stein v Blake (No 2) [1998] 1 All ER 724, [1998] 1 BCLC 573, [1998] BCC 316.....2.57, 4.7, 4.15, 4.19, 8.30 Stevenson v Southwark LBC [2011] EWHC 108 (QB), [2011] All ER (D) 27 (Feb)....8.19

lxvii

Table of cases Stewarts (Brixton) Ltd, Re [1985] BCLC 4................................................9.2, 9.49, 9.60, 9.67, 9.104, 9.155 Sticky Fingers Restaurant Ltd, Re [1992] BCLC 84, [1991] BCC 754.........................7.42 Stimpson v Southern Private Landlords Association Ltd [2009] EWHC 2072 (Ch), [2010] BCC 387, [2009] All ER (D) 193 (May)...............................6.21, 6.22, 6.31, 6.37, 6.40, 6.45 Stobart v Tinkler [2019] EWHC 258 (Comm), [2019] 2 WLUK 235.........................2.18, 2.20 Storm Financial Ltd (recs & mgrs apptd) (admin apptd) Australian Securities & Investments Commission , Re (2009) 71 ACSR 81, [2009] FCA 269....................16.30 Strahan v Wilcock [2006] EWCA Civ 13, [2006] 2 BCLC 555, [2006] All ER (D) 106 (Jan)...............................................................................................9.122, 9.133, 9.137, 9.160, 10.21, 10.22, 10.25 Stratos Club Ltd, Re [2021] EWHC 1008 (Ch), [2021] 2 WLUK 461..........................10.10 Stratos Club Ltd, Re [2020] EWHC 3485 (Ch), [2020] 12 WLUK 463.....................2.39, 2.49 Streeter v Western Areas Exploration Pty Ltd (No 2) (2011) 278 ALR 291..................16.38 Strong v J Brough & Son (Strahfield) Pty Ltd (1991) 5 ACSR 296...............................16.30 Sulamerica Cia Nacional De Seguros SA v Enesa Engenharia SA [2012] EWCA Civ 638, [2013] 1 WLR 102, [2012] 1 Lloyd’s Rep 671, [2012] All ER (D) 145 (May).......................................................................................................................9.16 Sunrise Ltd, Re [2010] 1 BCLC 367, [2013] EWCA Civ 667, [2014] 1 BCLC 427.....3.39 Sunrise Radio Ltd, Re, Kohli v Lit [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, aff’d [2013] EWCA Civ 667, [2014] 1 BCLC 427.............................2.22, 3.39, 4.20, 9.5, 9.7, 9.8, 9.69, 9.70, 9.81, 9.85, 9.86, 9.88, 9.89, 9.106, 9.108, 9.111, 9.112, 9.113, 9.115, 9.116, 9.117, 9.119, 9.174, 10.2, 10.22, 10.24, 10.25, 10.26, 10.29, 10.31, 10.36, 10.39, 11.39, 11.44, 12.3 Superbee Pty Ltd, Re (1989) 7 ACLC 418.....................................................................16.30 Sussex Brick Co Ltd, Re [1904] 1 Ch 598, 73 LJ Ch 308, 90 LT 426...............7.24, 7.37, 9.28 Swaledale Cleaners Ltd, Re [1968] 1 WLR 1710, [1968] 3 All ER 619, 112 SJ 781....7.27 Swindle v Harrison [1997] 4 All ER 705, [1997] PNLR 641, [1997] NPC 50..............4.3 System Building Services Group Ltd (in liquidation), Re [2020] EWHC 54 (Ch), [2020] 2 All ER (Comm) 565, [2020] BCC 345.....................................................2.13 Szen Corp Pty Ltd v Clean Energy Council Ltd (2009) 69 ACSR 365, [2009] FCA 40............................................................................................................................16.21 T

TPD Investments Ltd [2017] EWHC 657 (Ch)............................................................10.2, 10.6 TPT Patrol Pty Ltd (as trustee for Amies Superannuation Fund) v Myer Holdings Ltd (2019) 140 ACSR 38.................................................................................16.40, 16.41 Taberna Europe CDO II plc v Selskabet [2016] EWCA Civ 1262, [2017] QB 633.....4.6, 4.25 Taldua Rubber Co, Re [1946] 2 All ER 763...................................................................11.47 Tamplin (FA) Steamship Co Ltd v Anglo Mexican Petroleum Products Co Ltd [1916] 2 AC 397, 85 LJKB 1389, 115 LT 315........................................................3.34 Tang Man Sit (Deceased) v Capacious Investments Ltd [1996] 1 AC 514, [1996] 2 WLR 192, [1996] 1 All ER 193 (Hong Kong).......................................................3.2, 7.71 Tappenden (t/a English & American Autos) v Artus [1964] 2 QB 185, [1963] 3 WLR 685, [1963] 3 All ER 213........................................................................................3.30 Target Holdings Ltd v Redferns [1996] 1 AC 421, [1995] 3 WLR 352, [1995] 3 All ER 785....................................................................................................................4.3 Tay Bok Choon v Tahansan Sdn Bhd [1987] 1 WLR 413, [1987] BCLC 472, (1987) 131 SJ 473..............................................................................................9.78, 9.128, 9.150, 11.43, 11.44 Taylor v Mcnamara [1974] 1 NSWLR 164, SC (NSW).................................................7.65

lxviii

Table of cases Taylor v National Union of Mineworkers (Derbyshire Area) [1985] BCLC 237, [1985] IRLR 99......................................................................................................5.12, 6.4 Taylor Goodchild Ltd v Taylor [2021] EWCA Civ 1135, [2021] 7 WLUK 379............14.10 Territory Realty Pty Ltd v Garraway [2009] FCA 292...................................................16.22 Tett v Phoenix Property & Investment Co Ltd [1986] BCLC 149, [1986] BCC 99140, [1986] 1 FTLR 210, [1984] BCLC 599, [1983–85] BCC 99327...3.35, 3.36, 3.37 Theakston v London Trust plc [1984] BCLC 390, (1984) 1 BCC 99095......................3.37 Thermascan Ltd v Norman [2009] EWHC 3694 (Ch), [2011] BCC 535....................2.38, 2.39 Third v North East Ice & Cold Storage Co Ltd 1997 SLT 1177, [1998] BCC 242........9.142 Thomas v D’Arcy & Others [2005] QCA 68, (2005) 52 ACSR 609.........4.2, 8.32, 8.42, 16.13 Thomas v Dawson [2015] EWCA Civ 706, [2015] BCC 603.................................10.17, 10.32 Thomas v H W Thomas Ltd [1984] 1 NZLR 686, NZ...................................................9.85 Thompson v Goblin Hill Hotels Ltd [2011] UKPC 8, [2011] 1 BCLC 587, [2011] All ER (D) 135 (Mar).............................................................................................3.29 Thompson v Renwick Group plc [2014] EWCA Civ 635, [2014] 2 BCLC 97...........1.25, 9.57 Thompson’s Settlement, Re [1986] Ch 99, [1985] 3 WLR 386, [1985] 3 All ER 720...2.38 Three Rivers District Council v Bank of England (No 3) [2001] UKHL 16, [2003] 2 AC 1, [2001] 2 All ER 513.....................................................................................14.11 Thunder Cats Investments 92 (Pty) Ltd v Nkonjane Economic Prospecting & Investments (Pty) Ltd 2014 (5) SA 1 (SCA)...........................................................18.44 Thundercrest Ltd, Re [1995] 1 BCLC 117, [1994] BCC 857.........................................7.28 Tiessen v Henderson [1899] 1 Ch 861, 68 LJ Ch 353, 80 LT 483......................2.57, 4.10, 4.19 Tivoli Freeholds Ltd, Re [1972] VR 445........................................................................16.30 Tobian Properties Ltd, Re [2012] EWCA Civ 998.....................................2.38, 2.59, 9.6, 9.45, 9.95, 9.96, 9.109, 11.25 Tomanovic v Global Mortgage Equity Corp Pty Ltd (2011) 84 ACSR 121, [2011] NSWCA 104...........................................................................................................16.21 Torvale Group Ltd, Re [1999] 2 BCLC 605...................................................................3.16 Tottenham Hotspur plc, Re [1994] 1 BCLC 655............................................................9.144 Towcester Racecourse Co Ltd v The Racecourse Association Ltd [2002] EWHC 2141 (Ch), [2003] 1 BCLC 260, [2002] All ER (D) 335 (Oct)..............................3.29 Towers v African Tug Company [1904] 1 Ch 558, 73 LJ Ch 395, 52 WR 532...........6.11, 6.13 Towers v Premier Waste Management Ltd [2011] EWCA Civ 923, [2012] 1 BCLC 67, [2012] BCC 72, [2012] IRLR 73..........................................................2.11, 2.39, 2.59 Tran v Bloorston Farmes Ltd 2020 ONCA 440, 151 OR (3d) 563................................17.6 Transatlantic Life Assurance Co Ltd, Re [1980] 1 WLR 79, [1979] 3 All ER 352, (1979) 123 SJ 859................................................................................................7.22, 7.28 Transvaal Lands Co v New Belgium (Transvaal) Land & Development Co [1914] 2 Ch 488, [1914–15] All ER Rep 987, 84 LJ Ch 94..................................................16.38 Tribe (Peter John) v Elborne Mitchell LLP [2021] EWHC 1863 (Ch), [2021] 7 WLUK 34................................................................................................................3.11 Trinity Asset Management (Pty) Ltd & others v Investec Bank Ltd & others 2009 (4) SA 89 (SCA)..........................................................................................4.7, 4.8, 4.10, 18.1 Tunstall v Steigmann [1962] 2 QB 593, [1962] 2 WLR 1045, [1962] 2 All ER 417.....1.28 Turnbull v NRMA Ltd (2004) 50 ACSR 44, 22 ACLC 1094, [2004] NSWSC 577.......16.21 U

UTB LLC v Sheffield United Ltd [2018] EWHC 1663 (Ch), [2018] 1 WLR 5195, [2018] 6 WLUK 654...............................................................................................10.45 UTB LLC v Sheffield United Ltd [2019] EWHC 2322 (Ch), [2019] 9 WLUK 144......9.93 Ultraframe (UK) Ltd v Clayton (No 2) [2002] EWHC 1964 (Ch), [2003] RPC 435.....1.30 Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638, [2007] WTLR 835, [2006] FSR 17, [2005] All ER (D) 397......................................................................2.4, 2.5, 2.59 Union Music Ltd v Watson [2003] EWCA Civ 180, [2003] 1 BCLC 453, [2004] BCC 37................................................................................................................7.38, 7.40

lxix

Table of cases Uniq plc, Re [2011] EWHC 749 (Ch), [2012] Bus LR D18...........................................3.15 Unisoft Group (No 3) Ltd, Re [1994] 1 BCLC 609, [1994] BCC 766.......2.4, 9.47, 9.50, 9.52, 9.53, 9.77, 9.79, 9.99 Universal Project Management Service Ltd v Fort Gilicker Ltd [2013] EWHC 348 (Ch), [2013] Ch 551............................................................................6.7, 6.11, 6.13, 6.16, 6.43, 6.50, 12.8 V

VB Football Assets v Blackpool Football Club (Properties) Ltd (formerly Segesta Ltd) [2019] EWHC 530 (Ch), [2019] 2 WLUK 537, [2019] BCC 896..................10.12 VTB Capital plc v Nutritek International Corp [2012] EWCA Civ 808, [2012] All ER (D) 147 (Jun), [2012] WLR (D) 181................................................1.1, 1.16, 1.17, 5.2 VTB Capital plc v Nutritek International Corp [2013] UKSC 5....................................1.15 Varieties Ltd, Re [1893] 2 Ch 235, 62 LJ Ch 526, 3 R 324............................................11.47 Vatcher v Paull [1915] AC 372, 84 LJPC 86, 112 LT 737..............................................6.6 Veba Oil Supply & Trading GmbH v Petrotrade Inc [2001] EWCA Civ 1832, [2002] 1 Lloyd’s Rep 295...................................................................................................10.34 Vectone Entertainment Holding Ltd v South Entertainment Ltd [2004] EWHC 744 (Ch), [2004] 2 BCLC 224, [2005] BCC 123..........................................................7.40 Via Servis Ltd, Re [2014] EWHC 3069 (Ch)..................................................9.47, 9.85, 10.12, 10.38, 10.39 Virdi v Abbey Leisure Ltd, Abbey Leisure Ltd, Re [1990] BCLC 342, [1990] BCC 60.........................................................................................................9.170, 9.171, 9.175, 10.31, 11.4, 11.29, 11.31, 11.46, 12.9, 14.10, 14.13 Visser Sitrus (Pty) Ltd v Goede Hoop Sitrus (Pty) Ltd 2014 (5) SA 179 (WCC)...18.27, 18.29 Vivendi SA v Richards [2013] EWHC 3006 (Ch), [2013] BCC 771............................2.4, 2.29 Vlad Nielsen Holdings AS v Baldorino [2019] EWHC 1926 (Comm), [2019] 7 WLUK 306..............................................................................................................4.18 Vocam Europe Ltd, Re [1998] BCC 396........................................................................9.13 Vujnovich v Vujnovich [1990] BCLC 227, 5 BCC 740...............................11.28, 11.33, 11.44, 11.50 W

WT Ramsay Ltd v CIR [1982] AC 300, [1981] 2 WLR 449, (1981) 54 TC 101...........15.7 Wakim, Re, Ex parte McNally (1999) 198 CLR 511, 163 ALR 270, 31 ACSR 99, [1999] HCA 27.......................................................................................................16.1 Wala Wynaad Indian Gold Mining Company, Re (1882) 21 ChD 849, 52 LJ Ch 86, 47 LT 128................................................................................................................11.21 Waldron v Waldron [2019] EWHC 115 (Ch), [2019] Bus LR 1351, [2019] BCC 682..9.82 Walker v Stones [2001] QB 902, [2000] 4 All ER 412, [2000] Lloyd’s Rep PN 864....8.34 Wallersteiner v Moir (No 1) [1974] 1 WLR 991, [1974] 3 All ER 217, 118 SJ 464......1.16 Wallersteiner v Moir (No 2) [1975] QB 373, [1975] 2 WLR 389, [1975] 1 All ER 849..........................................................................................................................6.47 Walsham Chalet Park Ltd (t/a Dream Lodge Group) v Tallington Lakes Ltd [2014] EWCA Civ 1607, [2014] 12 WLUK 443, [2015] CP Rep 15.................................14.14 Wann v Birkinshaw [2017] EWCA Civ 84.....................................................................10.35 Watercor Ltd, Re [2017] EWHC 1814 (Ch)................................................................10.3, 12.1 Waterhouse v Waterhouse (1998) 46 NSWLR 449........................................................16.33 Watson v James [1999] NSWSC 600.............................................................................16.26 Watts v Midland Bank plc [1986] BCLC 15, (1986) 2 BCC 98961...................6.48, 6.49, 6.51 Wear v HNH International Holdings Ltd [2014] EWHC 3542 (Ch), [2014] 10 WLUK 877..............................................................................................................14.14 Weavering Capital (UK) Ltd v Bouchier [2012] EWHC 1480 (Ch), [2012] All ER (D) 46 (Jun).............................................................................................................2.34

lxx

Table of cases Weavering Macro Fixed Income Fund Ltd v Peterson (2011) 26 August, Grand Ct of the Cayman Islands.................................................................................................2.35 Webster v Sandersons Solicitors [2009] EWCA Civ 830, [2009] 2 BCLC 542, [2009] PNLR 37............................................................................................5.2, 8.27, 8.35 Weedmans Ltd, Re [1974] Qd R 377..............................................................................16.24 Weitmann v Katies Ltd (1977) 29 FLR 336...................................................................16.32 Wells v Bioniche Life Sciences Inc 2013 ONSC 4871...................................................17.3 Welton v Saffery [1897] AC 299, 66 LJ Ch 362, [1895–9] All ER Rep 567........3.1, 3.18, 7.70 Wessex Computer Stations Ltd, Re [1992] BCLC 366..................................................11.25 West v Blanchet [2000] 1 BCLC 795, [2000] TLR 85.....................................9.85, 10.2, 14.13 West Mercia Safetywear Ltd v Dodd [1988] BCLC 250, [1988] BCC 30.....................2.28 Westcoast (Holdings) Ltd (formerly Kelido Ltd) v Wharf Land Subsidiary (No 1) Ltd [2012] EWCA Civ 1003...................................................................................3.18 Westmid Packing Services Ltd, Re [1998] 2 BCLC 646................................................2.31 Wey Education plc v Atkins [2016] EWHC 1663 (Ch)...............................................2.26, 2.30 Wheal Emily Mining Co, Re, Cox’s Case (1863) 46 ER 834, 4 De GJ & Sm 53..........11.16 Wheeler v Ross [2011] EWHC 2527 (Ch)..................................................................7.39, 12.4 Whillock v Henderson [2009] BCC 314............................................. 9.49, 9.104, 9.164, 9.167 Whitchurch Insurance Consultants Ltd, Re [1993] BCLC 1359, [1994] BCC 51.........7.42 White v Bristol Aeroplane Co Ltd [1953] Ch 65, [1953] 2 WLR 144, [1953] 1 All ER 40......................................................................................................................7.50 White v Jones [1995] 2 AC 207, [1995] 2 WLR 187, [1995] 1 All ER 691...................4.6 Whyte, Petitioner (1984) BCC 99044......................................................................10.11, 10.45 Wilkinson v West Coast Capital [2005] EWHC 3009 (Ch), [2007] BCC 717, [2005] All ER (D) 346 (Dec).....................................................................9.85, 9.88, 9.100, 9.126 Willers v Joyce [2016] UKSC 44, [2018] AC 843, [2016] 3 WLR 534.........................7.26 Williams v Brinkmann [2004] EWHC 601 (Ch), [2004] 3 WLUK 417.........................14.5 Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830, [1998] 2 All ER 577, [1998] 1 BCLC 689................................................................................................ , 4.6 Williams v Russell Price Farm Services Ltd [2020] EWHC 1088 (Ch), [2020] 5 WLUK 6, [2020] BCC 636.....................................................................................7.22 Wilson v Alharayeri 2017 SCC 39, [2017] 1 SCR 1037................................................17.9 Wilton-Davies v Kirk [1996] 12 WLUK 390, [1997] BCC 770, [1998] 1 BCLC 274...14.7 Wilton UK Ltd v Shuttleworth [2017] EWHC 215 (Ch)...............................................6.2, 6.21 Winlyn Developments Pty Ltd, Re, Taiqi Investments (Aust) Pty Ltd v Winlyn Developments Pty Ltd [2011] NSWSC 1218, 86 ACSR 197.................................16.5 Wishart v Castlecroft Securities Ltd [2009] CSIH 65, 2009 SCLR 696, 2009 SLT 812, [2010] BCC 161, CSIH.............................................................6.31, 6.33, 6.34, 6.39, 6.45 Wolverhampton Steel & Iron Co, Re [1977] 1 WLR 860, [1977] 3 All ER 467, (1977) 121 SJ 476...................................................................................................11.21 Wondoflex Textiles Pty Ltd, Re [1951] VLR 458, [1951] ALR 1005.....................9.153, 16.30 Wood v Links Golf Tasmania Pty Ltd [2010] FCA 570.................................................16.20 Wood v Odessa Waterworks Co (1889) LR 42 ChD 636, 58 LJ Ch 628, 37 WR 733...3.1 Wood v Sureterm Direct Ltd (aka Wood v Capita Insurance Services Ltd) [2017] UKSC 24, [2017] AC 1173, [2017] 2 WLR 1095................................................3.19, 3.29 Woolfson v Strathclyde Regional Council 1978 SC 90, 1978 SLT 159, (1979) 38 P&CR 521..........................................................................................................1.16, , 1.24 Woolwich v Milne [2003] EWHC 414 (Ch), [2003] All ER (D) 211 (Feb)...................9.159 Wootliff v Rushton-Turner [2016] EWHC 2802 (Ch)...............................................9.31, 9.151 Wootliff v Rushton-Turner [2017] EWHC 3129 (Ch), [2017] 11 WLUK 401, [2018] 1 BCLC 479............................................................................................................9.134 Worldhams Park Golf Course Ltd, Re [1998] 1 BCLC 554...........................................11.40 Woven Rugs Ltd, Re [2002] 1 BCLC 324, [2001] All ER (D) 05 (Dec).........7.40, 7.42, 9.120, 12.4

lxxi

Table of cases Woven Rugs Ltd, Re [2010] EWHC 230 (Ch), [2010] All ER (D) 41 (Jun)...9.46, 9.78, 9.149, 10.11, 10.12, 11.3, 11.43 Wright v Atlas Wright (Europe) Ltd [1999] 2 BCLC 301, [1999] BCC 163, (1999) 96(8) LSG 29..........................................................................................................3.16 Wyatt v Frank Wyatt & Son Ltd [2003] EWHC 520 (Ch), [2003] 2 WLUK 737..........14.13 X

XYZ Ltd, Re (1986) 2 BCC 99520.................................................................................9.97 Y

Yenidje Tobacco Co Ltd, Re [1916] 2 Ch 426, 86 LJ Ch 1, 115 LT 530.....11.34, 11.35, 11.37, 11.38, 16.30, 18.1, 18.29 Yoo Design Services Ltd v Illy Realty PTE Ltd [2021] EWCA Civ 560, [2021] 4 WLUK 141..............................................................................................................3.29 Yukong Line Ltd v Rendsburg Investments Corp [1998] 1 WLR 294, [1998] 4 All ER 82, [1998] 2 BCLC 485, QBD..........................................................................1.16 Yung Kee Holdings Ltd, Re [2014] 2 HKLRD 313 (HKCA).........................................9.82 Z

Zagora Management Ltd v Zurich Insurance plc [2019] EWHC 257 (TCC), [2019] 2 WLUK 242..............................................................................................................9.8 Zavahir v Shankleman [2016] EWHC 2772 (Ch)........................................................6.30, 6.39 Zetnet Ltd, Re, Harris v Jones [2011] EWHC 1518 (Ch), [2011] All ER (D) 94 (Jun).9.27 Zim Properties Ltd v Procter [1985] STC 90, 58 TC 371, (1985) 129 SJ 68.................15.5 Zinotty Properties Ltd, Re [1984] 1 WLR 1249, [1984] 3 All ER 754, [1985] PCC 285.....................................................................................................................7.27, 11.39

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Chapter 1

Companies’ Separate Legal Personality

Contents The perpetual problem

1.1

Meaning of ‘company’ and ‘shareholder’ Company Shareholder

1.4 1.4 1.6

Separate legal personality Its origin Its foundation: Salomon v Salomon The exception: piercing the corporate veil

1.8 1.8 1.13 1.15

The implications of a separate legal personality Shareholders not liable for the company’s debts A company makes agreements in its own name Profits generated by a company are its own Shareholders have no rights to the assets of a company A company has the right to sue and be sued in its own name Wrongs committed by a company are not chargeable to its members Shareholders do not owe their company a duty of care Shareholders are not per se entitled to represent the company

1.26 1.26 1.27 1.31 1.32 1.33 1.34 1.35 1.36

THE PERPETUAL PROBLEM 1.1 In the infancy of modern company law, an eminent lawyer1 identified the distinction between a company as a body corporate, on the one hand, and the members of a company, on the other hand, as lying at the root of many of the most perplexing questions that beset company law. Then, as now, it is a distinction which has to be properly understood. Failing that, the many significant consequences flowing from this vital distinction2 may be overlooked at the peril of the company, the shareholders, directors and creditors alike. It is only with an appreciation of this distinction that the various rights of shareholders are capable of proper definition and contextualisation. Undoubtedly, the distinction has, for the most part, been consistently applied in practice,3 yet problems with its application remain. This chapter considers examples 1 Palmer, Company Law based on Lectures delivered in the Inner Temple Hall at the Request of the Council of Legal Education (Stevens and Sons Ltd, 1898). 2 See 1.26–1.36 for a comprehensive discussion. 3 See, for instance, Diamantides v JP Morgan Chase Bank [2005] EWCA Civ 1612.

1

1.2  Companies’ Separate Legal Personality

where the application of the principle caused difficulty to one or both of the parties, or to the courts. As much as lawyers and judges wrestled with the application of the distinction in the late nineteenth century,4 so its application has caused litigation in this century:5 for example, may a shareholder be lawfully employed by a company of which he is the sole or dominant shareholder as well as a director? If so, what measure of control does the company, represented by its board of directors (comprising the same individual who is the sole or dominant director), exercise over the employee (again, the same individual) to whom it gives instructions? Does the default history of a sole proprietor in respect of late VAT payments transfer to a limited company to which he transfers his business?6 A wrong answer to any of these questions may very well undermine the concept of the separate existence of a company and the relationship between company, director, shareholder, employee and creditor, whether or not in the context of a private company (and particularly quasi-partnership companies)7 with which this book predominantly concerns itself, but also in relation to public and quoted companies where the principles apply with equal force. 1.2 It nevertheless remains surprising, after many decades of development and refinement of company law, to find case law where Law Lords find themselves at loggerheads regarding these cardinal principles. In Stone & Rolls Ltd v Moore Stephens,8 Lord Brown stated: ‘I  recognise, of course, that confining the ex turpi causa9 defence, as I  would, to one-man company frauds means that, where any innocent shareholders are involved, a claim against the auditors may well lie (through the company) at their suit’.10 In his (minority) speech, Lord Mance commented that the remark11 ignores the principle of separate corporate personality and stated that a company (especially when in liquidation) sues in its own right, and not for, or at the suit of, its shareholders.12 The difficulties with the concept of a separate corporate personality are further illustrated by the divergent views expressed by the Supreme Court justices in Petrodel Resources Ltd v Prest13 regarding the precise scope of the exception to the rule, namely piercing (or lifting) of the corporate veil. The reality is that the separate existence of a company, though perhaps theoretically straightforward, continues to cause problems in its practical application. A company, which possesses of no flesh, bones, mind or soul, comes into existence when corporators, risking their capital, perform certain statutorily prescribed actions to

4

See eg Salomon v Salomon & Co Ltd, also known as Broderip v Salomon [1895] 2 Ch 323, CA (reversed on appeal: [1897] AC 22, HL). Further references to the Salomon case are to the judgment of the House of Lords. 5 For example, Ashby v Monterry Designs Ltd (unreported, 18 December 2009 (EAT)); Neufeld & Howe v Secretary of State for Business Enterprise and Regulatory Reform [2009] EWCA Civ 280; [2009] 3 All ER 790, CA; VTB Capital plc v Nutritek International Corp [2012] EWCA Civ 808, [2012] 2 BCLC 437, CA at [68]; Revenue and Customs Commissioners v Holland [2010] UKSC 51, [2010] 1 WLR 2793, SC. 6 See Drumkinnon Joinery & Building Ltd v Revenue and Customs Commissioners [2013] UKFTT 416 (TC), [2013] STI 3034. 7 For a discussion of the notion of quasi-partnership companies, see 9.131–9.143. 8 [2009] 1 AC 1391, HL. 9 Loosely translated as ‘arising from illegal conduct’. 10 At [203]. 11 At [255]. 12 See Chapter 6. 13 [2013] UKSC 34, [2013] 2 AC 415; discussed in more detail in 1.18–1.20.

2

The perpetual problem 1.3

bring it to life and register it as such.14 That very deed initiated by the individual corporators converts them into shareholders,15 with the immediate consequence of them forfeiting their powers of effective control16 – at least on the basis of conducting the affairs of the company on a day-to-day basis – to a board of directors which may or may not be constituted of the corporators themselves. This creature immediately, in the case of a private company, or shortly thereafter, in the case of a public company,17 possesses the same competency as an individual to enter into agreements, acquire assets, incur debts, and commit torts or offences. In fact, a company possesses many of the powers which a natural person does, but it cannot act without human agency in the form of representation by directors, employees or other agents. 1.3 The Companies Act 2006 (‘the 2006 Act’) restates the principles underpinning companies’ separate existence from their shareholders which had been entrenched in former Companies Acts.18 However, legislative recognition of this state of affairs does not in itself provide solutions to practical problems arising therefrom. The sources of the problem are both conceptual and historical: conceptual, because it demands the accommodation of a legal fiction (the company), which cannot be represented other than by human agency (usually, directors, employees or other agents)19 in the creation of rights or the incurring of obligations; and historical, because the development of company law, particularly in relation to the limited liability of shareholders, is crucial to understanding and appreciating the reasons for the separate legal existence of a company. This evolution took centuries to mature to a point, arrived at by the second half of the nineteenth century, of a clear distinction between the separate existence of a company and its members. This distinction put clear water between the non-liability of a shareholder for the debts of a company (apart from any contractual obligation), on the one hand, and the company’s responsibility for those debts on the other. It brought to an end an era where business venturers had little choice but to trade as sole owners, or in partnership, or as members of an 14

15 16

17

18

19

Registration is premised on compliance with the formalities prescribed by the Companies Act 2006 (‘the 2006 Act’) regarding a memorandum of association (s 8) and a constitution (Pt 3). The constitution (s 17) incorporates articles of association whether by design or by default, as the case may be (s 18). Under previous Companies Acts, the notion of a constitution was not expressly stated, although, in reality, the memorandum and the articles jointly constituted the founding documentation. Under previous Companies Act dispensations, courts did refer to the memorandum and the articles jointly as the ‘constitution’ – see eg In Re Elgindata Ltd [1991] BCLC 959, ChD, at 985c. By virtue of the provisions of s 16(5) of the 2006 Act. Shareholders with the required voting power will retain ultimate control at meetings of shareholders not only in relation to ordinary and special resolutions (see ss 282, 283 of the 2006 Act and 5.11–5.12), but also by the significant power to dismiss directors (see 7.62–7.65). See also, for the consequences of registration, s 16 of the 2006 Act. A public company may not do business or exercise any borrowing power unless the registrar of companies (the ‘registrar’ – see s 1060 of the 2006 Act) has issued it with a trading certificate confirming that he is satisfied that the company’s allotted share capital is not less than the authorised minimum: ss 16(3), 761(1) of the 2006 Act. A company which does business or exercises any borrowing powers without the trading certificate is, together with its officers, guilty of an offence: s 767(1) of the 2006 Act. The relevant former Companies Acts are primarily those following the Partnership Law Amendment Act 1865 (Bovill’s Act) which had recognised the principle that members of a company are not liable for the debts of a company which had a few members only, namely the Companies (Consolidation) Act 1908, the Companies Act 1926, the Companies Act 1948, and the Companies Act 1985. But not shareholders in their capacity as such.

3

1.4  Companies’ Separate Legal Personality

unincorporated association, in each instance exposing their personal assets to the risk of liability for the debts of the business. Despite its gradual progression, once the avoidance of liability of shareholders for the debts of their business structure was conceived by legislation, it brought about a seachange to the manner in which business had been conducted.20 The role and function of shareholders and directors, as well as the relationship between shareholders and the company, are primarily informed by this distinction. It is necessary to define the ‘shareholders’ and the ‘companies’ to which this book applies, before investigating the origin, foundation, exceptions and implications of the separate legal existence of companies.

MEANING OF ‘COMPANY’ AND ‘SHAREHOLDER’ Company 1.4 The meaning of ‘company’ is strictly to be found in the Companies Act in force from time to time. By section 1(1) of the 2006 Act, a ‘company’ means a company formed and registered under that Act.21 It includes a company formed and registered after the commencement of Pt 1 (on 1 October 2009),22 or a company that was formed and registered immediately before 1 October 2009 under the Companies Act 1985 (‘the 1985 Act’) or was an existing company for the purposes of the 1985 Act.23 Companies may be either limited or unlimited.24 A company is a ‘limited company’ if the liability of its members is limited by its constitution, either by shares or by guarantee.25 Recognition is given to the limited liability of shareholders by the provision that, if members’ liability is limited to the amount, if any, unpaid on the shares held by them, the company is ‘limited by shares’.26 If members’ liability is limited to such amount as the members undertake to contribute to the assets of the 20

21 22 23

24 25 26

Ironically, the very much delayed transformation of investment banks from partnerships to companies since the 1980s may have contributed to subsequent financial crises, because the risk for those who have funded their partnerships disappeared by them continuing their operations in corporate form, thereby avoiding personal risk for liabilities of the corporate vehicle in conformance with the principle of the separate existence of companies and their shareholders. Since the law of England and Wales is set out herein, references in the 2006 Act to company law provisions in Northern Ireland and Scotland (and references to authorities dealing therewith) are omitted, except, on occasion, for comparative purposes. By Companies Act 2006 (Commencement No 8, Transitional Provisions & Savings) Order 2008, SI 2008/2860, art 3(a). By s 735(1)(b) of the 1985 Act, ‘existing company’ is defined as a company formed and registered under the former Companies Acts, excluding companies formed and registered under the Joint Stock Companies Acts or the Companies Act 1862. By s 735(1)(c) of the 1985 Act, the ‘former Companies Acts’ were defined as the Joint Stock Companies Act, the Company Act 1862, the Companies (Consolidation) Act 1929 and the Companies Acts 1948 to 1983. The ‘Joint Stock Companies Acts’ means the Joint Stock Companies Act 1856 (c 47), the Joint Stock Companies Acts 1856, 1857 (20 & 21 Vict c 14), the Joint Stock Banking Companies Act 1857 (c 49), and the Act to enable Joint Stock Banking Companies to be formed on the principle of limited liability (1858 c 91), but does not include the Joint Stock Companies Act 1844 (c 110). By s 1171 of the 2006 Act, these definitions are perpetuated. Section 3 of the 2006 Act. Section 3(1) of the 2006 Act. Section 3(2) of the 2006 Act.

4

Meaning of ‘company’ and ‘shareholder’ 1.5

company in the event of its being wound up, the company is ‘limited by guarantee’.27 There is still scope for a corporate form not limiting the liability of members, in which event the company will be registered as an ‘unlimited company’.28 Companies may be private or public companies.29 Whether or not they have a share capital, they may become community interest companies.30 1.5 This work concerns itself with companies whose members are shareholders, incorporated in England and Wales,31 namely: • • • • •

any company incorporated under the currently operative 2006 Act;32 ie companies incorporated since 1 October 2007; any company incorporated under the 1985 Act; any company which existed in terms of the 2006 Act and the 1985 Act;33 any company that was in existence on 2  November 1862 (including any company registered under the Joint Stock Companies Acts); and any company formed after 2  November 1962 in pursuance of an Act of Parliament, other than the 2006 Act, or any of the former Companies Acts; in pursuance of letters patent; or that is otherwise duly constituted according to law34 if such a company registers itself under the 2006 Act35 as a company limited by shares.36

Overseas companies are excluded.37

27 28 29 30 31 32 33

Section 3(3) of the 2006 Act. Section 3(4) of the 2006 Act. Section 4 of the 2006 Act; and see, for the differences between them, Pt 20 of the 2006 Act. These differences are not material for present purposes. Section 6 of the 2006 Act, by virtue of Pt 2 of the Companies (Audit, Investigations and Community Enterprise) Act 2004. See the definition of ‘company’ in s 1(1) of the 2006 Act. Most of the provisions thereof are in operation. As at 1 November 2021, a provision such as s 22(2) of the 2006 Act has still not come into operation. Section 1(1)(b)(ii) of the 2006 Act. By s 735(1)(b) of the 1985 Act, ‘existing company’ is defined as a company formed and registered under the former Companies Acts, excluding companies formed and registered under the Joint Stock Companies Acts, the Companies Act 1962 or the Companies (Consolidation) Act 1908 in what then comprised Ireland. By s 735(1)(c) of the 1985 Act, the former Companies Acts were defined as the Joint Stock Companies Act, the Company Act 1862, the Companies (Consolidation) Act 1929 and the Companies Acts 1948 to 1983. By s 1171 of the 2006 Act, the ‘former Companies Acts’ and the ‘Joint Stock Companies Acts’ are the following: ‘In the Companies Acts, “the former Companies Acts” means –

34 35 36 37

(a) the Joint Stock Companies Acts, the Companies Act 1862 (c 89), the Companies (Consolidation) Act 1908 (c 69), the Companies Act 1929 (c 23), the Companies Act (Northern Ireland) 1932 (c 7 (NI)), the Companies Acts 1948 to 1983, the Companies Act (Northern Ireland) 1960 (c 22 (NI)), the Companies (Northern Ireland) Order 1986 (SI 1986/1032 (NI 6)) and the Companies Consolidation (Consequential Provisions) (Northern Ireland) Order 1986 (SI 1986/1035 (NI 9)), and (b) the provisions of the Companies Act 1985 (c 6) and the Companies Consolidation (Consequential Provisions) Act 1985 (c 9) that are no longer in force.’ Section 1(2)(a), read with s 1040(1) of the 2006 Act. Section 1040(2) of the 2006 Act. Section 1040(4) and (5) of the 2006 Act. None of the provisions applicable to overseas companies are relevant to the topics covered in this book (see s 1(3), read with Pt 34 of the 2006 Act).

5

1.6  Companies’ Separate Legal Personality

Shareholder 1.6 A  shareholder is someone who has been entered as a member38 in the members’ register39 of a company limited by shares40 or entered as such a member in the central register.41 A register is prima facie evidence of its contents.42 ‘Member’, wherever it appears in the Companies (Tables A  to F) Regulations 1985, Sch  1, para 40, and in ss 112–114, 123, 127 and 318 of the 2006 Act, includes any member registered on the company’s register of members, whether alive or dead (when a natural person), and, if corporate, whether in an insolvency procedure or dissolved.43 In the case of a company registered in England and Wales, a certificate under the common seal of the company specifying any shares held by a member is prima facie – and therefore not conclusive – evidence of his title to the shares.44 The shares of quoted companies will mostly be dematerialised as so-called CREST shares, ie stored electronically, without hard copy share certificates. But what is a share? Borland’s Trustee v Steel Brothers & Co Ltd45 provides the classic definition: ‘A  share is the interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se in accordance with s 16 of the Companies Act, 1862. The contract contained in the articles of association is one of the original incidents of the share. A share is not a sum of money settled in the way suggested, but is an interest measured by a sum of money and made up of various rights contained in the contract, including the right to a sum of money of a more or less amount.’ 1.7 A  share is one indivisible piece of property.46 It exhibits most of the characteristics of property, but can usually not be freely transferred if held in a private company, either because another shareholder may exercise a right of pre-emption or

38 39 40

41

42 43 44 45

46

Section 112 of the 2006 Act. See Pt 8, Ch 2 and 2A of the 2006 Act for the provisions pertaining to registers. Article 1 of Sch 1 (model articles for private companies limited by shares) to the Companies (Model Articles) Regulations 2008, SI 2008/3229, defines a ‘shareholder’ as a person who is the holder of a share, and ‘holder’ as the person whose name is entered in the register of members as the holder of the shares. Article 1 of Sch 3 (model articles for public companies) does not offer a definition of ‘shareholder’ as such, but ‘holder’ is defined as, in relation to shares, the person whose name is entered in the register of members as the holder of the shares or, in the case of a share in respect of a share warrant has been issued (and not cancelled), the person in possession of that warrant. Chapter 2A of Pt 8 of the 2006 Act now provides for the record of membership to be kept, at the election of subscribers of a company to be formed or an existing company, on the register kept by the registrar instead of entering the particulars in the register of members. That register will be referred to as the central register. Sections 127 and 128H of the 2006 Act respectively. Re BW Estates Ltd [2017] EWCA Civ 1201, [2017] BCC 406, CA at [71]. Section 768(1) of the 2006 Act. [1901] 1 Ch 279 at 288. See also Grays Timber Products Ltd v Revenue and Customs Commissioners [2010] UKSC 4, [2010] 1 WLR 497, SC, at [27]; Martyn Rose Ltd v AGK Group Ltd [2003] EWCA Civ 375, [2003] 2 BCLC 102, CA, at [42]; Re Claygreen Ltd [2005] EWHC 2032 (Ch), [2006] 1 BCLC 715, ChD, at [40]. IRC v Crossman [1937] AC 26, HL, at 51.

6

Separate legal personality 1.8

because of the directors’ right to refuse registration of a new member.47 Shares in a private company may also not be offered by the company to the public for sale.48 A share provides a right to dividends, if and when declared, and a return of capital pro rata to the shareholding on winding up or on an authorised reduction of share capital. Different rights and privileges may attach to different shares if so authorised by the constitution.49 The member need not be the beneficial owner of the shares; he may merely be the nominee.50 Unless registered as a member in a register, the beneficial owner will ordinarily not be able to exercise all his rights as shareholder.51 He will not be able to vote at general meetings. He will at least retain the personal claim to be entered on a register. The primary manner of becoming a shareholder in a company is as subscriber to the memorandum of association.52 Subsequently, every other person who agrees to become a member of a company, and whose name is entered in the company’s register of members, is a member of the company.53 Membership is essential to exercise personal claims54 and to establish standing for purposes of derivative claims,55 unfair prejudice petitions56 and winding up.57

SEPARATE LEGAL PERSONALITY Its origin58 1.8 Currently, business in England and Wales can be conducted: by an individual for his own account as sole trader; in partnership;59 as a limited liability partnership

47

These powers should be apparent from a company’s constitution. The restriction on tradability may negatively influence the value of shares. 48 By s 755(1) of the 2006 Act a private company limited by shares or limited by guarantee and having a share capital must not: (a) offer to the public any securities of the company; or (b) allot or agree to allot any securities of the company with a view to their being offered to the public. 49 For a discussion of a company’s constitution, see Chapter 3, particularly 3.8–3.28. 50 If membership is reflected in the name of a nominee holding on a bare trust, the beneficial holder will be subject to tax relating to the shares as if the shares were held outright. So, for example, a beneficial owner who is an individual and subject to UK taxation will be required to self-assess for dividend income received and any chargeable gains on disposals – see s 60 of the Taxation of Chargeable Gains Act 1992 (‘TCGA’). 51 The right to petition under s 994 or for a just and equitable winding up, pursue a derivative claim and bring personal claims open to shareholders or even to vote or receive dividends. 52 Section 16(5), read with s 112(1) of the 2006 Act. 53 Section 112(2) of the 2006 Act. This is so even if a member entered on the register is a company which has been dissolved long before: Re BW Estates Ltd [2017] EWCA Civ 1201, [2017] BCC 406, CA, at [71]. 54 For which, see Chapter 7. 55 See Chapter 6. 56 See 9.19–9.39. However, by s 994(2) 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, will enjoy protection against unfair prejudice as if a member. 57 See 11.10–11.23. 58 See, for a more detailed version, Chapters 2 and 3 of Gower, The Principles of Modern Company Law (Stevens & Sons Ltd, 1954), and Lindley, A treatise on the law of companies [considered as a branch of the law of partnership] (6th ed, Vol 1, Sweet & Maxwell Ltd, 1902). 59 Regulated by the provisions of the Partnership Act 1890.

7

1.9  Companies’ Separate Legal Personality

(‘LLP’);60 or as a company.61 It also remains possible to conduct business as an unincorporated company62 or as an unlimited company.63 The sole trader, the partners regulated by the Partnership Act 1890, and the members of an unincorporated company risk their personal capital for the debts of their business. LLPs are corporations with legal personality existing separately from their members. Those members and shareholders of companies do not run the risk of direct exposure towards creditors of the corporation. Shareholders’ risk is limited to the loss of their investment (either as equity or as loans) or, where applicable, the amount unpaid on their shares. Accordingly, in the ordinary course, members are totally protected from exposure to liability for the debts of the company by reason of their membership of the company.64 This was not always the case. It only became possible because the company as a legal fiction was able to exist entirely separately from its members. 1.9 Various forms of associations were known to medieval law. Ecclesiastical and public bodies recognised the concept of incorporation. Commerce was served by Guilds of Merchants, many of which were incorporated by Charters from the Crown. The Guilds represented and protected their member traders. Each member continued to trade for his own account. Trading on joint account was carried on through partnerships. A partner of the predecessor65 of the partnership, as it is known today, was a representative of all the other partners and liable to the full extent of his private estate for partnership debts. In the fourteenth century, the concept of a ‘company’ in the commercial context took root. It was effected by incorporation by Royal Charter. However, each member traded with his own stock and on his own account. His trading debts were entirely separate from that of the company and the other members. Gradually, the partnership principle of trading on joint account invaded the chartered companies. Of necessity, they became joint commercial enterprises. Operations were now undertaken on a joint account and with joint stock. The incorporated joint stock company was born when, by the end of the seventeenth century, a form of company, designed to trade for the benefit of its members, made its appearance. Each member contributed towards a permanent fixed capital, divided into transferable shares, and received dividends. These companies flourished, despite the fact that the members remained liable for the debts of the company.66 60 61

62

63 64 65 66

Regulated by the Limited Liability Partnerships Act 2000. Incorporated in terms of the 2006 Act or any of its predecessors since 1865; there are numerous other companies in existence which are incorporated by charter or special Act of Parliament. Those categories are not addressed in this work, unless they have the qualities of being limited by shares and having shareholders, thereby sharing common ground with the principles addressed in this work. JH Rayner (Mincing Lane) Ltd v Department of Trade and Industry [1990] 2 AC 418, HL, also cited as Maclaine Watson & Co Ltd v Department of Trade and Industry and related appeals; Maclaine Watson & Co Ltd v International Tin Council [1989] 3 All ER 523, HL (‘the International Tin Council case’). Section 3(4) of the 2006 Act. This occurs when indeed there is no limit on the liability of members. Any one of them may, of course, bind himself as a surety for the company, but any liability following therefrom does not follow as a result of his membership of the company. Known as ‘societas’ (society). This form of company is still possible – see s 3(4) of the 2006 Act. Why corporators would choose this as a vehicle for conducting business instead of the partnership modelled in terms of the Partnership Act 1890 is difficult to understand, but remains a commercial reality.

8

Separate legal personality 1.11

Despite this obvious disadvantage, business and commerce appreciated the benefits of incorporation: the existence of the corporation in perpetuity; the ability to sue outsiders and its own members; and the possession of a common seal, facilitated the distinction between the acts of the company and those of its traders. Limited liability featured to an extent: individual members of a corporation were not liable for the corporation’s debts, in the case of non-trading corporations, as early as the fifteenth century and, subsequently, in the case of trading companies. The purpose was not the protection of members’ personal estates, but arose from the principle that companies were entitled to raise levies on their members to cover the debts of the company. As such, limited liability was an illusion. 1.10 The infamous South Sea Bubble67 of the early eighteenth century introduced a period of loss of corporate investor confidence for more than 75 years. The Bubble Act 172068 was intended to stifle the abuse of the illusory limited liability by prohibiting a corporation to act without a charter or statute, at the same time declaring that the persons incorporating it were personally liable for the debts of the body corporate. The purpose was to prevent the activities of joint stock companies by ordaining that the raising of capital, other than by an Act of Parliament or a Crown Charter, would be invalid. The Bubble Act did nothing to quell the prevailing gambling spirit and failed to put joint stock companies on a proper basis. It resolved little, if anything. As a result, the structural development of companies stalled. Charters were difficult to obtain. It was no easier to get Parliament to pass a special Act to incorporate a business. There was no uniform system: shareholders of companies incorporated in this manner were either exempt from liability towards company creditors or held liable therefor, depending on the terms of the particular incorporation by statute or charter. 1.11 These, almost insuperable, difficulties placed in the way of incorporation caused a resurgence of the unincorporated association. Fear of illegality regarding the transfer of shares in such undertakings was resolved by using the concept of a trust to confer almost all the benefits of incorporation onto those associations constituting trusts. A company would be formed by a deed of settlement with prescribed joint stock divided into shares. The company’s property would vest in trustees. The trustees were authorised to sue or to be sued. This was a significant step closer to the separation of the corporate identity from those of its shareholders. However, the disadvantages of these unincorporated companies remained. They included, in particular: (a) the absence of a power to sue or to be sued. Actions had to be brought by or against every member who was a member at the time when the cause of action arose. The larger the membership, the more the risk of transfers of shares in the interim and the greater the difficulty of identifying the members at the 67

68

The South Sea company acquired virtually the whole of the United Kingdom’s national debt by buying out the holders thereof or exchanging their holdings for the company’s stock. The theory was that it would be beneficial to be the holder of an interest-bearing loan owed by the state, enabling the company to raise further sums to extend their trade. Similar high-risk ventures were doing the rounds. Widespread panic was caused by the institution of proceedings against some of the companies operating under obsolete charters. The South Sea company share price tumbled. The severe losses suffered by the public dented public confidence for the greater part of a century. 6 Geo 1 c 18.

9

1.12  Companies’ Separate Legal Personality

relevant time. The trust model addressed this to some extent, but not entirely. On a limited basis, companies were granted the right to sue and to be sued by specific Acts of Parliament; (b) the inability of members to limit or exclude their personal liability. Despite the practical difficulties of suing a fluctuating body and the even greater difficulties of levying execution, the potentially unlimited personal liability of members was unattractive, especially to those who were investors and did not actively manage the business. The model was therefore unsatisfactory both to investors and creditors. The Bubble Act was repealed in 1825, with no legislation substituting it to fill the void. An increase in speculation by 1834 saw a reversion to the unincorporated company, the legality of which was still in doubt until 1843. The Trading Companies Act 183469 empowered the Crown to confer, by letters patent, all or any of the benefits of incorporation without actually granting a charter. Limited liability of members was not one of the privileges granted by this legislation. The Chartered Companies Act 183770 improved the situation somewhat, by determining that personal liability of members might be expressly limited by the letters patent to a specific amount per share. 1.12 A  significant step forward was the introduction, by the Joint Stock Companies Act 1844,71 of provisions for the registration of all new companies with a membership exceeding 25 in number, or with shares transferable without the consent of all the members, and incorporation by mere registration72 and full publicity. Members’ limited liability was still largely excluded. Members’ liability would only cease three years after they had transferred their shares. Creditors had to proceed first against the assets of the company before they could seek satisfaction of the company’s debts from the personal estates of the members. Having developed from the unincorporated company, the beneficial influence of partnership principles was evident, in that the company constitution had always been viewed as being contractual in nature.73 An important step in the process was the Limited Liability Act 1855,74 which built on the 1844 Act and provided for the limited liability of the members of a company on complete registration75 if certain conditions were met.76 The method of limitation was that already used for chartered companies under the 1837 Act and for statutory companies under the Companies Clauses Act 1845, namely the restriction of members’ liability to the nominal (unpaid) value of their shares.

69 70 71 72 73 74 75 76

4 and 5 Wm c 94. 7 Wm 4 and 1 Vict c 78. 7 and 8 Vict c 110. Although there was a complicated system of initially granting provisional registration, final registration occurred only after the expiry of three years, coupled with compliance with further requirements. See, for the correct view, 3.3. 18 and 19 Vict c 188. Ie after the expiry of three years from date of provisional registration. They were: (a) the company had to have at least 25 members holding £10 shares paid up to the extent of 20% of the nominal value; (b) not less than three fourths of the nominal capital was subscribed; (c) the suffix ‘limited’ was added to the company’s name; and (d) the board approved the appointment of auditors.

10

Separate legal personality 1.13

It was followed by the repeal of the Limited Liability Act 1855 and its incorporation in the Joint Stock Companies Act 1856.77 This Act introduced the simple process of submitting a signed memorandum of association. Articles of association were required in a prescribed format known as ‘Table B’. The first Companies Act, properly so-called, was the Companies Act 1862.78 The ultimate development was reached in 1865 by the passing of the Partnership Law Amendment Act 186579 which, at long last, extended the principle of limited liability to shareholders at large. It enabled entrepreneurs to become investors and shareholders of companies, without fear of exposure to infinite personal losses. The unique features of companies established by this Act are found in all subsequent companies limited by shares.80

Its foundation: Salomon v Salomon 1.13 The implications of a company’s existence apart from its members are best exemplified by the ground-breaking case of Salomon v A Salomon & Co Ltd.81 Mr Salomon conducted a prosperous business as sole owner. He sold the business to a company which he had established, A Salomon & Co Ltd. The purchase price was settled by means of a share issue of 20,001 shares to himself, as well as cash and debentures secured by a bond over the company’s assets. His wife and five of his children were, in addition, allotted one share each.82 Salomon and two of his children were appointed as directors. The company fell into hardship and was wound up. The assets were insufficient to cover the secured debentures; Mr Salomon would benefit, but none of his creditors would. The liquidator submitted that Salomon and his company were one and the same entity and that, under circumstances where the company was unable to satisfy the debts, Mr Salomon, in his personal capacity, remained liable for the debts of the company. The House of Lords rejected the argument. It was not contrary to the true intent and meaning of the Companies Act 1862 for a trader, in order to limit his liability and obtain the preference of a debenture holder over other creditors, to sell his solvent business to a limited company in the fashion described in an arm’s-length transaction, the terms of which had been known to and approved by the shareholders, and all the requirements of the Act having been complied with. There was no reason to find, on the facts, that the company was registered for an unlawful purpose as a vehicle to prejudice creditors. There was no fraud on the creditors or shareholders.

77 78 79 80 81 82

19 & 20 Vict c 47. 25 & 26 Vict c 89. 28 & 29 Vict c 6 (also known as ‘Bovill’s Act’). Legislation developed with the assistance of courts’ interpretation and criticism, resulting in numerous amendment acts leading to the Companies (Consolidation) Act 1908, the Companies Acts of 1926, 1948, 1980 and 1985 and, ultimately, the Companies Act 2006. [1897] AC 22, HL. See also The Gramophone and Typewriter Co Ltd v Stanley [1908] 2 KB 89, CA. By s 2 of the Companies Act 1862, at least seven subscribers were required for a company to be legally registered; hence, probably, the involvement of Mr Salomon’s wife and children to reach the required threshold. But for the then existing legal impediment, it would suffice, and the same principles would apply, if Mr Salomon had become the sole shareholder of the company that he had incorporated.

11

1.14  Companies’ Separate Legal Personality

1.14 Once a company has been formed and registered in accordance with the applicable Companies Act, it becomes a separate juristic person for all intents and purposes. Thus, from its inception, a company enjoys a life distinct and separate from its members: ‘Once the company is legally incorporated it must be treated like any other independent person with its rights and liabilities appropriate to itself, and that the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are’.83 Lord Macnaghten stated the position as follows:84 ‘When the memorandum is duly signed and registered, though there be only seven shares taken, the subscribers are a body corporate “capable forthwith,” to use the words of the enactment, “of exercising all the functions of an incorporated company.” … The company attains maturity on its birth. There is no period of minority – no interval of incapacity. I cannot understand how a body corporate thus made “capable” by statute can lose its individuality by issuing the bulk of its capital to one person, whether he be a subscriber to the memorandum or not. The company is at law a different person altogether from the subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act.’ Its independent existence allows it to sue and be sued, to incur debts, and to hold property, and to perform all acts necessary for carrying on a business.85

The exception: piercing86 the corporate veil General 1.15 The 2006 Act recognises an incorporated company as possessing legal personality which is distinct from the separate legal personalities of the members of the company in question.87 This provision perpetuates the principle enunciated in company legislation since 1862, as amply illustrated by the Salomon case. Most rules of law have exceptions. The exception to the rule of the separate existence of a company and its members is that there are circumstances where the law will not countenance such separation and will require the piercing of the corporate veil and hence violate the separate personality. The challenge is to correctly identify the principles underlying the exception to justify such violation. 83

At 30, per Lord Halsbury LC. This proposition was questioned in Adams v Cape Industries plc [1990] Ch 433, CA, at 540C–540F: the motive for setting up a company may be a relevant consideration. In view of the current state of the law on piercing of the corporate veil, as discussed at 1.15–1.20, this qualification pales into insignificance. The critical question has become whether the impugned conduct constitutes concealment (which will not justify piercing) or evasion (which will justify it). 84 At 51. 85 At 54, 55, per Lord Davey. 86 ‘Piercing’ and ‘lifting’ are used interchangeably: see VTB Capital plc v Nutritek International Corp [2013] UKSC 5 at [118]. 87 Section 16(2), (3).

12

Separate legal personality 1.16

The seeds of the exception were planted in Salomon itself: if there were grounds on which fraud could have been established, the outcome in that matter may have been different. Fraud can never be tolerated, hence the entrenched principle of a separate corporate existence was usually trumped by the presence of fraud, either in establishing the company or in conducting the business in corporate form. As a result, the law allowed the ‘lifting’, ‘stripping’ or ‘piercing’ of the veil of corporate personality to expose fraud, the real perpetrators of crime, or the abuse of the corporate form. Public policy demanded that the privilege of separate corporate existence yields in favour of the truth. No uniform principled approach can be distilled from the numerous judgments dealing with lifting. This is illustrated by the judgment of Lord Neuberger in the Supreme Court in Petrodel Resources Ltd v Prest88 (‘Petrodel v Prest’)89 where he observed: ‘The history of the doctrine over 80 years of its putative life (taking Gilford Motors90 as the starting point) is, therefore, at least as I see it, a series of decisions, each of which can be put into one of three categories, namely: (i) Decisions in which it was assumed that the doctrine existed, but it was rightly concluded that it did not apply on the facts; (ii) Decisions in which it was assumed that the doctrine existed, and it was wrongly concluded that it applied on the facts; (iii) Decisions in which it was assumed that the doctrine existed and it was applied to the facts, but where the result could have been arrived at on some other, conventional, legal basis, and therefore it was wrongly concluded that it applied.’ Judgments preceding Petrodel v Prest should therefore be treated with circumspection. Those dealt with below91 serve largely as providing an historical perspective. 1.16 The balancing of the demand for piercing the corporate veil on the one hand, and maintaining separate corporate existence, on the other, confined the application of lifting the corporate veil: only in exceptional circumstances would a court look beyond – and therefore override – the separate legal personality of a company in order to disclose the true state of affairs. Not even an order under section 24(1)(a) of the Matrimonial Causes Act 1973 could be made in respect of a company’s property unless there were legitimate grounds for piercing the corporate veil.92 But that begs the question: what are the ‘exceptional circumstances’ or ‘legitimate grounds’ for so doing? As a general proposition, a company set up for a fraudulent purpose, or being used for a fraudulent purpose as a shield for the activities of those in control of the

88 89

[2013] UKSC 34, [2013] 2 AC 415. At [74]. Despite his misgivings, Lord Neuberger, at [80], refrained from discarding the doctrine entirely, because it might still prove to be a valuable tool in future. Lord Walker, at [106], considered that piercing is not a doctrine at all, in the sense of a coherent principle or rule of law. 90 The reference is to Gilford Motor Co Ltd v Horne [1933] Ch 935, CA. 91 At 1.16–1.17. 92 Petrodel Resources Ltd v Prest [2012] EWCA Civ 1395, [2013] 2 WLR 557, CA (Rimer and Patten LJJ, Thorpe LJ dissenting). This part of the Court of Appeal decision was upheld by the Supreme Court. Further referred to as Petrodel v Prest, CA.

13

1.17  Companies’ Separate Legal Personality

company, would find its veil lifted,93 if not ripped or rudely torn away,94 to expose the true perpetrators of the fraud.95 Descriptions to the effect that the company is a mere ‘façade’, or that its activities constitute a ‘sham’, ‘stratagem’, ‘mask’, ‘cloak’ or ‘device’ concealing the true facts,96 or as a device to evade an existing contractual or other obligation,97 do not detract from the point that fraud was the key to lifting the veil. What constitutes a façade, sham or device? Diplock LJ described98 the expression ‘sham’99 as ‘acts done or documents executed by the parties to the “sham” which are intended by them to give to third parties or to the court the appearance of creating between the parties, legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intended to create’.100 The parties must be complicit in creating the sham, ie  all participating parties should have a common subjective intention.101 In light of the principled stance expressed by the Supreme Court in Petrodel v Prest there does not appear to be merit in continued use of this kind of labelling. 1.17 By 2012 the Privy Council had formulated the following summary of the principles determining whether the corporate veil should be lifted or not: 102 ‘In the first place, ownership and control of a company are not of themselves sufficient to justify piercing the veil. This is, of course, the very essence of the principle in Salomon v A Salomon & Co Ltd [1897] AC 22 … Secondly, the court cannot pierce the corporate veil, even where there is no unconnected third party involved, merely because it is thought to be necessary in the interests of justice … 93 94

Re Darby [1911] 1 KB 95; Wallersteiner v Moir (No 1) [1974] 1 WLR 991, CA, at 1013E. Jennings v CPS [2008] 1 AC 1046, HL, at [16]. See also R v Del Basso (Luigi) [2010] EWCA Crim 1119; R v Rooney [2010] EWCA Crim 2; CPS v Nelson [2009] EWCA Crim 1573, [2010] 2 WLR 788, CA; R v Silvester [2009] EWCA Crim 2182; R v Allpress [2009] EWCA Crim 8; R v Straughan [2009] EWCA Crim 955. 95 See also VTB Capital plc v Nutritek International Corp [2012] EWCA Civ 808, [2012] 2 BCLC 437, CA at [47]–[49]. 96 Woolfson v Strathclyde Regional Council 1978 SC 90, HL, at 95; Snook v London and West Riding Investments Ltd [1967] 2 QB 786, CA, at 802C–802F; Gilford Motor Co Ltd v Horne [1933] Ch 935, CA, at 962; Jones v Lipman [1962] 1 WLR 832, ChD; and the discussion of these authorities in Yukong Line Ltd v Rendsburg Investments Corp [1998] 1 WLR 294, QB, at 306E–308B. See also Ben Hashem v Ali Shayif [2008] EWHC 2380 (Fam). 97 Office of Fair Trading v MB Designs (Scotland) Ltd 2005 SLT 691, CSOH, at 696 (applied in Office of Fair Trading v Miller [2009] EWCA Civ 34); Creasey v Breachwood Motors Ltd [1993] BCLC 480, QB (relevant for purposes of the particular factual setting – it was not approved in Ord v Belhaven Pubs Ltd [1998] 2 BCLC 447, CA); South Llanharran Colliery Co (1879) 12 ChD 503, CA. 98 Snook v London and West Riding Investments Ltd [1967] 2 QB 786, CA, at 802D. 99 The other expressions carry similar meanings. Further use of the expression ‘sham’ is intended to cover all its variants. 100 See also, in similar vein, although in different context, National Westminster Bank v Jones [2001] EWCA Civ 1541, [2002] 1 BCLC 55, CA; Re Polly Peck International plc [1996] 2 All ER 433, ChD, at 444a–444e. 101 Hitch v Stone [2001] EWCA Civ 63 at [65]–[69]. 102 La Générale des Carrières et des Mines v FG Hemisphere Associates LLC [2012] UKPC 27, [2012] 2 Lloyd’s Rep 443, PC, at [23], relying on the judgment by Munby J in Ben Hashem v Ali Shayif [2008] EWHC 2380 (Fam) at [159]–[164]. See further its repetition in Petrodel v Prest at [25].

14

Separate legal personality 1.19

Thirdly, the corporate veil can be pierced only if there is some impropriety … Fourthly, the court cannot, on the other hand, pierce the corporate veil merely because the company is involved in some impropriety. The impropriety must be linked to the use of the company structure to avoid or conceal liability … Fifthly, it follows from all this that if the court is to pierce the veil it is necessary to show both control of the company by the wrongdoer(s) and impropriety, that is, (mis)use of the company by them as a device or façade to conceal their wrongdoing … Finally, and flowing from all this, a company can be a façade even though it was not originally incorporated with any deceptive intent. The question is whether it is being used as a façade at the time of the relevant transaction(s). And the court will pierce the veil only so far as is necessary to provide a remedy for the particular wrong which those controlling the company have done. In other words, the fact that the court pierces the veil for one purpose does not mean that it will necessarily be pierced for all purposes.’ Two qualifications were added by VTB Capital v Nutritek International Corp:103 first, that it was not necessary in order to pierce the corporate veil that there should be no other remedy available against the wrongdoer; second, that it was not enough to show that there had been wrongdoing – it had to be in the nature of an independent wrong that involves the fraudulent or dishonest misuse of the corporate personality of the company for the purpose of concealing the true facts. These qualifications do not survive the decision of the Supreme Court in Petrodel v Prest.

Petrodel v Prest The facts 1.18 Mr Prest held interests in Petrodel and other property holding companies. His divorce from Mrs Prest resulted in an order for the transfer of certain of the properties held by those companies to Mrs Prest. Those companies were held to have been wholly owned and controlled (directly or through intermediate entities) by Mr Prest. The question was whether the court had the power to order the transfer of the properties to Mrs Prest given that they legally belonged not to Mr Prest but to companies under his control, in circumstances where none of the companies had ever had independent directors, and Mr Prest had treated the cash balances and property of the companies as his own and drawn on them as he saw fit.

Decisions of the courts below 1.19 The court of first instance104 correctly held that there was no general principle of law which entitled the court to reach the companies’ assets by piercing the corporate veil. However, it did so in reliance on the perceived wider powers under section 24(1)(a) of the Matrimonial Causes Act 1973.105 103 [2012] EWCA Civ 808, [2012] 2 BCLC 437 at [79], [80]. 104 Reported as Prest v Prest [2011] EWHC 2956 (Fam). 105 Whereby a court may order that a party to the marriage shall transfer to the other party such property as may be so specified, being property to which the first-mentioned party is entitled, either in possession or reversion.

15

1.20  Companies’ Separate Legal Personality

The judgment was challenged in the Court of Appeal106 essentially for lack of jurisdiction to make such an order. The court alluded to the practice which had developed in the Family Court to treat the assets of companies substantially owned by one party to the marriage as the assets of that party and subject to an order of redistribution, provided that a liquidity and solvency test is passed ensuring that the company will remain able to satisfy the claims of its creditors after such redistribution. The majority of the Court of Appeal rejected the Family Court practice unless: (i) the corporate personality of the company was being abused for a purpose which was in some relevant aspect improper; or (ii) on the particular facts of the case it could be shown that an asset legally owned by the company was held in trust for the husband.107

The Supreme Court’s majority judgment 1.20 The majority accepted the existence of a doctrine of lifting/piercing the corporate veil and agreed that section 24(1)(a) of the Matrimonial Causes Act 1973 did not extend the common law power to pierce the corporate veil, but limited its operation substantially to a clearly defined ambit and scope. It concluded that, if there is any life in the doctrine at all, it will find application only in the rarest of circumstances. Lord Sumption identified the concealment principle and the evasion principle as underpinning the correct understanding and definition of lifting (as opposed to piercing).108 He explained it as follows:109 ‘The concealment principle is legally banal and does not involve piercing the corporate veil at all. It is that the interposition of a company or perhaps several companies so as to conceal the identity of the real actors will not deter the courts from identifying them, assuming that their identity is legally relevant. In these cases the court is not disregarding the “facade”, but only looking behind it to discover the facts which the corporate structure is concealing. The evasion principle is different. It is that the court may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the company’s involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement … .’ The court analysed two judgments illustrative of these principles, namely Gilford Motor Co Ltd v Horne110 (‘Gilford’) and Jones v Lipman111 (‘Jones v Lipman’). Lord Sumption’s judgment proceeded as follows:112 ‘Because the restrictive covenant prevented Mr Horne from competing with his former employers whether as principal or as agent for another, it did not matter whether the business belonged to him or to JM Horne & Co Ltd provided that he 106 Petrodel Resources Ltd v Prest [2012] EWCA Civ 1395, [2013] 2 WLR 557, CA (Rimer and Patten LJJ, Thorpe LJ dissenting). 107 Petrodel v Prest, CA at [7]. 108 Petrodel v Prest at [28]. Lady Hale and Lord Wilson, although agreeing with Lord Sumption but not with Lord Neuberger, were nevertheless not convinced of this categorisation: see [92]. Lord Clarke, at [103], was also hesitant to adopt this categorisation. 109 Petrodel v Prest at [28]. 110 [1933] Ch 935, CA. 111 [1962] 1 WLR 832, ChD. 112 Petrodel v Prest at [29].

16

Separate legal personality 1.20

was carrying it on. The only relevance of the interposition of the company was to maintain the pretence that it was being carried on by others … The company was restrained in order to ensure that Horne was deprived of the benefit which he might otherwise have derived from the separate legal personality of the company. I agree with the view expressed by the Court of Appeal in VTB Capital, at para, 63 that this is properly to be regarded as a decision to pierce the corporate veil …’. In Jones v Lipman the facts were that Mr Lipman sold a property to the plaintiffs. Subsequently, thinking better of the deal, he sold it to another company, Alamed Ltd, in an attempt to make it impossible for the plaintiffs to enforce transfer of the property from him in his personal capacity. Mr Lipman acquired Alamed, a shelf company, wholly owned and controlled by him, solely for the purpose of defeating the plaintiffs’ rights to specific performance. The court of first instance ordered the transfer of the property to the plaintiffs against both Mr Lipman and Alamed jointly. Lord Sumption explained:113 ‘As against Mr Lipman this was done on the concealment principle. Because Mr Lipman owned and controlled Alamed Ltd, he was in a position specifically to perform his obligation to the plaintiffs by exercising his powers over the company. This did not involve piercing the corporate veil, but only identifying Mr Lipman as the man in control of the company … [A]s against Alamed Ltd itself, the decision was justified on the evasion principle, by reference to the Court of Appeal’s decision in Gilford Motor Co.’ In conclusion, the Supreme Court summarised the law as it stands, as follows:114 (1) the corporate veil may be pierced only to prevent the abuse of corporate legal personality, which may be the case when a company is used to evade the law or to frustrate its enforcement. It is not an abuse to cause a legal liability to be incurred by the company in the first place. That is part and parcel of the incorporation of a company; (2) there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control.115 The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality.116 This is essentially the evasion principle referred to above; (3) the principle is a limited one, since in most cases where the test (in (2) above) is satisfied, the facts will disclose the existence of a legal relationship between the company and its controller which will make it unnecessary to pierce the corporate veil; (4) if it is not necessary to pierce the corporate veil, it is not appropriate to do so, there being no public policy imperative which justifies that course;117 113 Petrodel v Prest at [30]. 114 Petrodel v Prest at [34]–[35]. 115 Lord Neuberger agreed with this proposition at [81], with the reservation that piercing should only be allowed when all other, more conventional remedies, proved to be of no assistance. This is consistent with point (4). 116 Petrodel v Prest at [35]. 117 See n 115 above.

17

1.21  Companies’ Separate Legal Personality

(5) the principle (as in (2) above) has been recognised far more often than it has been applied, but the few cases where it had been correctly applied, are consistent with authority and with long-standing principles of legal policy. Petrodel v Prest has since been applied118 and followed119 without any perceptible qualification.

Insufficient reasons to lift the veil 1.21 Following the decision of the Supreme Court in Petrodel v Prest, it is now beyond doubt that there is no general jurisdiction to lift the veil simply when it may be ‘just’ to do so, or where the ‘interest of justice’ so requires, or even where there is a proven divestment of assets at an undervalue.

Legislation 1.22 In proceedings under the Criminal Justice Act 1988 and the Drug Trafficking Act 1994, it is imperative to permit the lifting of the corporate veil where a company is instrumental in perpetrating a crime.120 Tax legislation may require the corporate veil to be pierced.121 Careful consideration should be given on the facts whether it is an instance of concealment or evasion before the label of lifting or piercing is used. Sometimes it may not be necessary to resort to this mechanism if the result can be achieved by the mere interpretation and application of the legislative provision itself, without attaching any label to it.122

Criminal cases 1.23 The issue of whether the corporate veil can be pierced or lifted frequently arises in criminal cases in connection with applications made for an order for confiscation of the proceeds of crime under the Proceeds of Crime Act 2002. In light of Petrodel v Prest, the position as regards the application of lifting in criminal law when considering confiscation, has now been stated in R v Boyle Transport (Northern Ireland) Ltd.123 The Court of Appeal applied Petrodel v Prest and concluded that the test is not simply one of justice, and in assessing the reality of the matter, the Crown Court cannot depart from the established principles as applied in the civil courts relating to the separate legal status of a limited company, as stated by the Supreme Court in Petrodel v Prest. The 2002 Act contains no provision sanctioning a departure 118 See eg R v Boyle Transport (Northern Ireland) Ltd [2016] EWCA Crim 19; [2016] 4 WLR 63, CA – discussed in more detail at 1.23; Antonio Gramsci Shipping Corp v Recoletos Ltd [2013] EWCA Civ 730, [2013] 4 All ER 157, CA; Persad v Singh [2017] UKPC 32; Rossendale BC v Hurstwood Properties (A) Ltd [2021] UKSC 16, [2021] 2 WLR (SC) at [63]–[76]. 119 See eg Standard Chartered Bank (Hong Kong) Ltd v Independent Power Tanzania Ltd [2016] EWCA Civ 411, [2016] 2 All ER (Comm) 740. 120 R v Green [2007] 3 All ER 751, CA, at [42], affirmed by the House of Lords on appeal [2008] UKHL 30, [2008] 1 AC 1053, HL; CPS v Compton [2002] EWCA Civ 1720. 121 See eg R v May [2008] UKHL 28, [2008] 1 AC 1028, HL, at [45]. 122 Grimm v Newman Chantry Vellacott DFK [2002] EWCA Civ 1621, [2003] 1 All ER 67, CA, at [41]. 123 [2016] EWCA Crim 19 at [88]–[97]. Followed in R v Powell (Jacqueline) [2016] EWCA Crim 1043 (CA), [2016] 4 WLR 63.

18

Separate legal personality 1.24

from the ordinary principles of company law. Where a company involved in relevant wrongdoing is solely owned and controlled by the defendant, it does not necessitate a conclusion, in a confiscation case, that it is an alter ego company, whose turnover and assets were to be equated with being the property of the defendant himself.

Groups of companies 1.24 The position of groups of companies requires specific consideration. A logical consequence of the Salomon principle is that companies retain their separate existence even if one company (the parent or holding company) is holding all or the majority of the shares in, or otherwise controls, another company (the subsidiary),124 irrespective of the number of companies within a group.125 Subject to certain limited exceptions,126 a body corporate cannot be a member of a company that is its holding company, and any allotment or transfer of shares in a company to its subsidiary is void.127 The wording of legislation or a contract may justify a court in treating a parent and its subsidiary as one company,128 but clear and unequivocal language will be required for that purpose.129 A group of companies may be one in an economic sense, but not in a legal sense. It is a fundamental distinction.130 Roskill J described the relationship between parent companies, on the one hand, and the subsidiaries through which they trade, on the other, as follows:131 ‘… [E]ach company in a group of companies (a relatively modern concept) is a separate legal entity possessed of separate legal rights and liabilities so that the rights of one company in a group cannot be exercised by another company in that group even though the ultimate benefit of the exercise of those rights would enure beneficially to the same person or corporate body irrespective of the person or body in whom those rights were vested in law.’ 124 See the more detailed discussion of this relationship in 9.58–9.65. 125 Albacruz v Albazero [1977] AC 774, HL, at 807C–807F; Bank of Tokyo Ltd v Karoon [1987] AC 45, CA; Adams v Cape Industries plc [1990] Ch 433, CA, at 532A–532C; Acatos & Hutcheson plc v Watson [1995] 1 BCLC 218, ChD; Ord v Belhaven Pubs Ltd [1998] 2 WLUK 260, [1998] 2 BCLC 447, CA, at 457b–457h; Woolfson v Strathclyde Regional Council 1978 SC 90, HL. 126 Sections 138 (subsidiary acting as personal representative or trustee) and 141 (subsidiary acting as authorised dealer in securities – and since 31 December 2020 in UK securities only) of the 2006 Act. Note the amendment to section 141(2)(b) limiting the definition of intermediary to one having access to a UK regulated market. 127 Section 136 of the 2006 Act. 128 See Adams v Cape Industries plc [1990] Ch 433, CA, at 536B–536E, for several examples. 129 Dimbleby & Sons Ltd v National Union of Journalists [1984] 1 WLR 427, HL, at 435D–435E (per Lord Diplock) stated as much regarding legislation, but certainly the same should apply to agreements. 130 Bank of Tokyo Ltd v Karoon [1987] AC 45, CA, at 53F–54A, 64F–64G. Re Polly Peck International plc [1996] 2 All ER 433, ChD, is also authority for the proposition that it is not open to a court to treat a closely integrated group of companies as a single economic unit, save when the circumstances warrant the lifting of the corporate veil within the recognised categories available for such lifting. 131 Albacruz v Albazero [1977] AC 774, HL, at 807E–807F, overruling the judgment of the Court of Appeal ([1975] 3 WLR 491) but not on the point of the separate existence of companies within a group; the Court of Appeal’s approach in this respect remains unaltered: Adams v Cape Industries plc [1990] Ch 433, CA, at 532A–532C.

19

1.25  Companies’ Separate Legal Personality

1.25 There is no assumption that a company is acting as an agent of its shareholders. In Adams v Cape Industries plc,132 the court limited the possibility that a subsidiary or an associate might be treated as the agent of its holding company to situations where such an inference was justified on the facts: in the absence of specific agreement to that effect, it will be difficult to establish an agency relationship. It is a matter of fact and not of principle: if the subsidiary had any authority to bind the parent, the normal rules of agency will bind the parent as principal. There is no presumption that their identities merged or that the one is merely a front for the other. Lifting of the veil will accordingly be inappropriate in those circumstances. Courts were reluctant to pierce the veil in order to reallocate rights or obligations in a group context. The limited meaning and narrow field of application of the doctrine as now formulated in Petrodel v Prest will certainly feed the reluctance. In Ord v Belhaven Pubs,133 the issue was one of misrepresentation in relation to the sale of public houses by a subsidiary. The court refused to allow the holding company to be substituted as defendant, even though a subsequent corporate reorganisation left the subsidiary without assets. The court held firmly to a restrictive approach. Similarly, in Adams v Cape Industries plc,134 the Court of Appeal refused to reallocate liability within the group. The court explicitly declined to accept, as a matter of law, that it was entitled to lift the veil as against a defendant company in a group merely because the corporate structure had been used so as to ensure that the legal liability in respect of future activities of the group – which encompassed the avoidance of risk of the enforcement of the liability – would fall on another member of the group rather than the defendant. The court concluded by stating that the right to use a corporate structure in that manner is inherent to company law.135 However, in Chandler v Cape Plc136 the Court of Appeal ruled that a parent may be held responsible for the health and safety of its subsidiary’s employees under circumstances where: (a) the businesses of the parent and subsidiary were in a relevant respect the same; (b) the parent had, or ought to have had, superior knowledge on some relevant aspect of health and safety in the particular industry; (c) the subsidiary’s system of work was unsafe as the parent company knew, or ought to have known; (d) the parent knew, or ought to have foreseen, that the subsidiary, or its employees, would rely on it using that superior knowledge for the employees’ protection although it was not necessary to show that the parent was in the practice of intervening in the health and safety policies of the subsidiary. This list does not constitute a fixed set of circumstances to hold a parent company liable, as demonstrated in Lungowe v Vedanta Resources Plc.137 The Supreme Court held that the ordinary principles of liability in tort must be applied to render the parent company liable: ‘Everything depends on the extent to which, and the way in which, the parent availed itself of the 132 [1990] Ch 433, CA, at 536B–536G; see also Ebbw Vale Urban District Council v South Wales Traffic and Licensing Authority [1951] 2 KB 366, CA, at 370, 374 (also known as R v South Wales Traffic and Licensing Authority, ex parte Ebbw Vale Urban District Council [1951] 1 All ER 806, CA). 133 [1998] 2 BCLC 447, CA. 134 [1990] Ch 433, CA. See also Linsen International Ltd v Humpuss Sea Transport Pte Ltd [2011] EWHC 2399 (Comm), [2012] 1 BCLC 651, QB (Comm). 135 [1990] Ch 433, CA, at 544A–544G. 136 [2012] EWCA Civ 525, [2012] 1 WLR 3111, CA; distinguished in Thompson v Renwick Group Plc [2014] EWCA Civ 635, [2014] 2 BCLC 97, CA. 137 [2019] UKSC 20, [2019] 2 WLR 1051.

20

The implications of a separate legal personality 1.26

opportunity to take over, intervene in, control, supervise or advise the management of the relevant operations (including land use) of the subsidiary.’138

THE IMPLICATIONS OF A SEPARATE LEGAL PERSONALITY Shareholders not liable for the company’s debts 1.26 The most significant consequence of the existence of a company as legal entity separate from that of its shareholders is that members’ liability to the company is limited to the capital invested when acquiring the share, together with the amount, if any, unpaid on the shares.139 Limited liability means that members are not liable to indemnify the company against debts incurred by it.140 In Rainham Chemical Works Ltd v Belvedere Fish Guano Co Ltd,141 Lord Buckmaster LC put it as follows:142 ‘It not infrequently happens in the course of legal proceedings that parties who find they have a limited company as debtor with all its paid-up capital issued in the form of fully-paid shares and no free capital for working suggest that the company is nothing but an alter ego for the people by whose hand it has been incorporated, and by whose action it is controlled. But in truth the Companies Acts expressly contemplate that people may substitute the limited liability of a company for the unlimited liability of the individual, with the object that by this means enterprise and adventure may be encouraged.’ This approach does not result in injustice to creditors of a company. Since the coming of age of the principle of separate corporate existence, the risk that creditors of companies are exposed to has been part and parcel of trade and commerce: ‘Since Salomon’s case, traders and creditors have known that they do business with a corporation at their peril if they do not require guarantees from members of the corporation or adequate security’.143 Any possible liability of the shareholder beyond his equity and loan contributions towards the capital of the company will arise not as an incidence of his membership but because of an obligation arising from a discrete contractual relationship entered into directly with the creditor. In what may be considered an exception to the rule, shareholders were ordered to pay the costs of the proceedings against their company when the company’s defence was conducted in an unreasonable manner.144 138 At [49]. See also [51]–[54]. 139 Loan capital contributed to a company by a shareholder as a consequence of his shareholding (such as an obligation arising from a shareholders’ agreement) is, of course, also at risk. 140 JH Rayner (Mincing Lane) Ltd v Department of Trade and Industry [1990] 2 AC 418, HL, at 482B. 141 [1921] 2 AC 465, HL. 142 At 475. See also JH Rayner (Mincing Lane) Ltd v Department of Trade and Industry [1990] 2 AC 418, HL, at 482H, 506D; Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187, PC, at 221F–221G. 143 JH Rayner (Mincing Lane) Ltd v Department of Trade and Industry [1990] 2 AC 418, HL, at 482H. 144 Raleigh UK Ltd v Mail Order Cycles Ltd [2011] BCC 508, ChD. For a similar occurrence of non-party costs granted against a controlling shareholder and director of an insolvent company, see Gatnom Capital v Sanders [2012] BPIR 299, ChD; and compare Merchantbridge & Co Ltd v Safron General Partner 1 Ltd [2012] 2 BCLC 291, QB (Comm).

21

1.27  Companies’ Separate Legal Personality

A company makes agreements in its own name 1.27 One of the most obvious consequences of the separate existence of a company includes the capacity to contract in its own name with any other individual or corporate entity on precisely the same footing as an individual possessing the necessary capacity would have been able to.145 It includes contracts with companies holding shares in the first party or other companies in which the first party holds shares, even to the extent of a 100% subsidiary thereof. That does not make one contracting company the agent of the other – they contract as equals.146 It does not matter that the respective corporate parties are represented by the same individual. It follows that a shareholder, whether a prospective one or an existing sole or majority shareholder, may contract with the company in which his shares are held. This early insight was put as follows by Lindley LJ:147 ‘A sale by a person to a corporation of which he is a member is not either in form or in substance, a sale by a person to himself. To hold that it is, would be to ignore the principle which lies at the root of the legal idea of a body corporate, and that idea is that the corporate body is distinct from the persons composing it. A sale by a member of a corporation is in every sense a sale, valid in equity as well as at law.’ 1.28 There is nothing untoward for a sole trader or a partnership to incorporate a company, for the owner or partners to become shareholders and/or directors of the company, and then to sell the business to that company, represented by one or more of the individuals who conceptualised the creation of the company.148 In Commissioners of Inland Revenue v Sansom,149 S traded as a sole trader but sold his business as a going concern to a private company, in which he held 2,499 shares and his daughter one share. S was the governing (managing) director, and the whole direction, control and management of the business and affairs of the company were in his hands. Substantial profits were made, but not declared as dividends. Instead, the company made substantial loans to S. The company’s fortunes waned and it was wound up. S was assessed to super tax on the loans made to him as if representing income and not capital. Recognising the separate existence of S as shareholder and the company, the court held, ‘with the utmost clearness’,150 that it was a private company, correctly registered, to enable the corporators to take over a business; that it had paid for it and took it over; that it carried it on with entire regularity; and, having discharged every debt and liability incurred by it, was finally in due form wound up.151 The court continued:152 ‘In my judgment so long as such a company as this was is recognised by the legislature there can be no reason why the contracts and the engagements made in its name or entered into on its behalf, and themselves ex facie regular, should not 145 JH Rayner (Mincing Lane) Ltd v Department of Trade and Industry [1990] 2 AC 418, HL. 146 For example, Multinational Gas and Petrochemical Co Ltd v Multinational Gas and Petrochemical Services Ltd [1983] Ch 258, CA; JH Rayner (Mincing Lane) Ltd v Department of Trade and Industry [1990] 2 AC 418, HL, at 482A–482G. 147 Farrar v Farrars Ltd (1889) LR 40 ChD 395 at 409–410. 148 This is modelled on the pattern set by Salomon. 149 [1921] 2 KB 492, CA. 150 At 515. 151 Per Younger LJ at 514–515. 152 At 516–517.

22

The implications of a separate legal personality 1.29

everywhere until the contrary is alleged and proved be regarded as the company’s and not those of somebody else, any more than there is any reason why the contracts and engagements and transactions, say even of such a company as the London & North Western Railway Company, should not be regarded as regular until the contrary is shown. To my mind it is strange that it should be necessary to insist upon this aspect of the case at this time of day. But until it is fully realised the loyal adherence to the principles of Salomon’s case, to say nothing of obedience to the declared policy of the legislature – which is required of all courts – will not be forthcoming.’ Accordingly, the sale and transfer by partners (or a sole trader) of their entire business to a company, in which the same partners or sole shareholder hold the shares and are the counterparty represented by the very same individuals, are entirely legitimate,153 unless, of course, there are grounds to lift the corporate veil – a course of action which has been substantially narrowed in Petrodel v Prest.154 Tax legislation looks favourably on such a transfer.155 1.29 The application of the principle has caused particular problems in the field of employment where a typical single member company156 employed a single person, being the same individual who is not only the sole or dominant shareholder but also the director of the company and who, in that capacity, applied his mind and formed the consensus on behalf of the company necessary to enter a contract of employment with himself. The problem is suitably illustrated by the facts in Lee v Lee’s Air Farming Ltd:157 Mr Lee established the respondent company. He was its controlling shareholder and the ‘governing’158 director, as well as an employee who was the 153 John Foster & Sons, Ltd v The Commissioners of Inland Revenue [1894] 1 QB 516, CA, at 530; Rainham Chemical Works Ltd v Belvedere Fish Guano Co Ltd [1921] 2 AC 465, HL, at 475; Tunstall v Steigmann [1962] 2 QB 593, CA, at 600–601. 154 See 1.18–1.20. 155 Capital gains roll-over relief is provided automatically under s 162 of TCGA 1992 (subject to s 162A whereby an election can be made to opt out of the provisions of s 162) under conditions where a person, who is not a company, transfers to a company a business as a going concern, together with the whole assets of the business other than cash, and the transfer is made in exchange, wholly or partly, for shares issued by the transferee company. Any inherent chargeable gains in the transferred assets, at the time of the transfer, are apportioned between the newly issued shares and any other consideration received. The amount apportioned to the shares reduces the base cost of the shares and, on a future disposal, CGT will arise in the normal way but on the lower base cost. 156 References to a ‘one man’ company (or, preferably, a single member company as described in s 123 of the 2006 Act), are not limited to the literal single shareholder company, but may include, as the context requires, a reference to a company with a majority or dominant shareholder, ie a shareholder ordinarily holding 75% or more of the issued shares, giving him the voting power to pass both ordinary and special resolutions of the company. The dominance may be arrived at by force of personality. The crucial point is that a single person is in effective control of a company: see Moore Stephens v Stone Rolls Ltd [2009] 1 AC 1391, HL, at [51], [115], [160], [161] and [167]. Note should be taken of the discussion of this judgment in Singularis Holdings Ltd (In Official Liquidation) (A Company Incorporated in the Cayman Islands) v Daiwa Capital Markets Europe Ltd [2019] UKSC 50, [2020] AC 1189, [29]–[34] with the unanimous conclusion at [34] to the effect that ‘the answer to any question whether to attribute the knowledge of the fraudulent director to the company is always to be found in consideration of the context and the purpose for which the attribution is relevant’ is adopted as the correct approach. 157 [1961] AC 12, PC. 158 The matter emanated from New Zealand where, at the time, managing directors were apparently referred to as ‘governing’ directors.

23

1.30  Companies’ Separate Legal Personality

company’s chief pilot. As director and controlling shareholder, he exercised full and unrestricted control over all the operations of the company. As a statutory obligation, the company had insured itself against liability to pay compensation in the case of an accident suffered by Mr Lee in the course of his employment. There was such an accident. In the course of his employment, the aircraft which Mr Lee piloted crashed and he was killed. The appellant, the deceased’s wife, claimed compensation on the basis that, at the time of the accident, her husband was employed by the respondent company. The Privy Council concluded in her favour. In the speech of Lord Morris, several important implications of the separate legal identity/personality of the company were highlighted:159 ‘There appears to be no greater difficulty in holding that a man acting in the one capacity can give orders to himself in another capacity then there is in holding that the man acting in one capacity can make a contract with himself in another capacity. The company and the deceased were separate legal entities. The company had the right to decide what contracts for Aerial Top Dressing it would enter into. The deceased was the agent of the company in making the necessary decisions. Any profits earned would belong to the company and not to the deceased.’ His Lordship emphasised that it was a well-established principle that the mere fact that someone is a director of a company is no impediment to his entering into a contract to serve the self-same company.160 The company’s customers were farmers who contracted with the company and the company alone. That was only possible by virtue of the fact that the deceased as one legal person was willing to work for, and to make a contract with, the company, which in turn was another legal entity. 1.30 No contractual obligations were invalidated by the circumstance that the deceased was the sole governing director in whom the full government and control of the company was vested. On the assumption that the company was not a sham, ‘… the capacity of the company to make a contract with the deceased could not be impugned merely because the deceased was the agent of the company in its negotiation’.161 This construction did not at all detract from the company’s right of control over its employee, an essential element in the employer/employee relationship: ‘Just as the company and the deceased were separate legal entities so as to permit of contractual relations being established between them, so also were they separate legal entities so as to enable the company to give an order to the deceased’.162 Lee has been referred to and applied on numerous occasions,163 most recently in Neufeld & Howe v Secretary of State for Business, Enterprise and Regulatory Reform,164 where the Court of Appeal accepted the principles enunciated in Lee. The appeal dealt with two matters simultaneously. Both arose out of the insolvency of companies in which businesses Mr Neufeld and Mr Howe were respectively engaged. The common issue was whether they had been employees of the respective 159 At 30. 160 At 25. 161 At 26. 162 At 27. 163 For example, Nesbitt v Secretary of State for Trade and Industry [2007] IRLR 847, EAT; Ultraframe (UK) Ltd v Clayton (No 2) [2002] EWHC 1964 (Ch); Rowley, Holmes & Co v Barber [1977] 1 WLR 371, EAT. 164 [2009] 3 All ER 790, CA.

24

The implications of a separate legal personality 1.31

failed companies. If they were, they enjoyed the protection given by section 182 of the Employment Rights Act 1996. In each instance, the claimant was the controlling shareholder and the director of the company. The court ruled in their favour. It distilled the following two propositions:165 • •

an individual who owns all the shares in, and is the sole director of, a company, thereby having effective control over it, is fully capable of being employed by the company under a contract of service; and it is no answer to the claim that there must have been absent the element of control typical of the employer/employee relationship. The answer is that, even in relation to a single member company’, the company and the member are not the same person. It remains the company that exercises the relevant control.

Contracts between sole members, who are directors, and their companies are subject to certain formalities.166 Where a limited company having only one member enters into a contract with the sole member (who is also a director of the company), and the contract is not entered into in the ordinary course of the company’s business, the agreement ought to be in writing. If it is not in writing, the company must ensure that the terms of the contract are either set out in a written memorandum or recorded in the minutes of the first meeting of the directors of the company following the making of the contract. Failure to comply with this provision does not affect the validity of the contract,167 but an offence is committed by every officer of the company who is in default.168 By definition, directors are employees under section 5 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA  2003), subjecting their earnings to the regime of employment income at Parts 2 to 7 of ITEPA 2003.

Profits generated by a company are its own 1.31 A member’s proprietary rights are proprietary rights in relation to the shares he holds, and are thus a right to have a share of the profits of the company when realised and divided amongst its members, whether on the declaration of a dividend or pro rata on the winding up of a company.169 To the extent that the declaration of a dividend is based on the profits generated by a company, the profits are only released to members as of right upon such declaration. The principle is easier to comprehend in the context of large companies with thousands of shareholders, where it is inconceivable that shareholders will be 165 At [33]. 166 Section 231 of the 2006 Act, which is derived from s 322B and Sch 24 of the 1985 Act. By the Companies Act 2006 (Commencement No 3, Consequential Amendments, Transitional Provisions and Savings) Order 2007, SI 2007/2194, art 9, Sch 3, para 14, this section applies to agreements entered into on or after 1 October 2007, but s 322B of the 1985 Act continues to apply to agreements entered into before that date. 167 Section 231(6). 168 Section 231(3). 169 Bank of Hindustan, China and Japan Ltd v Alison (1871) 6 CP 54 at 73–74: ‘His interest is not an interest in the real or personal property of the company, including its business or goodwill; but it is merely a right to have a share of the profits of the company when realized and divided amongst its members’; Re George Newman & Co [1895] 1 Ch 674, CA, at 685; Short v Treasury Commissioners [1948] 1 KB 116, CA, at 122–123, affirmed by the House of Lords ([1948] AC 534).

25

1.32  Companies’ Separate Legal Personality

able to lay their hands on profits in the form of cash in the bank, as opposed to the position of the typical domestic company comprising a few shareholders, where the temptation may be stronger and the opportunity greater to lay their hands on the profits without formally declaring dividends. However, the principle carries equal weight, irrespective of the size of the company or the number of shareholders.

Shareholders have no rights to the assets of a company 1.32 A company’s contracts are personal to itself.170 Members have no personal or proprietary rights in relation thereto, or, for that matter, in relation to any asset of the company.171 The distribution of a company’s assets to a shareholder can only be effected lawfully in accordance with statutory prescripts.172 Not even a sole shareholder has a proprietary interest in the company’s assets.173 It is accordingly possible for a shareholder, even a sole shareholder, to steal from the company in which it holds shares.174 Misappropriation of company assets by the directors constitutes a loss for the company and is primarily recoverable by the company from aberrant directors. If the company does not pursue the claim, a derivative action is available to shareholders.175 A further consequence is that a personal claim by a shareholder against a wrongdoer of the company, which resulted in a diminution in the market value of his shares, may not be recoverable:176 such a ‘loss’ is only a reflection of the loss suffered by the company in the form of the diminution in the value of its net assets. The plaintiff’s shares merely constitute a right of participation in the company on the terms found in the articles of association. The shares themselves are not directly affected by the wrongdoing, because the right to participation remains.177 It also follows that a shareholder does not have an insurable interest in the business of a company in which it holds shares.178

A company has the right to sue and be sued in its own name 1.33 No one can sue on a contract save the parties to the contract.179 It follows that, where contracts are concluded by a company, shareholders are, on the one hand, 170 JH Rayner (Mincing Lane) Ltd v Department of Trade and Industry [1990] 2 AC 418, HL, at 478H–479E and 506C–506E; Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187, PC, at 221F–221G. 171 Bank Voor Handel en Scheepvaart NV v Slatford [1953] 1 QB 248, CA, at 269–270, reversed by the House of Lords ([1954] AC 584), but on a different point. 172 See eg Progress Property Co Ltd v Moore [2010] UKSC 55, [2011] 1 WLR 1 at [15]; Part 23 of the 2006 Act. 173 Macaura v Northern Assurance Co Ltd [1925] AC 619, HL; see also Prest v Prest [2012] EWCA Civ 1395, [2013] 2 WLR 557, CA at [101] and Petrodel Resources Ltd v Prest [2013] UKSC 34, [2013] 2 AC 415, at [8]. 174 A-G’s Reference (No 2 of 1982) [1984] QB 624, CA; Bilta (UK) Ltd (In Liquidation) v Nazir [2013] EWCA Civ 968, [2014] Ch 52, CA, at [75]. 175 See Chapter 6. 176 Prudential Insurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, CA, at 222F–223B. See Chapter 8. 177 See further Chapter 8. 178 Macaura v Northern Assurance Co [1925] AC 619, HL. 179 Unless the contract meets the requirements of the Contracts (Rights of Third Parties) Act 1999.

26

The implications of a separate legal personality 1.35

not liable on such contracts and, on the other, unable to sue the counterparty pursuant to the contract.180 As much as a natural person has the right to sue in his own name and be subjected to legal proceedings against himself, so a company has the right to sue, and is liable to be sued, in its own name. The principle is a corollary of the development of the nature of companies that no other persons (in particular, not the members) are liable for the debts or entitled to the assets or profits of the company (unless such a person or shareholder is liable on a different discrete basis) and, more particularly, rests on the foundation of the rule in Foss v Harbottle.181 A resolution to institute or defend proceedings is ordinarily taken by the directors and not by the shareholders.182

Wrongs committed by a company are not chargeable to its members 1.34 A  member, in that capacity, is not personally responsible for the wrongs committed by the company. A company can commit a wrong only through human agency. A director or employee may factually or ostensibly represent the company when committing a wrong and thereby make the company criminally or tortiously liable as a result. It does not absolve the human actor from liability jointly or severally with the company.183 A member may very well be a director and/or or an employee of the company, but it is in his representative capacity that the obligation is incurred and not because of the incidence of membership. A case in point is Booth v Helliwell.184 A company conducted a business. The sole shareholder was the general manager of the business. In his absence, a shop assistant sold an article in contravention of the Sale of Foods and Drugs Act 1875. The general manager was convicted of the offence. On appeal, it was held that the shop assistant was the servant of the company and not of the general manager, and that the conviction was wrong, upholding the Salomon case.

Shareholders do not owe their company a duty of care 1.35 A  shareholder does not owe a duty of care to the company or other shareholders in his capacity as shareholder as such.185 A member does not stand in any fiduciary relationship to the company or any other shareholder. It has been held that, in the absence of good faith, a shareholder is not liable for any negligent conduct by directors appointed by it to a company in which it held shares.186 180 JH Rayner (Mincing Lane) Ltd v Department of Trade and Industry [1990] 2 AC 418, HL. See also Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187, PC, at 221F–221G. 181 See 5.2. 182 It is possible for the members in general meeting to exercise such authority. See 5.7–5.10. 183 R v Grubb [1915] 2 KB 683, CA. 184 [1914] 3 KB 252. The decision was distinguished in Goodfellow v Johnson [1966] 1 QB 83 at 90B–90C, precisely because, in Booth, the sole question was whether a shareholder who had had a preponderating interest in a company is a separate entity from the company. 185 JH Rayner (Mincing Lane) Ltd v Department of Trade and Industry [1990] 2 AC 418, HL. See also Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187, PC. 186 Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187, PC, at 221A–221B. Without derogating from this principle, the case was distinguished in New Zealand Guardian Trust Co Ltd v Brooks [1995] 1 WLR 96, PC.

27

1.36  Companies’ Separate Legal Personality

Shareholders are not per se entitled to represent the company 1.36 The members exercise their powers by majority vote in general meeting. There is nothing preventing a company’s constitution from empowering its members in general meeting to manage its business, however impractical such an arrangement may be, particularly in the event of multiple shareholders. Nothing prevents the company from employing any of its members to perform managerial functions, but the source of the shareholder’s power is the agreement entered into with the company and not the fact of membership as such. In practice, management powers are invariably conferred on the directors, together with a power to delegate their powers to a managing director.187

187 Limited liability companies, so Lord Summer stated in Gas Lighting Improvements Co Ltd v Inland Revenue Commissioner [1923] AC 723, HL, at 740–741, ‘… are simply machinery, in an economic sense, by which natural persons, who desire to limit their liability, participate in undertakings which they cannot manage to carry on themselves, either alone or in partnership, but, legally speaking, this machinery is not impersonal though it is inanimate’. The articles of association frequently so provide. See eg the Companies Act 1948, Table A, art 80; the 1985 Act, Table A, art 70; the Companies Act 2006 Model Articles, art 3.

28

Chapter 2

Directors and their Duties

Contents Introduction 2.1 The nature of the office of director

2.2

Who owes directors’ duties and to whom are they owed?

2.3

Shadow directors

2.4

Source of directors’ duties – the common law and Part 10 of the 2006 Act

2.9

Scope and nature of statutory duties Duty to act within powers Duty to promote the success of the company Duty to report own wrongdoing Duty to exercise independent judgment Duty to exercise reasonable care, skill and diligence Duty to avoid conflicts of interest Duty not to accept benefits from third parties

2.13 2.14 2.22 2.30 2.31 2.33 2.38 2.44

Bribery Act 2010

2.45

Duty to declare interest in proposed transaction or arrangement

2.47

Civil consequences of breach of general duties

2.52

Ratification of breach of duty by shareholders

2.54

Can directors owe duties direct to shareholders? At common law Fiduciary duties

2.55 2.56 2.57

No reflective loss

2.58

Relief from liability – section 1157

2.59

INTRODUCTION 2.1 This chapter is concerned with the general duties owed by directors (and sometimes owed by those acting as directors, although not actually appointed as such), which apply when they perform, and when they fail to perform, their functions of managing the company and its business. Other specific statutory duties and obligations owed by directors under the Companies Act 2006 (‘the 2006 Act’), and indeed other legislation, are numerous. A significant category are transactions entered

29

2.2  Directors and their Duties

into by directors (and those associated with them) with the company, which require some form of approval by the members. Part 10, Chapter 4 (sections 188–225) of the 2006 Act makes detailed provision for the identification of such transactions and how such approval may be obtained, together with the consequences of failing to do so. The transactions affected include long-term service contracts,1 substantial property transactions,2 loans to directors and connected parties,3 and compensation for loss of office.4 Breaches by directors of these specific statutory requirements may give rise to claims against them by the company, or, where the company fails to pursue such claims, possible actions by shareholders, either against the company or against the offending director, by way of a derivative claim.5 Such breaches are also frequently the basis for an unfair prejudice petition.6

THE NATURE OF THE OFFICE OF DIRECTOR 2.2 The position of a director of a company has some similarities with that of an agent, partner, professional adviser and trustee, but it is also separate and, in important respects, distinct from each. By reason of a company’s separate legal personality and dependency on its directors to act on its behalf, directors perform all of those roles on behalf of the company, but in doing so act in the name of the company itself. A director is a fiduciary but is not a trustee. As explained in the nineteenth century by James LJ in Smith v Anderson,7 the office of director is a distinct one from that of trustee and subject to a number of important differences. This has since been noted and applied.8 A  director differs from a trustee in having no title to the company’s assets but is treated as a trustee for the company of his powers.9

WHO OWES DIRECTORS’ DUTIES AND TO WHOM ARE THEY OWED? 2.3 Anyone occupying the position of a director,10 by whatever name called, owes the duties of a director.11 Accordingly, it is not possible for the liabilities arising from such duties to be ignored by demonstrating some defect in the purported appointment of a director, or indeed to establish that no appointment was actually

1 Section 188. 2 Section 190. 3 Sections 197 and 200. 4 Section 215. 5 See Chapter 6. 6 See Chapter 9. 7 (1880) 15 ChD 247, CA, at 275. 8 See eg Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, HL, per Lord Porter at 159. 9 Eclairs Group Ltd v JKX Oil & Gas Plc [2015] UKSC 71, [2016] 1 BCLC 1, SC, per Lord Sumption at [16]. 10 Although a senior employee may owe fiduciary duties, he will not necessarily owe the duties which would be owed by a director. If he is neither a director nor a shadow director, it will be necessary to examine the terms of the employee’s contract of employment to establish the fiduciary duties he owes: Customer Systems plc v Ranson [2012] EWCA Civ 841. 11 Section 250 of the 2006 Act.

30

Shadow directors 2.4

made. This clearly extends to de facto directors.12 In the case of corporate directors,13 the courts will be slow to conclude that a director of a company, which is in turn a corporate director of a further company, is a de facto director of the latter company. The crucial starting point is that the two companies are separate legal entities. It will be presumed that the individual director’s actions are referable to his role as a de jure director of the corporate director, unless it can be shown that he has assumed a role in the second company sufficient to impose fiduciary duties owed to that company on him.14 However, an individual’s involvement in important matters will lead to his status as a de facto director being readily inferred, whether or not he receives any material gain.15 A  sole director cannot successfully argue that he is not liable for breaches of duty by reason of being the guiding mind of the company so that his actions were attributable to the company itself.16

SHADOW DIRECTORS 2.4 De facto directors and shadow directors are quite distinct: there is no single test for de facto directors17 but a de facto director will generally be someone who presumes to act as a director and is held out as such by the company. Put another way, it is a question of whether (i) the relevant person was part of the corporate governance system of the company and (ii) he or she assumed the status and function of a director so as to make himself or herself responsible as if he or she were a director. It is focussed on the key strategic decisions of the company and the relevant individual’s role in making them.18 The question of whether the individual had the power of a director in the sense of having ultimate control over an issue will frequently be important,19 as it is difficult to see how an individual could otherwise discharge a duty to act exercising independent judgment.20 The lack of authority on the divide between corporate governance functions and those of senior employees has been noted and the court will focus on the corporate governance structure of the particular company and what the relevant individual did in the particular case.21

12 See 2.4 for who is a de facto director. 13 Section 156A of the 2006 Act (added by the Small Business, Enterprise and Employment Act 2015) provides that directors must be natural persons (subject to any exceptions provided for by regulations) when it comes into force. 14 Revenue & Customs Commissioners v Holland [2010] UKSC 51, [2010] 1 WLR 2793, SC. 15 Re Snelling House Ltd [2012] EWHC 440 (Ch). Involvement in matters not synonymous with the role of a director and circumstantial or equivocal evidence will not lead to such an inference: SOS for Business, Energy & Industrial Strategy v Rahman [2020] EWHC 2213 (Ch) at [52]. 16 Bilta (UK) Ltd (In Liquidation) v Nazir [2013] EWCA Civ 968, [2014] Ch 52, CA, at [79]–[82]. 17 Revenue & Customs Commissioners v Holland [2010] UKSC 51, [2010] 1 WLR 2793, SC. 18 Burnell v Trans-Tag Ltd [2021] EWHC 1457 (Ch), [2021] 5 WLUK 419, at [347]; applying Smithton Ltd v Naggar [2014] EWCA Civ 939, [2015] 1 WLR 189, CA, at [31]–[44]. See also the helpful list of typical characteristics which may indicate a de facto director set out by Hildyard J in SoS for Business, Innovation and Skills v Chohan [2013] EWHC 680 (Ch), [2015] BCC 755, at [41]. 19 Bishopsgate Contracting Solutions Ltd v O’Sullivan [2021] EWHC 2103 (QB), [2021] 7 WLUK 544 at [170]; SoS v Tjolle [1998] BCC 282, Ch. 20 As required by s 173 of the 2006 Act, as to which see 2.31–2.32 below. 21 Smithton v Naggar [2014] EWCA Civ 939, [2015] 1 WLR 189, per Arden LJ at [31]–[34]. For a recent example of the courts grappling with the question, see Bishopsgate Contracting Solutions Ltd v O’Sullivan [2021] EWHC 2103 (QB), [2021] 7 WLUK 544, at [164]–[171].

31

2.4  Directors and their Duties

It will be a matter of fact and degree in each case and no single factor is decisive.22 The meaning of a de facto director may not be exactly the same in all of the contexts in which a director may be liable.23 A shadow director does not so presume and is not held out as a director.24 However, it is possible for someone to be both a shadow director and a de facto director at the same time.25 There is no general answer to the question of which of the general duties owed by directors is also owed by shadow directors. This is because section 170(5) of the 2006 Act provides that the general duties set out in the Act apply to shadow directors ‘where and to the extent that the corresponding common law rules or equitable principles so apply’. As explained in 2.5, this is largely fact specific. Ascertaining when each of those rules and principles apply to shadow directors is not straight-forward. Section 250(1) of the 2006 Act defines shadow directors as persons ‘in accordance with whose directions or instructions the directors of a company are accustomed to act’. The definition is not new:26 it is the same definition as was set out in section 741(2) of the Companies Act 1985 (‘the 1985 Act’) and has been consistently used in other statutes.27 As Morritt LJ explained in Secretary of State for Trade and Industry v Deverell,28 it is not necessary for the directors to invariably act in accordance with the instructions of the shadow director, but only that they are accustomed to do so. Whether they so act in a mechanical way or after consideration does not bear on whether the definition is satisfied. However, it is essential that they do so act for the definition to be met.29 The giving of instructions or directions by a third party does not constitute him a shadow director. It is only when the actual directors act on such instructions or directions and become accustomed to do so that the definition is met. Accordingly, it is not so much what the putative shadow director does, so much as what the actual directors do in response, which determines his status. In order for a shadow directorship to arise, it is necessary that at least a controlling majority of the board30 are accustomed to act in accordance with the instructions or direction of the putative shadow director.31 It is also not necessary that the alleged shadow director exercises control through his instructions over all board

22

Revenue & Customs Commissioners v Holland [2010] 1 WLR 2793, SC; Smithton Ltd v Naggar [2014] EWCA Civ 939, [2015] 1 WLR 189, CA, at [33]; Re Mumtaz Properties Ltd [2011] EWCA Civ 610, [2012] 2 BCLC 109, CA; it is a matter of substance rather than form; Re Mea Corp Ltd [2006] EWHC 1846 (Ch), [2007] 1 BCLC 618, ChD, at [83]; Secretary of State for Trade and Industry v Tjolle [1998] 1 BCLC 333, ChD. 23 Revenue & Customs Commissioners v Holland [2010] UKSC 51, [2010] 1 WLR 2793, SC, at [93]; Ingram v Singh [2018] EWHC 1325 (Ch), [2018] BCC 886, at [101]. 24 Per Millett J in Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180, ChD. 25 Re Mea Corp Ltd [2006] EWHC 1846 (Ch), [2007] 1 BCLC 618, ChD; Re Paycheck Services 3 Ltd [2010] UKSC 51, [2011] BCC 1, SC; Smithton Ltd v Naggar [2014] EWCA Civ 939, [2015] 1 WLR 189, CA, at [32]. 26 Its origin is the Companies (Particulars as to Directors) Act 1917. 27 See eg s 251 of the Insolvency Act 1986. 28 [2001] Ch 340, CA. 29 It may be sufficient that a person exercises influence over a narrow range of matters if they are important ones, meaning that the individual owes duties to the company in relation to those matters only; see the approach of David Richards J in McKillen v Misland (Cyprus) Investments Ltd [2012] EWHC 521, ChD, at [76]. 30 Of course, this may be only a single individual, depending on the constitution of the board in question. 31 See Lord v Sinai Securities Ltd [2004] EWHC 1764 (Ch), [2005] 1 BCLC 295, ChD, per Hart J, and Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638, ChD, per Lewison J at [1272].

32

Shadow directors 2.5

matters,32 but involvement in a limited number of decisions only may not be enough to justify an inference that an individual is a shadow director.33 Whether the board are ‘accustomed to act’ will be a question of fact and degree. However, it will be necessary to show a regular (though not necessarily invariable) course of conduct in so acting over a period of time.34 It is not necessary for the individual to lurk in the shadows; an individual who takes no steps to conceal his part in the management of the company may still be a shadow director where the board is accustomed to act on his instructions.35 2.5 The question of whether the corresponding common law rules and/ or equitable principles apply to a shadow director will depend on the facts of the particular case.36 For the common law rules, it will depend whether, on the particular facts, a duty of care is owed by the shadow director (as well as the nature and extent of that duty) and/or the existence of some contractual duty. In relation to equitable principles, it will be necessary to examine the relationship between the shadow director and the company to see whether that relationship is one that gives rise to fiduciary duties.37 The touchstone for the existence of fiduciary relationship is generally the assumption of a duty of loyalty.38 A shadow director may assume no such duty, but rather quite deliberately act in his own interests or those of someone connected with him, and not on behalf of the company. His refusal to assume any duty to act on behalf of the company will often be behind his remaining a shadow director and not becoming an actual director. In Ultraframe (UK) Ltd v Fielding39 Lewison J concluded that in such circumstances, he will therefore not owe fiduciary duties to the company whose board he directs or instructs.40 However, Newey J in Vivendi SA  v Richards41 considered42 that Ultraframe understated the position and concluded that shadow directors will commonly owe fiduciary duties at least to some degree. He considered that by assuming to act in relation to the company’s affairs and giving instructions to the de jure directors, the shadow director will have assumed responsibility for the company’s affairs at least in relation to those instructions, and as a result of assuming such responsibility will owe some duty of loyalty. Newey J also pointed out that promoters of a company owe fiduciary duties to the company43 and the fact that shadow directors may not subjectively wish or intend to assume 32 33 34 35 36

37 38 39 40 41 42 43

Secretary of State for Trade and Industry v Deverell [2001] Ch 340, [2000] BCC 1057, CA; McKillen v Misland (Cyprus) Investments Ltd [2012] EWHC 521 (Ch). McKillen v Misland (Cyprus) Investments Ltd [2012] EWHC 521 (Ch). Per Harman J in Re Unisoft Group (No 3) Ltd [1994] 1 BCLC 609, ChD, at 620g–620h. Vivendi SA v Richards [2013] EWHC 3006 (Ch), [2013] BCC 771, ChD, at [126]. Shadow directors may also incur tax liabilities in connection with the company of which they are a shadow director. HMRC are alive to the issue of potential tax avoidance by shadow directors (see HMRC Compliance Operational Guidance Manual at COG915185, which refers to the PAYE regulations and advises inspectors to be aware of ‘a shadow director controlling company finances and contriving to avoid tax deductions by that company’). Section 67 of ITEPA 2003 defines ‘director’ as including ‘any person in accordance with whose directions or instructions the directors of the company … are accustomed to act’, thereby mirroring the Companies Act 2006 definition. Only then can it be ascertained whether a fiduciary relationship has arisen, as explained by Millett LJ in Bristol & West Building Society v Mothew [1998] Ch 1, CA, at 18A–18C. As put forward by Millett LJ in the Bristol & West case, at 18A–18C, and since widely adopted. [2005] EWHC 1638 (Ch). Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch) at [1289]. [2013] EWHC 3006 (Ch), [2013] BCC 771, ChD, at [142]. See also R v R [2013] EWHC 4244 (Fam). At [143]. Erlander v New Sombrero Phosphate Co (1878) LR 3 App Cas 1218.

33

2.6  Directors and their Duties

fiduciary duties cannot matter. As Newey J observed, this is consistent with public policy, which points strongly towards shadow directors owing fiduciary duties. The approach taken by Newey J has since been followed and it is now established that a shadow director owes fiduciary duties in relation to those areas of the company’s activity in respect of which he has acted and given instructions.44 It is considered that Vivendi should now be followed rather than Ultraframe on the question of when fiduciary duties are owed by a shadow director.45 2.6 Former directors also owe duties to avoid conflicts of interest as regards exploitation of any property, information or opportunity that they became aware of while still a director, and not to accept benefits from third parties in relation to things done or not done before they ceased to be a director.46 2.7 A  director of a company owes duties to the company and usually to the company alone.47 The general duties owed under the 2006 Act are owed to the company alone.48 Directors owe duties to others only in exceptional circumstances.49 Duties may be owed to shareholders in takeover and acquisition activities;50 or to creditors when the company is close to insolvency.51 Where directors are themselves also shareholders and are parties to a shareholders’ agreement, any contractual duties arising under the shareholders’ agreement are owed by shareholders in their capacity as such, and not as directors. 2.8 Nominee directors do not owe duties to their nominator by reason of their appointment by the nominator.52 However, the potential difficulty for nominee directors of being required to act for proper purposes, avoid conflicts of interest, exercise independent judgment, and promote the success of the company will be readily apparent. In practice, nominee directors are likely to want to take advantage of the provisions of section 180 of the 2006 Act, to obtain the consent, approval or authorisation of the members of the company, to avoid difficulty arising from their potentially conflicted position. However, the possibility that a nominee director’s duties could be qualified by the unanimous agreement of the shareholders has been recognised.53

44 45 46 47 48 49 50 51 52 53

Standish v Royal Bank of Scotland [2019] EWHC 3116 (Ch), [2020] 1 BCLC 826, at [55]–[57]; and per by Sir James Munby, President of the Family Division, in R v R [2013] EWHC 4244 (Fam), [2013] 11 WLUK 438. And it was by Sir James Munby, President of the Family Division, in R v R [2013] EWHC 4244 (Fam). Section 170(2), applying ss 175 and 176 to former directors. For a consideration of when directors owe duties directly to the shareholders, see 2.55–2.57 and Chapter 4. Section 170(1). For example, during a takeover or attempted takeover, directors may owe duties direct to shareholders. See, in this regard, 4.17, 4.29–4.34 and 7.53–7.62. See the discussion at 2.55–2.57, 4.17 and 4.29–4.34. See eg Liquidator of West Mercia Safety Wear Ltd v Dodds [1988] BCLC 250, CA; BTI 2014 LLC v Sequana SA [2016] EWHC 1686 (Ch), [2017] 1 BCLC 453, ChD, and s 172(3) of the 2006 Act, discussed at 2.28–2.29. Re Neath Rugby Ltd [2009] EWCA Civ 291, [2009] 2 BCLC 427, CA, at [32]. Although they may owe such duties pursuant to the terms of a contract or by reason of another legal relationship, such as employer/employee. Re Southern Counties Fresh Foods Ltd [2008] EWHC 2810 (Ch), per Warren J.

34

Source of directors’ duties – the common law and Part 10 of the 2006 Act 2.11

SOURCE OF DIRECTORS’ DUTIES – THE COMMON LAW AND PART 10 OF THE 2006 ACT 2.9 The duties owed by directors have been recognised and enforced by the courts at common law and in equity. Such duties are fiduciary, tortious and contractual. However, since 1 October 2007, when parts of Part 10, Chapter 2 of the 2006 Act came into force,54 the duties owed by directors have also had a statutory source. This follows the approach previously taken in Canada, Australia and New Zealand.55 The duties set out there are referred to as ‘general duties’, and are the duties which directors owe to their companies in place of the previous duties at common law and in equity.56 The new statutory rules do not purport to replace all of the common law rules and equitable principles which previously applied, but only ‘certain’ of them.57 The common law and equitable rules continue to be relevant. The remainder of this chapter is concerned with these general duties owed by directors referred to in the 2006 Act. 2.10 To regard the general statutory duties as simply replacing the previous rules is an over-simplification. The statutory general duties owed by directors are stated to be based on them and are to be ‘interpreted and applied’ in the same way as those rules, and regard is to be had to those rules in interpreting and applying the general duties.58 Although, at first sight, this provision may appear tautologous, the repetition indicates that regard is to be had to changes and developments in the common law rules and equitable principles which occur after the enactment and coming into force of the 2006 Act when interpreting and applying the general duties.59 2.11 While the statutory duties of directors introduced by the 2006 Act in large part simply codified the existing law,60 the 2006 Act varies the circumstances in which a breach of duty can be ratified or authorised by the company, as explained below.61 The common law duties also continue to apply to breaches of duty which occurred prior to the relevant section coming into force. The statutory provisions and the way in which they are phrased will also influence the application of the common law principles where relevant,62 so that the result of claims of breach of duty are likely to be the same under both the common law and the 2006 Act. Accordingly, while the statutory duties have been described as a codification of the common law duties, it would be more accurate to call them a partial codification.63 54

Sections 170–173 and 178–180 came into force on 1 October 2007. Sections 174–177 came into force on 1 October 2008. 55 For the position in Canada, see Chapter 17; and, for Australia, see Chapter 16. 56 Section 170(3). 57 Section 170(3). They did not replace the common law rules relating to bribery: Kings Security Systems Ltd v King [2021] EWHC 325 (Ch), [2021] 2 WLUK 260, at [148]. 58 Section 170(4). 59 According to the Companies Act 2006 Explanatory Notes at [305]. 60 Or ‘extract and express the essence of the rules and principles which they have replaced’ – Towers v Premier Waste Management Ltd [2011] EWCA Civ 923, [2012] 1 BCLC 67, CA, per Mummery LJ at [3]. 61 See 2.54. 62 Towers v Premier Waste Management Ltd [2011] EWCA Civ 923, [2012] 1 BCLC 67, CA, per Mummery LJ at [3]. 63 See Ranson v Computer Systems plc [2012] EWCA Civ 841, per Lewison LJ at [20]. This also follows from s 178(2) of the 2006 Act, which refers to ‘any other fiduciary duty’.

35

2.12  Directors and their Duties

2.12 The tortious duties owed by directors are a clear and obvious example of the long-established ‘neighbour principle’ that imposes on everyone a duty to take reasonable care to avoid acts or omissions which they can reasonably foresee would be likely to injure their neighbour. A neighbour, for these purposes, is anyone who may be so closely and directly affected by conduct that they ought reasonably to be in contemplation as being so affected.64 This duty is now codified in section 174(1) of the 2006 Act. Directors may also, by contract, assume wider duties and higher standards than those arising by statute, common law or equity, under the terms of their service contracts or a relevant shareholders’ agreement. The 2006 Act also provides that the consequences of a breach of one or more of the general duties by a director is the same as would follow from a breach of the equivalent common law duty or equitable principle.65

SCOPE AND NATURE OF STATUTORY DUTIES 2.13 As indicated above, the duties of directors set out in the 2006 Act broadly replace the common law and equitable duties that directors owed to their company.66 More than one of the new statutory duties owed by directors may apply in any given case.67 As duties contained in the 2006 Act are to be interpreted and applied in the same way as the common law rules and equitable principles, and regard shall be had to those rules and principles in interpreting and applying the duties contained in the Act,68 pre-2006 Act authorities continue to be relevant to the content and application of the statutory duties. However, s 170(2) has the effect that the statutory duties under sections 175 and 176 continue to have some application to former directors, which is probably an extension of the previous common law position.69 When a company goes into a formal insolvency process, the Insolvency Act 1986 imposes additional duties on its directors. There is authority that directors also continue to owe the general duties contained in Part 10 of the 2006 Act, when the company goes into administration or creditors’ voluntary winding up.70

Duty to act within powers 2.14 Section 171 of the 2006 Act provides that a director must act in accordance with the company’s constitution and only exercise powers for the purpose for which they are conferred. As will be apparent, this provision has two distinct elements. 2.15 The constitution of a company is defined in section 17.71 It includes the articles of association of the company and also any special resolutions and any other resolution or agreement that would, if passed as a resolution of the company, need 64 To paraphrase the words of Lord Atkin in Donoghue v Stevenson [1932] AC 562, HL, at 580. 65 Section 178. 66 Section 170(3). However, the common law tortious rules as to bribery have not been replaced; Kings Security Systems Ltd v King [2021] EWHC 325 (Ch), [2021] 2 WLUK 260, at [148]. 67 Section 179. 68 Section 170(4). 69 Burnell v Trans-Tag Ltd [2021] EWHC 1457 (Ch) at [402]–[412]. 70 Re System Building Services Ltd (In Liquidation) [2020] EWHC 54 (Ch), [2020] BCC 345, per ICC Judge Barber at [48]–[56] where the point was not fully argued; [47]. 71 See also the discussion at 3.8–3.25.

36

Scope and nature of statutory duties 2.16

to be passed as a special resolution. It also includes any resolution or agreement of all the members of a class of shareholders and any resolution or agreement that effectively binds all members of a class of shareholders, even if it was not agreed to by all members of that class.72 This definition is quite wide, and will potentially extend to shareholders’ agreements73 and class resolutions, so that directors’ powers may be varied by agreements to which the directors themselves need not be parties, and shareholder directors may incur liabilities consequential on shareholders’ agreements that are both contractual and based on breach of director’s duty.74 Breaches of any part of the constitution by a director will also be a breach of s 171.75 It is no longer the case that the validity of an act of the company may be called into question as beyond its capacity by reason of a provision of its constitution.76 However, that does not affect the requirement that the directors comply with section 171 and only act in accordance with the company’s constitution. The company’s articles may also contain restrictions on the directors’ authority to act on behalf of the company, although the most common provisions give the directors a general power to manage the business of the company.77 An individual director, even if a managing director, will only have delegated powers to act on behalf of the board and the company to the extent that such actual delegation can be established.78 Any implied delegation of power79 to a managing director does not have the effect of excluding the power of the board and must be exercised in accordance with any strategy set by the board. So, for instance, a managing director does not have implied delegation of powers to suspend another director or to bring or defend proceedings in the name of the company.80 So far as third parties are concerned, there is no doubt that directors have broad apparent authority to act on behalf of the company, even as regards a third party who might be expected to have identified a potential conflict of interest.81 The duty to act within the constitution of the company has been found to be a fiduciary one.82 2.16 The duty to exercise powers for a proper purpose is a duty that was well established prior to the 2006 Act. Any fiduciary exercising a power is obliged to exercise it for a proper purpose. Restricting the exercise of powers to the purposes for which they are conferred is one of the main ways that equity enforces the proper conduct of directors.83 The question of the identification of the purpose for 72 Section 29 of the 2006 Act. 73 See 7.67–7.73. 74 For a case of an apparent conflict between shareholders’ contractual duties under a shareholders’ agreement and directors’ fiduciary duties, see Jackson v Dear [2013] EWCA Civ 89, [2014] 1 BCLC 186, CA. 75 See eg Re Macom GmBH Ltd [2021] EWHC 1661 (Ch) at [68]. 76 Section 39(1). 77 See Companies Act 1948, Table A, article 82; Companies Act 1985, Table A, article 70; and Companies Act 2006, Model Articles, article 3. 78 Article 72 of the Companies Act 1985 Table A provides for delegation of powers by the board to a managing director. Contrast article 5 of the Companies Act 2006 Model Articles, where the provision is differently structured but arguably as broad. A managing director’s contract of employment may be effective to delegate powers to him. 79 When a managing director is appointed, he is thereby impliedly authorised to do all such things as are usually within the scope of that office: Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549, CA, per Lord Denning at 583. 80 Smith v Butler [2012] EWCA Civ 314, [2012] BCC 645, CA. 81 See eg Newcastle International Airport Ltd v Eversheds LLP [2013] EWCA Civ 1514, [2014] 1 WLR 3073, CA at [74]–[76]. 82 Eclairs Group Ltd v JKX Oil & Gas Plc [2015] UKSC 71, [2016] BCC 79, SC. 83 Eclairs Group Ltd v JKX Oil & Gas Plc [2015] UKSC 71, [2016] BCC 79 , SC, at [37].

37

2.17  Directors and their Duties

which a power was conferred is an objective one and as it depends upon the proper construction of the constitution of the company, is a question of law rather than fact. When the purpose of the power is established, it is then necessary to determine the purpose of the director; this is a subjective matter and a question of fact.84 The duty of directors only to exercise their powers for a proper purpose was set out most clearly by the Privy Council in Howard Smith Ltd v Ampol Petroleum Ltd.85 In that case, Lord Wilberforce made clear that the principle was simply the application to directors of the general principle applicable to fiduciary powers, and deprecated the use of phrases such as ‘bona fide in the interest of the company as a whole’ as an inaccurate restatement of the same principle that adds nothing useful to the analysis. He made clear that it is not necessary to show that the directors were acting out of self-interest in order to establish that they are acting outside their powers.86 2.17 In Howard Smith, the directors had acted to support a minority shareholder in a takeover bid by allotting to it enough new shares to make it a majority shareholder.87 On behalf of the Privy Council, Lord Wilberforce set out a series of steps that must be taken in order for a court to judge whether a power has been exercised for a proper purpose.88 These were:89 (a) a consideration of the particular power and ascertaining of its nature; (b) the establishing of the limits, or some limits, within which the power may be exercised; (c) the examination of the purpose for which the power was in fact exercised and the reaching of a conclusion as to whether the actual purpose was a proper one. Accordingly, the factual context in which the power was exercised is important. In carrying out this process, the court will respect the judgment of the directors as to matters of management and give credit to any opinion held by them in good faith. 2.18 The process applied by Lord Wilberforce is likely to be the one that is applied under section 171, namely the identification of the purpose(s) for which the power in issue was conferred on the directors, and a comparison with what the court finds was the principal purpose for which it was exercised by the directors on the facts of the particular case.90 The test is, accordingly, an objective one as to the purpose of the power, but with a subjective element as to the director’s own

84

The director’s purpose is of course not necessarily the same as what the effect of the exercise of the power turned out to be. 85 [1974] AC 821, HL. 86 At 834H. 87 The case pre-dated the current law with regard to pre-emption rights now contained in s 561 of the 2006 Act. 88 More recently, Marcus Smith J stated in Keymed (Medical & Industrial Equipment) Ltd v Hillman [2019] EWHC 485 (Ch) at [88] that the test could be stated as: ‘(1) First, construe the power and determine the limits within which it must be exercised. This is a question of law. (2) Secondly, consider the purpose actuating the exercise of the power and determine whether it falls within the proper limits of the power. As Lord Sumption noted in Eclairs Group Ltd v JKX Oil & Gas plc, this involves a subjective element.’ 89 At 835F–835H. 90 See eg the approach of the court in Hunter v Senate Support Services Ltd [2004] EWHC 1085 (Ch), [2005] 1 BCLC 175, ChD, where the alleged improper purpose was rejected after a careful analysis of the particular facts. For a recent example, see Stobart v Tinkler [2019] EWHC 258 (Comm) at [437].

38

Scope and nature of statutory duties 2.20

purpose.91 However, as Lord Wilberforce noted,92 the identification of the purposes for which a power is granted must be assessed in the light of modern conditions; so, by implication, it may, at least to some extent, change over time. A consideration of the purpose and nature of the power is likely to involve issues of construction of the constitutional documents of the company. Any powers conferred by those documents must be construed in accordance with usual principles, including in the light of the relevant document as a whole93 or, if the context so requires, the constitution as a whole.94 2.19 A  clear example of the exercise of a power for an improper purpose is where a director shareholder allots shares to himself to dilute the interest of other shareholders and ensure his control of the company.95 There is, however, no specific duty in the 2006 Act to exercise powers fairly as between shareholders.96 The exercise of a power in a way that has, as a by-product, relative unfairness to a shareholder is therefore not necessarily a breach of duty by the board if the power is exercised for a proper purpose. Further, where the court is satisfied that directors have exercised their powers in pursuit of a legitimate purpose and in a way that is not prohibited by the constitution of the company, the fact that the board has chosen to follow a route to achieve it that is unfavourable to one or more shareholders does not make the exercise of the power improper.97 2.20 In many cases, the directors will have acted for more than one purpose. It was indicated in Howard Smith98 that in such cases it is necessary to establish that the improper purpose was the primary or dominant purpose in order to establish a breach of this duty.99 In Eclairs Group Ltd v JKX Oil & Gas Plc100 Lord Sumption101 stated that the statutory duty requires that directors only exercise their powers for the purposes for which they were conferred and that they are in breach of duty if any improper purpose influences them. However, equity allows the decision to stand in some cases because the breach does not result in injustice to the interests which equity seeks to protect.102 He continued that this means considering questions of causation and said: 91 Keymed (Medical & Industrial Equipment) Ltd v Hillman [2019] EWHC 485 (Ch) at [88]–[89]. 92 Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, HL, at 835. 93 Cream Holdings Ltd v Davenport [2011] EWCA Civ 1287, [2012] 1 BCLC 365, CA. 94 See 3.29–3.34. 95 As in Dalby v Bodilly [2004] EWHC 3078 (Ch), [2005] BCC 627, ChD, and Hogg v Cramphorn [1967] Ch 254. See also Re A Company (No 005134 of 1986), ex p Harries [1989] BCLC 383, ChD; Re Regional Airports [1999] 2 BCLC 30, ChD. However, the pre-emption rights contained in s 561 of the 2006 Act will limit the scope for this in many cases (although the pre-emption rights may be excluded in the case of private companies). See also 9.115–9.118. 96 Although such fairness is a factor that must be taken into account under s 172 when considering the duty to promote the success of the company. 97 CAS (Nominees) Ltd v Nottingham Forest FC plc [2002] 1 BCLC 613, ChD; Re OS3 Distribution Ltd [2017] EWHC 2621 (Ch). 98 [1974] AC 821, HL. 99 This could prove difficult in practice. 100 Eclairs Group Ltd v JKX Oil & Gas Plc [2015] UKSC 71, [2016] 1 BCLC 1, SC. 101 With whom all of the other members of the court agreed as to the result. The majority also agreed with the analysis of the proper purpose test, but Lords Mance and Neuberger did not express a firm view on the proper test, preferring to wait for a case in which the test was the subject of more detailed submissions from the parties – in Eclairs the parties had essentially agreed on the appropriate analysis and therefore had not directly addressed it. 102 Eclairs Group Ltd v JKX Oil & Gas Plc [2015] UKSC 71, [2016] 1 BCLC 1, SC at [21]. See also Re OS3 Distribution Ltd [2017] EWHC 2621 (Ch).

39

2.21  Directors and their Duties

‘One has to focus on the improper purpose and ask whether the decision would have been made if the directors had not been moved by it. If the answer is that without the improper purpose(s) the decision impugned would never have been made, then it would be irrational to allow it to stand simply because the directors had other, proper considerations in mind as well, to which perhaps they attached greater importance. … Correspondingly, if there were proper reasons for exercising the power and it would still have been exercised for those reasons even in the absence of improper ones, it is difficult to see why justice should require it to be set aside.’103 The correct approach is therefore to see whether if the improper purpose had not been present, the director would have exercised the power in the same way. In other words, a ‘but for’ test applies.104 It has been suggested105 that for liability to arise the director must know that his purpose is improper or know of the facts which make the purpose improper. However, this is not established and it is suggested that if the court considers that the purpose was an improper one then the directors will be in breach of duty, regardless of whether the directors considered in good faith that they were acting in the best interests of the company.106 Where it is necessary to determine the purposes of a board of directors in making a decision, there may be some directors who opposed the decision or had different reasons. In such a case, the court is likely to be concerned to establish the purpose of the majority which determined the decision.107 2.21 Where the directors have exercised a power for an improper purpose, their action is not void; it is voidable at the election of the company.108 This contrasts with the position where the directors do not have authority (actual or apparent) to enter into an agreement, in which case the resulting agreement is void.109

Duty to promote the success of the company 2.22 Section 172 of the 2006 Act requires every director to act in a way he considers, in good faith, to be most likely to promote the success of the company for 103 Ibid at [21]. Lord Sumption also expressly agreed with the view of Dixon J in the High Court of Australia in Mills v Mills (1938) 60 CLR 150 at 185–186. 104 Per Lords Sumption and Hodge. However, other members of the court in Eclairs Group reserved their position on this issue as it was not argued in that case. Accordingly, there remains some uncertainty in relation to it: Eclairs Group Ltd v JKX Oil & Gas Plc [2015] UKSC 71, [2016] BCC 79, SC, see eg per Lord Mance at [50]–[55], with whom Lord Neuberger agreed. The approach of Lord Sumption was applied by HHJ Russen QC in Stobart v Tinkler [2019] EWHC 258 (Comm). 105 By Popplewell J in an obiter passage in Madoff Securities International Ltd (In Liquidation) v Raven [2013] EWHC 3147 (Comm) at [200]. 106 The duty under s 171 is a separate and distinct from that under s 172 and this follows from the approach described by Lord Sumption in Eclairs. Cf Re OS3 Distribution Ltd [2017] EWHC 2621 (Ch) for an instance where the directors were in breach of s 171 duties (at [96]–[108]) but because it did not result in any prejudice to the shareholder, no relief was granted (at [118]–[123]). 107 Gwyer v London Wharf (Limehouse) Ltd [2002] EWHC 2748 (Ch), [2003] 2 BCLC 153, ChD, at [92]. 108 Howard Smith v Ampol Petroleum Ltd [1974] AC 821, HL, at 834B. 109 Criterion Properties plc v Stratford Properties LLC [2004] 1 WLR 1846, HL; applied in Ford v Polymer Vision Ltd [2009] EWHC 945 (Ch), [2009] 2 BCLC 160, ChD, at [54]–[55].

40

Scope and nature of statutory duties 2.22

the benefit of the members as a whole.110 This is a slight variation of the previous duty to act in good faith in what they consider to be the best interests of the company.111 The duty to act in the best interests of the members as a whole will not be met where a director is acting unfairly as between individual members, as that will not be in the best interests of the members ‘as a whole’ even if the director considers that it is in the commercial interests of the company.112 The concept of the ‘success of the company’ seems inherently less precise, being capable of more than one meaning, depending on the criteria by which success is defined, whereas the best interests of a trading company at least were generally regarded as being its financial best interests, meaning profit and shareholder value. The section itself gives guidance as to the meaning of such success and lists a number of particular factors that a director is to have regard to in so considering.113 They are: (a) the likely consequence of any decision in the long term;114 (b) the interests of the company’s employees; (c) the need to foster the company’s business relationships with suppliers, customers and others; (d) the impact of the company’s operations on the community and the environment; (e) the desirability of the company maintaining a reputation for high standards of business conduct; (f) the need to act fairly as between members of the company.115 It is important to note that the section does not provide that the listed matters determine what the success of the company is. That remains something to be determined by the company’s shareholders from time to time by resolution or agreement. The listed factors are matters that the directors are required to have regard to when seeking to promote the success of the company for the benefit of the members. The section does not specify what weight is to be attached to all or any of the matters listed, and this remains a matter for the directors to decide on in the light of the circumstances of the company, and the nature of the particular issues or decisions with which they are concerned from time to time, in working out what will best further the success of the company. Where there is a conflict between the factors appearing on the list, 110 A director who is outvoted at a board meeting is not in breach of duty where she considers that the view of the majority is not most likely to promote the success of the company. She may defer to the views of the majority provided she considers them to be held in good faith, even if she is not herself persuaded: Keymed (Medical & Industrial Equipment) Ltd v Hillman [2019] EWHC 485 (Ch) at [93]. 111 See eg Re Smith & Fawcett Ltd [1942] Ch 304, CA, at 306, and Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd [2002] EWHC 2748 (Ch), [2003] 2 BCLC 153, ChD, at [72]. It was said to be a codification of the previous duty in Re HLC Environmental Projects Ltd [2013] EWHC 2876 (Ch), [2014] BCC 337, ChD, and in Madoff Securities International Ltd v Raven [2013] EWHC 3147 (Comm), but it is suggested that this is not quite accurate. It is also not the same as promoting the interests of the members generally: LRH Services Ltd (In liquidation) v Trew [2018] EWHC 600 (Ch) at [29]. 112 Barrowfen v Patel [2021] EWHC 2055 (Ch) at [275]–[276]. 113 Section 172(1). 114 As a practical matter it may be difficult to challenge a decision on this basis since evidence of long term consequences will frequently be hard to come by. The Financial Reporting Council’s 2016/17 review of corporate reporting indicated increasing calls for more information about how a company has considered its long-term success and how directors have discharged their duties under s 172. 115 Such fairness does not necessarily require equal treatment; Re BSB Holdings Ltd [1996] 1 BCLC 155, per Arden J at 249; Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, per HHJ Purle QC at [95] and [117] (not affected by the appeal on a different issue at [2013] EWCA Civ 667).

41

2.23  Directors and their Duties

the directors will need to resolve it by reference to what will best further the success of the company, as they consider that to be, having taken account of the statutory factors. Success of the company for the benefit of members requires it to be able to meet its liabilities to creditors, since if it does not do so it is liable to be wound up, putting an end to its business and, necessarily, its ‘success’.116 2.23 The emphasis of the list will be seen to be on the long term.117 The financial success of the company is notably absent from the list. The directors might ordinarily be presumed to have this well in mind, and it will no doubt generally be at least part of what the shareholders mean by ‘the success of the company’. Its absence from the list underlines the fact that all of the matters to which the directors are required to ‘have regard’ are something other than the financial interests of the company and its shareholders. These provisions seek to focus on what has come to be called ‘enlightened shareholder value’. The courts are unlikely to be willing to interfere with directors’ exercise of their powers to advance the commercial interests of the company as they see it, where they have had regard to the listed matters but decided that the success of the company does not involve prioritising other agendas ahead of its commercial advancement.118 There are some indications that the courts might regard ‘success’ as often meaning much the same in practice as ‘best interests’ was held to mean at common law.119 2.24 Whether this section makes it significantly easier for shareholders to challenge directors’ decisions, save in exceptional circumstances, is doubtful.120 Where it is shown that directors failed to have regard to one of the matters set out in section 172, it seems unlikely that the courts would interfere with the decision where it is clear that the failure has not affected the outcome of the decision.121 Equally, before the enactment of section 172, the courts had indicated a willingness to interfere with decisions taken by directors if it was established that the board had failed to take into account a matter of some importance to it, so that no reasonable board of directors could have proceeded in such a way and reached such a conclusion.122 A  similar conclusion, or a finding of absence of good faith, may be required before a decision made or transaction entered into contrary to section 172 will be avoided by the court.

116 LRH Services Ltd (In Liquidation) v Trew [2018] EWHC 600 (Ch) at [30], [151]. 117 A director who intends to resign is nonetheless obliged to consider the foreseeable consequences of his actions (or omissions) even though he will no longer be in office when they come about: LRH Services Ltd (In Liquidation) v Trew [2018] EWHC 600 (Ch) at [37]. 118 R (on the application of People and Planet) v HM Treasury [2009] EWHC 3020 (Admin). 119 This was the approach of Warren J in Re Southern Countries Fresh Foods Ltd [2008] EWHC 2810 (Ch), who observed at [52] that ‘they come to the same thing’. A similar view has been expressed by academic commentators, such as Professor Andrew Keay in his paper: ‘Duty to promote the success of the company: Is it fit for purpose?’ at the University of Leeds Conference; ‘Directors’ Duties and Shareholder Litigation in the Wake of the Financial Crisis’, 20 September 2010. 120 When the Bill was under discussion, the government made clear that it was not intended to increase the risk of litigation. In the Committee Stage in the House of Commons, David Howarth MP pointed out that the class of potential claimants is limited and the identification of loss flowing from a breach of this duty will be difficult. It provides scope for directors to find alternative legitimate bases for actions which have reduced the value of the shares. The bringing of a derivative action to enforce such a duty may also be difficult in practice for a shareholder. However it is often pleaded. 121 Certainly this was the intention of the then government when the Act was before Parliament, as the Attorney-General explained – see Hansard, 9 May 2006, vol 681, p 142. 122 See per Harman J in Re A Company, ex p Glossop [1988] 1 WLR 1068, ChD.

42

Scope and nature of statutory duties 2.26

2.25 Whilst the list of matters included in section 172 will draw attention to matters on which a challenge to a decision on such grounds may be made, it may also make it easier in practice for a well-run or well-advised company to avoid such a challenge when making a controversial decision, as it provides a readily available checklist for directors to run through as part of their decision-making process. In that sense, it provides a potential new basis for defence by directors. However, mere box-ticking in the face of material facts ignored in the process should not avail the directors. 2.26 In Re A  Company, ex p Glossop,123 Harman J  invoked the well known ‘Wednesbury’ principle from the field of public law, and took the approach that a decision cannot stand if the directors failed to take into account a matter that they ought to have, or took into account a matter that they ought not to have. Whilst there are some similarities between the approach which may be taken by the courts to the review of decisions reached by directors and the public law principle, the analogy is not exact.124 The courts have understandably shown greater reluctance to interfere with decisions taken by directors to further the private interests of their company than they have with decisions taken pursuant to fulfilling a clear statutory function or duty. As Nourse LJ stated when considering a challenge to decisions taken by a liquidator in Re Edennote Ltd:125 ‘… it may be confusing, to introduce into the court’s control of the acts and decisions of liquidators the language of its control of administrative action. In the latter case the court is usually concerned with the supervision of public servants performing statutory functions; in the former with the supervision of persons who must, in most of what they do, act as prudent businessmen. In general there seems to be something unrealistic in judging the propriety of the acts and decisions of a businessman by asking whether he took into account something he ought not to have taken into account or failed to take into account something he ought to have taken into account.’ This approach reflects the general reluctance of the courts to interfere with decisions taken by directors that are not shown to be in bad faith or clearly seriously incompetent. It indicates the likely approach to challenges based on the matters set out in section 172. The test is what the director considers in good faith, as a matter of judgment, to be most likely to promote the success of the company,126 so is in essence a subjective one, as was observed by Warren J in Re Southern Counties Fresh Foods Ltd.127 It is not for the court to second guess management decisions provided they were reached in good faith.128 However, the subjectivity has qualifications.129 Where the duty extends to the interests of creditors130 then their interests are paramount and 123 [1988] 1 WLR 1068, ChD. See also 9.40 and 9.112. 124 See eg Hunter v Senate Support Services Ltd [2004] EWHC 1085 (Ch), [2005] 1 BCLC 175, ChD. 125 [1996] 2 BCLC 389, CA, at 394g–394h. 126 See R (on the application of People and Planet) v HM Treasury [2009] EWHC 3020 (Admin), where s 172 was considered in the light of criticism that, following its part-nationalisation, the Royal Bank of Scotland was being run in a way that gave too much precedence to commercial ends. 127 [2008] EWHC 2810 (Ch) at [53]. See also per Jonathan Parker J in Regentcrest Plc v Cohen [2001] BCC 494 at [120]. 128 Birdi v Specsavers Optical Group Ltd [2015] EWHC 2870 (Ch) at [62]. 129 See Re HLC Environmental Projects Ltd [2013] EWHC 2876, [2014] BCC 337, ChD, at [92]. 130 See 2.28–2.29.

43

2.27  Directors and their Duties

hence objectively considered.131 Where there is no evidence that the director actually considered the interests of the company, an objective test applies.132 The test will be whether an intelligent and honest person in the position of a director of the company could, in the circumstances, reasonably have acted (or omitted to act) as the director did.133 Further, where a very material interest, such as large creditor in the case of a company with doubtful solvency, is unreasonably not taken into account, an objective test applies as this goes to the validity of the directors’ decision making process in taking into account relevant matters at the time, and is not a case of the court substituting its own judgment with hindsight.134 This is in substance the principle referred to by Harman J in the ex parte Glossop case. These last two exceptions to the subjective test are hardly surprising; if it were otherwise an errant director would be able to rely on his abject lack of ability and probity as a defence to liability, which cannot be permitted. Section 172 has been relied on in a straight-forward case of disloyalty by a director who set up a competing business135 and no doubt such action would be likely to fall foul of it, although section 175 is perhaps a more obvious duty breached in such circumstances. 2.27 Section 172(2) of the 2006 Act makes specific provision for companies whose purpose is or includes something other than the benefit of its members, and provides that references in the section to ‘benefit of its members’ is to be replaced with that other purpose in such cases. This most obviously applies to not-for-profit companies and those whose purpose is the advancement of interests of groups other than the members. Although, in many cases, it will be clear when a company has some other such purpose, it will be necessary to satisfy the court what the other purpose is. This might most easily be done, in the case of a company that does not have a memorandum recording such objects, by the passing of a special resolution that then becomes part of the constitution of the company.136 2.28 Section 172(3) provides that the duties under the section are subject to any statutory provision or rule of law requiring the directors to consider or act in the interests of creditors in particular circumstances.137 This provision reflects the existing duty of directors at common law to consider the interests of creditors when 131 Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd [2002] EWHC 2748 (Ch), [2003] 2 BCLC 153, ChD at [74]; Re HLC Environmental Projects Ltd [2013] EWHC 2876, [2014] BCC 337, ChD, at [92]; Atkinson v Kingsley [2020] EWHC 2913 (Ch) at [62]–[63]. 132 Extrasure Travel Insurance Ltd v Scattergood [2003] 1 BCLC 598, ChD, at [138]; Re HLC Environmental Projects Ltd [2013] EWHC 2876, [2014] BCC 337, ChD, at [92]. 133 There is a helpful description of the subjective and objective elements of the test by John Randall QC in HLC Environmental Projects Ltd [2013] EWHC 2876, [2014] BCC 337, ChD, at [91]–[92]; see also Atkinson v Kingsley [2020] EWHC 2913 (Ch) at [70]. 134 Re HLC Environmental Projects Ltd [2013] EWHC 2876, [2014] BCC 337, ChD, at [92], per John Randall QC sitting as a High Court Judge. 135 Wey Education Plc v Atkins [2016] EWHC 1663 (Ch). 136 Pursuant to ss 17 and 29 of the 2006 Act. 137 Note also s 214 of the Insolvency Act 1986 which provides for the directors to be liable if the company has gone into insolvent liquidation and at some time before the commencement of the winding up of the company, the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation and failed to take every step which they ought to have taken to minimise the potential loss to creditors.

44

Scope and nature of statutory duties 2.29

the company has either become insolvent or is in danger of so doing.138 The effect of the duty is that actions which a director might properly undertake in relation to a solvent company may not be appropriate where the company is of doubtful solvency.139 The subsection is not a codification of that duty and the question of when a duty is owed to creditors remains a matter of common law.140 The duty is not one which directors owe to creditors directly; they continue to owe their duties to the company.141 However, by reason of its financial situation, those who stand behind the company as being ultimately interested in how its affairs are conducted have become the creditors rather than the members. This means the creditors as a class, not any particular creditor or creditors. If, in the context of insolvency or approaching insolvency, a director acts in a way which favours individual creditors over the interests of the class of creditors, such an action will be a breach of duty.142 2.29 The directors may face a difficult decision in deciding when they should cease to comply with, or only with, section 172(1) and must move to compliance with section 173(3). If the company is insolvent, the duty to consider or act in the interests of creditors will be clear. However, whether the directors determined or should have determined at a particular point that the company was insolvent will be fact-specific and may be a very difficult question to answer. It may be that the company moved in and out of insolvency several times during a given period. Further uncertainty arises as to whether directors should move to compliance with section 173(3) when the company is in financial distress, but short of insolvency. The question will inevitably be highly fact-specific.143 Authorities have treated directors as owing duties to creditors at varying stages. It has been stated that the duty would arise where the company was ‘nearing insolvency’, and where the company is ‘of doubtful solvency’,144 and where the company ‘is in financial difficulties to the extent that its creditors are at risk’.145 However, in the cases where the duty was considered and found to exist, the companies concerned were either insolvent or clearly very close to collapse.146 Although the test as to the required proximity to insolvency has 138 See West Mercia Safetywear Ltd v Dodd [1988] BCLC 250, CA; Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd [2002] EWHC 2748 (Ch), [2003] 2 BCLC 153, ChD; Re Cityspan Ltd [2007] EWHC 751 (Ch), [2007] 2 BCLC 522, ChD; and Roberts v Frohlich [2011] EWHC 257 (Ch), [2011] 2 BCLC 625, ChD. 139 Roberts v Frohlich [2011] EWHC 257 (Ch), [2011] 2 BCLC 625, ChD, per Norris J. 140 See 2.29. 141 This was the case at common law as well as under s 172: Kuwait Asia Bank v National Mutual Life Ltd [1991] 1 AC 187, PC, at 219. Other parts of this decision were doubted in New Zealand Guardian Trust Co Ltd v Brooks [1995] 1 WLR 96, PC, but not this principle. 142 GHLM Trading Ltd v Maroo [2012] EWHC 61 (Ch), [2012] 2 BCLC 369, Ch, per Newey J at [168]. However, where insolvency is not in contemplation, it is not a breach of duty for a director to prefer one creditor of the company over another – Knight v Frost [1999] 1 BCLC 364, ChD, per Hart J at 382c–382e, Barrowfen v Patel [2021] EWHC 2055 (Ch) at [281]–[282]. 143 As stated by the New South Wales Court of Appeal in Linton v Telnet Pty Ltd [1999] NSWCA 33; (1999) 30 ACSR 465. It is the state of knowledge as to solvency and not merely cashflow, and of the particular company rather than other group companies or the group as a whole, that matters: Re Burnden Holdings Ltd [2019] EWHC 1566 (Ch) at [399]. 144 Colin Gwyer v London Wharf (Limehouse) Ltd [2002] EWHC 2748 (Ch), [2003] 2 BCLC 153, ChD, at [74]. 145 Re MDA Investment Management Ltd [2003] EWHC 2277 (Ch), [2004] 1 BCLC 217, ChD, at [70]. 146 For example, Colin Gwyer & Associates Ltd v London Wharf (Limehouse) Ltd [2002] EWHC 2748, [2003] 2 BCLC 153, ChD; Re MDA Investment Management Ltd [2003] EWHC 2227 (Ch), [2004] 1 BCLC 217, ChD; GHLM Trading Ltd v Maroo [2012] EWHC 61 (Ch), [2012] 2 BCLC 369, ChD; and Vivendi SA v Richards [2013] EWHC 3006 (Ch), [2013] BCC 771, ChD.

45

2.29  Directors and their Duties

been expressed in a variety of ways, the different formulations have been regarded as really different ways of expressing the same underlying principle; that directors are not free to act in a way which creates a real (rather than a remote) risk that creditors will not be paid, without having first considered the interests of the creditors rather than those of the company and its shareholders.147 These different ways of framing the test were said by the Court of Appeal in BTI 2014 LLC v Sequana SA148 to be too vague to serve as useful tests for when the duty to take into account the interests of creditors is engaged. In that case the test was stated to be when the directors knew or should have known that the company was or was likely to become insolvent. In that context, ‘likely’ meant probable.149 This is accordingly the way in which the test is to be formulated, although the Court of Appeal pointed out that judicial formulations should not be construed and interpreted as if they were statutes.150 This is a higher test than most, if not all, of the previous competing formulations. The test is not met whenever there is any risk of the company becoming insolvent at some indefinite point in the future, for instance because provision made for a liability could turn out to be insufficient,151 or because there is a recognised risk of some adverse event which could lead to insolvency such as where the company faces a disputed claim which if the directors’ assessment of the prospects turns out to be wrong may or will bring the company down.152 It is not met where the directors are aware that without further funding the company will become insolvent where they know that further funding is available.153 Mere risk of insolvency will not do even if it is a ‘real’ risk. Such a test was found to be likely to have a ‘chilling effect on entrepreneurial activity’.154 Something close to insolvency such as a parlous financial state at the relevant time is required.155 It has been said that when it is engaged the requirement of the duty is subjective, in that it depends upon whether the individual director honestly believed that his act or omission was in the interests of creditors.156 By contrast, in another case it was said that determining insolvency is an objective issue and so if a director does not believe that his or her company is insolvent that is not going to stop the company’s insolvency triggering the duty.157 Since the decision of the Court of Appeal in BTI 2014 LLC v Sequana SA it is clear that the test is essentially objective, a director will be subject to the duty when they knew or ‘should have known’ that the company was or was likely to become insolvent.

147 Re HLC Environmental Projects Ltd (In Liquidation) [2013] EWHC 2876 (Ch), [2014] BCC 337, ChD, at [89] per John Randall QC sitting as a High Court Judge; BTI 2014 LLC v Sequana SA [2016] EWHC 1686 (Ch), [2017] 1 BCLC 453 at [477] per Rose J. 148 [2019] EWCA Civ 112, [2019] BCC 631, at [213]. 149 At [220], approving the formulation of Sir Andrew Morritt C and Patten LJ in Bilta (UK) Ltd (In Liquidation) v Nazir [2013] EWCA Civ 968, [2014] Ch 52, CA. 150 At [220]. 151 BTI 2014 LLC v Sequana SA [2016] EWHC 1686 (Ch), [2017] 1 BCLC 453, ChD, at [477]–[480] per Rose J. 152 Dickinson v NAL Realisations (Staffordshire) Ltd [2017] EWHC 28 (Ch) at [118]. 153 Re Burnden Holdings Ltd [2019] EWHC 1566 (Ch) at [400]. 154 BTI 2014 LLC v Sequana SA [2019] EWCA Civ 112, [2019] BCC 631, at [201]. 155 BTI 2014 LLC v Sequana SA [2016] EWHC 1686 (Ch), [2017] 1 BCLC 453, ChD, at [477]–[483] per Rose J. 156 Barrowfen v Patel [2021] EWHC 2055 (Ch) at [283], [531]. 157 Madoff Securities International Ltd v Raven [2013] EWHC 3147 (Comm) at [273].

46

Scope and nature of statutory duties 2.30

The practical difficulty for directors and for those seeking to bring a claim against them, in identifying exactly when the directors’ duties were owed to shareholders and when to creditors, may be considerable.

Duty to report own wrongdoing 2.30 It is notable that the formulation of the duty in section 172 gives rise to a positive duty to act where appropriate. The duty to promote the success of the company may extend to a duty on a director to report his own breach of duty or other wrongdoing to other members of the board or, if there are none, or no innocent other board members, to the shareholders. This was established at common law in Items Software (UK) Ltd v Fassihi.158 The duty was not said to be a separate or distinct duty, but an aspect of the general duty of a director to act in what he considers in good faith to be in the best interests of the company. The decision in Items Software was considered in the light of section 172 by Newey J in GHLM Trading Ltd v Maroo,159 who concluded that the enactment of section 172 rather underpinned the existence of such an obligation. He observed:160 ‘… Item Software (UK) Ltd v Fassihi is a somewhat controversial decision. Arguably, it breaks new ground in treating a fiduciary duty as prescriptive rather than merely proscriptive. Its result can perhaps now be justified also by reference to section 172 of the Companies Act 2006, which came into force on 1 October 2007. The duty to promote the success of a company which that provision imposes can be said to be expressed in prescriptive terms (a director “must act in the way he considers, in good faith, would be most likely to promote the success of the company …” – emphasis added). Be that as it may, Item Software (UK) Ltd v Fassihi is clearly binding on me. I therefore proceed on the basis that a director’s duty of good faith can potentially require him to disclose misconduct.’ Though initially controversial, the duty to report own wrongdoing is now clearly established.161 It does not follow that there is a duty on a director to disclose any and every breach of duty.162 This duty to notify only arises where the director subjectively considers (or would if acting in good faith) that such disclosure would be most likely to promote the success of the company.163 The court will consider whether in failing to disclose or concealing his conflict the director was acting in good faith. 164 That will not be so in the case of every breach and is most likely to be where the director is acting in secret against the company’s interests such as by setting up a competing business.165 Where the articles of the company provide that it is to be managed by

158 159 160 161

162 163 164 165

[2004] EWCA Civ 1244, [2005] 2 BCLC 91, CA. [2012] EWHC 61 (Ch), [2012] 2 BCLC 369, ChD. At [193]. Haysport Properties Ltd v Ackerman [2016] EWHC 393 (Ch), [2016] 2 BCLC 522, ChD, at [56]; Wey Education Plc v Atkins [2016] EWHC 1663 (Ch) at [146] and [148]; FM Capital Partners Ltd v Marino [2018] EWHC 1768 (Ch) at [77]; Kings Security Systems Ltd v King [2021] EWHC 325 (Ch) at [177], Bishopsgate Contracting Solutions Ltd v O’Sullivan [2021] EWHC 2103 (QB) at [176]. Wey Education Plc v Atkins [2016] EWHC 1663 (Ch) at [146]. GHLM Trading Ltd v Maroo [2012] EWHC 61 (Ch), [2012] 2 BCLC 369, Ch, at [194], [198]. Cullen Investments Ltd v Brown [2017] EWHC 1586 (Ch) at [245]. Wey Education Plc v Atkins [2016] EWHC 1663 (Ch) at [146].

47

2.31  Directors and their Duties

the directors, disclosure to the board should be sufficient to discharge this duty,166 provided there are other innocent board members to whom disclosure can be made. The existence of a duty to disclose wrongdoing means that the failure to disclose it will be a breach of duty in the form of concealing the breach. It may have the result of extending the limitation period for a claim to be brought based on the breach as it may amount to deliberate concealment for the purposes of section 32(1) of the Limitation Act 1980167 so that time only begins to run when the company became aware of the breach. Where the other members of the board, or a majority of them, are implicated in the wrongdoing, it may be necessary for disclosure to be made direct to the shareholders of the company, but this will depend on the particular facts.168 A director’s duty to draw attention to a breach of duty committed by another director, where that is what he genuinely believes promotes the success of the company, is well-established and perhaps less controversial.169

Duty to exercise independent judgment 2.31 Section 173 of the 2006 Act requires directors to exercise their independent judgment. It also states that this duty is not infringed by directors acting in accordance with an agreement entered into by the company which restricts the directors’ future exercise of discretion, or acting in a way that is authorised by the company’s constitution.170 This provision is a fairly straightforward codification of the longestablished common law position171 that shareholders are entitled to the benefit of the judgment of all directors, and no director is permitted to act as a ‘rubber stamp’ to decisions taken by a co-director or directors,172 or indeed to delegate the exercise of their powers to anyone else unless duly authorised. This principle applicable to directors is derived from the long-standing general principle that agents are not entitled to delegate the responsibilities of their agency without the agreement of their principal.173 It is related to the duty to avoid conflicts of interests set out in section 175.174 However, the section also retains the common law position that directors are entitled to contractually bind themselves as to the future exercise of their powers in a particular way as part of a contract that is for the benefit of the company, as explained by Neill LJ in Fulham Football Club Ltd v Cabra Estates plc:175 166 GHLM Trading Ltd v Maroo [2012] EWHC 61 (Ch), [2012] 2 BCLC 369, Ch, at [199]. 167 Haysport Properties Ltd v Ackerman [2016] EWHC 393 (Ch), [2016] 2 BCLC 522, ChD, at [116] per Peter Smith J. Deliberate concealment may also mean that the shareholders’ knowledge of or ability to discover the breach is not to be attributed to the company for the purposes of the limitation period for a claim for breach of duty brought by it: Julien v Evolving Technologies & Enterprise Development Co Ltd [2018] UKPC 4, [2018] BCC 376. 168 At [199]. 169 British Midland Tool Ltd v British Midland Tooling Ltd [2003] 2 BCLC 523, [2003] 2 BCLC 523, ChD; Hemsley v Graham [2013] EWHC 2232 (Ch) at [411]. 170 This might include a shareholders’ agreement which formed part of the constitution of the company. The terms of a shareholders’ agreement were held to bind shareholder-directors in Jackson v Dear [2013] EWCA Civ 89, [2014] 1 BCLC 186, CA. 171 See eg Kregor v Hollins (1913) 109 LT 225. 172 See eg Bishopsgate Investment Management Ltd v Maxwell (No 1) [1994] 1 All ER 261, CA, per Hoffmann LJ at 265d–265f, 265j. 173 An early example is Cobb v Becke (1854) 6 Queen’s Bench Reports 930. 174 Keymed (Medical and Industrial Equipment) Ltd v Hillman [2019] EWHC 485 (Ch) at [99]; and see 2.38–2.43 below. 175 [1994] 1 BCLC 363, CA, at 392a–392b.

48

Scope and nature of statutory duties 2.33

‘It is trite law that directors are under a duty to act bona fide in the interests of their company. However, it does not follow from that proposition that directors can never make a contract by which they bind themselves to the future exercise of their powers in a particular manner, even though the contract taken as a whole is manifestly for the benefit of the company. Such a rule could well prevent companies from entering into contracts which were commercially beneficial to them.’ The reference in section 173 to the constitution of the company is to its articles of association and also special resolutions and other resolutions and agreements that bind the company and its shareholders, or classes of shareholders.176 The duty will be breached where a director allows himself to be dominated or bamboozled by fellow directors.177 However, it is perfectly proper, and often necessary, for there to be division and delegation of responsibility for particular aspects of the management of a company and a director is entitled to rely upon the judgment, information and advice of a fellow director whose integrity, skill and competence he has no reason to suspect.178 An individual director does not commit a breach of duty under section 173 by reason only of reaching a different view to his fellow directors on a particular matter relating to the affairs of a company. Part of his duty as a director acting in the interests of the company is to take account of the views of the other directors when reaching decisions.179 2.32 This duty is perhaps most likely to be relevant where a director is a nominee or otherwise in office by reason of his relationship with, or to, a third party. In such circumstances, the director must take particular care to act independently, although he can take into account the interests of a third party provided he exercises his independent judgment in what he genuinely believes to be the best interests of the company.180

Duty to exercise reasonable care, skill and diligence 2.33 Section 174 of the 2006 Act codifies the common law duty of care that directors owe in performing their duties as directors, namely the duty to exercise reasonable skill, care and diligence.181 This duty is most likely to be relied upon where a director’s actions causing loss were honest, but incompetent.182 It may also be relied upon in relation to conduct giving rise to breaches of other duties. The section also sets out the standard to which directors will be held: the standards of a reasonably diligent person with the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the 176 Section 29 of the 2006 Act. 177 See eg Re Westmid Packing Services Ltd [1998] 2 BCLC 646, CA at 653; Re Barings Plc (No 5) [1999] 1 BCLC 433 at 486h–489c (affirmed on appeal at [2000] 1 BCLC 523); Re Queens Moat Houses plc [2004] EWHC 1730 (Ch), 1 BCLC 136, ChD, at [26]. 178 Dovey v Cory [1901] AC 477 at 486 and 492. 179 Madoff Securities International Ltd (In Liquidation) v Raven [2013] EWHC 3147 (Comm), per Popplewell J at [193]. 180 Re Neath Rugby Ltd (No 2) [2009] EWCA Civ 291, [2009] 2 BCLC 427, CA, at [33]. 181 This is a duty formulated in the same terms as the duty specified in s 214(4) of the Insolvency Act 1986. 182 Keymed (Medical and Industrial Equipment) Ltd v Hillman [2019] EWHC 485 (Ch) at [102]– [103].

49

2.34  Directors and their Duties

director in relation to the company, and the general knowledge, skill and experience that the director has. This mirrors the provisions of section 214(4) of the Insolvency Act 1986, which was adopted as an accurate expression of the test at common law by Hoffmann LJ in Re D’Jan of London Ltd.183 It is not a fiduciary duty.184 The duty of care is owed both collectively by the whole board of directors and by each of the directors individually.185 2.34 It includes both an objective and a subjective test – the standard that might reasonably be expected; but, where an individual director has greater skill, knowledge or experience, he may be held to that higher standard.186 Whilst the best guide to what the statutory test is will be the words of the section itself, the test under section 174 has been stated as ‘that which a reasonable director of [such a company] in her position, with her experience, actual knowledge and intelligence should have done, and whether she acquired a sufficient knowledge of [the company’s] business to discharge her duties’.187 It is accordingly at least partly fact-specific and will be affected by the context in which the director is operating.188 Hindsight is not to be used in judging the standard of a director’s performance.189 It is accepted that directors of companies are often in the business of making judgments and taking appropriate risks and to do so is not a breach of duty.190 Reliance on others in a position of trust is not necessarily a breach of duty even if that reliance proves misplaced.191 However, conduct which was obviously careless at the time will suffice, such as signing large numbers of blank cheques and leaving them with another director.192 An objective standard in relation to financial awareness and competence may also be based on other provisions in the 2006 Act which provide for directors to have responsibility with regard to accounts and financial records and the requirement for approval by directors of annual accounts as showing a true and fair view.193 2.35 It is notable that there is no different standard stated per se to be applicable to non-executive directors. However, what the standard requires in a particular case is fact-specific,194 and the statutory test is by reference to the functions carried out by the director. This will mean that, where they have a different function from executive 183 [1994] 1 BCLC 561, ChD. 184 Section 178(2). 185 Lexi Holdings Plc v Luqman [2008] EWHC 1639 (Ch), [2008] 2 BCLC 725, ChD (this was not in issue on the appeal at [2009] EWCA Civ 117, [2009] BCC 716, CA and as a matter of principle must be correct). 186 Section 174(2); Re D’Jan of London Ltd [1994] 1 BCLC 561, ChD; Madoff Securities International Ltd (In Liquidation) v Raven [2013] EWHC 3417 (Comm) at [193]. 187 Weavering Capital (UK) Ltd v Bouchier [2012] EWHC 1480 (Ch), per Proudman J at [174]. This part of her judgment was not disturbed or even questioned by the Court of Appeal at [2013] EWCA Civ 71, [2015] BCC 741, CA. 188 Ciban Management Corp v Citco [2020] UKPC 21, [2021] AC 122 at [22]. 189 Roberts v Frohlich [2011] EWHC 257 (Ch), [2011] BCLC 625, ChD, per Norris J at [102], Atkinson v Kingsley [2020] EWHC 2913 (Ch) at [71]. 190 Bishopsgate Contracting Solutions Ltd v O’Sullivan [2021] EWHC 2103 (QB) at [186], citing Palmers’ Company Law, 8.2810. 191 Atkinson v Kingsley [2020] EWHC 2913 (Ch) at [66]. 192 Dorchester Finance Co Ltd v Stebbings [1989] BCLC 498, Ch. 193 Section 393. 194 See, in the context of when a director should be disqualified, Re Barings plc (No 5) [1999] 1 BCLC 433, ChD, at 489a–489c, passage approved on appeal ([2000] 1 BCLC 523, CA, per Morritt LJ at [36]–[41]). See also Brumber v Motornet Service and Repairs Ltd [2013] EWCA Civ 195, [2013] 1 WLR 2783, CA, where at [54], Beatson LJ described the question of whether s 174 had been breached as highly fact specific.

50

Scope and nature of statutory duties 2.37

directors, non-executives will be judged against different standards.195 Matters such as the size of the company and make-up of the board and the particular responsibilities may also be taken into account.196 There is also some indication that the level of reward paid to or anticipated by a director may provide some guide to the level of responsibilities which the company can reasonably expect of the director.197 However little the remuneration, no director, whether non-executive or not, can avoid liability for failing to exercise reasonable skill and care by not acting at all. This was clear at common law,198 and the inclusion of ‘diligence’ in the statutory test underlines the point. It is important to remember that an actual breach of duty is required for directors to be liable and mere errors of judgment are not sufficient to constitute a breach of duty.199 2.36 No doubt directors will from time to time rely on expert advice. Reasonable reliance on a suitable expert is likely to amount to the exercise of reasonable care in many cases,200 but is not necessarily a way of escaping liability in every case.201 It will be a question of whether it is reasonable on the facts of the case for the director to rely entirely on the advice of the professional, bearing in mind the director’s experience and qualifications and the nature of the company.202 Directors are also entitled to rely on trusted employees and co-directors to carry out tasks and provide advice, at least to a degree and until they have reason to cease to so rely.203 Many modern businesses are too large and complex for every director to know and understand everything which goes on. However, directors retain an overriding duty of oversight and control, meaning that they must have adequate knowledge and understanding of the company and its business to be able to adequately perform their functions and duties.204 What this will involve in any given case depends on the particular company and the nature of its business.205 2.37 The practical utility to shareholders of establishing a breach of this duty alone may often be limited. In a classic case where the negligence of one or more directors has allowed others to act improperly or fraudulently, it will generally be

195 In Weavering Macro Fixed Income Fund Ltd v Peterson, Grand Court of the Cayman Islands, 26 August 2011, at [8], the non-executive directors were held to the standard of a reasonable independent non-executive director of an open ended investment fund incorporated in that jurisdiction. 196 As they are when s 214(4) of the Insolvency Act 1986 is applied. See also Re Barings (No 5) [1999] 1 BCLC 433, ChD, at 484 (affirmed on appeal at [2000] 1 BCLC 523). 197 Re Barings plc (No 5) [1999] 1 BCLC 433, ChD, approved on appeal ([2000] 1 BCLC 523, CA, at [36]); Weavering Capital (UK) Ltd v Bouchier [2012] EWHC 1480 (Ch) at [164]. This part of the judgment was not disturbed or even questioned by the Court of Appeal at [2013] EWCA Civ 71, [2015] BCC 741, CA. 198 Dorchester Finance Co Ltd v Stebbing [1989] BCLC 498, ChD. 199 Roberts v Frohlich [2011] EWHC 257 (Ch), [2011] 2 BCLC 625, ChD, per Norris J at [106]. 200 Green v Walkling [2007] EWHC 3251 (Ch), [2008] 2 BCLC 332, ChD, Sharp v Blank [2019] EWHC 3096 (Ch) at [630]. 201 Re Bradcrown Ltd [2001] 1 BCLC 547, ChD; and, where reliance on such advice was not a defence to an allegation of unfitness, Secretary of State for Business, Enterprise and Regulatory Reform v Sullman [2008] EWHC 3179 (Ch), [2009] 1 BCLC 397, ChD, at [64]. 202 Sharp v Blank [2019] EWHC 3096 (Ch) at [630]. 203 Eg Dovey v Cory [1901] AC 477, HL. 204 Equitable Life Assurance v Bowley [2003] EWHC 2263 (Comm), [2004] 1 BCLC 180, QB. 205 Secretary of State for Trade & Industry v Baker (No 1) [1998] BCC 583, ChD.

51

2.38  Directors and their Duties

difficult to show that the omissions of the negligent directors were the legal cause of the company’s loss.206 That will usually be the improper actions of the co-directors.

Duty to avoid conflicts of interest 2.38 Section 175207 provides that a director must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. It does not apply to transactions or arrangements between the director and the company.208 It applies to conflicts of interest, to conflicts between an interest and a duty, and to conflicts of duties.209 The question of what the interests of the company are in a particular case is an issue of fact.210 This question of whether in a particular case the duty has been breached may also be highly fact-specific.211 This is part of the 2006 Act’s embodiment of the self-dealing rule of general application to fiduciaries.212 This rule flows from the duty of loyalty which gives rise to the fiduciary relationship.213 Its particular application to company directors is long established and it is a simple consequence of an overriding duty of loyalty. As Lord Cranworth LC said in Aberdeen Railway Co v Blaikie Bros:214 ‘… it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interest of those whom he is bound to protect. So strictly is this principle adhered to, that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into.’ This section is essentially a codification of the common law position.215 It extends to any case where a reasonable person, aware of the facts, would consider that there was a reasonable possibility of a conflict.216 It can lead to harsh results, and intentionally so, as a key purpose of the rule is to act as a deterrent.217 It is engaged frequently in cases where directors take steps to compete with the business of the company,

206 In exceptional cases, boards of directors may be held collectively liable, despite the innocence of certain individual directors: see 4.24–4.28 and 4.32–4.33. 207 This section came into force on 1 October 2008. 208 Section 175(3). 209 Section 175(7). This will include a conflict which may arise from a director simultaneously being a director of a competitor or supplier. 210 Barrowfen v Patel [2021] EWHC 2055 (Ch) at [292]. 211 Brietenfeld UK Ltd v Harrison [2015] EWHC 399 (Ch), [2015] 2 BCLC 275, at [67]. 212 For a clear example, see Re Thompson’s Settlement [1986] Ch 99. For an explanation of the rule and its origins, see FM Capital Partners Ltd v Marino [2018] EWHC 1768 (Comm) at [71]–[74]. 213 Potential qualifications to the extent of the prohibition of potential conflicts of interest were considered in F&C Alternative Investment (Holdings) Ltd v Barthelemy [2011] EWHC 1731 (Ch), [2012] 3 WLR 10, ChD, at [228]–[230]. 214 (1854) 1 Macq 461 at 471. 215 Per Lord Hodge in the Scottish case of Eastford Ltd v Gillespie [2009] CSOH 119. This also is the approach taken by both parties and the court in Thermascan Ltd v Norman [2009] EWHC 3694 (Ch), [2011] BCC 535, ChD, at [14] and by the Court of Appeal in Re Tobian Properties Ltd [2012] EWCA Civ 998, [2013] 2 BCLC 567, CA, at [22]–[23] and Sharma v Sharma [2013] EWCA Civ 1287, [2014] BCC 73, CA. 216 Eg Bhullar v Bhullar [2003] EWCA Civ 424, [2003] 2 BCLC 241, CA; Cullen Investments Ltd v Brown [2017] EWHC 1586 (Ch) at [182]. 217 Re Tobian Properties Ltd [2012] EWCA Civ 998, [2013] 2 BCLC 567, CA, at [23].

52

Scope and nature of statutory duties 2.38

before or after leaving office218 and is the basis, with section 176, for the prevention of directors accepting secret commissions or bribes.219 Unlike most of the other statutory duties, a director continues to be subject to it even after leaving office, in relation to the exploitation of any information or opportunity which the director became aware of whilst still in office.220 The principles which apply to the question of when the duty extends to a former director were summarised, after reviewing the authorities, as follows in the recent case of Burnell v Trans-Tag Ltd221: ‘(a) The classic statements of the circumstances in which a former director may be found liable for a breach of duty giving rise to liability to account for profits refer to cases in which a former director has obtained for him or herself, without the informed approval of the company, a profit from the exploitation of property or a maturing business opportunity of the company where his or her resignation can be fairly said to have been prompted or influenced by a wish to acquire that opportunity for himself or herself and where it was the former director’s position with the company rather than some fresh initiative which led to the opportunity which the former director later acquired. (b) In these cases, the courts have had to balance the need to prevent the emasculation of fiduciary duties, which might occur if a fiduciary was free to exploit opportunities which arose during the course of the fiduciary relationship by the simple expedient of resigning, with public policy issues in relation to the restraint of trade. The result is that the courts have adopted a merits-based approach and the circumstances in which a former director has been found to have breached his or her fiduciary duty are highly fact-sensitive.  (c) The basis of the liability imposed on a former director for breach of fiduciary duty is not that the fiduciary duty survived the termination of the relationship as director, but that a breach of fiduciary duty prior to or at the termination of the relationship resulted in a liability to account for a profit which was realized after the termination of the relationship but causally connected to the breach.  (d) Unless other factors are involved, it will not ordinarily be a breach of duty for a director to resign with the intention of setting up in business to compete with the business of the company of which the individual was formerly a director. There will need to have been some additional element amounting to a breach of the obligation of loyalty owed by the director before or at the time of resignation.  (e) The underlying basis of the liability of a former director who exploits a business opportunity of the company is that the opportunity was of such a nature as to be treated as the property of the company at the time at which he or she was 218 The principles applicable to the question of whether a director has taken sufficient steps towards competing were summarised by Deputy Judge Akhlaq Choudhury QC in Gamatronic UK Ltd v Hamilton [2016] EWHC 2225 (QB) at [88]. See also Cullen Investments Ltd v Brown [2017] EWHC 1586 (Ch). 219 For example, A-G for Hong Kong v Reid [1994] 1 AC 324; Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA 347, [2012] Ch 453, CA; FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45. Where a director has resigned to pursue the opportunity, it is not a requirement for liability that the director’s resignation was prompted or influenced by the wish to exploit the opportunity: Burnell v Trans-Tag Ltd [2021] EWHC 1457 (Ch). 220 Section 170(2)(a). And see Burnell v Trans-Tag Ltd [2021] EWHC 1457 (Ch) at [394]. 221 [2021] EWHC 1457 (Ch) at [406], per DHCJ Ashley Greenbank.

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2.39  Directors and their Duties

a director. The courts have employed the term “maturing business opportunity” – which is derived from the judgment of Laskin J  in Canaero – to identify an opportunity which is sufficiently developed that the subsequent exploitation of the opportunity by a director following his or her resignation can be regarded as giving rise to a breach.  (f) For an opportunity to be regarded as “maturing”, it is not necessary for it to have developed into a contract between the company and a third party. It may suffice that there has been contact between the company and a third party with regard to future business such that “some outlines of future contractual relations are in play”. However, the opportunity must (i) have come to the former director by reason of his position as a director and (ii) be an opportunity which the company was “actively pursuing”.’ There is authority that contrary to the position at common law, a breach of this duty can arise solely from activity by the director after leaving office.222 2.39 Section 175(2) states that this applies ‘in particular’ to the exploitation of any property, information or opportunity. The three examples given of the application of the principle are just that: examples. The reference to them does not qualify the generality of the prohibition of conflicts of interest, but simply gives instances (perhaps the most likely ones) of when the prohibition may be relevant. The meaning of ‘property’, ‘information’ and ‘opportunity’ follows the previous common law meaning of those words in this context.223 The section also makes clear that it is immaterial to the application of the prohibition whether the company could take advantage of the property, information or opportunity.224 It follows that the inability of the company to pursue its interest which conflicts with that of the director is irrelevant in all cases.225 This reflects the previous common law position.226 The fact that the company may be insolvent so that regard is had to the interests of creditors 222 Burnell v Trans-Tag Ltd [2021] EWHC 1457 (Ch) at [411]–[413]. This is contrary to the common law position as stated in cases such as Foster Bryant Surveying Ltd v Bryant [2007] EWCA Civ 200, [2007] BCC 804, and Recovery Partners GB Ltd v Rukhadze [2018] EWHC 2918 (Comm), [2019] Bus LR 1166. 223 Burnell v Trans-Tag Ltd [2021] EWHC 1457 (Ch) at [408] and [458]. This includes a ‘maturing business opportunity’; Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443 (Birmingham Assize); Canadian Aero Service v O’Malley (1973) 40 DLR 371, Island Export Finance Ltd v Umunna [1986] BCLC 460, QB and since the 2006 Act came into force cases such as Recovery Partners GB Ltd v Rukhadze [2018] EWHC 2918 (Comm) and Re Edwardian Group Ltd [2018] EWHC 1715 (Ch), [2019] 1 BCLC 171. 224 Section 175(2). 225 Sharma v Sharma [2013] EWCA Civ 1287, [2014] BCC 73, CA; Pennyfeathers Ltd v Pennyfeathers Property Co Ltd [2013] EWHC 3530 (Ch) at [62]; Davies v Ford [2020] EWHC 686 (Ch); Re Stratos Club Ltd [2020] EWHC 3485 at [276]–[279], [293]–[296]. 226 This principle of general application to fiduciaries was long established at common law: see eg Keech v Sandford (1762) Sel Cas Ch 61, and Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, HL. The point is the breach of the strict duty of loyalty, depriving the company of an opportunity, whether or not the company would have taken the opportunity: Towers v Premier Waste Management Ltd [2011] EWCA Civ 923, [2012] 1 BCLC 67, CA. For an example of its continuing application to a director after vacating office in relation to information acquired during his period in office, see Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443 (Birmingham Assize); Canadian Aero Service v O’Malley (1973) 40 DLR 371, and Island Export Finance Ltd v Umunna [1986] BCLC 460, QB. The same approach has been taken since the 2006 Act came into force: Thermascan v Norman [2009] EWHC 3694 (Ch), [2011] BCC 535, ChD; Re Edwardian Group Ltd [2018] EWHC 1715 (Ch) and Recovery Partners GB Ltd v Rukhadze [2018] EWHC 2918 (Comm).

54

Scope and nature of statutory duties 2.40

potentially in priority to those of members is irrelevant to this issue.227 The existence of a relevant opportunity is something that the company is entitled to know of and which the director has a duty to inform it of where it is information relevant for the company to know, whether or not it is within in the scope of the company’s current business.228 It is not necessary that the director made a profit or obtained a benefit from the conflict for him to be liable.229 The prohibition does not apply if the situation concerned cannot reasonably be regarded as likely to give rise to a conflict of interest,230 but prudent directors will err on the side of caution. In many cases the question of whether a conflict in fact arose will be highly fact specific, so that previous authorities are of limited benefit in establishing whether a breach has occurred.231 If the shareholders are aware of the opportunity and give informed consent to it being pursued by the director, liability may be avoided. The shareholders need full knowledge of the relevant facts to give such consent but do not need to be aware that the proposed conduct would be a breach of duty by the director.232 Such consent may only be inferred from silence if the shareholders know that their consent is required or the circumstances are such that it would be unconscionable for the shareholders to remain silent at the time and then object after the event.233 Authorisation may also be provided by the other directors where the requirements of the section are met.234 The particular conflict of duties, and potentially of interests and duties, which arises where a director of a company which is the sponsoring employer is also a trustee and beneficiary of a pension scheme was considered by Marcus Smith J in Keymed (Medical & Industrial Equipment) Ltd v Hillman.235

Declaration of interest in transactions 2.40 It is an established exception to the self-dealing rule that its consequences can be avoided where the fiduciary has made full disclosure and the principal has authorised the transaction. Section 175 does not apply to a conflict of interest arising in a transaction between a director and the company.236 However, the 2006 Act includes (at sections 182–187) detailed provisions requiring directors to declare such interests in existing transactions, and (at section 177) in relation to proposed transactions. A declaration in relation to existing transactions is to be made by the director as soon as reasonably practicable237 and may be made at a meeting of directors, in writing238 227 Davies v Ford [2020] EWHC 686 (Ch) at [286]–[288]. 228 Re Allied Business and Financial Consultants Ltd [2009] EWCA Civ 751, [2009] 2 BCLC 666, CA, per Rimer LJ at [70]. 229 Towers v Premier Waste Management Ltd [2011] EWCA Civ 923, [2012] 1 BCLC 67, CA. 230 Section 175(4)(a). Nor probably to a merely theoretical conflict: Boulting v Association of Cinematograph, Television and Allied Technicians [1963] 2 QB 606, per Upjohn LJ at 638. 231 See Bhullar v Bhullar [2003] EWCA Civ 424, [2003] 2 BCLC 241, CA, per Jonathan Parker LJ at [36]. 232 See eg Sharma v Sharma [2013] EWCA Civ 1287, [2014] BCC 73, CA, at [52]. This is an application of the well-known principle established in Re Duomatic Ltd [1969] 2 Ch 365. 233 Sharma v Sharma [2013] EWCA Civ 1287, [2014] BCC 73, CA, at [52]. 234 See s 175(5) and (6) discussed at 2.41. 235 [2019] EWHC 485. 236 Section 175(3). However, these conflicts are dealt with by s 177. Section 181 varies the application of s 175(3) to charitable companies. 237 Section 182(5). 238 In which case it must comply with s 184.

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2.41  Directors and their Duties

or by way of a general declaration.239 A general declaration may be made at a meeting of directors but, if given at some other time, the director who has given it must take reasonable steps to have it brought up and read at the next directors’ meeting after it is given.240 The general declaration must specify the body corporate or firm or person in or with which the director has an interest and the nature of his interest or connection. It must also state that the director is to be regarded as interested in any transaction or arrangement that the company may have after the date of the notice with that body corporate or firm or person.241 It has been said that ‘full and open disclosure’ is required to avoid liability.242 The importance of this declaration regime is emphasised by the provision in section 183, that the failure by a director to declare an interest in an existing transaction or arrangement is a criminal offence. 2.41 Section 175 also makes detailed provision for authorisation to be given by the directors to a particular director’s conflict of interest.243 The other directors may provide such authorisation in the case of a private company where nothing in the constitution of the company prevents such authorisation and, in the case of a public company, where the constitution includes provision for such authorisation.244 Accordingly, in the case of private companies, authorisation can be provided by the other directors unless the constitution prevents it; while, in the case of public companies, authorisation by the board can only be provided where the constitution of the company specifically provides for it. However, in each case the authorisation can only be granted if the meeting at which it is considered is quorate without including the conflicted director, and the authorisation is approved without counting any vote of the conflicted director, or would have been if the issue had been put to the vote of the meeting.245 To be effective, any authorisation must comply with these rules. The company’s articles remain relevant to the extent that they may contain further requirements in addition to these statutory rules.246 This statutory authorisation regime differs from the common law in that, while at common law a fiduciary could be relieved of his duty by his principal, in the case of a company the principal was the members of the company and the method was ratification by the members in general meeting or by written resolution, or the Duomatic principle.247 The provision in the section for authorisation is clearly less restrictive, enabling directors to authorise each other’s conflicts of interest. However, it broadly follows articles 85 and 86 of the standard Table A articles under the 1985 Act,248 in use by many current companies; so, in practice, the change will frequently be less significant than it might first appear. 239 240 241 242 243

This requirement also applies, with slight modifications, to shadow directors pursuant to s 187. Section 15(4). Section 185(2). Allnutt v Nags Head Reading Ltd [2019] EWHC 2810 (Ch), [2020] BCC 70, at [70]. These provisions are without prejudice to any statutory requirement for approval by the members and any requirement for such approval contained in the company’s constitution. 244 Section 175(5). The transitional provisions provide that in the case of companies incorporated on or after 1 October 2008 this is always the case, but for a company incorporated prior to that date, it is necessary for the members to pass a resolution to approve it; Companies Act 2006 (Commencement No. 5, Transitional Provisions and Savings) Order 2007 (SI 2007/3495), Sch 3, para 47(3)(b). Although the coming into effect of s 175 is far from new, these transitional provisions currently continue to apply. 245 Section 175(6). 246 Section 180. 247 Re Duomatic Ltd [1969] 2 Ch 365 – ratification may occur where all of the shareholders have considered the matter and reached informal agreement to ratify. This is discussed at 3.16–3.17. 248 Companies (Tables A to F) Regulations 1985, SI 1985/805.

56

Scope and nature of statutory duties 2.44

2.42 This is to be contrasted with sections 232–238 of the 2006 Act, which restrict the use of provisions to protect directors from liability. Provisions protecting directors from liability to the company and provisions protecting them from liability to third parties, by way of insurance or provision of an indemnity by the company, are dealt with differently. The liabilities of directors to third parties are outside the scope of this chapter.249 However, the statutory control of the protection of directors from liability to their company is relevant to the consideration of directors’ duties. Section 232 provides that any provision that purports to exempt a director of a company (to any extent) from any liability that would otherwise attach to him in relation to the company is void.250 The section makes clear that ‘any provision’ means any provision in any document or agreement at all.251 However, provisions such as those included in the 2006 Act Model articles and the Table A articles under the 1985 Act continue to be permitted, as the section provides that nothing in it prevents a company’s articles making such provision as has previously been lawful for dealing with conflicts of interest.252 2.43 This relationship between the statutory prohibition and provision in the articles relieving liability was addressed in Movitex Ltd v Bulfield.253 Vinelott J held that a director was entitled to rely on the exclusion in the articles, provided he had made appropriate disclosure of his interest, on the basis that, where proper disclosure had been made, there was no breach of fiduciary duty, so the article did not purport to exclude such liability contrary to section 205 of the 1948 Act. This way of analysing the application of the self-dealing rule and its avoidance by disclosure has since been disapproved by the Court of Appeal, but when doing so it specifically referred to the decision in Movitex and did not suggest that the result was wrong in that case.254 Therefore, despite its questionable theoretical basis, it is probably still good law in common law cases. The application of the self-dealing rule in Movitex is now within the scope of section 175 of the 2006 Act, where it is expressly stated to be a duty. In any event, section 180(4) provides that the general duties of directors (which include the duty in section 175) are not infringed where the company’s articles contain provisions for dealing with conflicts of interest and those provisions are complied with.255 However, such compliance does not obviate the need to satisfy any requirement elsewhere in the 2006 Act for the separate approval of members.256

Duty not to accept benefits from third parties 2.44 Section 176 of the 2006 Act prohibits a director from accepting a benefit from a third party that is conferred on him by reason of his being a director or doing 249 See Chapter 4 for directors’ potential liability to shareholders. 250 A provision to similar effect was included in s 310 of the 1985 Act and had its origin in the 1948 Act. 251 Section 232(3). 252 Section 232(4). 253 [1988] BCLC 104, ChD. 254 Gwembe Valley Development Co Ltd v Koshy (No 3) [2003] EWCA Civ 1048, [2004] 1 BCLC 131, CA, where the theoretical basis of Movitex is criticised by Mummery LJ at [104]–[109], but the decision itself effectively applied at [52]. 255 It also makes the duty to avoid conflicts in s 175 subject to any existing rule of law that permits the company to give authority for any act or omission by a director that would otherwise be a breach of the section. 256 Section 180(3).

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2.45  Directors and their Duties

(or not doing) anything as a director.257 No definition of ‘benefit’ is included, so the term will be given its ordinary meaning. Its meaning is therefore fairly broad. In this context, ‘third parties’ means anyone other than the company, an associated body corporate, or someone acting on behalf of the company or an associated body corporate.258 This provision significantly overlaps with the prohibition on conflicts of interest contained in section 175 and, again, codifies the position in equity, which prohibits a director from using his position as such for personal benefit and/or receiving a secret profit by reason of his position.259 Like section 175, it has potential application to a director after leaving office.260 It reflects the long-established equitable principle that fiduciaries may not receive secret commissions.261 Where this duty is breached by a director, the company may be able to set aside the transactions,262 and the director will be obliged to account to the company for any benefits received263 or provide equitable compensation. 2.45 The prohibition is not infringed by the acceptance of a benefit that cannot reasonably be regarded as likely to give rise to a conflict of interest.264 Nor is there a breach where the benefit is received by the director from someone by whom his services as a director are provided to the company.265 This duty may also be relaxed by provisions in the articles of the company, as provided for in section 232 of the 2006 Act; although, unlike in section 175, there is no provision in section 176 for ratification by the board alone.266 Where the benefit is one to which Chapter  4 of Part 10 of the 2006 Act applies (sections 188–232, transaction between the company and directors), provided the requirements of that chapter are complied with, the transaction will not be a breach of section 176.

BRIBERY ACT 2010 2.46 The Bribery Act 2010267 will be relevant in some cases where there is a breach or possible breach of section 176. It created specific statutory criminal offences of bribery. It applies to both public officials and private organisations and individuals. The offences created by the Bribery Act 2010 are offering or paying a bribe,268 requesting or receiving a bribe,269 bribing a foreign public official270 and, for 257 It is another application of the fundamental rule that a fiduciary is not allowed to put themself in a position where their interest and their duty conflict: Kings Security Systems Ltd v King [2021] EWHC 325 (Ch) at [161]. 258 Section 176(2). 259 For example, as stated in the well-known case of Boston Deep Sea Fishing v Ansell (1888) 39 ChD 339 at 363–364. 260 As regards things done or omitted to be done before leaving office: s 170(2)(b). 261 A-G for Hong Kong v Reid [1994] 1 AC 324, PC (New Zealand). 262 For example, as in Logicrose v Southend United FC Ltd (No 2) [1988] 1 WLR 1256, ChD. 263 For example, as in Gwembe Valley Development Co Ltd v Koshy (No 3) [2003] EWCA Civ 1048, [2004] 1 BCLC 13, CA. 264 Section 176(4). 265 Section 176(3). Typically where the director acts through his own service company and receives benefits from that service company. 266 FM Capital Partners Ltd v Marino [2018] EWHC 1768 (Comm) at [81]. 267 Which came into force on 1 July 2011. 268 Section 1. 269 Section 2. 270 Section 6.

58

Duty to declare interest in proposed transaction or arrangement 2.48

corporate bodies, failing to put in place a reasonable system to prevent bribery.271 The Bribery Act 2010 does not of itself offer any assistance to shareholders wishing to bring claims against directors. It does mean that directors can cause the company to incur criminal liability by reason of their failure to put in place a reasonable system to prevent bribery. In such a case, the directors would be likely to be in breach of section 174, in addition to any personal liability incurred under section 176.272

DUTY TO DECLARE INTEREST IN PROPOSED TRANSACTION OR ARRANGEMENT 2.47 The provisions of section 177 are linked to those of sections 175 and 176.273 The section replicates the equitable principle that, as fiduciaries, directors must not be interested in transactions with the company unless they obtain prior authorisation from their principals, the shareholders. It codifies (and arguably extends) another part of the equitable rule against self-dealing referred to above.274 Section 177 requires a director to declare to the other directors (rather than the shareholders)275 the nature and extent of any interest that he has, whether directly or indirectly, in any proposed transaction or arrangement with the company. It may therefore apply even if the director is not a party to the transaction in issue. The 2006 Act contains no definition of what such an ‘interest’ is. Where there is doubt, it will be necessary to consult the relevant case law.276 While sections 175 and 176 require the involvement of a third party, section 177 does not. If a fiduciary is misappropriating the assets of their principal, it is self-evident that they are not acting with single-minded loyalty, regardless whether a third party is involved.277 As should be obvious, compliance with the duty to declare an interest does not relieve directors of their other duties.278 2.48 Section 177 does not require a director to make (and therefore does not provide that he is in breach of duty for failing to make) a declaration of an interest of which he is not aware, either because he is unaware of his interest, or of the relevant transaction, or both. A director can only rely on this provision in respect of matters that he ought not reasonably to be aware of.279 A director also need not declare an interest if it cannot reasonably be regarded as likely to give rise to a conflict of interest, or where, and to the extent that, the other directors are already aware of the interest. This will include anything that they ought reasonably to be aware of, whether or not they were in fact so aware.280 A sole director is not required to make 271 Section 7. 272 The introduction of the duties in the 2006 Act did not replace the common law rules relating to bribery: Kings Security Systems Ltd v King [2021] EWHC 325 (Ch) at [148]. 273 For recent examples of its application see Birdi v Specsavers Optical Group Ltd [2015] EWHC 2870 (Ch), per Nugee J, in particular at [181]–[184] and Cullen Investments Ltd v Brown [2017] EWHC 1586 (Ch). 274 See 2.38. 275 Although the articles of the company may provide for shareholder approval to be required in such cases, as well as disclosure to the other directors in accordance with the section. 276 Burns v FCA [2017] EWCA Civ 2140, [2018] 1 WLR 4161, at [69]. 277 Kings Security Systems Ltd v King [2021] EWHC 325 (Ch) at [162]. 278 Keymed (Medical & Industrial Equipment) Ltd v Hillman [2019] EWHC 485 (Ch). 279 Section 177(5). 280 Section 177(6). This exception is objectively framed and gives rise to an objective test: Keymed (Medical & Industrial Equipment) Ltd v Hillman [2019] EWHC 485 (Ch) at [107].

59

2.49  Directors and their Duties

a declaration to himself.281 Additionally, a director need not declare an interest that concerns terms of his service contract which have been or are to be considered by a meeting of the directors or a committee of the directors duly appointed for that purpose.282 Nothing in the section prevents a conflicted director from participating in the making of the relevant decision, provided he has complied with the statutory disclosure requirements.283 2.49 The section requires the declaration to be made before the company enters into the transaction284 and requires it to be made either in writing in compliance with the provisions of section 184, or generally in compliance with the provisions of section 185.285 This is to enable the directors on behalf of the company to decide whether to enter into the transaction, on what terms and with what safeguards.286 The declaration must be made in a manner and at a time that gives the board or members the opportunity to consider whether to approve the proposed transaction and not left until it is a fait accompli.287 The declaration must make full disclosure of the conflict which arises288 and should be sufficiently detailed to enable the other directors to know what the interest is and how far it goes.289 However, the level of detail required will be highly fact-specific.290 The declaration must remain accurate so that, if a declaration made by a director proves to be or becomes inaccurate, the director must make a further declaration of the then accurate position.291 If the company enters into the transaction and the requirements of disclosure under section 177 have not been complied with by the director, a further duty of disclosure will arise and apply to the director under section 182. Section 182(1) provides that if directors are in any way, directly or indirectly, interested in a transaction or arrangement that the company has entered into, they must declare the nature and extent of that interest to the other directors. The provision has no application where directors have already declared, under section 177, the nature and extent of the interest. The section does not prescribe the form of the declaration, but provides that it may be made to the board, at a meeting, or in writing in compliance with section 184 or 185.292

281 Section 186. But in such a case the relevant details of the interest and transaction must be recorded in writing. 282 Section 177(6). 283 Although the company’s articles of association may do so. 284 Section 177(4). 285 See 2.40–2.43. 286 Keymed (Medical & Industrial Equipment) Ltd v Hillman [2019] EWHC 485 (Ch) at [107]. 287 See Re Nuneaton Borough AFC Ltd (No 2) [1991] BCC 44, ChD, per Harman J at 60. 288 Keymed (Medical & Industrial Equipment) Ltd v Hillman [2019] EWHC 485 (Ch) at [108]. This reflects the usual position with regard to fiduciaries that in order to avoid liability, fully informed consent is required: FM Capital Partners Ltd v Marino [2018] EWHC 1768 (Ch) at [78]. 289 This was the position under the predecessor provision, s 317 of the 1985 Act – Movitex Ltd v Bullfield [1988] BCLC 104, ChD; and Gwembe Valley Development Co Ltd v Koshy (No 3) [2003] EWCA Civ 1048, [2002] 1 BCLC 478, ChD, per Rimer J at [255]; and in the same case per Mummery LJ at [65]. Cases under s 317 of the 1985 Act can be relevant to s 177 but that section contained material differences to the current section so care needs to be taken. 290 Fairford Water Ski Club Ltd v Cohoon [2021] EWCA Civ 143, [2021] BCC 498, at [45], a case under s 317 of the 1985 Act, applying the Privy Council decision in Gray v New Augarita Porcupine Mines Ltd [1952] 3 DLR 1 at [14]. It may be that the company’s articles require more by way of disclosure than s 177. See eg Re Stratos Club Ltd [2020] EWHC 3485 (Ch) at [185]–[188]. 291 Section 177(3). 292 Section 177(2).

60

Civil consequences of breach of general duties 2.53

2.50 Provided a director complies with the declaration requirements of section 177, the transaction will not be set aside by reason of any failure to comply with a common law rule requiring the consent or approval of shareholders to the transaction,293 but compliance with section 177 does not amount to a defence to any failure to comply with any other statutory disclosure requirements or any such requirements included in the constitution of the company.294 2.51 Section 177 alone may be unlikely in practice to provide a route to a remedy against a director who breaches it. Where the director fails to make a declaration as required by section 177 but proceeds to enter into the transaction with the company, the transaction will be voidable, and it would follow that the company’s right to rescind may be lost in accordance with ordinary contractual principles if the company has not acted promptly to avoid the contract. In such a case, establishing that the company has suffered a loss by reason of the director’s breach of section 177 alone295 may be difficult. No loss, recoverable or not, will generally be suffered unless the company enters into the transaction. At that point, unless the director then declares the transaction, he will be in breach of section 182. A breach of section 182 is a criminal offence.296 It will also give the company the usual remedies against the director and third parties which are available following a breach of fiduciary duty, subject to the usual principles and limitations.

CIVIL CONSEQUENCES OF BREACH OF GENERAL DUTIES 2.52 Section 178 preserves the common law rules and equitable principles, so that breaches of the general duties are enforceable in the same way as any other breach of such a duty. Accordingly, the company may be able to obtain damages for breaches of duties equivalent to common law duties. In relation to breaches of duties equivalent to fiduciary duties, it may be able to avoid transactions in connection with which a director was in breach of duty, recover compensation for any losses it suffers, and require any director who acts in breach of duty to account for any profits made thereby.297 Where the breach of duty consists of misapplication of company property, the director will be in the same position as a trustee so acting, and therefore liable to reconstitute the property by returning it or paying its value to the company.298 Tracing remedies will also be available.299 Non-financial remedies such as injunction and declaration will be available in appropriate cases. 2.53 The availability of these remedies and their extent will depend on the usually applicable equitable and common law principles and will be subject to the

293 Section 180(1). 294 Section 180(1). 295 In such a case, the defaulting director may also be in breach of another duty, which breach enables the company to obtain a valuable remedy. 296 Section 183. 297 For example, Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347, [2012] Ch 453, CA; FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45. 298 JJ Harrison (Properties) Ltd v Harrison [2001] EWCA Civ 1467, [2002] 1 BCLC 162, CA, at [25], per Chadwick LJ. 299 See eg FHR European Ventures LLP v Mankarious [2013] EWCA Civ 17, [2014] Ch 1, CA.

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2.54  Directors and their Duties

same limitations.300 Where the director has not gained by the breach, there may be no practical remedy if the company has suffered no loss.301 Even where the company has suffered a loss as a result of a director’s breach of duty, general equitable or common law principles may operate to prevent the company recovering compensation.302 Director’s breaches of duties will most frequently be enforced by shareholders via unfair prejudice petition.303 They may also afford the basis of a derivative claim.304 Remedies against third parties implicated in or benefiting from a director’s breach of duty will also be available, subject to the usual equitable and common law principles and limitations.305

RATIFICATION OF BREACH OF DUTY BY SHAREHOLDERS 2.54 As previously, a director may be absolved from a breach of duty by vote of the shareholders.306 Statutory ratification is provided for in section 239 of the 2006 Act. It reflects the previous law. The shareholders can approve a foolish or negligent decision in the ordinary course of business, at least where the company is solvent.307 However, there are limits to the types of breach of duty which are capable of ratification. It is not possible for the appropriation of the company’s property by directors to be ratified (or authorised) for purposes which are not in the best interests of the company.308 It has also been suggested, but not decided, that where the appropriation of company property to the prejudice of minority shareholders results from decisions of the majority of the shareholders rather than the directors, authorisation or ratification of the appropriation is not possible, indicating that the separate personality of the company imposes some general limits on the power of shareholders to approve actions which ignore that separate personality.309 Ratification must be by the members of the company by resolution at a meeting, or following the procedure for a written resolution (although the section does not affect the validity of any decision taken by unanimous consent of the members).310 However, unlike previously, although the director is entitled to attend any such meeting, take part 300 For a recent examples of a case where the court considered a range of remedies in respect of a director’s breaches of duty see Clegg v Pache (Deceased) [2017] EWCA Civ 256; Interactive Technology Ltd v Ferster [2018] EWCA Civ 1594 and Auden McKenzie (Pharma Division) Ltd v Patel [2019] EWCA Civ 2291, [2020] BCC 316. 301 See eg Re Coroin Ltd [2013] EWCA Civ 781, [2013] 2 BCLC 583, CA and Gamatronic (UK) Ltd v Hamilton [2016] EWHC 2225 (QB). 302 Such as the principle of ex turpi causa in Safeway Stores Ltd v Twigger [2010] EWCA Civ 1472, [2011] 2 All ER 841, CA. 303 See Chapter 9. 304 See Chapter 6. 305 Claims against directors for breach of duty do not preclude additional claims against third parties, such as for knowing receipt: Davies v Ford [2021] EWHC 2250 (Ch), [2021] 9 WLUK 226. 306 This is a long established principle – see eg Kaye v Croydon Tramways Co [1898] 1 Ch 358. 307 Petrodel Resources Ltd v Prest [2013] UKSC 34, [2013] 2 AC 415 at [41]; Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983] Ch 258, CA. 308 Petrodel Resources Ltd v Prest [2013] UKSC 34, [2013] 2 AC 415 at [41]; Belmont Finance Corp Ltd v Williams Furniture Ltd [1979] Ch 250, CA at 261; DPP v Gomez [1993] AC 442, HL at 496–497. 309 See Hook v Sumner [2015] EWHC 3820 (Ch), [2016] BCC 220, ChD at [91]–[92]. 310 Section 239(6). Therefore, the principle established by Re Duomatic Ltd [1969] 2 Ch 365 remains applicable. See further 3.16–3.17.

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Can directors owe duties direct to shareholders? 2.56

and be counted towards the quorum of it, his vote of his own shares is disregarded in determining whether the resolution is passed.311 Any such ratification must also comply with any requirements for ratification contained in the constitution of the company or any other enactment or rule of law limiting what may be ratified or how such ratification is to occur.312 There has been considerable academic debate as to breaches of which of the statutory duties may be so ratified.313 Where the company is insolvent or sufficiently close to insolvency that creditors’ interests are required to be taken into account,314 effective ratification to protect against a claim in the ensuing insolvency was not possible previously315 and is probably not possible under section 239. Section 239(6) provides that the section does not affect the validity of any ratification by unanimous consent. Accordingly, the Duomatic principle316 continues to operate to permit informal unanimous ratification by shareholders.

CAN DIRECTORS OWE DUTIES DIRECT TO SHAREHOLDERS? 2.55 The statutory duties arising under the 2006 Act are owed by directors to the company only.317 It is possible for company directors acting as directors to owe common law duties direct to shareholders, but it is unusual. Cases where such duties may be owed are most commonly in circumstances of a takeover or some other offer to purchase shares, or where the directors allot shares in a manner which may prejudice a shareholder’s proprietary interests.318

At common law 2.56 At common law, a claim by shareholders against directors will be a claim in respect of pure economic loss. A duty of care will only be owed if there is the necessary proximity between director and shareholder. This will require an assumption of responsibility by the director for the conduct which gives rise to the claim.319 In practice, following the decision of the Supreme Court in Manchester Building Society v Grant Thornton320 liability will be governed by the purpose of the duty judged on an objective basis. Directors usually owe duties to the company for 311 Section 239. 312 Section 239(7). 313 The authors are in agreement with the view expressed by Professor Andrew Keay that provided s 172 (3) is not engaged, breaches of ss 171(a) and (b) and 174 may be ratified, in the latter case at least where the breach of duty is not self-serving. In addition, breaches of s 177 may be ratified where the director acted in good faith; see Keay, Directors’ Duties (LexisNexis, 4th edition, 2020) at 16.56. In each case, ratification will only be possible subject to the common law limits on ratification relating to vires and applying to cases of dishonesty or using the company as vehicle for fraud or other wrong-doing. 314 See 2.28–2.29. 315 See eg Re Horsley & Weight Ltd [1982] Ch 442, CA; Re DKG Contractors Ltd [1990] BCC 903, ChD; Crown Dilmun v Sutton [2004] EWHC 52 (Ch), [2004] 1 BCLC 468, ChD. 316 Re Duomatic [1969] 2 Ch 365. 317 Section 170(1). 318 This issue is addressed in more detail in Chapter 4. 319 As classically stated by the House of Lords in Hedley Byrne v Heller & Partners Ltd [1964] AC 465, HL. 320 [2021] UKSC 20, [2021] 3 WLR 81.

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2.57  Directors and their Duties

the purpose of protecting or advancing the interests of the company rather than the shareholder. For liability direct to a shareholder to arise it will generally be necessary to establish that the director assumed responsibility to advise the shareholder as to a course of conduct. In the context of rival bids for the shares in a private company, Hoffmann J held in Re A Company (No 008699 of 1985)321 that the directors are not under a duty to advise shareholders to accept a particular bid, but if they do so, they owe a duty to the shareholders ‘to refrain from giving misleading advice or exercising their fiduciary powers in a way which would prevent or inhibit shareholders from choosing to take the better price’. In Sharp v Blank322 concerning a claim brought by shareholders in Lloyds Bank against the directors relating to the bank’s takeover of HBOS, at the trial it was conceded by the directors that they owed a duty to shareholders at common law with regard to the accuracy of a circular relating to a takeover which was addressed to them. Norris J nonetheless undertook some analysis of the existence and scope of the common law duty owed by the directors to the shareholders in the circumstances of the case.323 He considered that the duty owed to shareholders in such a case was essentially the same duty as that owed to the company under section 174 of the 2006 Act and applied to the recommendations made and the provision of sufficient information.324 Norris J held that the duty did not apply to an announcement issued by the directors.325 He reached this conclusion by considering the application of both the traditional assumption of responsibility test326 and the purpose of the announcement,327 the latter being more in line with the guidance subsequently given by the Supreme Court in Manchester Building Society v Grant Thornton.328 A duty of care is also imposed on directors to give relevant and accurate information and advice by the City Code on Takeovers and Mergers.329

Fiduciary duties 2.57 It will require special circumstances for directors to owe fiduciary duties direct to shareholders.330 Again, some sort of assumption of responsibility is generally needed.331 In Stein v Blake (No 2),332 Millett LJ recognised the possible existence of fiduciary duties owed by directors direct to shareholders, observing:333 ‘Directors owe fiduciary duties to their company to preserve and defend its assets and to the shareholders to advise them properly so that they are not induced or compelled to part with their shares at an undervalue. No doubt other fiduciary duties are also owed both to the company and to its shareholders.’

321 322 323 324 325 326 327 328 329 330 331 332 333

(1986) 2 BCC 99024, ChD, at 99030. [2019] EWHC 3096 (Ch). At [619]–[633]. At [623]. At [638]. At [639]. At [640]. [2021] UKSC 20, [2021] 3 WLR 81. Rules 19 and 23. Discussed in more detail at 4.29–4.34. See, for a more general discussion, 4.7–4.20. Peskin v Anderson [2001] 1 BCLC 372, CA. [1998] 1 All ER 724, CA. At 730b–730c.

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Relief from liability – section 1157 2.59

At an interlocutory hearing in Sharp v Blank334 Nugee J considered an application by former directors of Lloyds Bank to strike out a claim brought against them by shareholders in the bank relating to the bank’s takeover of HBOS. He set out what he considered to be the law as to fiduciary duties owed by directors to shareholders as follows:335 ‘I take it therefore to be established law, binding on me, that although a director of a company can owe fiduciary duties to the company’s shareholders, he does not do so by the mere fact of being a director, but only where there is on the facts of the particular case a “special relationship” between the director and the shareholders. It seems to me to follow that this special relationship must be something over and above the usual relationship that any director of a company has with its shareholders. It is not enough that the director, as a director, has more knowledge of the company’s affairs than the shareholders have: since they direct and control the company’s affairs this will almost inevitably be the case. Nor is it enough that the actions of the directors will have the potential to affect the shareholders – again this will always, or almost always, be the case. On the decided cases the sort of relationship that has given rise to a fiduciary duty has been where there has been some personal relationship or particular dealing or transaction between them.’ In striking out the claims based on fiduciary duties alleged to be owed to the shareholders, Nugee J went on to state that if a director is to be held to owe fiduciary duties to shareholders there must be something unusual in the relationship which gives rise to those duties.336 Older cases indicate a duty on directors properly to inform, but also to advise where they are making a recommendation to a general meeting to support a resolution put forward.337

NO REFLECTIVE LOSS 2.58 However, as explained in Chapter 8, shareholders bringing a claim against a director will only be able to recover damages in respect of their personal loss, which must be separate and distinct from any loss suffered by the company itself. These different and distinct losses were identified in the context of advice relating to a takeover offer and conveniently explained by Lawton LJ in Heron International Ltd v Lord Grade.338 In Sharp v Blank339 it was agreed that the reflective loss rule does not apply in those particular circumstances.

RELIEF FROM LIABILITY – SECTION 1157 2.59 Section 1157 of the 2006 Act gives the court discretion to grant relief to a director (or other officer of a company) from the consequences of a breach of duty, 334 [2015] EWHC 3220 (Ch), [2017] BCC 187, ChD. 335 At [12]. 336 At [13]. 337 Eg Peel v London & North Western Railway Co [1907] 1 Ch 5 at 16; Tiessen v Henderson [1889] 1 Ch 861 at 866–67. 338 [1983] BCLC 244, CA, at 261f–263e. See also Gardner v Parker [2004] EWCA Civ 781, [2004] 2 BCLC 554, CA, per Neuberger LJ at [60]. 339 [2015] EWHC 3220 (Ch), [2017] BCC 187, ChD.

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2.59  Directors and their Duties

in whole or in part.340 A director may seek such relief from the consequences of his negligence, default, breach of duty or breach of trust. The section is applicable to claims brought against the director by the company, a liquidator or a shareholder for breach of the general duties and other duties under the 2006 Act and potentially extends to proprietary as well as personal claims341. However, it does not apply to a director’s liability in respect of a debt due to a third party.342 The section gives the court a discretion to grant relief where it considers that the director has acted honestly and reasonably and, in all the circumstances of the case,343 he ought fairly to be excused. As the wording of the section indicates, it is necessary for the director to establish that he acted both honestly and reasonably344 before the discretion of the court is engaged. The court’s discretion to relieve directors from liability arising from their breaches of fiduciary duties in particular will not be lightly exercised345 but the exercise of the discretion will always be highly fact specific.346 Directors who are highly paid may be less likely to be excused than those who act gratuitously or for nominal remuneration347 and the test of reasonableness is an objective one, by reference to the knowledge and skill of the particular director.348 The question of whether a director acted honestly is judged subjectively349 although in the absence of evidence to the contrary the director is assumed to have acted honestly.350 A director will need to call evidence to establish his conduct was fair and reasonable and cannot

340 A shadow director or de facto director will not be found liable for breach of duty where a de jure director who had committed the same breach would be entitled to relief under section 1157; Instant Access Properties (In Liquidation) v Rosser [2018] EWHC 756 (Ch), [2018] BCC 751, at [278], [345] and [355]–[356]. 341 Dickinson v NAL Realisations (Staffordshire) Ltd [2019] EWCA Civ 2146, [2020] BCC 271, at [44]. It also extends to cases where the breach caused the directors to have received an unlawful dividend, although it will usually not be appropriate to grant relief in such a case: Burnden Holdings UK Ltd (In Liquidation) v Fielding [2019] EWHC 1566 (Ch), [2020] BPIR 1, at [413]. 342 Customs and Excise Commissioners v Hedon Alpha [1981] QB 818, CA, and First Independent Factors and Finance Ltd v Mountford [2008] EWHC 835 (Ch), [2008] 2 BCLC 297, ChD. It also does not assist a director who is liable under s 214 of the Insolvency Act 1986 as a result of the company’s wrongful trading: Re Produce Marketing (No 1) [1989] 1 WLR 745, ChD. 343 All the circumstances means the whole of the director’s stewardship of the company but not any matters pertaining to him personally; Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch), per Lewison J at [1451]. 344 A director’s failure to act at all will always be unreasonable: Lexi Holdings Ltd v Luqman [2007] EWHC 2652 (Ch), per Briggs J. However, conduct may be negligent but still reasonable for the purpose of the section; per Hoffmann LJ (sitting as additional judge of the Chancery Division) in Re D’Jan of London [1994] BCLC 561, ChD, at 649, and see Bairstow v Queen Moat Houses plc [2000] 1 BCLC 549, QB. 345 The court will have in mind the intended deterrent function of the potential harshness of the strict application of rules against fiduciaries: Re Tobian Properties Ltd [2012] EWCA Civ 998, [2013] 2 BCLC 567, CA, at [23]; Towers v Premier Waste Management Ltd [2011] EWCA Civ 923, [2012] 1 BCLC 67, CA. 346 For example, where a director takes the only practical course open to her, takes early advice and acts on it and causes no significant prejudice by her breach, relief will be appropriate; Patel v Ferdinand (unreported, 11 July 2016), per HHJ Purle QC; the court will distinguish the degree of involvement in and culpability for a breach of duty by several directors and may exercise its discretion to relieve one of liability but no others: SSF Realisations Ltd v Loch Fyne [2020] EWHC 3521 (Ch), [2021] BCC 354, at [165]–[169]. 347 See National Trustees Co of Australasia v General Finance Co of Australasia [1905] AC 373 (PC) at 381. 348 Cullen Investments Ltd v Brown [2017] EWHC 2793 (Ch). 349 Coleman Taymar Ltd v Oakes [2001] 2 BCLC 749 at [83]. 350 Re Kirby Coaches Ltd [1991] BCLC 414, ChD, per Hoffmann J at 415.

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Relief from liability – section 1157 2.59

rely on general statements and inferences.351 However, having analysed the case in order to make a finding of breach of duty, the court may deal quite shortly with the question of whether to grant relief.352 Section 1157(2) allows a director who apprehends that a claim might be made against them for breach of duty to apply for relief without waiting for the claim to be brought.

351 See eg Re MDA Investment Management Ltd [2004] EWHC 42 (Ch), [2005] BCC 783, ChD, per Park J at [25]; Richard Hunt Investments Ltd v Hunt [2017] EWHC 988 (Ch). 352 Towers v Premier Waste Management Ltd [2011] EWCA Civ 923, [2012] 1 BCLC 67, CA.

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Chapter 3

Shareholders’ Relationships

Contents Purpose of the chapter

3.1

No fiduciary duty towards one another

3.2

Agreement the source

3.3

Dispensation before the 2006 Act

3.4

The 2006 Act Significant changes The constituent parts of the constitution under the 2006 Act

3.5 3.5 3.8

Interpretation 3.29 General principles 3.29 Implication 3.30 Pre-emption 3.35 As between shareholders 3.36 The 2006 Act 3.39

PURPOSE OF THE CHAPTER 3.1 No company with a share capital can exist without members,1 whether as a single member company,2 a number of family members or friends joining forces to form a company,3 existing partners converting their partnership business to a company,4 or as individual or institutional investors in a global conglomerate. The threads common to all these companies are that they have been established within a statutory regime by agreement; such agreement manifesting itself in the consensus expressed in signing up to a memorandum and articles of association and, often, 1

2 3 4

A member of a company is not necessarily a shareholder, since an unlimited company or a company limited by guarantee may exist without a share capital and without any share to hold. When a company has a capital limited by shares, the shareholders are the only members, if so registered either by virtue of s 113 of the 2006 Act in the members’ register or the central register by virtue of the provisions of Chapter 2A of Part 8 of the 2006 Act. This book concerns itself with companies having a capital limited by shares. The expressions ‘shareholder’ and ‘member’ are accordingly used interchangeably but, in each case, the purpose is to refer to a shareholder as a registered member. See s 123 of the 2006 Act; further 1.28–1.30. The typical quasi-partnership company, being one established on the basis of mutual trust and confidence amongst the corporators. It is axiomatic in such conversion that the principles of mutual trust and confidence inherent amongst partners in a partnership will continue in corporate form.

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3.1  Shareholders’ Relationships

also shareholders’ agreements.5 Shareholders find themselves in a lateral relationship with other shareholders (where there is more than one), as well as in a horizontal relationship with the company, managed by a board of directors (which may consist of one director even if it is a single member company) – many, if not all of whom, coming from the ranks of the shareholders.6 By s 33(1) of the Companies Act 2006 (‘the 2006 Act’), the provisions of a company’s constitution bind the company and its members to the same extent as if there were covenants on the part of the company and of each member to observe those provisions. It has the consequence that members are entitled to enforce their rights in their capacity as members,7 and may enforce them reciprocally.8 The basis for the lateral relationship lies in a company’s constitution. This chapter concerns itself predominantly with the source of the lateral relationship. The horizontal relationship is dealt with elsewhere.9 However, the two basic relationships cannot entirely be divorced from each other. Shareholders are entitled to expect their directors to comply with the explicit rules contained in a company’s constitution and the duties imposed on them by the 2006 Act. If the directors do not, shareholders and the company may take action against them, whether by means of the exercise of their votes at general meeting overruling or dismissing them or by means of appropriate legal action. The shareholders may also have legitimate expectations and interests not expressed in the constitution but which nevertheless bind directors and shareholders alike,10 breach of which may entitle shareholders to some form of relief. Directors stand in a fiduciary relationship to their company11 and, only rarely, in a fiduciary relationship to shareholders.12 The 2006 Act presents a company’s constitution in a somewhat different guise to its predecessors: whereas previous Companies Acts focused on the memorandum and articles of association as the sources of the agreement between the shareholders, the constitution under the 2006 Act encompasses a broader range of additional documentation (such as shareholders’ agreements arrived at among all the shareholders, and company resolutions) minus the memorandum, as part of the constitution, determining shareholders’ rights. The implication of this formulation must be contextualised and the question must be addressed whether interpretations given to the memorandum and articles under previous Companies Act regimes are applicable to the more comprehensive constitution under the 2006 Act.

5

A single person cannot contract with itself; but, once the company has been formed, the constitution with its contractual characteristics regulates the relationship between the company and the single shareholder in addition to s 231 of the 2006 Act which regulates contracts with a sole member who is also a director. Upon the first disposal of a share to a second shareholder, the constitution becomes the source of the relationship between multiple shareholders again, in addition to the provisions of the 2006 Act. 6 The articles of association will determine whether holding shares is a prerequisite for becoming a director. 7 Rayfield v Hands [1960] Ch 1; Hurst v Crampton Bros (Coopers) Ltd [2002] EWHC 1375 (Ch), [2003] 1 BCLC 304, ChD, where the transfer of shares by a member, in breach of pre-emption requirements in articles, was held to be defeasible at the suit of another member. 8 See Wood v Odessa Waterworks Co (1889) LR 42 ChD 636; Welton v Saffery [1897] AC 299, HL, at 315; Hickman v Kent or Romney Marsh Sheep Breeders’ Association [1915] 1 Ch 881. 9 See Chapter 2, which deals extensively with the topic. 10 Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, HL. See also 9.122 ff. 11 See Chapter 2. 12 See Chapters 2 and 4.

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No fiduciary duty towards one another 3.2

NO FIDUCIARY DUTY TOWARDS ONE ANOTHER 3.2 Members, in their capacity as such, do not owe one another any duty of care other than that which arises from agreement – whether under the general law or in a fiduciary capacity.13 So, for instance, a shareholder may, with impunity, cast his vote in whichever way he wishes without taking into account the interests of other shareholders. Attempts to construe fiduciary duties arising from shareholders’ agreements governing matters such as the exercise by members of voting rights have been unsuccessful. Even where the shareholders’ agreement purports to create an agency relationship, attempts at the imposition of fiduciary duties onto contractual ones have failed. In Halton International Inc v Guernroy Ltd,14 Patten J  rejected a claim that fiduciary duties were owed where an examination of the terms of the agreement did not indicate that the agent had agreed to act in the interests of the principal. He cited with approval15 the comments of Mason J in the High Court of Australia in Hospital Products Ltd v United States Surgical Corp:16 ‘In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.’ In other words, in the absence of a term of the agreement by which the agent undertakes the duty of loyalty generally required for a fiduciary relationship to exist,17 contractual and not fiduciary duties are owed. There is also no common law duty of good faith in contract,18 unless specifically agreed.19 Where the effect of the shareholders’ agreement is to give rise to a joint venture, the position may be different.20 13 See Halton International Inc v Guernroy Ltd [2005] EWHC 1968 (Ch), [2006] 1 BCLC 78, ChD, at [135]–[153], where a voting agreement contained in a shareholders’ agreement was held not to impose a fiduciary duty on the person burdened therewith, and Ellard v Andrews [2002] EWHC 2842 (QB); see also Berezovsky v Abramovich [2012] EWHC 2463, QB, where similar contentions did not succeed on the facts. See also the discussion at 7.71. 14 [2005] EWHC 1968 (Ch), [2006] 1 BCLC 78, ChD, at [135]–[153], affirmed by the Court of Appeal [2006] EWCA Civ 801. 15 At [139]. 16 (1984) 156 CLR 81 at 97. See, for the comparable position in partnerships, F&C Alternative Investments (Holdings) Ltd v Barthelemy [2011] EWHC 1731 (Ch), [2012] 3 WLR 10, ChD; and for the principle in general, Khouj v Acropolis Capital Partners Ltd [2016] EWHC 2120 (Comm). 17 Bristol & West Building Society v Mothew [1998] Ch 1, CA, per Millett LJ at 18A–18C. 18 Compare ING Bank NV v Ros Roca SA [2011] EWCA Civ 353, [2012] 1 WLR 472, CA. 19 F&C Alternative Investments (Holdings) Ltd v Barthelemy [2011] EWHC 1731 (Ch), [2012] 3 WLR 10, ChD, at [252]–[259]; McKillen v Misland (Cyprus) Investments Ltd [2012] EWHC 521 (Ch) at [94], [97], [101]–[103]. 20 See eg Ross River Ltd v Waveley Commercial Ltd [2012] EWHC 81 (Ch); Murad v Al-Saraj [2004] EWHC 1235 (Ch) (point not addressed on appeal: [2005] EWCA Civ 959); Attorney-General for Hong Kong v Reid [1994] 1 AC 324, PC (but note that the latter judgment, even though of the Privy Council, was not followed by the Court of Appeal because of a long line of judgments which appeared to establish that the beneficiary of a fiduciary’s duties could not claim a proprietary interest, but was entitled to an equitable account – Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (In Administration) [2011] EWCA Civ 347; [2012] Ch 453 CA); Tang Man Sit v Capacious Investments [1996] AC 514, PC. The potential application of fiduciary duties between joint venturers was reviewed by Nugee J in Glenn v Watson [2018] EWHC 2016 (Ch) at [130]–[34] and considered by Leggat LJ in Al Nehayan v Kent [2018] EWHC 614 (Comm) at [159]–[165]. See also the discussion at 7.71.

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3.3  Shareholders’ Relationships

AGREEMENT THE SOURCE 3.3 The essence of the legal relationship in which shareholders stand to one another is contractual: ‘The contract contained in the articles of association is one of the original incidents of the share’.21 In Jones v Garnett (Inspector of Taxes),22 Lord Hope of Craighead put it that ‘[t]he rights which attach to shares in a company depend on the contractual relations between the holders of those shares as defined by the articles of association of the company’. Hoffmann LJ said of articles in Re Saul Harrison & Sons plc:23 ‘The articles of association are just what their name implies: the contractual terms which govern the relationships of the shareholders with the company and each other. They determine the powers of the board and the company in general meeting and everyone who becomes a member of a company is taken to have agreed to them. Since keeping promises and honouring agreements is probably the most important element of commercial fairness, the starting point in any case under s 45924 will be to ask whether the conduct of which the shareholder complains was in accordance with the articles of association.’ Apart from the articles of association, shareholders have always been, and still are, entitled to arrange aspects of their affairs by shareholders’ agreements. When all the shareholders enter into such an agreement, its status is elevated to a constituent part of the constitution. Previous Companies Acts provided, and the 2006 Act currently provides, for model articles of association as a default document,25 determining upon their adoption without change the contract between the shareholders. Amendments thereto, or even total substitution thereof by terms agreed upon by the corporators, are permitted. The freedom to contract is a fundamental building block of shareholders’ relationships. As much as the first subscribers to a memorandum of association consent to abide by the rules determined in the articles of association upon incorporation, as much all subsequent shareholders are bound thereby. Ultimately, one set of regulations apply to all shareholders, whether there is one class (or more) of shareholders. Prospective shareholders are able to familiarise themselves with those rules which will regulate their relationship with current shareholders and the company, because companies’ constitutional documents are freely accessible for public scrutiny.26 This does not derogate from the freedom of certain shareholders only to regulate affairs between themselves. Nobody other than the contracting parties is bound by such an agreement.

21

22 23 24 25 26

Borland’s Trustee v Steel Brothers & Co Ltd [1901] 1 Ch 279 at 288. See also Wake-Walker v AKG Group Ltd [2003] EWCA Civ 375, [2003] 2 BCLC 102, CA, per Arden LJ at [42]; Re Claygreen Ltd [2005] EWHC 2032 (Ch), [2006] 1 BCLC 715, ChD, at [53] where it was emphasised that a share in a company should be thought of as a bundle of rights, which has existence by virtue of the company’s articles. [2007] 1 WLR 2030, HL, at [35]. [1995] 1 BCLC 14, CA, at 17i–18a. Of the 1985 Act, the predecessor of s 994 of the 2006 Act. Section 20 of the 2006 Act. Sections 1085 and 1086 of the 2006 Act.

72

Dispensation before the 2006 Act 3.4

DISPENSATION BEFORE THE 2006 ACT 3.4 Prior to the 2006 Act, articles of association were considered to be subordinate to the memorandum of association. The memorandum defined the powers of the company, whereas the articles defined the duties, rights and powers of the shareholders as between themselves and the company at large.27 Ambiguities between the articles and the memorandum were first sought to be reconciled. If unresolved, the memorandum prevailed.28 The Companies Act 1985 (‘the 1985 Act’) is representative of the position prior to the 2006 Act: any two or more persons associated for a lawful purpose could – by subscribing their names to a memorandum of association and otherwise complying with the requirements of the 1985 Act in respect of registration – form an incorporated company29 with or without limited liability.30 A  company could be either a public company31 or a private company. A private company’s articles included three kinds of restrictions: (a) a restriction on the transfer of shares; (b) a limitation on the number of its members to 50 (excluding employees and ex-employees); and (c) a prohibition of any invitation to the public to subscribe to its shares or debentures. By section 2(1) of the 1985 Act, the memorandum had to state the name of the company, its location, its objects, and the number of shares each subscriber subscribed to.32 A company was not permitted to alter the conditions contained in its memorandum except as expressly provided for by the 1985 Act.33 The requirement of stating the objects had had a profound influence on the powers of a company, because conduct of its affairs outside the ambit and scope of its objects invoked the ultra vires rule to determine whether or not it was bound by a contract with a third party.34 In the case of a company limited by shares, the articles of association were signed by the subscribers to the memorandum, and registered with the memorandum.35 Section 27 Ashbury v Watson (1885) LR 30 ChD 376, CA. 28 Guinness v Land Corporation of Ireland (1883) LR 22 ChD 349, CA, at 376; Ashbury v Watson (1885) 30 ChD 376; Angostura Bitters (Dr JGB Siegert & Sons) Ltd v Kerr [1933] AC 550, PC, at 554; Re Duncan Gilmour & Co Ltd [1952] 2 All ER 871, ChD, at 874. 29 A company so formed could have been a company limited by shares, a company limited by guarantee, or an unlimited company: s 1(2) of the 1985 Act. 30 Section 1(1) of the 1985 Act. In terms of s 1(3A), one person was permitted, for a lawful purpose, to subscribe to a memorandum of association and form a company. Under s 38 of the 2006 Act, any enactment or rule of law applicable to companies formed by two or more persons or having two or more members applies with any necessary modification in relation to a company formed by one person or having only one person as member as provided for in s 123 of the 2006 Act. 31 See s 1(3) of the 1985 Act. This section was derived from s 11 of the Companies Act 1948, and ss 11, 2, 21 and Sch 3, para 2 of the Companies Act 1980. 32 Section 2(5) of the 1985 Act. 33 Section 2(7) of the 1985 Act. Such provision as envisaged in the sub-section was made in, for instance, s 4 (objects), s 17 (conditions which could have been in articles), s 28 (name), ss 43–53 (change of status), ss 121 and 147 (share capital), s 307 (unlimited liability of officers), s 425 (scheme of arrangement), and ss 459 and 461 (unfair prejudicial conduct). 34 Rolled Steel Products (Holdings) Ltd v British Steel & Corp [1986] Ch 246, CA. This provision was somewhat ameliorated by the introduction of s 3A of the 1985 Act with effect from 4 February 1991: if the company’s memorandum stated that the object of the company was to carry on business as a general commercial company, the object of the company was to carry on any trade or business whatsoever and the company had power to do all such things as were incidental or conducive to the carrying on of any trade or business by it. 35 Section 7(1) of the 1985 Act.

73

3.5  Shareholders’ Relationships

8(1) of the 1985 Act provided for the use of model articles, which could be adopted in whole or in part as a company’s articles.36 A company was permitted to alter its articles.37 The memorandum and articles bound the company and its members to the same extent as if they had been signed and sealed by each member respectively, and contained covenants on the part of each member to observe all the provisions of the memorandum and the articles.38

THE 2006 ACT Significant changes 3.5 Whereas, previously, the memorandum and the articles expressed the contractual relationship between members,39 section 33(1) of the 2006 Act introduced the ‘constitution’ as the source of contractual relationships: ‘The provisions of a company’s constitution bind the company and its members to the same extent as if there were covenants on the part of the company and of each member to observe those provisions’. The 2006 Act does not include the memorandum of association as part of the constitution. It has been relegated to a subordinate role, since a statement of the objects of a company is no longer required. The default position under the 2006 Act is that a company’s objects are unrestricted unless expressly restricted by the articles.40 In contrast to the 1985 Act,41 the 2006 Act deals with the memorandum of association and the constitution in different parts.42 The contractual elements of memoranda of association, by which companies were established under the dispensation before the 2006 Act, continue their existence by deeming them to be part of the articles of association.43 Transitional provisions44 relevant to this chapter are to the effect that nothing in the 2006 Act affects the registration or re-registration of a company under the former Companies Acts45 or the continued existence of a company by virtue of such registration or re-registration.46

36 37 38 39 40 41 42 43 44 45

46

Section 8(2) of the 1985 Act. Section 9(1) of the 1985 Act. Section 14(1) of the 1985 Act. Section 14(1) of the 1985 Act. Section 31(1) of the 2006 Act. It dealt with both the memorandum and the articles in one part: Pt I, Ch 1. Respectively Pt 2 (Company Formation) and Pt 3 (A Company’s Constitution). Section 28 of the 2006 Act. This applies not only to substantive provisions but also to provisions relating to entrenchment (see s 28(2), (3)). By Companies Act 2006 (Commencement No 8, Transitional Provisions and Savings) Order 2008, SI 2008/2860, art 5, read with Sch 2, para 1 (the ‘Transitional Provisions’). By s 2(1) of the 2006 Act, ‘The Companies Acts’ are defined as (a) the company law provisions of this Act, (b) Pt 2 of the Companies (Audit, Investigations and Community Enterprise) Act 2004 (c 27) (community interest companies), and (c) the provisions of the Companies Act 1985 (c 6) and the Companies Consolidation (Consequential Provisions) Act 1985 (c 9) that remain in force. By s 2(2), the company law provisions of the Act are (a) the provisions of Pts 1 to 39 and (b) the provisions of Pts 45 to 47 of the 2006 Act insofar as they apply for the purposes of those Parts. By para 1(1) of Sch 2 to the Transitional Provisions (above), those relating to Table B in the Joint Stock Companies Act 1856, Table A in any of the former Companies Acts, or the Companies (Tables A to F) Regulations 1985.

74

The 2006 Act 3.7

3.6 The concept of a ‘constitution’ appropriately describes the totality of the founding documentation establishing and regulating relationships within the company. By section 17 of the 2006 Act, unless the context otherwise requires, references in the Companies Acts47 to a company’s constitution include the company’s articles and any resolutions and agreements to which Chapter  3 of the Act applies. These resolutions and agreements are:48 (a) any special resolution;49 (b) any resolution50 or agreement agreed to by all the members of a company51 that, if not so agreed to, would not have been effective for its purpose unless passed as a special resolution; (c) any resolution or agreement agreed to by all the members of a class of shareholders that, if not so agreed to, would not have been effective for its purpose unless passed by some particular majority, or otherwise, in some particular manner; (d) any resolution or agreement that effectively binds all members of a class of shareholders though not agreed to by all those members;52 and (e) any other resolution or agreement to which Chapter 3 applies by virtue of any enactment. By section 257(2) of the 2006 Act, the matters referred to in section 257(1) must be added to this list. These categories are dealt with individually in the next section. 3.7 By their nature, special resolutions have always been required to be filed with the registrar. Their recognition as part of the constitution is, accordingly, not surprising. On the contrary, shareholders’ agreements unanimously arrived at can no longer be hidden from public scrutiny where they include provisions that, in order to be effective, would otherwise need to be implemented by the passing of a special resolution. They become part and parcel of the company’s constitution and will be binding on all members at the time and those joining thereafter. Agreements between any number of members less than all the members or a class of members (whichever is the position) are not included in the constitution but will continue to bind the parties thereto, but not new shareholders.

47 48

49 50 51 52

See footnote 45 for definition of the ‘Companies Acts’. Section 29(1) of the 2006 Act. For purposes of Pt 10 (A Company’s Directors), s 257(1) provides that references to the constitution include (a) any resolution or other decision come to in accordance with the constitution, and (b) any decision by the members of the company, or a class of members, that is treated by virtue of any enactment or rule of law as equivalent to a decision by the company. By s 283 of the 2006 Act, a special resolution requires a majority of 75% of the members, or any class of members, to which such a resolution is put. See, for ordinary resolutions, s 282 of the 2006 Act and in general, for resolutions adopted by companies, Pt 13 of the 2006 Act. By s 29(2) of the 2006 Act, references in s 29(1) to a member of a company, or of a class of members of a company, do not include the company itself where it is such a member by virtue only of its holding shares as treasury shares. For a history and theoretical background of the construction and exercise of powers conferred on a majority to bind a minority within a class, see Assénagon Asset Management SA v Irish Bank Resolution Corp Ltd [2012] EWHC 2090 (Ch), [2013] 1 All ER 495, ChD at [40]–[43].

75

3.8  Shareholders’ Relationships

Although the formation of a company under the 2006 Act cannot happen without one or more persons subscribing their names to a memorandum of association53 expressing their agreement to become members of the company54 and complying with the requirements of the 2006 Act regarding registration,55 the memorandum of association warrants no further discussion for current purposes.

The constituent parts of the constitution under the 2006 Act The articles of association56 3.8 A  company is obliged to have articles of association prescribing regulations for the company.57 Articles of association have to be understood by anybody who inspects the register at Companies House, either with a view to becoming a party to the statutory contract by buying shares, or simply to deal with the company.58 By section 19 of the 2006 Act, the Secretary of State is empowered to prescribe model articles. Different model articles may be prescribed for different descriptions of a company.59 The Secretary of State has done so.60 Schedule  1 to the regulations prescribes the model articles of association for private companies limited by shares.61 Schedule  3 prescribes the model articles of association for public companies.62 If, on registration of a limited company, articles are not registered or, if articles are registered, insofar as they do not exclude or modify the relevant model articles, the relevant model articles (so far as applicable) form part of the company’s articles in the same manner and to the same extent as if articles in the form of those articles had been registered.63 Where articles which had been drafted before the 2006 Act provided for majority voting on written resolutions and had used unambiguous language, the court could not rewrite them, but could make an order under section 306 of the 2006 Act to convene a company meeting in the absence of the company director.64

53 54 55

56 57 58 59 60 61 62 63 64

Section 7 of the 2006 Act. Section 8(1) of the 2006 Act. See ss 9–13 of the 2006 Act. Attention is drawn to some significant further information which must accompany the application for registration, by virtue of amendments to ss 9, 10 and 12 of the 2006 Act effective 30 June 2016. See also the insertion of s 12A (Statement of initial significant control) and Pt 21A (Information about People with Significant Control) with effect from 26 May 2015. By s 18(4) of the 2006 Act, references in the Companies Acts to a company’s ‘articles’ are to its articles of association. References to ‘articles’ in this work bears the same meaning. Section 18(1) of the 2006 Act. Re Euro Accessories Ltd [2021] EWHC 47 (Ch), [2021] BCC 401, at [30]. Section 19(2) of the 2006 Act. Companies (Model Articles) Regulations 2008, SI 2008/3229. Regulation 2. It covers substantially the same, but not all, matters dealt with by Table A of the Companies (Tables A to F) Regulations 1985, SI 1985/805. Regulation 4. There was no counterpart in the Companies (Tables A to F) Regulations 1985, SI 1985/805. Since this book does not, by its nature, deal with companies limited by guarantee, it does not deal with Sch 2, which contains the model articles for such companies. Section 20(1) of the 2006 Act. Puzitskaya v St Paul’s Mews (Islington) Ltd [2017] EWHC 905 (Ch).

76

The 2006 Act 3.10

The specific nature of articles 3.9 By section 33(1) of the 2006 Act, the provisions of a company’s constitution (which includes the articles) bind the company and its members to the same extent as if there were covenants on the part of the company and of each member to observe those provisions. By virtue of these provisions, the constitution (including the articles) becomes, upon registration, a contract between the members inter se, on the one hand, and between the members and the company on the other. This apparently straightforward proposition was originally a topic of hot dispute. It was not until 1915 that Astbury J  settled the issue in Hickman v Kent or Romney Marsh Sheep Breeders Association.65 He was called upon to choose between divergent views expressed by courts and textbook writers at the time66 and concluded that: (a) articles of association cannot constitute a contract between the company and a third person; (b) no enforceable right can be given by an article to a person, whether a member or not, in a capacity other than that of a member, as, for instance, a solicitor, promoter or director; and (c) articles regulating the rights and obligations of the members generally as such do create rights and obligations between them and the company respectively.67 3.10 In Bratton Seymour Service Co Ltd v Oxborough,68 Steyn LJ highlighted certain peculiarities attributed to articles of association: it is a statutory contract of a special nature with its own distinctive features.69 It derives its binding force not from a bargain struck between parties70 but from the terms of the statute.71 It is, unlike an ordinary contract, not defensible on the grounds of misrepresentation, common law mistake, mistake in equity, undue influence or duress. It cannot be rectified on the grounds of mistake. By rectification, a party may seek to correct a written agreement because it does not reflect the true terms at the time they were made.72 However, 65 66

[1915] 1 Ch 881. The principal authorities, in support of the view that the articles did not constitute a contract between the company and its members, were Pritchard’s case (1873) LR 8 Ch 956; Melhado v Porto Alegre Ry Co (1874) LR 9, CP 503; Eley v Positive Life Assurance Co (1876) Ex D 20, 88; Browne v la Trinidad (1887) 37 ChD 1. The contrary view – which held that a company is entitled, as against its members, to enforce and restrain breaches of its regulations – was enunciated in MacDougall v Gardiner (1875) 1 ChD 13; Pender v Lushington (1877) 6 ChD 70; and Imperial Hydropathic Hotel Co (1882) 23 ChD 1, 13. 67 [1915] 1 Ch 881 at 900. 68 [1992] BCLC 693, CA. 69 At 698c–698e. See also the judgment of Dillon LJ at 696f–696i to similar effect. 70 This statement should be questioned. Corporators are not obliged to use the model articles, but may draft their own, not corresponding in a single respect with the model articles, but reflecting the consensus arrived at between them. So, although the statute facilitated the creation of an own set of rules, in such an instance the parties thereto are bound by their consensus, by agreement, rather than by the prescripts of the Companies Act. 71 Compare Scott v Frank F Scott (London) Ltd [1940] Ch 794, CA. 72 See the summary provided by David Steele J in Investec Bank (UK) Ltd v Zulman [2009] EWHC 1590 (Comm) at [75], affirmed on appeal ([2010] EWCA Civ 536). This judgment followed shortly on the judgment of the House of Lords in Chartbrook v Persimmon Homes Ltd [2009] 1 AC 1101, overruling the judgment of the Court of Appeal ([2008] 2 All ER (Comm) 387). In the Court of Appeal, Lawrence Collins LJ restated the principles at [133]–[138]. It was not necessary for the House of Lords to consider the summary, yet, obiter (at [32], [60]), it accepted the contention that, in claims for rectification, the question was what an objective observer would have thought the interventions of the parties to have been. Accordingly, para [136] of Lawrence Collins LJ’s summary may have to be reviewed. Chartbrook v Persimmon Homes Ltd has consistently been followed for example in Arnold v Britton [2015] UKSC 36; Milton Keynes BC v Viridor (Community Recycling MK) Ltd [2017] EWHC 239 (TCC).

77

3.11  Shareholders’ Relationships

rectification cannot apply in relation to the articles, due to its statutory basis.73 That is the position if the constitution does not accord with the concurrent intention of all the signatories at the time of signing the memorandum. The articles come into being in accordance with a statute and the statute does not make provision for rectification. The remedy is to effect alterations to the articles in accordance with the 2006 Act.74 In matters where rectification is permissible, it has to be established that the parties were in agreement regarding the true terms. If such a state of affairs exists in relation to articles, their consensus can just as well be reflected in an amendment to the articles in the prescribed manner.

Amendment of articles 3.11 Once incorporated, a company’s articles of association are not cast in stone. Events in the course of a company’s lifetime may warrant adjustment to the articles. It is the one document in the batch comprising the constitution which, with statutory blessing, may be amended. By section 21(1) of the 2006 Act, a company may amend its articles by special resolution. Rectification being impossible,75 a mistake in the articles, as originally framed, should be corrected by amending the articles, thereby seeking fresh consensus between the members at the time. It is likely to be possible for an amendment to be achieved by the consensus of all the members entering into a shareholders’ agreement which expressly varies the terms of the articles. Directors do not have the power to alter the articles by resolution.76 The power conferred by section 21 may not be abused by a majority of members so as to cause unfair prejudice to the minority. A resolution to amend articles must be taken in good faith for the benefit of the company as a whole.77 ‘Good faith’ and ‘for the benefit of the company as a whole’ are not two separate standards; it is a single norm.78 In Citco Banking NV v Pusser’s Ltd,79 the Privy Council examined the authorities and rephrased the test by asking whether, in the opinion of the shareholders, the alteration of the articles was for the benefit of the company and whether there were grounds on which reasonable men could come to the same decision.80 Shareholders potentially benefiting by an amendment are not debarred from voting if they bona fide consider

73

74 75 76 77 78 79 80

Scott v Frank F Scott (London) Ltd [1940] Ch 794, CA; Bratton Seymour Service Co Ltd v Oxborough [1992] BCLC 693, CA. For the comparable position relating to a charge over land, where the public similarly have access to the documentation, and where rectification was refused on that ground, see Cherry Tree Investments Ltd v Landmain Ltd [2012] EWCA Civ 736, [2013] Ch 305, CA; see also Re BCA Pension Trustees Ltd [2015] EWHC 3492 (Ch), [2016] 4 WLR 5, ChD; Monsolar IQ Ltd v Woden Park Ltd [2021] EWCA Civ 961, [2021] 6 WLUK 392. Discussed at 3.11–3.13. It follows that a court will not order rectification in the course of proceedings: Evans v Chapman (1902) 86 LT 381; Scott v Frank F Scott (London) Ltd [1940] Ch 794, CA. Re British Provident Life and Guarantee Association, De Ruvigne’s Case (1877) LR 5 ChD 306, CA. Allen v Gold Reefs of West Africa [1900] 1 Ch 656, CA; Sidebottom v Kershaw, Leese & Co [1920] 1 Ch 154, CA; Greenhalgh v Arderne Cinemas [1951] Ch 286, CA; Assénagon Asset Management SA v Irish Bank Resolution Corp Ltd [2012] EWHC 2090 (Ch), [2013] 1 All ER 495, ChD, at [73]. Shuttleworth v Cox Bros & Co [1927] 2 KB 9, CA; Greenhalgh v Arderne Cinemas [1951] Ch 286, CA; Assénagon Asset Management SA v Irish Bank Resolution Corp Ltd [2012] EWHC 2090 (Ch), [2013] 1 All ER 495, ChD. [2007] UKPC 13, [2007] 2 BCLC 483, at [12]–[18]. At [24]–[27].

78

The 2006 Act 3.11

that the amendment is in the interests of the company as a whole, and there has been no attack on their bona fides.81 This was particularly the case in Re Charterhouse Capital Ltd.82 In a so-called tidying up exercise all the shareholders, with the exception of the petitioner, voted in favour of an alteration of the articles to ensure that the petitioner would abide by a drag provision. It was held to be a valid amendment. The court summarised the applicable principles83 in the following terms:84 ‘(1) The limitations on the exercise of the power to amend a company’s articles arise because, as in the case of all powers, the manner of their exercise is constrained by the purpose of the power and because the framers of the power of a majority to bind a minority will not, in the absence of clear words, have intended the power to be completely without limitation. These principles may be characterised as principles of law and equity or as implied terms … (2) A power to amend will be validly exercised if it is exercised in good faith in the interests of the company … (3) It is for the shareholders, and not the court, to say whether an alteration of the articles is for the benefit of the company but it will not be for the benefit of the company if no reasonable person would consider it to be such … (4) The view of shareholders acting in good faith that a proposed alteration of the articles is for the benefit of the company, and which cannot be said to be a view which no reasonable person could hold, is not impugned by the fact that one or more of the shareholders was actually acting under some mistake of fact or lack of knowledge or understanding: …. In other words, the court will not investigate the quality of the subjective views of such shareholders. (5) The mere fact that the amendment adversely affects, and even if it is intended adversely to affect, one or more minority shareholders and benefit others does not, of itself, invalidate the amendment if the amendment is made in good faith in the interests of the company: …. (6) A power to amend will also be validly exercised, even though the amendment is not for the benefit of the company because it relates to a matter in which the company as an entity has no interest but rather is only for the benefit of shareholders as such or some of them, provided that the amendment does not amount to oppression of the minority or is otherwise unjust or is outside the scope of the power … (7) The burden is on the person impugning the validity of the amendment of the articles to satisfy the court that there are grounds for doing so …’ 81 82 83

84

At [27]. [2015] EWCA Civ 536, [2015] BCC 574, CA. Recently applied in Peter John Tribe v Elborne Mitchell LLP [2021] EWHC 1863 (Ch) at [75] and [81]. Derived from the following case law: Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656; Sidebottom v Kershaw Leese and Co Ltd [1920] 1 Ch 154; Shuttleworth v Cox Broas and Co (Maidenhead) Ltd [1927] 2 KB 9, Peters’ American Delicacy Co v Heath (1939) 61 CLR 457; Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286; Citco Banking Corp NV v Pusser’s Ltd [2007] UKPC 13, [2007] BCC 205, PC; and Assenagon Asset Management SA v Irish Bank Resolution Corp Ltd [2012] EWHC 2090 (Ch), [2013] 1 All ER 495, ChD. At [90].

79

3.12  Shareholders’ Relationships

The 2006 Act does not provide for any overriding effect of registration in the event of conflict between what was agreed and what was registered: status as articles does not depend on registration.85 3.12 A  company cannot contract itself out of the statutory right to alter its articles,86 nor does it have the power to alter its articles for the purpose of committing a breach of contract.87 A claimant agreed with a company to be entitled to appoint two directors to the board as long as the claimant held 5,000 shares. This agreement was entrenched in the articles. The company thereupon objected to the two directors nominated by the claimant. The company sought to amend the articles by removing the clause entitling the claimant to nominate its directors. It was held that the company had no power to alter its articles for the purpose of committing a breach of contract.88 A  shareholder who takes up shares in a company, where the articles permit amendments, does so in the knowledge that a subsequent amendment may affect his shareholding.89 Whether or not the articles provide therefor, anyone taking up shares after commencement of section 21(1) of the 2006 Act90 does so with knowledge of a company’s right to amend its articles by special resolution. However, alterations to a company’s articles do not always bind a member. By section 25(1) of the 2006 Act, a member of a company is not bound by an alteration to articles after the date on which he became a member if, and so far as, the alteration– (a)

requires him to take up or subscribe for more shares than the number held by him on the date at which the alteration is made, or (b) in any way increases his liability as at that date to contribute to the company’s share capital, or otherwise, to pay money to the company. If the member expressly agrees in writing to be so bound, he cannot escape the consequences of the alteration.91 3.13 By section 22(1) of the 2006 Act, a company’s articles may contain a provision for entrenchment. It means that specified provisions of the articles may be amended or repealed only if certain conditions are met or procedures complied with, which are more restrictive than those required for passing a special resolution. Provision for entrenchment does not prevent amendment to the company’s articles by agreement of all the members of the company,92 nor does it affect the power of a court93 or other authority to alter a company’s articles.94 At present, these provisions are somewhat academic, as the all-important section 22(2) has not been brought into force yet.95 Section 22(2) determines that provision for entrenchment may only be made in the company’s articles upon formation or by an amendment of the company’s 85 86 87 88 89 90 91 92 93 94 95

Gunewardena v Conran Holdings Ltd [2016] EWHC 2983 (Ch), [2017] BCC 135, Ch. Punt v Symons & Co Ltd [1903] 2 Ch 506; Russell v Northern Bank Development Corp Ltd [1992] 1 WLR 588, HL. Allen v Gold Reefs of West Africa [1900] 1 Ch 656, CA, at 673; British Equitable Assurance Company Ltd v Baily [1906] AC 35 at 36. British Murac Syndicate v Alperton Rubber Co [1915] 2 Ch 186. Allen v Gold Reefs of West Africa [1900] 1 Ch 656, CA. On 1 October 2009, by SI 2008/2860, art 3(c), Sch 2, para 4(1). Section 25(2) of the 2006 Act provides that s 25(1) does not apply in a case where the member agrees in writing, either before or after the alteration is made, to be bound by the alteration. Section 22(3) of the 2006 Act. For instance, pursuant to orders made under s 996 of the 2006 Act. Section 22(4) of the 2006 Act. As at 1 November 2021.

80

The 2006 Act 3.14

articles agreed to by all the members of the company.96 Nothing prevents existing entrenched provisions from being carried forward as entrenched articles. By section 84 of the Small Business, Enterprise and Employment Act 2015 share warrants to bearer were abolished with effect from 26  May 2015. If, prior to that date a company’s articles contain a provision authorising the company to issue share warrants, the company may amend its articles for the purpose of removing the offending provision: (a) without having passed a special resolution as required by section 21 of the 2006 Act; and (b) without complying with any provision for entrenchment which is relevant to the offending provision as provided for in section 22 of the 2006 Act.97

Limitation on shareholders’ contractual rights 3.14 In the case of public companies, a company may give notice to any person whom the company knows or has reasonable cause to believe: (a) to be interested in98 the company’s shares; or (b) to have been so interested at any time during the three years immediately preceding the date on which the notice is issued.99 The notice may require the person to confirm that fact or not, and if he holds, or has during that time held, any such interest, to give such further information as may be required in accordance with subsections (3) and (4).100 It may include: (a) the identity of persons interested in the shares in question; and (b) whether persons interested in the same shares are or were parties to: (i) an agreement to which s 824 applies;101 or (ii) an agreement or arrangement relating to the exercise of any rights conferred by the holding of the shares.102 Considerable consequences flow upon non-compliance with the notice. The company may apply to court for an order directing that the shares in question be subject to restrictions.103 The restrictions include orders that: (a) any transfer of shares is void; (b) no voting rights are exercisable in respect of the shares; (c) no further shares may be issued in right of the shares or in pursuance of an offer made to their holder; (d) except in a liquidation, no payment may be made of sums due from the company on the shares, whether in respect of capital or otherwise.104 Moreover, where shares are subject to the restriction in (a) above, an agreement to transfer the shares is void;105 where shares are subject to the restriction in subsection (c) or (d) above, an agreement to transfer any right to be issued with other shares in right of those shares, or to receive any payment on them (otherwise than in a liquidation), is void.106

96

See, further, the related provisions in ss 23, 24 of the 2006 Act, which are similarly largely rendered academic until the coming into force of s 22(2). 97 Sections 85(1) and (2) of the Small Business, Enterprise and Employment Act 2015. 98 See further ss 820–825 of the 2006 Act defining an interest. 99 Section 793(1). And see generally the discussion in Eclairs Group Ltd v JKX Oil & Gas Plc [2015] UKSC 71, at [9]–[13], on these aspects by a unanimous court. 100 Section 793(2). 101 Certain share acquisition agreements. 102 Section 793(5). 103 Section 794. 104 Section 797(1). 105 Section 797(2). 106 Section 797(3).

81

3.15  Shareholders’ Relationships

In Eclairs Group Ltd v JKX Oil & Gas Plc107 the articles under consideration contained a provision similar to the trilogy of sections of the 2006 Act dealt with above. The court held that the articles had a threefold purpose:108 to induce shareholders to comply with a disclosure notice; to protect the company and its shareholders against having to make decisions about their respective interests in ignorance of relevant information; and to serve a punitive purpose.

Special resolutions 3.15 By section 29(1)(a) of the 2006 Act, special resolutions form part of the constitution. Even though attainable by a vote of only some of the members (albeit a substantial majority of them), a special resolution binds all the members at the time and all those who subsequently become members. A special resolution of the members (or a class of members) means a resolution passed by a majority of not less than 75% in meeting.109 A written special resolution is passed by a majority of not less than 75% if it is passed by members representing not less than 75% of the total voting rights of eligible members.110 There are two methods of arriving at a special resolution. The first appertains to private companies, which may make a special resolution in writing111 if it is expressly stated that it was proposed as a special resolution. If so stated, it may only be passed as such. The second, applicable to all companies, concerns a resolution passed at a meeting on a show of hands. It must be passed by a majority of not less than 75% of the votes cast by those entitled to vote.112 A resolution passed on a poll taken at a meeting is passed by a majority of not less than 75% if it is passed by members representing not less than 75% of the total voting rights of the members who (being entitled to do so)113 vote on the resolution.114 Where a resolution is passed at a meeting, the resolution is not a special resolution unless the notice of the meeting included the text of the resolution and specified the intention to propose the resolution as a special resolution.115 If the notice of the meeting so specified, the resolution may only be passed as a special resolution.116

Resolutions or agreements agreed to by all the members The Duomatic principle 3.16 By section 29(1)(b) of the 2006 Act, a further category of constitutional documents is introduced, namely resolutions or agreements agreed to by all the members that, if not so agreed to, would not have been effective for its purpose 107 [2015] UKSC 71. 108 At [32]. 109 Section 283(1) of the 2006 Act. 110 Section 283(2) of the 2006 Act. 111 Section 283(3) of the 2006 Act. 112 Section 283(4) of the 2006 Act. 113 See s 322A of the 2006 Act. 114 Section 283(5) of the 2006 Act. 115 Section 283(6)(a) of the 2006 Act. See In re Uniq plc [2011] EWHC 749 (Ch) at [27] for its practical application. 116 Section 283(6)(b) of the 2006 Act.

82

The 2006 Act 3.16

unless passed as a special resolution. The provision puts substance over form and gives effect to the Duomatic principle,117 which Neuberger J summarised as follows in Re Torvale Group Ltd:118 ‘The essence of the Duomatic principle is that, where a statute or a company’s articles provide that a course can be taken only with the sanction of a certain group, which sanction is to be given in accordance with a prescribed procedure, then, provided that all the members of that group agree to that course, the prescribed procedure is not normally treated as being of the essence. This is particularly likely to be the case if (i) the court is satisfied that the sole purpose of the prescribed procedure is for the protection of the members of the relevant group, and (ii) the prescribed procedure enables a majority of that group to bind the minority in relation to the course in question. The articles constitute a contract, are happy unanimously to waive or vary the prescribed procedure for a particular purpose, then, unless there is a ground of the sort considered in Peak119 and Wright120 for the Duomatic principle not to be applied, it seems to me that there is no good reason why it should not be capable of applying.’ The Duomatic principle is based on agreements121 made by all the members, ie  registered shareholders,122 at the time. The members’ or central register is conclusive for determining the identity of the shareholders123 This is well illustrated in Re BW Estates Ltd124 where there were two entries on the register: one in respect of an individual who was the sole director of the company holding 75%; the other a company no longer in existence (effectively by the individual alone). Decisions were taken on behalf of the company holding the balance and defended on the basis of acquiescence in the Duomatic mould. The demise of one member does not mean that the remaining member may take decisions as if it were a single person company. The court reiterated that a ‘member’, whenever it appears in articles of association, or in sections 112–114, 123, 127 and 318 of the 2006 Act, includes any member registered on the company’s register of members, whether alive or dead (when a natural person) and, if corporate, in an insolvency procedure or dissolved.125 The court held that the Duomatic principle required the assent of all shareholders with a right to attend and vote at a general meeting of the company. The principle 117 Re Duomatic Ltd [1969] 2 Ch 365 at 373B–373D. See also Cane v Jones [1980] 1 WLR 1451, ChD; Re Batesons Hotels (1958) [2013] EWHC 2530 (Ch), [2014] 1 BCLC 507, ChD; Madoff Securities International Ltd (In Liquidation) v Raven [2013] EWHC 3147 (Ch); Re Sherlock Holmes International Society Ltd [2016] EWHC 1076 (Ch), [2017] 2 BCLC 14, ChD at [72], [75], [90]. The Duomatic principles were consistently applied inter alia in Ciban Management Corp v Citco (BVI) Ltd and another [2020] UKPC 21, [2021] AC 122; Satyam Enterprises Ltd v Burton [2021] EWCA Civ 287 [2021], 3 WLUK 82; Byers v Chen [2021] UKPC 4, [2021] BCC 462. 118 [1999] 2 BCLC 605, ChD, at 617e–617g. See also Peña v Dale [2003] EWHC 1065 (Ch), [2004] 2 BCLC 508, ChD, at [117]. 119 RW Peak (Kings Lynn) Ltd [1998] 1 BCLC 193, ChD. 120 Wright v Atlas Wright (Europe) Ltd [1999] 2 BCLC 301, CA. 121 If, of course, if it is not established on the facts, the principle cannot find application: see Bhullar v Bhullar [2017] EWHC 407 (Ch). 122 It does not matter whether the source of the registration is the members’ register or the central register as provided for respectively by Chapter 2 and 2A of Pt 8 of the 2006 Act. 123 Domoney v Godinho [2004] 2 BCLC 15, ChD. See also ss 127 and 128A, each of which provides for the respective registers to constitute prima facie evidence of their contents; see 9.19–9.21. 124 [2017] EWCA Civ 1201, [2018] Ch 511. 125 At [71].

83

3.17  Shareholders’ Relationships

cannot apply in a situation where one of the registered shareholders was a corporation which no longer existed and from whom no consent could be obtained.126 Appropriate and timeous rectification of the register may cure any potential problem.127 Application of the Duomatic principle also means that the consent of nominee shareholders will be taken into account, but not the consent of beneficial owners of the shares, since they are by definition not members128 as their names will not appear in a register.129 3.17 Section 29(1)(b) does not prescribe the method by which the unanimous assent has to be arrived at. There is no doubt that properly executed written agreements qualify. On an equal footing are those ordinary resolutions which were reduced to writing, and signed or expressly approved of by all the members.130 Memoranda of agreements, although not signed, were probably intended to fall in this category, despite the apparent scope for subsequent disputes arising from the fact that the parties signifying their consent did not express their consent by appending their signatures to the memorandum. The subsection is silent as regards oral agreements or agreements arrived at by conduct;131 but, since they are not excluded, it is suggested that the language of the subsection will include them. In practice, only companies with a few shareholders might be able to utilise these non-written forms of agreement. The larger the number of shareholders, the more difficult it will be to rely on non-written agreements in view of the increasing potential for dispute about the exact terms. However, whereas written agreements have logically to be forwarded to the registrar for inclusion in the array of constitutional documents, a written memorandum – setting out the terms of a resolution or agreement that is not in writing – must be forwarded to the registrar within 15 days.132 The proviso to section 29(1)(b) that ‘if not so agreed to, would not have been effective for its purpose unless passed as a special resolution’ means that the specific provisions of section 283 of the 2006 Act need not have been complied with, as long as all the members of the class assented thereto. Where all the shares fall into one class only, there are no ‘class rights’ but only ‘shareholder rights’.

Shareholders’ agreements 3.18 Shareholders’ agreements may be entered into by any number of shareholders, depending on the purpose of the agreement or, indeed, the number of shareholders of the particular company. In public or quoted companies, it is highly unlikely that shareholders’ agreements will be entered into other than between major shareholders with common interests. Shareholders’ agreements are more commonly made between shareholders of quasi-partnership companies. Typical topics covered

126 At [83]. 127 See 7.21–7.25. 128 Section 112 of the 2006 Act. 129 To reiterate, either the members’ register or the central register. 130 Section 281(1) of the 2006 Act. 131 See as an example in this category, Sharma v Sharma [2013] EWCA Civ 1287, [2014] BCC 73, CA. 132 Section 30(1) of the 2006 Act.

84

The 2006 Act 3.19

in such agreements are: obligations to contribute towards loan capital; voting rights;133 the appointment of directors; an increase in share capital;134 and may involve, for example, provisions for the termination of the agreement.135 Only shareholders’ agreements between all the shareholders qualify for inclusion in the company’s constitution, and only where they include a provision that, if not part of the agreement, would have been required to be the subject of a special resolution. Before the 2006 Act, there was no obligation to disclose any shareholders’ agreements. They were not subject to public scrutiny, as were the memorandum and the articles. This benefit (as some would see it) has now been restricted by the provisions of section 33 of the 2006 Act, which requires registration, and thus, publication of shareholders’ agreements arrived at unanimously, whereupon they become part and parcel of the company’s constitution. Judgments which have held (on the basis of previous Companies Acts) that shareholders’ agreements only created personal obligations, and did not form part of the constitutional documentation of a company, are clearly no longer applicable as regards agreements entered into by all the members which, if not so agreed to, would not have been effective for their purpose unless passed as a special resolution.136 However, agreements between fewer than all of the shareholders are still valid and enforceable between the parties thereto,137 although they do not qualify for inclusion in the company’s constitution. Prospective shareholders will not have a right of inspection as regards those agreements and will, in any event, not be bound thereby when they acquire shares in the company. 3.19 This brings into question the interpretation of shareholders’ agreements: whereas shareholders’ agreements ought to have been construed as any other agreement, some of them now acquire statutory force by their elevation to the constitution.138 The traditional view of the interpretation of articles139 may bring into play factors such as the unavailability of rectification of articles140 (which now forms part of the constitution) in respect of those shareholders’ agreements which now also form part of the constitution. In view of their new status, it is submitted that such shareholders’ agreements will have to be interpreted, and bear all the limitations imposed on the interpretation of other parts of the constitution. As a matter of policy, that appears to be sound: once the constitutional documents are accessible to the public – and in particular, accessible to prospective shareholders or creditors – reliance ought to be placed on those documents in the format disclosed. As the articles were public documents which could affect third parties, the question was not what the parties intended but what the document meant.141 That does not mean that this kind of shareholders’ agreement is unalterable; it means that they will only be open to amendment by consensus, again arrived at between all the shareholders at the time of the proposed amendment. This proposition implies that provisions in such 133 Eg in Re Coroin Ltd [2012] EWHC 2343 (Ch) at [637]; affirmed on appeal [2013] EWCA Civ 781, [2013] 2 BCLC 583, CA. 134 See also the discussion at 7.67–7.73. 135 Westcoast (Holdings) Ltd (formerly Kelido Ltd) v Wharf Land Subsidiary (No 1) Ltd [2012] EWCA Civ 1003. 136 See eg Welton v Saffery [1897] AC 299, HL, at 331. 137 Grays Timber Products Ltd v Revenue & Customs Commissioners [2007] STC (SCD) 466, affirmed on appeal ([2010] 1 WLR 497, SC). 138 See 3.18. 139 Discussed at 3.29–3.34. 140 See 3.10 and 3.32. 141 Cherry Tree Investments Ltd v Landmain Ltd [2012] EWCA Civ 736, [2013] Ch 305, CA.

85

3.20  Shareholders’ Relationships

agreements allowing for amendment thereof, other than by all the shareholders, may be found to be unenforceable. Judicial pronouncements before the advent of the 2006 Act held that the interpretation of shareholders’ agreements had to be undertaken in accordance with the ordinary rules of construction142 and had to be examined in conjunction with the articles.143 When it appeared that they were interdependent, it followed that they should be construed together and by reference to each other.144 As a matter of logic, consistency and legal certainty, it seems to be a wholesome approach when interpreting constitutions under the 2006 Act to do so as one composite document with one set of interpretation tools. Simply put, the normal principles of interpretation applicable to a contract apply to shareholders’ agreements.145 3.20 There is not absolute freedom in making shareholders’ agreements. Any provision in such an agreement which purports to bind the company contrary to the terms of the prevailing Companies Act will be void as against the company. Inasmuch as the principle has been established that articles seeking to exclude or restrict a company’s statutory power to amend its articles are invalid, a term in a shareholders’ agreement to that effect should be equally invalid as against the company. However, as between shareholders, a provision to that effect may survive on the basis of a personal contract as between the parties to the specific agreement, as Russell v Northern Bank Development Corp146 demonstrates: the individual shareholders of a new holding company, together with a corporate shareholder of the new holding company, executed a shareholders’ agreement in terms by which they agreed that no further share capital would be created or issued in the company without the written consent of each of the parties. Thereafter, some of the parties to the agreement gave notice of an extraordinary general meeting to consider a proposal for an increase in the share capital. The claimant – one of the individual shareholders – unsuccessfully applied for an injunction restraining the other parties from voting on the resolution, on the basis that the shareholders’ agreement purported to fetter the company’s statutory right pursuant to article  131 of the Companies (Northern Ireland) Order 1986.147 The Northern Ireland Court of Appeal upheld the appeal. On further appeal, the House of Lords allowed the appeal by ruling that, although a provision in a company’s articles restricting its statutory power to alter the articles 142 Growth Management Ltd v Mutafchiev [2007] 1 BCLC 645 (Comm) at [33], [34]. A helpful analysis of the authorities relating to the construction of shareholders’ agreements, articles of association and commercial agreements was set out by Rimer LJ in McKillen v Misland (Cyprus) Ltd [2012] EWCA Civ 179, [2012] BCC 575, CA, at [43]–[55]. 143 Subject to the view expressed in note 70, articles of association are a statutory contract between members and the company. They are to be construed in accordance with the ordinary principles that applies to the interpretation of any contract, and in a manner tending to business efficacy because they are business documents: Arnold v Britton [2015] UKSC 36; Cosmetic Warriors Ltd v Gerrie [2015] EWHC 3718 (Ch), affirmed on appeal [2017] EWCA Civ 324. See also Re Euro Accessories Ltd [2021] EWHC 47 (Ch), [2021] 1 WLUK 53 and Wood v Sureterm Direct Ltd (aka Wood v Capita Insurance Services Ltd) [2017] UKSC 24, [2017] AC 1173 and the discussion at 3.29. 144 See Speed Investment Ltd v Formula One Holdings Ltd (No 3) [2004] EWHC 3215 (Ch). 145 See Cosmetic Warriors Ltd v Gerrie [2017] EWCA Civ 324 at [19]; Wood v Sureterm Direct Ltd (aka Wood v Capita Insurance Services Ltd) [2017] UKSC 24; [2017] AC 1173; Re Euro Accessories Ltd [2021] EWHC 47 (Ch), [2021] 1 WLUK 53 and the discussion at 3.29. 146 [1992] 1 WLR 588, HL (Northern Ireland). 147 Corresponding with s 131 of the 1985 Act; s 612 of the 2006 Act.

86

The 2006 Act 3.21

(or a formal undertaking by the company to that effect) would be invalid, individual shareholders might lawfully make a private agreement as to the exercise of their voting rights that did not purport to bind the company or shareholders not party to the agreement. The shareholders’ agreement, which was not binding on future shareholders, remained enforceable as between its parties. The company’s undertaking, however, was found to be severable from that of the shareholders. The undertaking by the company fettered its statutory powers and was unenforceable.148 Clause 3 of the agreement contained a clear prohibition against the creation or issuance of further share capital or rights attaching to the shares already in issue, save with the written consent of each of the parties. The parties to the litigation were in agreement that a company could not forgo its right to alter its articles.149 Lord Jauncey of Tullichettle distinguished the nature of the veto built into the voting rights in Bushell v Faith150 and concluded that the agreement in question was purely personal to the shareholders who executed it and was valid and enforceable to that extent. 3.21 The contents and extent of a shareholder’s rights are, apart of course from the applicable companies act, primarily found in the articles. An important question is: to what extent, if any, can any benefit or obligation imposed in a shareholders’ agreement add to or subtract from the bundle of rights comprising a share? In Grays Timber Products Ltd v Revenue & Customs Commissioners,151 Mr Gibson, the managing director of the appellant, had entered into a written service agreement with the appellant and had also been party to a subscription and shareholders’ agreement152 under which he paid £50,000 to take up ordinary shares (amounting to about 6% of the issued ordinary capital). As a result of a merger, Mr Gibson became entitled to a sum of £1.4m for his shares, whereas a rateable portion would have been just under £0.4m. The issue was whether the gain was taxable as employment income of Mr Gibson (as the respondent contended) or as a chargeable gain subject to capital gains tax, with a lower tax rate (as Mr Gibson contended). The appellant contended that rights attaching to shares may be found outside the articles in an agreement such as the subscription and shareholder agreement. Having accepted the familiar definition of a ‘share’153 and having emphasised that a share is one indivisible piece of property,154 the Supreme Court rejected the submission that rights attaching to shares might be found in arrangements outside a company’s articles.155 The rights attached 148 A similar point arose in Grays Timber Products Ltd v Revenue & Customs Commissioners [2010] 1 WLR 497, SC; but, inexplicably, the Russell case was not mentioned in argument on that occasion, although the court took it into account at [31]. 149 With reference to Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701, HL, per Lord Porter at 739; Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656, CA, per Lindley MR at 671; Walker v London Tramways Co (1879) 12 ChD 705. 150 [1969] 2 Ch 438, CA. See also 7.38 for a further discussion of this judgment. 151 [2010] 1 WLR 497, SC. 152 It should be noted that not all the shareholders were party to this agreement (see 3.22 dealing with the situation where all shareholders are in agreement). 153 As in Borland’s Trustee v Steel Bros & Co Ltd [1901] 1 Ch 279 at 288. 154 [2010] 1 WLR 497, SC, at [27], with reference to RIC v Crossman [1937] AC 26, HL, at 51. 155 The attempt to give the agreement precedence over the articles was held to be unsuccessful (at [31]) because an exclusion or restriction of the company’s statutory power to amend its articles is a nullity: Russell v Northern Bank Development Corp Ltd [1992] 1 WLR 588, HL. At [30], the court distinguished the dictum of Lord Hoffmann in O’Neill v Philips [1999] 1 WLR 1092, HL, at 1098, to the effect that the terms of association between corporators are contained in the articles and sometimes in ‘collateral agreements’, by pointing out that Lord Hoffmann was addressing the court’s equitable jurisdiction and not the subject of contractual share rights capable of inuring for the benefit of third parties.

87

3.22  Shareholders’ Relationships

to the subscription agreement were personal (and arising from the shareholder’s employment with the company) and therefore did not attach to the shares; hence, the purchaser would not have obtained the benefit thereof. The value of shareholder’s rights as tradable commodities may, accordingly, be excluded to the extent that such rights contained in a shareholders’ agreement can rightfully be classified as a collateral agreement. It is arguable that this reasoning may not apply to similar provisions in those shareholders’ agreements forming part of the constitution under the 2006 Act, because the test should be adapted to one asking whether contractual arrangements outside the constitution (and no longer the articles) are sought to have a bearing on the rights and obligations inherent to a share. Even in the sphere of quasi-partnership companies where mutual trust and confidence prevail, a shareholder who has entered into a shareholders’ agreement is under no duty to disclose (unless covenanted to the contrary) that he did not comply with the terms of the agreement. The parties to a shareholders’ agreement are not (unlike partners) under a duty of utmost good faith to one another.156

Any resolution or agreement agreed to by all the members of a class of shareholders157 3.22 By section 29(1)(c) of the 2006 Act, any resolution or agreement agreed to by all the members of a class of shareholders that, if not so agreed to, would not have been effective for its purpose unless passed by some particular majority, or otherwise, in some particular manner, forms part of the company’s constitution. This provision covers those instances where a class of shareholders finds consensus in a manner less formal than is required for a meeting and without passing a formal resolution. In the case of a private company, this may be achieved by a written resolution in accordance with Chapter  2 of the 2006 Act.158 As far as public companies are concerned, the resolution must be passed at a meeting of the members, in which event the provisions of Chapter 3 of the 2006 Act or, where relevant, Chapter 4 apply.159 Corporators are at liberty to create different rights for different classes of shares. The most obvious class is that of the preference shareholders (which may, in turn, consist of several classes in accordance with new allotments and varying preferences). Ordinary shares may be divided into any number of classes based on, for example, voting rights or entitlement to dividends. For purposes of the Companies Acts, shares are of one class if the rights attached to them are, in all respects, uniform.160 If shares do not carry the same rights to dividends in the 12 months immediately following their allotment, the rights thereto are not regarded as different from those attached to other shares for that reason only.161

156 Ellard v Andrews [2002] EWHC 2842 (QB) at [31]; see also 3.2. 157 The discussion at 3.16–3.17, regarding the application of the Duomatic principle and shareholders’ agreements, applies with equal force to agreements arrived at by all the members of a class of shareholders. 158 Section 281(1) of the 2006 Act. 159 Section 281(2) of the 2006 Act. 160 Section 629(1) of the 2006 Act. 161 Section 629(2) of the 2006 Act.

88

The 2006 Act 3.24

3.23 In Cumbrian Newspapers Group Ltd v Cumberland and Westmorland Herald Newspaper and Printing Co,162 Scott J identified three categories of rights and benefits which may form part of the articles: (a) those very clear matters, where the rights attach to shares, such as dividend rights and rights to participate in surplus assets on winding up;163 (b) rights conferred on an individual in a capacity other than a member, eg as accountant, but which category is not considered as a class right;164 and (c) rights conferred on a beneficiary as a member of a company, but which are not attached to any particular class of shares.165 Shareholders in categories (a) and (c) will be protected when class rights are sought to be varied. Scott J concluded that rights in the first and third categories constituted class rights, while those in the second category did not. He held that the rights in issue in the Cumbrian Newspapers case fell into the third category. 3.24 Rights attached to a class of a company’s shares may only be varied either in accordance with the provision in the company’s articles for the variation of those rights, or – where the company’s articles contain no such provision – if the holders of shares of that class consent to the variation in accordance with section 630(2) of the 2006 Act.166 The consent required comprises the following: (a)

consent in writing from the holders of at least three-quarters in nominal value of the issued shares of that class (excluding any shares held as treasury shares); or (b) a special resolution passed at a separate general meeting of the holders of that class sanctioning the variation.167 Section 630(2) does not derogate from the court’s powers to order changes to such rights,168 for example: in applications to cancel a resolution for a public company to be re-registered as private;169 instances of arrangements and reconstructions;170 and orders made for the protection of members against unfair prejudice.171 Any amendment of a provision contained in a company’s articles for the variation of the rights attached to a class of shares, or the insertion of any such provision into the articles, has in itself to be treated as a variation of those rights.172 In section 630, and (except where the context otherwise requires) in any provision in a company’s articles for the variation of the rights attached to a class of shares, references to the variation of those rights include references to their abrogation.173 162 [1987] Ch 1. 163 At 15E–16A. 164 This is because the articles are not binding on non-members: Cumbrian Newspapers Group Ltd v Cumberland and Westmorland Herald Newspaper and Printing Co [1987] Ch 1 at 16B–16H. 165 At 16H–17A. 166 This is without prejudice to any other restrictions on the variation of the rights (s 630(3) of the 2006 Act). 167 Section 630(4) of the 2006 Act. 168 Section 632 of the 2006 Act; amended with effect from 26 June 2020 to also include provision for Part 26A. It now reads ‘Nothing in section 630 or 631 (variation of class rights) affects the power of the court under section 98 (application to cancel resolution for public company to be reregistered as private), Part 26 (arrangements and reconstructions), or Part 26A (arrangements and reconstructions: companies in financial difficulty), or Part 30 (protection of members against unfair prejudice).’ 169 Section 98 of the 2006 Act. 170 Parts 26 and 26A of the 2006 Act. 171 Part 30 of the 2006 Act. 172 Section 630(5) of the 2006 Act. 173 Section 630(6) of the 2006 Act.

89

3.25  Shareholders’ Relationships

3.25 Important rights of objection174 are available to shareholders of a class of shares who did not vote in favour of the resolution for the variation175 in the event of amendments under section 630 of the 2006 Act. The holders of not less than 15% of the class in question176 may apply to the court to have the variation cancelled.177 Once the application is made, the variation is of no force or effect until it is confirmed by the court.178 Application must be made, ie issued and not necessarily heard, within 21 days after the date on which the consent was given or the resolution was passed (as the case may be).179 The application may be made on behalf of the shareholders entitled to make the application by one or more of their number as they may appoint, in writing, for the purpose.180 The test for adjudicating on the issue is whether the variation would unfairly prejudice the shareholders of the class represented by the applicant.181 If the court is satisfied that the applicants would be unfairly prejudiced by the variation, the variation will be disallowed. If not, the variation will stand. The decision of the court on any such application is final.182 A copy of the court order must be forwarded to the registrar within 15 days of the order of the court.183 It becomes part of the constitution of the company. The company is similarly obliged to notify the registrar of a variation to the rights attached to any shares.184

Any resolution or agreement that effectively binds all members of a class of shareholders though not agreed to by all those members 3.26 What is likely to be covered by section 29(1)(d) of the 2006 Act are the following ordinary resolutions and directors’ resolutions: • • • •

174 175 176 177 178 179 180 181 182 183 184 185 186 187 188

an ordinary resolution of the company giving, varying, revoking or renewing authority of directors to allot shares;185 resolutions of directors for re-registration of the company as a private company, or a company ceasing to be a public company following the acquisition of its own shares;186 an ordinary resolution conferring, varying, revoking or renewing authority for market purchase of its own shares;187 a resolution for a voluntary winding up;188

Section 633 of the 2006 Act. ‘Variation’ includes ‘abrogation’ (ss 630(6), 633(6)). By s 633(2) of the 2006 Act, it excludes any of the company’s share capital held as treasury shares. Section 633(2) of the 2006 Act. Section 633(3) of the 2006 Act. Section 633(4)(a) of the 2006 Act. Section 633(4)(b) of the 2006 Act. Section 633(5) of the 2006 Act. Section 633(5) of the 2006 Act. Section 635 of the 2006 Act. Section 637 of the 2006 Act. Section 551(8), (9) of the 2006 Act. See the circumstances set out in ss 662(1), 664(1) of the 2006 Act. Section 701(7), (8) of the 2006 Act. Section 84(1)(a) of the Insolvency Act 1986.

90

Interpretation 3.29

• • • • •

a directors’ resolution allowing title to a company’s shares to be evidenced and transferred without written instrument;189 an ordinary resolution of the company preventing or reversing such a resolution;190 an ordinary resolution of members of a private company incorporated before 1 October 2008, allowing directors to authorise conflicts of interest;191 any extraordinary resolution required by a provision of a company’s memorandum or articles or of a contract;192 an ordinary resolution amending or revoking a statement as to a company’s authorised capital where that statement was in force on 1 October 2009 and treated as a provision in the company’s articles by virtue of s 28 of the 2006 Act.193

Any other resolution or agreement to which Chapter 3 of Part 3 of the 2006 Act applies by virtue of any enactment194 3.27

No such enactment appears to exist at present.195

Section 257 of the 2006 Act 3.28 This section makes provision for references to a company’s constitution in Part 10 (‘A Company’s Directors’). The section is relevant to a number of provisions in Part 10, including the duty of directors to act within their powers196 and the duty to exercise independent judgment.197 References in Part 10 to a company’s constitution include: (a) any resolution or other decision arrived at in accordance with the constitution; and (b) any decision by the members of the company, or a class of members, that is treated by virtue of any enactment or rule of law as equivalent to a decision by the company.

INTERPRETATION General principles 3.29 Judicial pronouncements relating to the nature and contractual binding force of articles of association, of companies registered under the dispensation before the 2006 Act, should be equally applicable to each of the constituent documents of 189 Uncertificated Securities Regulations 2001, SI 2001/3755, reg 16(2); SI 2007/3495, art 9, Sch 4, Pt 3, para 47(3), (4). 190 Uncertificated Securities Regulations 2001, SI 2001/3755, reg 16(6); SI 2007/3495, art 9, Sch 4, Pt 3, para 47(3), (4). 191 Section 175 of the 2006 Act. 192 Companies Act 2006 (Commencement No 3, Consequential Amendments, Transitional Provisions and Savings) Order 2007, SI 2007/2194, Sch 3, para 23. 193 Companies Act 2006 (Commencement No 8, Transitional Provisions and Savings) Order 2008, SI 2008/2860, Sch 2, para 42. 194 Ie s 29(1)(e) of the 2006 Act. 195 As at 1 November 2021. 196 Section 171 of the 2006 Act. See also Chapter 2. 197 Section 173 of the 2006 Act. See also Chapter 2.

91

3.29  Shareholders’ Relationships

the constitution under the 2006 Act. One norm should apply for the interpretation and construction of all the documents comprising the constitution.198 Although, for historical reasons, the articles of association remain the main source of the contractual relationship between members of a company, they are now but one part thereof. In Lock and Trotman v The Queensland Investment and Land Mortgage Co Ltd,199 Lord Halsbury expressed the view that the ordinary principles of construing statutes should be used in construing articles of association.200 Currently, it is accepted that the principles regarding the interpretation of contracts are applicable in interpreting articles.201 There is no significant difference between the two approaches202 – nor should there be. A comprehensive discussion of the principles underlying interpretation of agreements is beyond the scope of this book, yet it is useful to have regard to the summary provided in Wood v Sureterm Direct Ltd (aka Wood v Capita Insurance Services Ltd)203: ‘The court’s task is to ascertain the objective meaning of the language which the parties have chosen to express their agreement. It has long been accepted that this is not a literalist exercise focused solely on a parsing of the wording of the particular clause but that the court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning.’ The summary of the applicable principles provided by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society204 serves as useful practical guidance to interpretation of company and shareholder documents:205 ‘(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

198 See also 3.19. 199 [1896] AC 461, HL. 200 At 465. 201 See eg Towcester Racecourse Co Ltd v The Racecourse Association Ltd [2002] EWHC 2141 (Ch), [2003] 1 BCLC 260, ChD, at [16]; Arnold v Britton [2015] UKSC 36; Cosmetic Warriors Ltd v Gerrie [2015] EWHC 3718 (Ch), affirmed on appeal [2017] EWCA Civ 324. 202 A helpful analysis of the authorities relating to the construction of shareholders’ agreements, articles of association and commercial agreements was set out by Rimer LJ in McKillen v Misland (Cyprus) Ltd [2012] EWCA Civ 179, [2012] BCC 575, CA, at [43]–[55]. 203 [2017] UKSC 24; [2017] AC 1173 at [10]. 204 [1998] 1 WLR 896, HL, at 912H–913F. See also Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101, HL; Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, SC; Scottish Widows Fund and Life Assurance Society v BGC International [2012] EWCA Civ 607 at [16]; Arnold v Britton [2015] UKSC 36, [2015] AC 1616, at [15], and the discussion of the most prominent recent authorities on the topic in Cosmetic Warriors Ltd v Gerrie [2017] EWCA Civ 324 at [19]–[23]. Also compare Britvic Plc v Britvic Pensions Ltd [2021] EWCA Civ 867, [2021] 6 WLUK 106. 205 A sixth principle may be taken from the observations of Lord Mance in Re Sigma Finance Corp [2009] UKSC 2 at [12] that ‘… the resolution of an issue of interpretation … is an iterative process, involving checking each of the rival meanings against the other provisions of the document and investigating its commercial consequences.’

92

Interpretation 3.29

(2) The background was famously referred to by Lord Wilberforce as the “matrix of fact”, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.206 (3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent.207 They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them. (4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous, but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax. See Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 3 All ER 352, [1997] 2 WLR 945.’208 The fifth principle is the ‘rule’ that words should be given their ‘natural and ordinary meaning’. It reflects the common sense proposition that it is not easily accepted that contracting parties have made linguistic mistakes.209 Lord Hoffmann explained:210 ‘On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Cia Naviera SA  v Salen Rederierna AB, The Antaios [1984] 3 All ER  229 at 233, [1985] AC 191 at 201: “… if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.”’ 206 Further explained in the dissenting speech of Lord Hoffmann in BCCI v Ali [2002] 1 AC 251, HL, at [39]. See also South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191, per Lord Hoffmann at 212E. 207 See Estafnous v London & Leeds Business Centres Ltd [2011] EWCA Civ 1157. 208 See also Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988, PC, at [16]. Note the different approach applied in Singapore: Sembcorp Marine Ltd v PPL Holdings Pte Ltd [2013] SGCA 43 and Peng v Mai [2012] SGCA 55; and see further the discussion at 3.33. 209 [1998] 1 WLR 896, HL, at 913D–913F. Jenkins LJ said in Holmes v Keyes [1959] Ch 199, CA, at 215 that articles ‘should be regarded as a business document and should be construed so as to give them reasonable business efficacy, where a construction tending to do that result is admissible on the language of the articles, in preference to a result which would or might prove unworkable’. See also Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, SC, at [30]; Thompson v Goblin Hill Hotels Ltd [2011] UKPC 8, [2011] 1 BCLC 587, PC (Jamaica). 210 [1998] 1 WLR 896, HL, at 913E–913F.

93

3.30  Shareholders’ Relationships

In the recent case of Minera La Bambas SA v Glencore Queensland Ltd211 Leggatt LJ carried out a review of the existing authorities and said: ‘In short, the court’s task is to ascertain the objective meaning of the relevant contractual language. This requires the court to consider the ordinary meaning of the words used, in the context of the contract as a whole and any relevant factual background. Where there are rival interpretations, the court should also consider their commercial consequences and which interpretation is more consistent with business common sense. The relative weight to be given to these various factors depends on the circumstances. As a general rule, it may be appropriate to place more emphasis on textual analysis when interpreting a detailed and professionally drafted contract such as we are concerned with in this case, and to pay more regard to context where the contract is brief, informal and drafted without skilled professional assistance. But even in the case of a detailed and professionally drafted contract, the parties may not for a variety of reasons achieve a clear and coherent text and considerations of context and commercial common sense may assume more importance.’

Implication212 3.30 Parties to a contract frequently fail to express all the terms of their agreement with sufficient clarity. These deficiencies may be cured by reading implied terms into the agreement on the basis of the principles as set out in The Moorcock:213 ‘In business transactions such as this, what the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended at all events by both parties who are businessmen; not to impose on one side all the perils of the transaction, or to emancipate one side from all the chances of failure, but to make each party promise in law as much, at all events, as it must have been in the contemplation of both parties that he should be responsible for in respect of those perils or chances.’ Courts will not, and cannot, make contracts for the parties. The scope for introducing implied terms is accordingly limited. Logic will dictate the terms implied from the express terms.214 The implication of a term is an exercise in the construction of the instrument as a whole215 but construing the words used and implying additional words are different 211 [2019] EWCA Civ 972. 212 See for a recent comprehensive exposition of the principle, Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72, [2016] AC 742 at [23]–[31]; followed inter alia in Yoo Design Services Ltd v Iliv Realty PTE Ltd [2021] EWCA Civ 560, [2021] 4 WLUK 141; Alpha Marine Corp v Minmetals Logistics Zhejiang Co Ltd [2021] EWHC 1157 (Comm), [2021] 5 WLUK 11. 213 (1889) LR 14 PD 64, CA, at 68. The Moorcock was distinguished by Frobisher Ltd v Kiloran Trust [1980] 1 WLR 425, Ch, at 432, to the extent that, if there is a disturbance of contractual relationships because a statute intervenes, it must be left to the statute to say what is to happen upon its intervention. What the parties or some outside body may have thought must perforce yield to the statutory intervention. 214 See eg AE Farr Ltd v Admiralty [1953] 1 WLR 965, QB; Sidney Bolsom Investment Trust Ltd v E Karmios & Co (London) Ltd [1956] 1 QB 529, CA; Tappenden v Artus [1964] 2 QB 185, CA; Gardiner v Moore [1969] 1 QB 55; Greaves & Co (Contractors) Ltd v Baynham Meikle & Partners [1975] 1 WLR 1095, CA. 215 Attorney General of Belize v Belize Telecom [2009] 1 WLR 1988, PC, at [19]. See also 3.34.

94

Interpretation 3.32

processes governed by different rules.216 It includes terms which the parties probably had in mind but did not express, and terms which the parties (whether or not they had them in mind) (a) would probably have expressed if the question had been brought to their attention,217 or (b) would have expressed had they foreseen the difficulty. 3.31 As an indisputably commercial document, implication deserves a legitimate place in the construction of company constitutions. In Bratton Seymore Service Co Ltd v Oxborough,218 the Court of Appeal held that implication in the context of articles is limited to the inference of a term purely from the language of the memorandum and articles219 and not ‘entirely’ from extrinsic circumstances. The facts were as follows: Mr Oxborough purchased a property with the view of developing the same. He eventually sold off six flats and retained the rest of the flats for his own use. In the agreement between the original owner, on the one hand, and Mr Oxborough and his erstwhile partner, on the other, the purchasers undertook to contribute certain percentages to the maintenance of certain specified items, excluding the amenity areas. It was envisaged that a management company would be set up to build the common parts of the estate, the members of which would be the residents in the various units created by the development. That company, in which the residents and Mr Oxborough held shares, was the claimant. Its memorandum provided for the acquisition of the freehold property to manage the property and collect the income therefrom. The land so acquired was the land in respect of which Mr Oxborough had given the undertakings to the vendors. The claimant required a contribution from Mr Oxborough in respect of maintenance of the amenity areas. Mr Oxborough took the stance that he never covenanted for that obligation. 3.32 The county court held that, by necessary implication and in order to give business efficacy to the scheme, such an obligation had to be implied into the articles, taking into account the prevalent background circumstances as at the date of the articles. In the Court of Appeal, Dillon LJ220 considered such an implication ‘insuperable’, drawing attention to the difference between a normal contract and one with statutory force, such as articles. If rectification is impossible, as was held in Scott v Frank F Scott (London) Ltd,221 then implication is also not a solution to the problem. The only way of avoiding the problem was said to be by amending the articles in accordance with the applicable statutory provisions. Implication cannot operate in order to give effect to the surrounding circumstances not apparent from the terms of the memorandum and the articles themselves, whereas, in this instance, such documents did not give the slightest clue as to the terms sought to be implied. In his judgment, Steyn LJ confirmed that, in the context of articles, implication cannot arise from surrounding circumstances. He pointed out the absurdities which may arise between the company and different subscribers if extrinsic circumstances were permitted to be taken into account:222 216 Marks & Spencer Plc v BNP Paribas Securities Trust Company (Jersey) Ltd [2015] UKSC 72, [2016] AC 742, per Lord Neuberger at [26]. 217 The so-called ‘officious bystander’ test, for which see Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206, CA, at 227, affirmed by the House of Lords ([1940] AC 701); compare SNCB Holding v UBS AG [2012] EWHC 2044 (Comm) at [68]. 218 [1992] BCLC 693, CA. See also HSBC Bank Middle East v Clarke [2006] UKPC 31 at [4]. 219 The submission is that it currently covers all documents comprising the constitution. 220 [1992] BCLC 693, CA, at 696e–696h. 221 [1940] Ch 794, CA. 222 [1992] BCLC 693, CA, at 698e–699a.

95

3.33  Shareholders’ Relationships

‘It is possible to imply a term purely from the language of the document itself: a purely constructional implication is not precluded. But it is quite another matter to seek to imply a term into articles of association from extrinsic circumstances. Here, the company puts forward an implication to be derived not from the language of the articles of association but purely from extrinsic circumstances. That, in my judgment, is a type of implication which, as a matter of law, can never succeed in the case of articles of association. After all, if it were permitted, it would involve the position that the different implications would notionally be possible between the company and different subscribers. Just as the company or an individual member cannot seek to defeat the statutory contract by reason of special circumstances such as misrepresentation, mistake, undue influence and duress and is furthermore not permitted to seek a rectification, neither the company nor any member can seek to add to or to subtract from the terms of the articles by way of implying a term derived from extrinsic surrounding circumstances. If it were permitted in this case, it would be equally permissible over the spectrum of company law cases. The consequence would be prejudicial to third parties, namely potential shareholders who are entitled to look to and rely on the articles of association as registered. Despite Mr Asprey’s lucid and incisive argument, I take the view that on this ground alone the implication cannot succeed.’ 3.33 In Equitable Life Assurance Society v Hyman,223 the issue was revisited. The claimant (respondent) was the holder of a retirement ‘with profit’ policy containing a guaranteed annuity rate with the appellant life assurance society. Under article 65 of the appellant’s articles, determination of the amount of any bonus was within the absolute discretion of the directors of the society. From 1994, when the annuity rate started to fall below the guaranteed annuity rate, the society adopted a practice of declaring, in relation to such policies, a lower final bonus to policy holders who chose to take an annuity at the guaranteed rate, when compared to those who elected to take one of the alternative options. The court of first instance held that the practice accorded with both the society’s articles and the terms of the policy, and granted a declaration to that effect.224 The Court of Appeal225 reversed the decision, but the original judgment was upheld by the House of Lords.226 Lord Steyn considered that the terms of the policies themselves offered a conclusive answer to the issue, but it had to be considered in the context of the powers afforded to the directors by article 65(1):227 ‘… The critical question is whether a relevant restriction may be implied into article 65(1). It is certainly not a case in which a term can be implied by law in the sense of incidents impliedly annexed to particular forms of contracts. … If a term is to be implied, it could only be a term implied from the language of article 65 read in its particular commercial setting. Such implied terms operate as ad hoc gap fillers. In Luxor (Eastbourne) Ltd v Cooper [1941] AC 108, 137 Lord Wright explained this distinction as follows:

223 224 225 226 227

[2002] 1 AC 408, HL. Equitable Life Assurance Society v Hyman [1999] Pens LR 297, ChD. Equitable Life Assurance Society v Hyman [2000] 2 WLR 798, CA. Equitable Life Assurance Society v Hyman [2002] 1 AC 408, HL. At 458H–459D.

96

Pre-emption 3.35

“The expression ‘implied term’ is used in different senses. Sometimes it denotes some term which does not depend on the actual intention of the parties but on a rule of law, such as the terms, warranties or conditions which, if not expressly excluded, the law imports, as for instance under the Sale of Goods Act and the Marine Insurance Act … But a case like the present is different because what it is sought to imply is based on an intention imputed to the parties from their actual circumstances.” It is only an individualised term of the second kind which can arguably arise in the present case. Such a term may be imputed to parties: it is not critically dependent on proof of an actual intention of the parties. The process “is one of construction of the agreement as a whole in its commercial setting”: Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191, 212e, per Lord Hoffmann. This principle is sparingly and cautiously used and may never be employed to imply a term in conflict with the express terms of the text. The legal test for the implication of such a term is a standard of strict necessity. This is how I must approach the question whether a term is to be implied into article 65(1) which precludes the directors from adopting a principle which has the effect of overriding or undermining the GARs.’ Applying the standard of strict necessity, Lord Steyn concluded that an implication precluding the use of the directors’ discretion in this way was strictly necessary.228 3.34 The most important recent consideration of the implication of terms was that of the Supreme Court in Marks and Spencer plc v BNP Paribas Securities Trust Company (Jersey) Ltd229 where the emphasis on the implication of terms as another part of contractual construction in Attorney General of Belize v Belize Telecom,230 was not entirely followed. While it is necessary to construe the contract first before considering implication, the implication of a term should only be made where it is necessary to give the contract business efficacy or is so obvious that it goes without saying. The term to be implied must also be capable of clear expression and it must not contradict any express term of the contract.231 Inconsistency in itself is a reason for rejecting the implication of a term.232

PRE-EMPTION 3.35 Pre-emption provisions operate on two levels: first, as a mechanism encapsulated in the articles and/or or a shareholders’ agreement to restrict the transfer of shares to a non-member on condition that the internal procedure of finding a purchaser among the current membership has been exhausted;233 and, 228 At 459H. 229 [2015] UKSC 72, [2016] AC 742. 230 [2009] 1 WLR 1988, PC. 231 Attorney General of Belize v Belize Telecom [2009] 1 WLR 1988, PC, at [26]. 232 Tamplin (FA) Steamship Co Ltd v Anglo Mexican Petroleum Products Co Ltd [1916] 2 AC 397, HL, at 422. 233 See eg McKillen v Misland (Cyprus) Investments Ltd [2012] EWCA Civ 179, [2012] BCC 575, CA, at [18]–[31]. In effect, a put option is granted to other shareholders to acquire the shares under certain circumstances. See also Tett v Phoenix Property and Investment Co Ltd [1984] BCLC 599, ChD, at 619e–619i, reversed on appeal on another point ([1986] BCLC 149, CA). Also compare Cottrell v King [2004] EWHC 397 (Ch), [2004] 2 BCLC 413, ChD.

97

3.36  Shareholders’ Relationships

second, shareholders have statutory pre-emption rights over the issue of new shares for cash, which may be abolished or modified only by the articles of association or a special resolution.234 In the first instance, the rights and obligations are created on a horizontal level between members. In the second instance, the relationship is created vertically between company and directors, on the one hand, and members on the other.

As between shareholders235 3.36 In contrast to the unlimited trading permitted in listed or quoted shares (or unlimited ‘over the counter’ trading in respect of public companies’ shares which are not so quoted), one of the characteristics of private companies is the limitation generally imposed on members to sell their shares to non-members. Members in quasipartnership companies236 are likely to seek to preserve the relationship of mutual trust and confidence by attempting to keep existing shares among existing shareholders. More generally, control is of paramount importance for any private company. The entrance of new shareholders who may acquire voting control warrants appropriate safeguards. The articles237 or a shareholders’ agreement,238 or even both, may provide the mechanism to protect current shareholders. Precisely because pre-emption provisions are based on agreement, the parties to the agreement (the shareholders) acquire the rights and incur the obligations as against each other. The process will ordinarily involve a notification by the prospective seller to the directors or the other shareholders of his intention to sell.239 The transfer notice should state the price or fair value at which the prospective vendor is prepared to sell,240 or, depending on the applicable agreement, should invoke the procedures for the determination of the price.241 If the articles do not stipulate a time limit for acceptance, the transfer notice should stipulate a reasonable time. Specific provision is ordinarily also made for the position upon the death or insolvency242 of a shareholder, to prevent the transfer of shares to unwanted heirs, beneficiaries or purchasers. Pre-emption provisions impinge on the freedom to dispose of property (which shares undoubtedly are) and the limitation should accordingly be stated in sufficiently clear

234 Pt 17, Ch 3 of the 2006 Act (ss 560–577). By s 577 of the 2006 Act, the provisions of Pt 17, Ch 3 have no application in relation to the taking of shares by the subscribers to the memorandum on the formation of the company. 235 See also 10.15–10.32 for the operation of buy-outs in the context of s 996 of the 2006 Act; and Chapter 15 for the tax implications regarding the purchase and sale of shares. 236 For a discussion of which, see 9.131–9.143. 237 Note should be taken of the fact that the Companies (Model Articles) Regulations 2008, SI 2008/3229, do not contain a default provision dealing with this aspect. It should be dealt with in an amendment or in separate articles if the model articles are used. 238 See eg Re Coroin Ltd [2012] EWHC 2343 (Ch) at [637]; affirmed on appeal [2013] EWCA Civ 781, [2013] 2 BCLC 583, CA. 239 Tett v Phoenix Property and Investment Co Ltd [1986] BCLC 149, CA. 240 If no price is stated when so required by the pre-emption provision, the provision is simply not triggered: see Re Claygreen Ltd [2006] 1 BCLC 715, ChD, at [34]. There is nothing for the other shareholders to respond to; no agreement can be concluded on acceptance of such an offer. 241 If a shareholder is dissatisfied with the price arrived at by the valuer, he cannot retract his notice: Doughty Hanson & Co Ltd v Roe [2008] 1 BCLC 404, ChD. 242 See Borland’s Trustee v Steel Bros & Co Ltd [1901] 1 Ch 279.

98

Pre-emption 3.37

language.243 A  notice of intention to transfer shares should substantially comply with the terms of the articles or shareholders’ agreement in the terms in which it is given, to ensure that the pre-emption provisions are validly triggered. The test for considering the interpretation and validity of unilateral notices, namely how a reasonable recipient would have understood it taking into account the relevant objective contractual scene,244 equally applies to transfer notices.245 3.37 A  ‘transfer’ of shares refers to a series of steps: an agreement to sell; execution of a deed of transfer; and the ultimate registration of the shares in the name of the purchaser.246 Pre-emption clauses should provide for these steps because, if the negotiation which a shareholder may have with a prospective third party purchaser does not result in the entry of the latter’s name as member, the conduct will not trigger the pre-emption clause with concomitant protective steps available to be taken by existing shareholders.247 Therefore, a transfer notice was held to be unnecessary, on the facts, where members held shares registered in their names as bare trustees for non-members who were not desirous of transferring their shares while the beneficiaries expressed no desire to exercise their right to compel a transfer.248 Also, a parent company was held not to have an ‘interest’ in shares held by its subsidiary and a sale of the subsidiary did not involve a transfer of an interest in the shares held by the subsidiary triggering the pre-emption provisions.249 The implication into a company’s articles of association of a term that the transferor of shares under pre-emption provisions would co-operate with the appointment of an accountant for the purpose of valuing the shares, and would not unreasonably refuse to agree the terms of engagement, was an obvious and necessary means of giving effect to the contract.250 A clause in a shareholders’ agreement granting pre-emption rights, on the sale of assets of a joint venture company, was held not to be intended to apply following liquidation of the company, since the detailed and prescriptive requirements of the clause would prevent the liquidators from achieving a satisfactory realisation of the assets.251 In the extraordinary circumstances of articles providing for a third party selected by the directors to buy shares, the pre-emption agreement did not avail an interested existing shareholder when the third party was selected and accepted the offer to purchase.252 The pre-emption machinery in a company’s articles had not been invoked effectively so as to bind a trustee in bankruptcy to sell the bankrupt’s shares, where a certificate of fair value given pursuant to that machinery had not been issued in accordance with those articles.253 243 Greenhalgh v Mallard [1943] 2 All ER 234, CA, at 237B–237C; see also Re Coroin Ltd [2011] EWHC 3466 (Ch); affirmed on appeal sub nom McKillen v Misland (Cyprus) Investments Ltd [2012] EWCA Civ 179, [2013] EWCA Civ 781, [2012] BCC 575, CA. 244 Mannai Investment Co Ltd v Eagle Star Life Ass Co [1977] AC 749, HL, per Lord Steyn at 767G–767H and see the discussion on interpretation at 3.29. 245 Re Dunstans Publishing Ltd [2010] EWHC 3850 (Ch), [2012] BCC 515, ChD, at [17]. 246 Lyle & Scott Ltd v Scott’s Trustees [1959] AC 763, HL, per Lord Reid at 778. 247 Scotto v Petch [2001] BCC 889, CA. See also Theakston v London Trust plc (1984) 1 BCC 99095, ChD; Re Ringtower Holdings (1989) 5 BCC 82, ChD. 248 Safeguard Industrial Investments Ltd v National Westminster Bank Ltd [1982] 1 WLR 589, CA. 249 McKillen v Misland (Cyprus) Investments Ltd [2012] EWCA Civ 179, [2012] BCC 575, CA. 250 Cream Holdings Ltd v Davenport [2011] EWCA Civ 1287, [2012] 1 BCLC 365, CA. 251 Leedon Ltd v Hurry [2011] 1 BCLC 580, PC (Mauritius). 252 Knox v Deane [2005] BCC 884, PC. 253 Re Porritt [2011] 9 WLUK 420, ChD.

99

3.38  Shareholders’ Relationships

Unless the purchaser of shares in a private company becomes registered as a member, his shares will be near worthless, because he cannot exercise any voting power, nor can he receive any dividends directly from the company. No reasonable prospective purchaser would pay anything for them. There is no obligation on the company to register the shares,254 leaving the vendor’s name as member with the concomitant benefits. Attempts to become so registered, by applying for the rectification of the share register255 without having followed the pre-emption provisions, will not succeed. Compliance with the pre-emption provisions is an essential prerequisite for such an application.256 Moreover, breach of a pre-emption agreement may result in prejudice to the remaining shareholders, which they may protect by any of the recognised remedies such as injunctions or actions for damages. It must be kept in mind that, for purposes of exercising a remedy in terms of section 994, section 994(2) provides that the provisions of Part 30 of the 2006 Act 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. 3.38 In McKillen v Misland (Cyprus) Investments Ltd,257 a court ordered that a respondent provide further information and specific disclosure in relation to his ability to raise finance to purchase shares where that information was material to his case that he had been unfairly prejudiced by the claimant’s failure to offer him shares under pre-emption provisions. The point of departure is that a company did not owe a member any fiduciary or other duty before the valuation began.258

The 2006 Act 3.39 To preserve a shareholder’s pro rata entitlement to his shares as a percentage of the total issued share capital, a company must not allot equity securities259 to a person on any terms unless (a) it has made an offer to each person who holds ordinary shares in the company to allot to him on the same or more favourable terms a proportion of those securities that is as nearly as practicable equal to the proportion in nominal value held by him of the ordinary share capital of the company, and (b) the period during which any such offer may be accepted has expired or the company has received notice of the acceptance or refusal of every offer so made.260 This is deemed as so important as to have deserved specific civil liability for the company and its officers in the event of non-compliance,261 with a prescribed limitation period of two years.262 254 Tett v Phoenix Property and Investment Co Ltd [1986] BCLC 149, CA. See also Hurst v Crampton Bros (Coopers) Ltd [2002] EWHC 1375 (Ch), [2003] 1 BCLC 304, ChD. 255 By s 125 of the 2006 Act. 256 See eg Hitchins v Hitchins (Hatfield) Ltd [2012] 5 WLUK 781, ChD, where a claim by executors for the rectification of a company’s register of members to replace the name of the deceased with the names of the executors failed, as an existing director’s pre-emptive rights had not been exhausted and there had been no forbearance, representation or waiver by the director concerning her rights. See also 7.21–7.25. 257 [2012] EWHC 505 (Ch). 258 Cream Holdings Ltd v Davenport [2011] EWCA Civ 1287, [2012] 1 BCLC 365, CA, at [28]–[29]. 259 For the meaning of which, see s 560 of the 2006 Act. 260 Section 561(1) of the 2006 Act. 261 Section 563(2) of the 2006 Act. 262 Section 563(3) of the 2006 Act.

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Pre-emption 3.39

The section 561 allotment does not extend to all new shares.263 All or any of the requirements of sections 561 and 562 may be excluded by provision contained in the articles of a private company.264 The directors of a private company that has only one class of shares may be given power by the articles, or by a special resolution of the company, to allot equity securities of that class as if section 261 of the 2006 Act did not apply to the allotment, or applied to the allotment with such modifications as the directors may determine.265

263 Bonus shares (s 564), non-cash issues (s 565) and employees’ share schemes (s 566) are excluded. 264 Section 567(1) of the 2006 Act. 265 Section 569(1) of the 2006 Act. See also ss 570 and 571. For an example of such disapplication, see Re Sunrise Ltd [2010] 1 BCLC 367, ChD, at [126], [131] and [135]; this was not in issue on appeal [2013] EWCA Civ 667, [2014] 1 BCLC 427, CA.

101

Chapter 4

The Liability of Directors and Advisers of the Company Directly to Shareholders

Contents Introduction 4.1 All companies limited by shares At common law Breach of fiduciary duty

4.5 4.5 4.7

Misrepresentation Act 1967

4.22

Regulated companies Financial Services and Markets Act 2000 The City Code on Takeovers and Mergers (‘the Code’)

4.23 4.24 4.29

INTRODUCTION 4.1 As considered in Chapter 2, directors owe a wide range of duties in their capacity as officers of the company. Those duties are generally owed to the company itself and nobody else. However, there are circumstances where directors owe duties direct to shareholders and where, consequently, shareholders may have directly enforceable claims against directors where those duties are breached. In some cases, those duties arise at common law, in others in equity; and, in particular circumstances, such duties emanate from statute and/or regulations. Similarly, although professional advisers to a company ordinarily owe duties to the company alone, in particular circumstances they may also owe duties to shareholders. 4.2 The answer to the question of to whom a duty of care is owed is, in practice, highly fact specific.1 Despite the default position of directors only owing their company a duty of care, there are well-established exceptional circumstances where directors owe shareholders a duty of care: first, when directors advise their shareholders to exercise their vote in a certain manner at general meetings2 – this is particularly the case in takeover and acquisition situations, where shareholders retain an independent cause of action, distinct from any claim the company may have,

1

However, a term implied by law may result in a finding that a duty exists: see Howard & Witchell v Woodman Mathews & Co [1983] BCLC 117, QB. 2 See 4.8–4.18.

103

4.3  The Liability of Directors and Advisers of the Company Directly to Shareholders

because of the breach of duties of care owed to the shareholders themselves;3 or, secondly, when they act in relation to a proprietary aspect of a shareholder’s shares.4 Such duties may also be fiduciary in nature, but, again, the facts of each case will determine the precise ambit and scope of any such duty. That a common law duty of care and a fiduciary duty owed to shareholders can co-exist is illustrated in Platt v Platt:5 three brothers held shares in a company conducting a motor vehicle dealership. One of them, the managing director, held ordinary shares, whilst the others held redeemable preference shares. The director persuaded his brothers, in a deceitful manner based on misrepresented facts, to part with their shares at a value of £1 each to him, in anticipation of a sale of the business. The sale did not take place. The business was subsequently sold at a considerable profit. The two brothers, who were no longer shareholders, did not share in the profit and sought to recover their loss on the basis of breach of contract, breach of common law duty and breach of fiduciary duty. The court concluded, with particular reliance on Re Chez Nico (Restaurants) Ltd6 and Coleman v Myers,7 that a breach of both a common law duty and a fiduciary duty had occurred. 4.3 It is of more than academic interest to establish whether a duty emanates from the common law or is a fiduciary one arising in equity. If a breach of fiduciary duty is established, equitable rules, rather than those applicable at common law, will apply. This distinction has two important consequences. First, it is likely that a defendant will not be able to plead contributory fault on the part of the claimant, thereby eliminating the possibility of a reduction of the claimant’s compensation.8 And, secondly, the focus of the equitable rules is to restore to the claimant what was lost as a result of the breach; in claims for a remedy for breach of fiduciary duty cases, the common law rules of foreseeability and remoteness do not always apply.9 In the Canadian Privy Council case of Brickenden v London Loan & Savings Co,10 Lord Thankerton said:11 ‘When a party, holding a fiduciary relationship, commits a breach of his duty by non-disclosure of material facts, which his constituent is entitled to know in connection with the transaction, he cannot be heard to maintain that disclosure would not have altered the decision to proceed with the transaction, because the 3

See the discussion of Heron International v Lord Grade [1983] BCLC 244, CA, especially at [4.1]–[4.7], at 8.33, and see Pilmer v Duke Group Ltd [2001] 2 BCLC 773, High Court of Australia (also [2001] 5 LRC 417). See also, for an example of deceit leading to the same result, Gould v Vaggelas [1985] HCA 85, distinguished on the facts in Thomas v D’Arcy [2005] QCA 68 at [20]; also compare the approach in Harris v Milfull [2002] FCAFC 442. 4 See 4.20–4.21. 5 [1999] 2 BCLC 745, ChD, reversed in part by the Court of Appeal ([2001] 1 BCLC 698), on an aspect relating to calculation of loss. 6 [1992] BCLC 192, ChD. 7 [1977] 2 NZLR 225. 8 Nationwide BS v Balmer Radmore [1999] PNLR 606, ChD; Nationwide BS v Thimbleby & Co [1999] PNLR 733, ChD. See also Matthew Conaglen, Fiduciary Loyalty (Hart Publishing, 2011), 172–176. 9 Target Holdings Ltd v Redferns [1996] AC 421, HL, at 436B–436E, 437C–437E and 438H–439B. It will depend upon the nature of the breach; where there has been an unauthorised dealing with the company’s assets, the obligation on the fiduciary in default is to account, and therefore to reconstitute the misapplied ‘fund’ – see Target at 434D–434F per Lord Browne-Wilkinson. 10 [1934] 3 DLR 465, PC. 11 At 468.

104

Introduction 4.4

constituent’s action would be solely determined by some other factor, such as the valuation by another party of the property proposed to be mortgaged. Once the Court has determined that the non-disclosed facts were material, speculation as to what course the constituent, on disclosure, would have taken is not relevant.’ The principle stated in Brickenden was somewhat diluted by Swindle v Harrison,12 which placed the consequences of a common law breach of duty and a breach of fiduciary duty on a broadly equal footing, save where the breach was equivalent to fraud.13 A body of divergent case law and academic opinion developed around the issue of who bears the burden of proving that the claimant would have avoided the loss if disclosure had been made by the fiduciary.14 It may be possible to construe the requirement so as to relieve a claimant of the burden of establishing reliance on the breach of duty for the loss to follow15 but the fiduciary will usually be able to avoid liability if he can establish that the loss would have been incurred regardless of his breach of duty.16 Accordingly, there may be considerable advantage to be gained by pursuing a claim for breach of fiduciary duty (where such duty exists), in that the defendant may be saddled with the onus of proof on issues relating to reliance and causation. 4.4 The ‘no reflective loss’ rule is not necessarily an impediment to shareholders’ actions against directors and advisers to the company.17 The rule is not concerned with barring causes of action as such, but with barring recovery of certain types of loss; and therefore compensation for loss claimed by shareholders, on the basis of misrepresentation or breach of fiduciary duty, will be limited to loss which is not reflective of any loss that the company may have suffered.18

12 13

14

15 16 17 18

[1997] 4 All ER 705, CA. Conaglen, ‘Remedial ramifications of conflicts between a fiduciary’s duties’ (2010) LQR 72. See Snell’s Equity (Sweet & Maxwell, 34th edn), para 7-051 (p181): ‘… [W]here a compensatory remedy is sought, the claim for breach of fiduciary duty takes on the characteristics of a duty-based claim, in the sense that the fiduciary has committed the wrong of acting with a conflict between duty and interest and that wrong is said to have caused loss to the claimant. Necessarily in such claims, the claimant’s position is relevant, in the sense that a claimant cannot recover for loss which he would have suffered in any event. To be recoverable, it must be shown that the loss was caused by the breach of fiduciary duty. Thus, it becomes important to determine how the claimant would have acted but for the breach of the fiduciary duty, in a way that is unimportant where the disability-based remedies are sought’. Support for the view that it is for the claimant to prove that he would have acted differently had disclosure been made (similar to the common law position) is to be found in Nationwide BS v Balmer Radmore [1999] PNLR 606, ChD, and in Conaglen and in Snell – see previous footnote. There appears to be a rather greater weight in the authorities which suggest the contrary (including the Privy Council in Brickenden itself, Chadwick J in Bristol BS v May, May & Merrimans [1996] 2 All ER 801, ChD, the Court of Appeal in Gwembe Valley Development Co v Koshy [2003] EWCA Civ 1048, [2004] 1 BCLC 131, CA, and Lewin on Trusts (Sweet & Maxwell, 19th edn), [39-12 to 39-13]). See also Bank of Ireland v Jaffery [2012] EWHC 1377 (Ch), where Vos J (at [290] and [354]) refers to this argument without adopting it. For the hallmarks of reliance, see Dadourian Group International Inc v Simms [2009] EWCA Civ 169 at [99]. Gwembe Valley Development Co v Koshy [2003] EWCA Civ 1048, [2004] 1 BCLC 131, CA at [147]. For which, see Chapter 8. Gardner v Parker [2004] EWCA Civ 781, [2004] 2 BCLC 554, CA; Shaker v Al-Bedrawi [2003] Ch 350, CA; see also Mellor v Partridge [2012] EWHC 1415 (QB) at [63]; Kyrris v Burger King Ltd [2007] EWHC 753 (Ch) at [66].

105

4.5  The Liability of Directors and Advisers of the Company Directly to Shareholders

ALL COMPANIES LIMITED BY SHARES At common law 4.5 Conduct by directors amounting to deceit (or conspiracy or any other intentional unlawful conduct), leading to loss for a shareholder, should result in a remedy for such loss against the directors. For deceit, a claimant will have to establish that the statement was one of fact made by one or more directors with knowledge of its falsity, or without belief in its truth, or recklessly, not caring whether it is true or false, with the intention that the claimant, or a class of persons including the claimant, should rely on it.19 An example is Kaye v Croydon Tramways Co,20 where Lindley MR used the word ‘tricky’ to describe a notice calling a meeting which had, as he found, ‘been most artfully framed to mislead the shareholders’. 4.6 Hedley Byrne & Co Ltd v Heller & Partners Ltd21 paved the way for claims for pure economic loss suffered as a result of a breach of a duty of care owed by professional advisers and directors to shareholders: the House of Lords held that a negligent, though honest, misrepresentation may give rise to an action for damages for financial loss22 caused thereby. It may occur in the absence of any contract or fiduciary relationship, the key being that the law will imply a duty of care when a party seeking information from a party possessed of a special skill trusts him to exercise due care, and that party knew or ought to have known that reliance was being placed on his skill and judgment.23 Once these prerequisites have been met, there is no need to embark on any further inquiry to determine whether it is fair, just and reasonable to impose liability for economic loss.24 A  completed cause of action will include evidence of actual reliance by the innocent party on the misrepresentation perpetrated by the wrongdoer, as well as causation resulting in loss. Several approaches may be adopted to establish the existence of a duty of care in particular factual settings.25 When a company employs a professional adviser, there is privity of contract between the company and the adviser. However, circumstances may arise where, as a result of an assumption of responsibility by the adviser to the shareholder, duties are owed in tort by the professional advisers to the shareholders.26 This may lead to liability

19

These tests were applied in Derry v Peek (1889) LR 14 App Cas 337, HL. See also Bradford Third Equitable Benefit Building Society v Borders [1940] Ch 202, CA, reversed in part by the House of Lords ([1941] 2 All ER 205). 20 [1898] 1 Ch 358, CA, at 369. 21 [1964] AC 465, HL. 22 Or ‘pure economic loss’, as it is also referred to. 23 At 486, 502 and 514. 24 Henderson v Merret Syndicates [1995] 2 AC 145, HL; Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830, HL; Caparo Industries v Dickman [1990] 2 AC 605, HL; and Smith v Eric S Bush [1990] 1 AC 831, HL. 25 See Marc Rich & Co AG v Bishop Rock Marine Co Ltd [1996] 1 AC 211, HL; Caparo Industries v Dickman [1990] 2 AC 605, HL; and Smith v Eric S Bush [1990] 1 AC 831, HL. 26 See, for an exposition of the application for the test for liability, BCCI v Price Waterhouse (No 2) [1998] BCC 617, CA, at [7].

106

All companies limited by shares 4.7

for surveyors,27 solicitors,28 accountants29 and investment bankers30 (particularly in takeover situations). However, many firm’s standard terms and conditions exclude liability to third parties. These terms may have the effect of excluding any assumption of responsibility31 provided they do not fall foul of statutory restrictions on unfair terms.32

Breach of fiduciary duty 4.7 A  director owes fiduciary duties to his company.33 Save in special circumstances, he will not owe such duties to individual shareholders.34 The nature and extent of fiduciary duties have been described as follows in Bristol & West BS v Mothew:35 ‘A  fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary. As Dr. Finn pointed out in his classic work Fiduciary Obligations (1977), p. 2, he is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary.’ In the context of shareholders’ interests, two situations arise which may create duties of a fiduciary nature owed by directors to shareholders36: first, when 27

Smith v Eric S Bush [1990] 1 AC 831, HL. The scope of this duty was narrowed in Scullion v Bank of Scotland Plc (t/a Colleys) [2011] 1 WLR 3212, CA. 28 See eg White v Jones [1995] 2 AC 207, HL. 29 Caparo Industries v Dickman [1990] 2 AC 605, HL; Killick v PricewaterhouseCoopers (No 1) [2001] 1 BCLC 65, ChD; Galoo v Bright Grahame Murray [1994] 1 WLR 1360, CA. 30 Morgan Crucible v Hill Samuel [1991] Ch 295, CA. See also Johan du Toit SC, ‘In the wake of the Facebook flotation: do investment banks owe a duty of care to shareholders of the companies they are advising?’ (2012) JIBFL 417. 31 As was the case in Barclays Bank plc v Grant Thornton UK LLP [2015] EWHC 320 (Comm), [2015] 2 BCLC 537 (Comm) (accountants) and Taberna Europe CDO II Plc v Selskabet [2016] EWCA Civ 1262, [2017] QB 633, CA (bankers). 32 Such as in the Unfair Contract Terms Act 1977. 33 Section 170(1) of the Companies Act 2006; see Chapter 2 for a detailed discussion. 34 See eg Stein v Blake (No 2) [1998] 1 All ER 724, CA; Peskin v Anderson [2001] 1 BCLC 372, CA. 35 [1998] Ch 1, CA, per Millett LJ at 18A–18C. See also, for a similar approach in Australia, 15.15–15.16; Brunninghausen v Glavanics (1999) 46 NSWLR 538, CA; Fraser v NRMA Holdings Ltd (1995) 127 ALR 543 (Federal Court of Australia, General Division, Full Court) at 554; and Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 (High Court of Australia); and, in South Africa, Trinity Asset Management (Pty) Ltd v Investec Bank Ltd 2009 (4) SA 89 (SCA). 36 In Sharp v Blank [2015] EWHC 3220 (Ch), [2017] BCC 187, ChD, it was suggested that at least some of these duties are better described as ‘equitable’ rather than fiduciary duties as they do not include the attribute of loyalty necessary for the arising of fiduciary duties described in Mothew (for which see 4.7), per Nugee J at [21]–[22].

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4.8  The Liability of Directors and Advisers of the Company Directly to Shareholders

giving shareholders advice or information; and, second, when directors deal with shareholders’ proprietary interests in their shares.

Directors giving advice or information 4.8 There is ample authority in England and Wales37 and the Commonwealth38 recognising the duties of directors to provide sufficient information to shareholders, who are called on to vote at a general meeting, to enable them to properly exercise their discretion.39 In a modern economy where complex corporate structures are in vogue, particularly amongst public quoted companies, the distance between the owner-shareholders and board of directors has grown considerably. It requires more, not less, transparency and accountability. What was said more than a century ago, by Fletcher Moulton LJ in Peel v London & North Western Railway Co,40 remains equally valid today: ‘Now, what is the position of a director? A director is chosen by the stockholders as a manager of the undertaking. As such manager he is brought into intimate connection with the working of the corporation, and acquires knowledge of its working and of its position which no ordinary stockholder can get. Assume that he learns that it is proposed to advise the stockholders to adopt a policy which his knowledge of the business and his investigations lead him to think will be disastrous to the corporation. I unhesitatingly say that, if he thinks there is any danger of the corporation taking a step which in his view would be injurious to the corporation, it is his duty to put his knowledge at the service of the individual corporators, and also to give them the advice which that knowledge leads him to think is best for the prosperity of the corporation.’ 4.9 In Matabeleland Co Ltd v British South Africa Co,41 Stirling J dismissed an application for an injunction to restrain Cecil John Rhodes and his co-directors from representing to the shareholders that a certain agreement was valid. The next day, the Court of Appeal (Lindley and AL Smith LJJ) heard and dismissed an appeal from this judgment, Lindley LJ holding that, in substance:42 ‘… it was an application to the court not to restrain the defendants from carrying out an agreement alleged to be beyond their powers, but to restrain the directors from convening a meeting to discuss certain matters on the ground that the notice convening the meeting contained misrepresentations which would mislead the shareholders. Assuming that to be true, the answer to the application would

37 38

Discussed at 4.9–4.19. See, for the Australian position Chapter 16 and Bulfin v Bebarfald’s Ltd (1932) 38 SR (NSW) 423 at 440–441; Shears v Chisholm [1994] 2 VR 535 at 624; Fraser v NRMA Holdings Ltd (1995) 127 ALR 543 (Federal Court of Australia, General Division, Full Court); in Canada Chapter 17 and Garvie v Axmith [1962] OR 65 (31 DLR (2d) 65 at 82–87); Goldex Mines Ltd v Revill [1974] 54 DLR (3d) 672 at 679 (Court of Appeal); Charlebois v Bienvenul [1967] 2 OR 635 at 644; and, in South Africa Chapter 18 and Trinity Asset Management (Pty) Ltd v Investec Bank Ltd 2009 (4) SA 89 (SCA). 39 The test was put in almost precisely these terms by Norris J in Sharp v Blank [2019] EWHC 3096 (Ch) at [782]. See also 4.13 below. 40 [1907] 1 Ch 5, CA, at 16. 41 (1893) 10 TLR 77 (Ch and CA). 42 At 80.

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All companies limited by shares 4.10

be, “Go and tell the shareholders they are being deceived; go and expose the misrepresentations …”’ and further: ‘(S)uppose that, though that agreement was not binding in point of law upon the company, the company thought it would be a breach of faith not to act upon it, was it a lie to tell the shareholders that, though that agreement was not binding in law, it was binding in honour, and was it wrong to ask them to act as in honour bound? To hold that would be outrageous.’ 4.10 Directors who withheld knowledge from shareholders about their personal beneficial involvement in the affairs of a company were the subject of the judgment of Kekewich J  in Tiessen v Henderson.43 The shareholders applied for an interim injunction to restrain the defendants from carrying into effect certain resolutions passed at an extraordinary general meeting. The resolutions related, inter alia, to the reconstruction of the company. Although the directors of the company were personally interested in the adoption of the scheme and were to be remunerated by means of a call on shares, these facts were not disclosed in the notice convening the meeting. Kekewich J held that this fact should have been disclosed, and granted an injunction to prevent the resolutions being carried into effect without there being another meeting. Following Kaye v Croydon Tramways Co,44 he said:45 ‘The application of the doctrine of Foss v Harbottle46 to joint stock companies involves as a necessary corollary the proposition that the vote of the majority at a general meeting, as it binds both dissentient and absent shareholders, must be a vote given with the utmost fairness – that not only must the matter be fairly put before the meeting, but the meeting itself must be conducted in the fairest possible manner …47 There is no question of conduct here, either on the part of Mr Henderson [the first defendant] or anybody else. The question is merely whether each shareholder as and when he received the notice of the meeting, in which I include the circular of the same date, had fair warning of what was to be submitted to the meeting. A shareholder may properly and prudently leave matters in which he takes no personal interest to the decision of the majority. But in that case he is content to be bound by the vote of the majority; because he knows the matter about which the majority are to vote at the meeting. If he does not know that, he has not a fair chance of determining in his own interest whether he ought to attend the meeting, make further inquiries, or leave others to determine the matter for him.’ He continued:48

43 [1899] 1 Ch 861. 44 [1898] 1 Ch 358. 45 At 866–867. 46 (1843) 2 Hare 461. See Chapter 5 for a discussion of Foss v Harbottle. 47 In Trinity Asset Management (Pty) Ltd v Investec Bank Ltd 2009 (4) SA 89 (SCA), the South African Supreme Court of Appeal drew attention (at [30]) to the fact that, in the Law Journal report ((1899) 68 LJ Ch 353 at 356), there appears a sentence before the sentence beginning ‘There is no question’ which reads as follows: ‘If you are to apply that rule in its entirety – that the vote of the majority controls the minority, and of course also the absent shareholder – it is a matter of absolute necessity that there should be the most perfect straightforwardness and openness throughout’. 48 At 870–871.

109

4.11  The Liability of Directors and Advisers of the Company Directly to Shareholders

‘The man I am protecting is not the dissentient, but the absent shareholder – the man who is absent because, having received and with more or less care looked at this circular, he comes to the conclusion that on the whole he will not oppose the scheme, but leave it to the majority. I cannot tell whether he would have left it to the majority of the meeting to decide if he had known the real facts. He did not know the real facts; and, therefore, I think the resolution is not binding upon him.’ 4.11 The growth of public companies and their number of shareholders make somewhat unrealistic a sentiment that the matter can be put right at a general meeting by informing the shareholders of the information or lack thereof only on that occasion.49 That was recognised by the courts as long ago as 1933. Maugham J in Re Dorman Long and Co Ltd; Re South Durham Steel and Iron Co Ltd dealt with the position as follows:50 ‘It may be observed that when the Joint Stock Companies Arrangement Act, 1870, was passed, in the majority of cases all the persons concerned with an arrangement could go to the meeting, listen to what was said and vote for or against the arrangement according to the views which they were persuaded to take. In these days, in many of the cases that come before me, only a fraction of the persons who are concerned can get into the room where the meeting is proposed to be held, and in the great majority of cases the proxies given to the directors before the meeting begins have in effect settled the question of the voting once for all. It is perhaps not unfair to say that in nearly every big case not more than five per cent of the interests involved are present in person at the meeting. It is for that reason that the Court takes the view that it is essential to see that the explanatory circulars sent out by the board of the company are perfectly fair and, as far as possible, give all the information reasonably necessary to enable the recipients to determine how to vote.’ 4.12 In Gething v Kilner,51 minority shareholders in a company facing a takeover bid (the offeree) objected on the basis that the offer document and the board’s recommendation of acceptance of the bid were misleading. The offer document did not disclose that the offeree company’s financial advisers recommended rejection of the offer. The board did not provide any rational explanation for its refusal to accept the advice. The minority shareholders sought an interlocutory injunction to restrain the offeror company from declaring the offer unconditional, thereby relieving any assenting shareholder of the offeree from any assent that had already been given. Brightman J refused to grant the relief. He considered that the evidence demonstrated that the offeree’s board honestly believed the offer to be advantageous, and that it was a reasonable view to adopt. He referred to ‘other remedies’ available to the claimants should a wrong have been committed. However, he continued by saying:52 ‘I accept that the directors of an offeree company have a duty towards their own shareholders, which in my view clearly includes a duty to be honest and a duty 49

50 51 52

With some 6 billion shares in issue, held by some 800,000 shareholders, only 307 individual Lloyds TSB shareholders were present and voted at an extraordinary general meeting of shareholders held on 19 November 2008 for the approval of the acquisition of HBOS. Not a single institutional shareholder attended, yet almost all of the votes cast in respect of about 3 billion shares were from institutional shareholders who voted by proxy. [1934] Ch 635 at 657. [1972] 1 WLR 337, ChD. At 341H–342A.

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All companies limited by shares 4.13

not to mislead. I  also accept that a shareholder in an offeree company may be prejudiced if his co-shareholders are misled into accepting the offer. I express this view because as soon as the appropriate percentage of shareholders have been misled and have assented, the minority become subject under section 209 [of the Companies Act 1948] to statutory powers of compulsory purchase. It therefore seems to me that a minority could complain if they were being wrongfully subjected to that power of compulsory purchase as a result of a breach of duty on the part of the board of the offeree company.’ 4.13 However, not every communication issued or approved by the directors in relation to a proposed transaction will give rise to a duty to shareholders. Giving judgment following the trial of Sharp v Blank53 Norris J distinguished between the liability of directors in respect of statements and recommendations in the circular, where the directors accepted that they owed a duty of care as to the accuracy of information and the foundations of the opinions they expressed,54 and the contents of announcements made about the proposed transaction. The case concerned a claim by shareholders against the directors of Lloyds Bank plc in relation to the bank’s takeover of HBOS. Norris J considered that that there was a significant distinction between the circular which had the purpose of informing shareholders about the details of the transaction and providing them with the information necessary to decide whether to support it, and announcements made in order to comply with the regulatory requirements. In the latter case there was no assumption of responsibility by the directors and no tendering of advice to individual shareholders. The purpose of each announcement was to inform the market in accordance with relevant regulatory requirements.55 Likewise, no duty was owed to shareholders in respect of statements made at presentations made to journalists and analysts. The mere fact that the statement was made by a director was not enough to give rise to a duty. The statement was not made to the shareholders but to a class of recipients who would be commenting on the proposals for the purpose of assisting them to do so and the statements could not reasonably be taken by the shareholders as qualifying or varying anything said in the circular which they had received.56 Norris J also set out the test for whether sufficient information had been provided to the shareholders57, which was said to be ‘largely uncontroversial’, as follows: ‘a) The shareholders must be given sufficient information to make informed decisions about the proposals to be put to them at shareholders meetings. … b) The performance of the duty is measured against the requirement of reasonableness or fairness in the circumstances having regard to the interests of the company as a whole; the object being to provide sufficient information (not such a surfeit as to obscure the real issue, or so little as to constitute a misrepresentation by omission). That is a summary of a passage from Residues Trading & Treatment v Southern Resources Ltd (1988) 14 ACLR 375 at 377 (cited with approval in the RAC Case ). As Hart J put it in CAS Nominees v Nottingham Forest FC [2002] 1 BCLC 613 at [72]: 53 54 55 56 57

[2019] EWHC 3096 (Ch). The directors were bound to do so as the circular contained statements that each individual named director had taken such reasonable care (at [618]). At [638] and [658]. At [769]. At [780].

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4.14  The Liability of Directors and Advisers of the Company Directly to Shareholders

“The circular to shareholders must give a fair, candid and reasonable explanation of the purpose for which the meeting is called.” c) The “sufficient information” duty requires the directors to set out fairly and candidly (and, the Defendant Directors concede, in comprehensible terms) matters within their knowledge: the proper performance of the duty does not require the Circular to set out what the responsible directors might have discovered had they initiated reviews or enquiries. d) The Claimants submitted that this meant that the Circular ought necessarily to have included any material in the directors’ possession which had a bearing on their own view of the Acquisition. … e) The Defendant Directors did not accept that interpretation: Ms Davies QC’s argument (though she did not put it in these precise terms) was that the very formulation of the duty shows that the directors have to exercise judgment about what (out of all they know) to include in the Circular in order to create a commercially informative document that aids comprehension and avoids confusion. f) I accept the submission of Ms Davies QC: I hold that fair, candid and reasonable disclosure does not require the complete disclosure of everything which went into the decision-making process of the directors, nor yet every single piece of information that might affect shareholder voting. … g) The source of the duty is equity: see Re Smiths of Smithfield Ltd [2003] BCC 769 at [46]. The consequences of a breach of such a duty will not necessarily be the same as those of a breach of a duty at common law. In general, if an insufficiency of information is established then that will raise this question: “Is there any reasonable ground for supposing that such imperfections as may be found in the Circular have had the result that the majority who have approved the transaction have done so under some misapprehension of the position?” (The formulation of the question draws on the words of Clauson J in Re ICI [1936] Ch 587 at 618). The “sufficient information” duty is directed at testing the validity of the decision of the meeting: a breach of it will normally lead to directions as to the convening of a fresh meeting, not to the generation of claims for compensation by individual shareholders.’ Norris J reiterated the established position (which had been stated by the defendants’ banking expert in evidence), that the shareholders needed to be provided with sufficient information to form a decision on whether or not to vote in favour of the transaction.58 4.14 Regard being had to the fact that an individual shareholder will be bound by the vote of the majority, it must follow that the shareholder’s rights extend not only to his or her being furnished with the necessary information, but also that all of his or her fellow shareholders receive such information. Similarly, it follows that a shareholder has the right, flowing from the company constitution, to insist that he and his fellow shareholders do not receive information which is inaccurate, and is entitled to enforce such a right by applying for an interdict to prevent a meeting

58

At [782].

112

All companies limited by shares 4.15

from proceeding. Apart from any rights arising from legislation or the City Code,59 the shareholders’ right to receive the necessary information arises from an implied term in the company constitution but, depending on the context within which the information is imparted, it may also amount to a fiduciary duty. That is likely to be the case when the information is coupled with advice, for example to approve of a particular resolution involving the proprietary rights of shareholders.60 The transition to the recognition of the duty as being a fiduciary one was subtle, but certain.61 In Re a Company (No 008699 of 1985),62 Hoffmann J held that, in a situation where rival bids were made, the offeree company’s directors were under no duty to advise63 shareholders to accept the higher offer. However, once the directors decided to advise the shareholders on the merits of the competing bids, they were obliged to provide sufficient information and advice to enable shareholders to reach an informed decision, and to refrain from giving misleading advice or exercising their fiduciary powers in ways which would prevent shareholders from being able to make an uninhibited or misinformed choice. Instead, they had placed their personal interests before the fiduciary duties owed to the shareholders under these circumstances.64 4.15 Stein v Blake (No  2)65 expressly recognised directors’ duties as being of a fiduciary nature in respect of a transaction concerning the shareholders’ shares. Although a matter of misappropriation by a director calling for a derivative rather than a personal action, Millett LJ said:66 ‘In my judgment, this case indicates the distinction which must be made. Directors owe fiduciary duties to their company to preserve and defend its assets and to the shareholders to advise them properly so that they are not induced or compelled to part with their shares at an undervalue. No doubt other fiduciary duties are also owed both to the company and to its shareholders. Shareholders may suffer loss in the event of a breach of either duty, but in the first case the loss consists of a diminution of the value of their shares, is fully reflected in the loss suffered by the company, and is fully compensated by restitution to the company. In the second case the company suffers no loss. Its assets are unaffected, though they are 59 See 4.29–4.34. 60 The court below and the Court of Appeal refused to strike out allegations of liability of directors in a takeover situation, leaving the aspect of the assumption of responsibility for trial, and without labelling any such duty as fiduciary in nature: Partco Group Ltd v Wragg [2002] EWCA Civ 594, [2002] 2 BCLC 323, CA. 61 The existence of such a fiduciary duty was recognised, but had not been breached on the facts, in John Crowther Group plc v Carpets International plc [1990] BCLC 460, ChD (Vinelott J). It was excluded as a possibility in Dawson International plc v Coats (1988) 4 BCC 305, CSOH, affirmed on appeal ((1989) 5 BCC 405, CSIH). 62 [1986] BCLC 382, ChD. 63 In the case of regulated companies, it appears to be a duty and not a choice (see 4.29–4.34). 64 At 388c–388f. 65 [1998] 1 All ER 724, CA. 66 At 730b–730d. See also Heron International v Lord Grade [1983] BCLC 244, CA; Re Smiths of Smithfield [2003] EWHC 568 (Ch), [2003] BCC 769 (Ch) at [46]-[47]; Residues Treatment & Trading Co Ltd v Southern Resources Ltd (1998) 14 ACLR 375, Supreme Court of South Australia, at 377–378, cited with approval by Neuberger J in Re RAC Motoring Services Ltd [2000] 1 BCLC 307, ChD, at 327a–327d (applied in Sharp v Blank [2015] EWHC 3220 (Ch), [2017] BCC 187, ChD; see further Pilmer v Duke Group Ltd [2001] 2 BCLC 773, High Court of Australia (and also [2001] 5 LRC 417).

113

4.16  The Liability of Directors and Advisers of the Company Directly to Shareholders

changed from physical assets to a chose in action consisting of a claim against the wrongdoers.’ (emphasis supplied) 4.16 These views regarding the labelling of the duty as one of a fiduciary nature were reinforced by the subsequent judgment of the Court of Appeal in Peskin v Anderson,67 which gave a comprehensive exposition of the factors informing the existence of a fiduciary duty owed by directors to shareholders. The claimant shareholders and members of the club contended that the directors of the Royal Automobile Club (RAC) were in breach of a fiduciary duty to shareholders, since they did not timeously warn shareholders what their business plan with the RAC was. As a result, some of them resigned as members, thereby forfeiting sharing in the prospects of the business plan which only became known after their resignations, which business plan promised to be more beneficial to shareholders and members. The shareholders would not have resigned had it not been for the perceived dereliction of duty by the directors. 4.17 Had the shareholders’ contentions been upheld, it would have had farreaching consequences for the manner in which companies were managed. Shareholders ordinarily did not, and do not, have rights to disclosure of minutes of board meetings. Had they had such rights, there would be a risk that sensitive information could easily leak to competitors to name but one example. Competitors could, by becoming shareholders be able to exercise such rights, undermine the business of the company if business plans hatched by a board of directors could be accessed. It is therefore not surprising that the claim was dismissed. However, in its reasoning the Court of Appeal defined those circumstances in which a fiduciary duty may well exist as establishing a ‘special factual relationship’ between the directors and the shareholders in a particular case, by first referring to the default position of directors standing in a fiduciary relationship to the company (and hence not to the shareholders). In his judgment, with which both Simon Brown and Latham LJJ agreed, Mummery LJ said:68 ‘33.  The fiduciary duties owed to the company arise from the legal relationship between the directors and the company directed and controlled by them. The fiduciary duties owed to the shareholders do not arise from that legal relationship. They are dependent on establishing a special factual relationship between the directors and the shareholders in the particular case. Events may take place which bring the directors of the company into direct and close contact with the shareholders in a manner capable of generating fiduciary obligations, such as a duty of disclosure of material facts to the shareholders, or an obligation to use confidential information and valuable commercial and financial opportunities, which have been acquired by the directors in that office, for the benefit of the shareholders, and not to prefer and promote their own interests at the expense of the shareholders.’ The court proceeded by defining the circumstances under which a ‘special factual relationship’ may arise:

67 68

[2001] 1 BCLC 372, CA. See also MacQuarie Internationale Investments Ltd v Glencore (UK) Ltd [2008] EWHC 1716 (Comm), [2008] 2 BCLC 565 (Comm). [2001] 1 BCLC 372, CA, at [33]–[34]. See also 16.15–16.16, Coleman v Myers [1977] 2 NZLR 225, CA, and Brunninghausen v Glavanics (1999) 46 NSWLR 538, CA.

114

All companies limited by shares 4.18

‘34.  These duties may arise in special circumstances which replicate the salient features of well-established categories of fiduciary relationships. Fiduciary relationships, such as agency, involve duties of trust, confidence and loyalty. Those duties are, in general, attracted by and attached to a person who undertakes, or who, depending on all the circumstances, is treated as having assumed, responsibility to act on behalf of, or for the benefit of, another person. That other person may have entrusted or, depending on all the circumstances, may be treated as having entrusted, the care of his property, affairs, transactions or interests to him. There are, for example, instances of the directors of a company making direct approaches to, and dealing with, the shareholders in relation to a specific transaction and holding themselves out as agents for them in connection with the acquisition or disposal of shares; or making material representations to them; or failing to make material disclosure to them of insider information in the context of negotiations for a take-over of the company’s business; or supplying to them specific information and advice on which they have relied. These events are capable of constituting special circumstances and of generating fiduciary obligations, especially in those cases in which the directors, for their own benefit, seek to use their position and special inside knowledge acquired by them to take improper or unfair advantage of the shareholders.’ These passages allow for an argument that the duties can arise not only in respect of offeree companies (whose shareholders are likely to give up shares in exchange for cash or shares in the offeror) but also in respect of offeror companies (where shareholders’ interests, dividend expectations and particularly their voting rights are likely to be affected) in takeover situations. 4.18 The circumstances when directors owe fiduciary duties to shareholders was the issue in Sharp v Blank69 when Nugee J considered an application by former directors of Lloyds Bank to strike out a claim brought against them by shareholders in the bank relating to the bank’s takeover of HBOS. The shareholders claimed that the former directors owed them a range of fiduciary duties which would follow from the overriding duty of loyalty that fiduciaries were held to owe in Mothew,70 including the wide-ranging duty to act in the best interests of the shareholders to prevent them from suffering loss. The former directors accepted that they owed tortious duties to the shareholders when making statements and providing information and recommendations71 and that they owed to the shareholders a duty to provide them with sufficient information as to enable them to make an informed decision as to how to vote with regard to the acquisition of HBOS. However, the former directors did not accept that this duty was actually a fiduciary one, but contended that it was properly described as ‘a duty in equity’.72 Nugee J did not need to decide whether the duty was a fiduciary one but indicated that he was inclined to agree that it was better referred to as an equitable duty, as it lacked the features of a fiduciary duty identified in Mothew.73 Nugee J  did not expressly say so, but clearly had in mind that the obligation of loyalty and the consequential duties to put the interests of shareholders

69 [2015] EWHC 3220 (Ch), [2017] BCC 187, ChD. 70 See 4.7. 71 At [3]. 72 At [6]. 73 At [21]–[22].

115

4.19  The Liability of Directors and Advisers of the Company Directly to Shareholders

before their own interests arising from a fiduciary undertaking to act on behalf of another were not a feature of it.74 Nugee J  set out what he considered to be the law as to fiduciary duties owed by directors to shareholders as follows:75 ‘I take it therefore to be established law, binding on me, that although a director of a company can owe fiduciary duties to the company’s shareholders, he does not do so by the mere fact of being a director, but only where there is on the facts of the particular case a “special relationship” between the director and the shareholders. It seems to me to follow that this special relationship must be something over and above the usual relationship that any director of a company has with its shareholders. It is not enough that the director, as a director, has more knowledge of the company’s affairs than the shareholders have: since they direct and control the company’s affairs this will almost inevitably be the case. Nor is it enough that the actions of the directors will have the potential to affect the shareholders – again this will always, or almost always, be the case. On the decided cases the sort of relationship that has given rise to a fiduciary duty has been where there has been some personal relationship or particular dealing or transaction between them.’ In striking out the claims based on fiduciary duties alleged to be owed to the shareholders, Nugee J went on to state that if a director is to be held to owe fiduciary duties to shareholders there must be something unusual in the relationship which gives rise to those duties.76 He observed that this is the likely reason why the cases where such duties have been held to exist are mostly in relation to small companies where the shares are closely held, where there is often a family or other personal relationship and where in most cases, there is a particular transaction involved in which directors are dealing with the shareholders and from which the directors stand to benefit personally.77 In Sharp v Blank no such special relationship was pleaded,78 no doubt because there was no such special relationship between the directors of a very large public company and its shareholders.79 4.19 However, in an appropriate case it is not necessary that the director personally stands to benefit from a transaction for fiduciary obligations to arise.80 Breaches of directors’ duties owed to shareholders have resulted in relief in the form of an injunction;81 by refusing to sanction any related scheme;82 and financial

74 75 76

77 78 79 80 81 82

See his observations in this regard at [13]. At [12]. This analysis was applied and the court found that no ‘special relationship’ which gave rise to such duties was present in Vlad Nielsen Holdings AS v Baldorino [2019] EWHC 1926 (Comm) at [746]–[751]; and reached the same conclusion in a case where the parties were on different sides to a transaction so that the shareholder cannot have considered that the director owed her a duty to prefer her interests to those of the company or himself: De Sana v Nataro [2020] EWHC 1031 (Ch), [2021] 1 BCLC 366, at [200] and [236]–[240]. At [13]. At [15]. See the facts referred to in n 49. Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, PC, at 837–838. Compare CAS Nominees Ltd v Nottingham Forest FC [2002] 1 BCLC 613, ChD. Tiessen v Henderson [1889] 1 Ch 861. Dorman Long and Co Ltd; Re South Durham Steel and Iron Co Ltd [1934] Ch 635 at 657.

116

All companies limited by shares 4.21

compensation for loss sustained by a shareholder resulting from such a breach (subject to the rule against reflective loss).83

Directors dealing with shareholders’ proprietary rights 4.20 It does not matter to a company who its shareholders are. The shares are not its property. When its directors make decisions regarding allotment of shares or terminating a shareholding, the personal proprietary interests of the shareholder are directly in issue, and are clearly distinct from any possible interest that the company may have in those processes. If new shares are issued disproportionately to existing shareholdings, those shareholders whose total shareholdings are diluted in the process will suffer prejudice in the form of diluted voting rights and reduced dividends. Therefore, raising money by a rights issue, where the directors know that a shareholder cannot take up the new shares due to financial inability, may be significantly detrimental to a shareholder’s interests encompassed in the bundle of rights that he holds. When resolving to allot new shares, there are accordingly a number of duties which directors ought to comply with, all of which are informed by the fiduciary nature of the power which requires the board to consider those matters fairly, in the interests of all groups of shareholders, and having regard to the foreseeable range of responses.84 An abuse of these powers is an infringement of a member’s contractual rights under the articles.85 These duties include the fulfilment of the requirement of even-handedness and fairness, in considering what price could and should be extracted from those willing and able to subscribe. The duty is of particular importance if the board members, or those in a position to control or influence them, stand to benefit from the exercise of the power in a particular way. All appropriate factors should be considered, which may include obtaining the views of shareholders regarding the price and terms of the rights issue. A failure in that duty could lead to the directors’ liability for loss incurred by shareholders who are prejudiced by the directors’ breach. 4.21 The claimant in Hunter v Senate Support Services86 sought to impugn the forfeiture of his minority shareholding after he had failed to heed calls for payment for shares. It was held that the claimant had standing to bring the claim to set aside the forfeiture of his own shares. The essence of a claim to set aside a forfeiture of shares was an infringement of the claimant’s individual rights as a shareholder and not a claim where a wrong had been done to the company, nor a claim where the rights which were infringed belonged to the company alone:87

83 84

85 86 87

Heron International v Lord Grade [1983] BCLC 244, CA; Stein v Blake (No 2) [1998] 1 All ER 724, CA. Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 at 837–838; Re a Company (Case No 005136 of 1986) [1987] BCLC 82, ChD, at 84f; Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [95], not affected by the judgment on appeal – [2013] EWCA Civ 667, [2014] 1 BCLC 427, CA. Re a Company (Case No 005136 of 1986) [1987] BCLC 82, ChD, at 84i–85c; Re Sunrise Radio Ltd [2010] 1 BCLC 367, ChD, affirmed on appeal [2013] EWCA Civ 667, [2014] 1 BCLC 427, CA. [2004] EWHC 1085 (Ch), [2005] 1 BCLC 175, ChD. At [199], with the reasoning at [192]–[198] leading to the conclusion. Cf Re Hastings-Bass [1975] Ch 25, CA.

117

4.22  The Liability of Directors and Advisers of the Company Directly to Shareholders

‘[199] If a shareholder has the right to sue in his own name to set aside a decision of directors to make an allotment which has had the effect of diluting his shareholding and thereby reducing its value, one would surely expect a right to sue in his own name to set aside a decision of directors to forfeit his shareholding to follow a fortiori. The substance of a claim to set aside a forfeiture of shares, such as the present, is indeed an alleged infringement of the claimant’s individual rights as a shareholder; it is not in substance a claim where a wrong has been done to the company, which needs to restrain its continuance, or to recover its own property or compensation due to it, nor a claim where the rights infringed belong to the company alone.’

MISREPRESENTATION ACT 1967 4.22

By section 2(1) of the Misrepresentation Act 1967:

‘Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made the facts represented were true.’ Although, theoretically, a director and a shareholder may enter into an agreement on the strength of a misrepresentation, it is hard to imagine a practical situation where that can happen between a director and a shareholder in those respective capacities.88

REGULATED COMPANIES 4.23 In addition, or in the alternative, to the potential claims applicable to all companies limited by shares, the legislature has stepped in to create certain rights and remedies for shareholders faced with the might of regulated (usually quoted (listed)) companies. To put it differently, obligations have been created with which directors have to comply, failing which they may be exposed to liability to shareholders. As a general principle, no claim for breach of statutory duty is available where the statute does not specifically provide for a personal right to claim for breach of the duty, at least insofar as the Financial Services and Markets Act 2000 (‘FSMA 2000’) is concerned.89 Such claims are defined in sections 90, 90ZA and 90A of FSMA 2000, whereas the City Code on Takeovers and Mergers (‘the Code’) creates duties complementary to the establishment of common law or fiduciary duties.

88 See Hall v Cable & Wireless Plc [2009] EWHC 1793 (Comm), [2010] 1 BCLC 95 (Comm) at [25]. 89 Hall v Cable & Wireless Plc [2009] EWHC 1793 (Comm), [2010] 1 BCLC 95 (Comm) at [21]– [24]; Brown v InnovatorOne plc [2012] EWHC 1321 (Comm) at [1269], [1274] and [1276].

118

Regulated companies 4.25

Financial Services and Markets Act 2000 4.24 Part VI of FSMA 2000 deals with Official Listings, and hence relates to quoted companies. Section 90 and its clones (sections 90ZA, 90A and 90B)90 were grouped under the heading ‘Compensation for false or misleading statements etc’.91 Section 90 (read with Schedule 10) makes provision for compensation for false or misleading statements published in listing particulars,92 which include prospectuses.93 Section 90ZA deals with liability for key investor information. Section 90A (read with Schedule 10A) provides for the liability of issuers of securities to pay compensation to persons who have suffered loss as a result of either misleading statements or dishonest omissions in certain published information relating to the securities, or a dishonest delay in publishing such information. If liability is established under section 90, there is no additional liability under section 90A.94 Insofar as the facts will allow, breach of common law or fiduciary duty claims can still be brought as alternative claims to these statutory claims. However, it is submitted that the overriding purpose of the legislative provisions was not to codify the common law, but to simplify recovery of loss suffered by shareholders caused by unscrupulous companies, their directors or advisers (where applicable).

Section 90 4.25 By section 90(1) of FSMA 2000, any person ‘responsible’ for a prospectus95 is liable to pay compensation to a person who has acquired securities on the strength of the prospectus and suffered a loss as a result of any untrue or misleading statement in the prospectus, or the omission therefrom of any matter required to be included by sections 87A and 87G.96 It may extend to shares acquired in the so-called ‘aftermarket’.97 Fraud or dishonest intention is not stated as a requirement for liability. 90 91 92 93 94 95 96

97

Section 90B requires no further discussion, because it merely provides for the Treasury to make further regulations about the liability of issuers of securities traded on a regulated market. No such regulations had been made by 1 November 2017. For a historical overview of the predecessors of these provisions, see Possfund Custodian Trustee Ltd v Diamond [1996] 1 WLR 1351, ChD, at 1358H–1361A. Dealt with by ss 79–83 of FSMA 2000. By s 90(11). For convenience, no distinction will be drawn and the expression ‘prospectus’ will be used. Schedule 10A, para 4. The issuer, the directors and those who permitted their names to be added in the prospectus as accepting responsibility therefor – see FCA Prospectus Rules 5.5. It will usually include accountants, solicitors and investment bankers. Broadly speaking, it relates to information necessary to enable investors to make an informed assessment of: (a) the assets and liabilities, financial position, profits and losses, and prospects of the issuer of the transferable securities and of any guarantor; and (b) the rights attaching to the transferable securities. In the case of listing particulars, the comparable sections are 80, 81 and 82. There is no liability solely on the basis of a summary in the prospectus unless the summary, when read with the rest of the prospectus, is misleading, inaccurate or inconsistent or does not provide required key information: Prospectus Regulations 2012, SI 2012/1538, reg 7. Hall v Cable & Wireless Plc [2009] EWHC 1793 (Comm), [2010] 1 BCLC 95 (Comm) at [20]; Possfund Custodian Trustee Ltd v Diamond [1996] 1 WLR 1351, ChD. It must be emphasised that Possfund only dealt with the position of initial public offerings (IPOs), where it is reasonable to expect that directors should foresee that, in the period after listing, appetite for the shares may be driven by the contents of the prospectus. Different considerations may apply in, for instance, rights issues, where an invitation is extended to existing shareholders only to take up new shares, and where it is arguable that liability for the responsible persons will be limited to claims by those addressed in the prospectus. Compare Peek v Gurney (1873) LR 6 HL 377 at 395 and 499–500 and Taberna Europe CDO II Plc v Selskabet [2016] EWCA Civ 1262, [2017] QB 633, CA.

119

4.26  The Liability of Directors and Advisers of the Company Directly to Shareholders

A person does not incur any liability if he satisfies the court that he can rely upon one of the statutory defences contained in Schedule  10. These include where the defendant can show that at the time when the prospectus was submitted to the competent authority, he reasonably believed (having made such enquiries, if any, as were reasonable) that: (a) the statement was true and not misleading; or (b) the matter whose omission caused the loss was properly omitted, and that one or more of the conditions set out in subparagraph (3) are satisfied.98 The onus of proof is clearly on the defendant on this point. A claimant will have to have established that: (a) the prospectus was untrue or misleading or omitted material information; (b) the investor acquired shares to which the prospectus applied; and (c) the investor has suffered a loss as a result. There is a dearth of authority on this provision. The reason may be that claims launched under this provision are usually made on behalf of a large number of claimants, or have the potential of very many shareholders joining, with the litigation settling early because of the risk of adverse costs orders.99 Liability to pay compensation for breach of sections 90 and 90A is in respect of loss suffered ‘as a result of’ untrue or misleading statements or omissions.100 A claimant must establish a causal link between the misstatements and the loss suffered. It is not necessary for the sale and purchase of the securities to have completed for liability to arise, the entering into of a binding contract to do so will suffice.101 Nor is the statutory claim limited to subscribers; it also extends to purchasers in the market in appropriate cases102 although such purchasers may not be able to bring common law tortious claims.103 4.26 The requirement of ‘reliance’ has been treated differently from the common law by the legislature. By paragraph 3(4) of Schedule 10A (to be read with section 90A), a loss is not regarded as suffered as a result of a misstatement unless the person suffering it acquired, continued to hold, or disposed of the relevant securities ‘(a) in reliance on the information in question, and (b) at a time when, and in circumstances in which, it was reasonable for him to rely on’. A  similar provision in section 90 is conspicuously absent. This was no omission by the legislature, but a decisive break with the previous provisions which required the claimant to have subscribed 98

Schedule 10, para 1(2). The conditions in para 1(3) are that (a) he continued in his belief until the time when the securities in question were acquired; (b) they were acquired before it was reasonably practicable to bring a correction to the attention of persons likely to acquire them; (c) before the securities were acquired, he had taken all such steps as it was reasonable for him to have taken to secure that a correction was brought to the attention of those persons; and (d) he continued in his belief until after the commencement of dealings in the securities following their admission to the official list and they were acquired after such a lapse of time that he ought in the circumstances to be reasonably excused. 99 See BCCI v Price Waterhouse [1999] BCC 351, ChD, at [16]: ‘However, it is common knowledge that in many cases like this in which enormous sums of damages are sought, the dispute does not reach the stage of a judgment. The sums claimed, the sheer cost of the litigation which in a case like this will be in many tens of millions of pounds, the enormous time which will be needed for the trial and the dislocation that will impose on the parties means that there will be very great pressure on them to settle’. 100 See, respectively, s 90(1)(b) (loss must be suffered ‘as a result of’) and Sch 10A, para 3(1)(b), using the same terminology. 101 Section 90(7). 102 Section 90(1). 103 If the approach in Peek v Gurney (1873) LR 6 HL 377 is followed.

120

Regulated companies 4.28

‘on the faith of the prospectus’.104 In the absence of any judgment on this point, commentators favour a construction excluding proof of reliance105. The statutory remedy was probably intended to provide a remedy distinguishable from those already available at common law (requiring proof of reliance) so that it is more likely that proof of reliance is not required.106 The measure of damages is identical to that for the tort of deceit.107

Section 90ZA 4.27 Section 90ZA of FSMA 2000 was added with effect from 1 July 2011 and slightly amended with effect from 6 June 2013. It stipulates that: ‘A person is not to be subject to civil liability solely on the basis of the key investor information produced in relation to a collective investment scheme or a sub-fund of such a scheme in accordance with rules or other provisions implementing Chapter IX of the UCITS108 directive, or of any translation of that information, unless the key investor information is misleading, inaccurate or inconsistent with the relevant parts of the prospectus published for that collective investment scheme or sub-fund in accordance with rules made by the FCA under section 248 or 261J of this Act.’

Section 90A 4.28 Section 90A of FSMA  2000 was introduced on 8  November 2006, and was substantially amended with effect from 1 October 2010.109 In its present form, section 90A contains no substantive provisions but merely refers to Schedule 10A, which embodies the detailed provisions. The issuers covered by the provisions of Schedule  10A are those whose securities are trading on a market operating in or situate in the United Kingdom. Only the issuer is liable and not the directors or advisers. Fraud or deceit is the norm. This has the somewhat disturbing result that shareholders who successfully make claims against the issuer (the very company in which they might still hold shares) will take from the coffers of the company to fill the pockets of the claimants. If only negligence can be established, thereby falling 104 Cartwright, Misrepresentation, Mistake and Non-Disclosure (Sweet & Maxwell, 4th edn), [7.52]. [Note to readers: 5th edn due out in November 2021.] 105 See Mortimore’s Company Directors [27.44]; Cartwright Misrepresentation, Mistake and Non-Disclosure (Sweet & Maxwell, 4th edn) [7.52]; * [Note: 5th edition due November 2021] Encyclopaedia of Financial Services Law (Lomnicka and Powell, November 2010 update) [2A160/22]; Ferran’s Principles of Corporate Finance Law, 450; Palmer’s Company Law 5.790. 106 Even if proof of reliance were required, it will usually not be difficult to prove, see Cartwright: Misrepresentation, Mistake and Non-Disclosure (Sweet & Maxwell, 4th edn), [7.52] fn 231. 107 McConnel v Wright [1903] 1 Ch 546, CA, at 554; Clark v Urquhart [1930] AC 28, HL, at 67, 76. 108 Ie Undertakings for Collective Investments in Transferable Securities. 109 The previous version, in operation from 8 November 2006 until 1 October 2010, applied to (a) any reports and statements published in response to a requirement imposed by a provision implementing Article 4, 5 or 6 of the Transparency Obligations Directive, and (b) any preliminary statement made in advance of a report or statement to be published in response to a requirement imposed by a provision implementing Article 4 of that Directive, to the extent that it contains information that it is intended (i) will appear in the report or statement, and (ii) will be presented in the report or statement in substantially the same form as that in which it is presented in the preliminary statement.

121

4.29  The Liability of Directors and Advisers of the Company Directly to Shareholders

short of the benchmark for liability under section 90A, a claim can still be brought under the common law or in equity. The published information to which the Schedule applies is information published by recognised means or by any other means where the availability of the information has been announced by the issuer by recognised means. Circulars and financial statements are within the scope of this section. Two different causes of action are created: one in respect of misleading statements and omissions from statements; and the other for the delay in imparting information. As pointed out above,110 proof of reliance is necessary for liability to follow.

The City Code on Takeovers and Mergers (‘the Code’) 4.29 The Code creates a set of rules which obliges company directors and advisers to act in the interest not only of the company, but also in the interests of shareholders, thus setting the scene for the creation of the ‘special factual relationship’ in which common law and fiduciary duties may arise as between director and shareholder.111 A code has been in existence since 1968. The current version is the thirteenth edition published in July 2021. It was voluntarily developed to reflect the collective opinion of those professionally involved in the field of takeovers regarding appropriate business standards, fair treatment of shareholders, and an orderly framework for takeovers.112 The Code did not have the force of legislation, but in R v Spens113 it was held that the Code sufficiently resembled legislation so as to be likewise regarded in the construction of its provisions. Even without a legislative basis, it was fully taken into account in considering the conduct of parties in a takeover situation in Re Chez Nico (Restaurants) Ltd:114 ‘The Code does not have the force of law. But in considering for the purposes of sec. 430C [of CA 1985] whether the court should exercise its discretion, in my judgment the Code is a factor of great importance. One of the purposes of the Code is to provide protection to the shareholders whose shares are the subject of a bid. Where, under the Code, the bidder is himself under a duty to provide such information, substantial infringements of the provisions of the Code as to disclosure in my judgment provide strong evidence that the offer is not fairly made: it certainly negatives any presumption that the offer is fair because 90 per cent of the shareholders have accepted it: see Re Lifecare International plc (1989) 5  BCC  755. I  am not suggesting that any infringement of the Code (however small) will necessarily lead the court to exercise its discretion in favour of the non-assenting shareholder. But substantial failure by the bidder to comply with the Code’s provisions as to disclosure should, in my view, be a very major factor operating against the compulsory acquisition of the non-assenting shareholders’ shares.’ This relatively informal application of the Code changed when the Panel on Takeovers and Mergers was designated as the supervisory authority to carry out 110 At 4.26. 111 See 4.17–4.18. 112 The Code, para A2 113 [1991] 1 WLR 624, CA. 114 [1992] BCLC 192, ChD, at 209g–209i.

122

Regulated companies 4.31

certain regulatory functions in relation to takeovers pursuant to the Directive on Takeover Bids (2004/25/EC) (the ‘Takeover Directive’).115 The Panel has the duty to make rules giving effect to Articles 3.1, 4.2, 5, 6.1 to 6.3, 7 to 9 and 13 of the Takeover Directive.116 It comprises, amongst other things, the making of rules for, and in connection with, the regulation of takeover bids, merger transactions, and other transactions that have or may have, directly or indirectly, an effect on the ownership or control of companies. The current Code117 is a product of these provisions and, accordingly, has statutory force. 4.30 The Code applies to all offers (not falling within the category of shared jurisdiction) for companies (and, where appropriate, statutory and chartered companies) which have their registered offices118 in the United Kingdom, the Channel Islands or the Isle of Man, if any of their securities are admitted to trading on a regulated market in the United Kingdom or on any stock exchange in the Channel Islands or the Isle of Man.119 The Code also applies to all offers (not falling within the previous category or the category of shared jurisdiction) for public and private companies (and, where appropriate, statutory and chartered companies) which have their registered offices in the United Kingdom, the Channel Islands or the Isle of Man and which are considered by the Panel to have their place of central management and control in the United Kingdom, the Channel Islands or the Isle of Man. In relation to private companies, there are a number of qualifications limiting the applicability of the Code.120 The Code is concerned with regulating takeover bids and merger transactions of the relevant companies, however effected, including by means of statutory merger or scheme of arrangement.121 The Code is also concerned with regulating other transactions, including offers by a parent company for shares in its subsidiary, dual holding company transactions, new share issues, share capital reorganisations and offers to minority shareholders.122 4.31 The Code applies to a range of persons who participate in, or are connected with, or who in any way seek to influence, intervene in, or benefit from takeovers or other matters to which the Code applies.123 Directors124 of both the offeror and offeree companies are covered by this provision. The Code also applies to all advisers to such persons, insofar as they advise on takeovers or other matters to which the Code applies.125 The Code imposes limitations on the manner in which directors can act in connection with takeovers, which may impinge on the duties that the directors of 115 Its statutory functions are set out in and under Companies Act 2006, Pt 28, Ch 1 (as amended by the Companies Act 2006 (Amendment of Schedule 2) (No 2) Order 2009). 116 Section 943 of the Companies Act 2006 (constituting a section within Pt 28). 117 Thirteenth edition, July 2021. 118 In the case of a UK unregistered company, the reference to ‘registered office’ shall be read as a reference to the company’s principal office in the UK – see the footnote to para 3 at p A3 of the Code. 119 The Code, Introduction, para 3(a)(i), p A3. 120 The Code, Introduction, para 3(a)(ii), p A3. 121 See Pt 26 of the Companies Act 2006. 122 The Code, Introduction, para 3(b), p A5. 123 The Code, Introduction, para 3(f), p A7. 124 By definition, directors include persons in accordance with whose instructions the directors or a director are accustomed to act (ie shadow directors): the Code, p C9. Compare the discussion at 2.4–2.8. 125 The Code, Introduction, para 3(f), p A7.

123

4.32  The Liability of Directors and Advisers of the Company Directly to Shareholders

offeror and offeree companies might owe. The Code also applies in respect of the acts and omissions of any person in connection with a takeover or any other matter to which the Code applies, notwithstanding that the offeree company may since have ceased to be subject to the Code.126 In the case of a scheme of arrangement, a reference to the offeree company should normally be construed as a reference to the company whose shares are proposed to be acquired under the scheme.127 The offeror in turn includes companies wherever incorporated and individuals wherever resident. Any reference to an offeror includes a potential offeror. In the case of a scheme of arrangement,128 a reference to an offeror should normally be construed as a reference to the person who it is proposed will acquire shares of the offeree company under the scheme.129 4.32 There are several instances where the Code places an obligation on directors to act in a certain way, particularly in relation to the information to be imparted to shareholders. Rule 3.1 provides that the board of the offeree company must obtain competent independent advice on any offer, and the substance of such advice must be made known to its shareholders. A similar duty rests on the board of the offeror company130 when the offer being made is a reverse takeover131 or when the directors are faced with a conflict of interest.132 Competent independent advice must be sought, and the substance of such advice must be made known to shareholders. Under these circumstances, shareholders must have sufficient time to consider advice given to them prior to any general meeting held to implement the proposed offer. Any documents or advertisements published by the board in such cases must include a responsibility statement by the directors, as set out in Rule 19.2. Rule 19.2 does not only cover these limited circumstances. An assumption of a duty of care is imposed on, inter alia, directors by the provision of Rule 19.2(a): ‘19.2 RESPONSIBILITY (a) Each document published in connection with an offer by or on behalf of an offeror or the offeree company, must state that the directors of the offeror and/or, where appropriate, the offeree company accept responsibility for the information contained in the document (including any expressions of opinion) and that, to the best of their knowledge and belief (having taken all reasonable care to ensure that such is the case), the information contained in the document is in accordance with the facts and that it does not omit anything likely to affect the import of the information. (b) The Panel’s consent is required if it is proposed to exclude any director from a responsibility statement. Such consent will be given only in exceptional circumstances and in any case where the Panel’s consent is given the exclusion and the reasons for it must be stated in the document.’ 126 127 128 129 130 131

The Code, Introduction, para 3(f), p A7. Per the definition of ‘offeree company’ at the Code, p C15. Most of the provisions of the Code are applicable to schemes of arrangement. Per the definition of ‘offeror’ in the Code, p C14. Rule 3.2. A transaction will be a reverse takeover if an offeror might, as a result, need to increase its existing issued voting equity share capital by more than 100% (per the definition of ‘reverse takeover’ in the Code at C20). 132 A conflict of interest will exist, for instance, when there are significant cross-shareholdings between an offeror and the offeree company, when there are a number of directors common to both companies, or when a person has a substantial interest in both companies.

124

Regulated companies 4.34

4.33 Paragraph  1 of Appendix 3 puts it beyond doubt that directors cannot necessarily be seen to avoid responsibility because of a possible lesser role that any one of them may be playing; because, whilst a board of directors may delegate the day-to-day conduct of an offer to individual directors or a committee of directors, the board as a whole must ensure that proper arrangements are in place to enable it to monitor that conduct in order that each director may fulfil his responsibilities under the Code. This extends to non-executive directors. For the existence of a duty of care, breach of which may lead to liability for purely economic loss, an assumption of the duty is necessary. The mechanics of Rule 19.2 provide for exactly that. In addition, a standard of care higher than the ordinary common law test of reasonableness is unequivocally required by the provisions of Rule 19.1, which is applicable to the preparation of every takeover document: ‘Each document, announcement or other information published, or statement made, during the course of an offer must be prepared with the highest standards of care and accuracy. The language used must clearly and concisely reflect the position being described and the information given must be adequately and fairly presented. These requirements apply whether the document, announcement or other information is published, or the statement is made, by the party concerned or by an adviser on its behalf.’ (emphasis supplied) This would cover circulars distributed by or on behalf of offerors and offeree companies. 4.34 This must be read together with Rule 23 dealing with the obligation as to information, reminiscent of the position under the common law,133 in the following terms: ‘Shareholders must be given sufficient information and advice to enable them to reach a properly informed decision as to the merits or demerits of an offer. Such information must be available to shareholders early enough to enable them to make a decision in good time. No relevant information should be withheld from them. The obligation of the offeror in these respects towards the shareholders of the offeree company is no less than an offeror’s obligation towards its own shareholders.’ These high standards are given some more flesh by, first, a duty to use unambiguous language and, secondly, in the same vein, prohibiting the use of language which, while factually accurate, may nevertheless be misleading. The notes to Rule 19.1 indicate that the language used in documents, announcements, information, releases or advertisements must clearly and concisely reflect the position being described. Rule 19.3 in turn determines that parties to an offer and their advisers must take care not to make statements which, while not factually inaccurate, may be misleading or may create uncertainty.

133 See 4.8–4.19.

125

Chapter 5

Who is in Control? The Rule in Foss v Harbottle

Contents Introduction 5.1 The rule in Foss v Harbottle 5.2 The respective powers and roles of directors and members in relation to litigation 5.7 Majority rule among members

5.11

No application to breach of shareholder’s personal rights The exceptions to majority control – a derivative claim 5.14

5.13

INTRODUCTION 5.1 ‘The rule in Foss v Harbottle’1 is one of the most used phrases in company law. Since the provisions of the Companies Act 2006 (‘the 2006 Act’) governing derivative actions2 came into force,3 the rule is of less direct practical importance than it was. It remains directly applicable to claims in respect of wrongs committed against a company prior to the coming into force of the relevant provisions of the 2006 Act; it is also of wider importance to shareholder claims, as it is the basis for the principle of the irrecoverability of reflective loss4 and the key principle of majority rule.

THE RULE IN FOSS V HARBOTTLE 5.2 The rule in Foss v Harbottle may be shortly but accurately summarised as that ‘the only person who can sue in respect of a wrong done to a corporation is the corporation’.5 Accordingly, shareholders cannot ordinarily themselves take action and obtain a remedy in respect of an injury done to their company. The rule 1 67 ER 189, ChD, (1843) 2 Hare 461, ChD. 2 See Chapter 6. 3 On 1 October 2007. 4 See Chapter 8. 5 Webster v Sandersons Solicitors [2009] EWHC 1793 (Comm), [2009] 2 BCLC 542, CA, per Lord Clarke at [26]. It was put virtually identically by Lord Reed, giving the judgment of the majority of the Supreme Court in Marex Financial Ltd v Sevilleja [2020] UKSC 31, [2020] 3 WLR 255, at [10].

127

5.3  Who is in Control? The Rule in Foss v Harbottle

follows from three long-established legal principles: (a) a company has a separate legal personality from its shareholders;6 (b) one person generally cannot obtain a remedy from a wrongdoer in respect of damage caused by the wrongdoer to someone else;7 and (c) the principle of majority rule. This third principle, of majority rule, is also behind the related principle established by Foss v Harbottle that an individual shareholder cannot bring an action to complain of an irregularity (as distinct from an illegality) in the conduct of the company’s internal affairs. 5.3 In fact, the rule has two parts. In Edwards v Halliwell,8 Jenkins LJ defined the rule as follows:9 ‘First, the proper plaintiff in an action in respect of wrong alleged to be done to a company or association of persons is prima facie the company or the association itself. Secondly, where the alleged wrong is a transaction which might be made binding on the company or association and on all of its members by a simple majority of the members, no individual member of the company is allowed to maintain an action in respect of that matter for the simple reason that, if a mere majority of the members of the company or association is in favour of what has been done, then cadio quoestio. No wrong has been done to the company or association and there is nothing in respect of which anyone can sue. If, on the other hand, a simple majority of members of the association is against what has been done, then there is no valid reason why the company or association itself should not sue. In my judgment, it is implicit in the rule that the matter relied on as constituting the cause of action should be a cause of action properly belonging to the general body of corporators or members of the company or association as opposed to a cause of action which some individual member can assert in his own right. The cases falling within the general ambit of the rule are subject to certain exceptions. It has been noted in the course of argument that in cases where the act complained of if wholly ultra vires the company or association the rule has no application because there is no question of the transaction being confirmed by any majority. It has been further pointed out that where what has been done amounts to what is generally called in these cases a fraud on the minority and the wrongdoers are themselves in control of the company, the rule is relaxed in favour of the aggrieved minority who are allowed to bring what is known as a minority shareholders’ action on behalf of themselves and all others. The reason for this is that, if they were denied that right, their grievance could never reach the court because the wrongdoers themselves, being in control, would not allow the company to sue.’ This definition and explanation helpfully set out both the importance and the limitation of the principle of majority rule. 6 7 8 9

This remains just as important following the ostensible narrowing of the exception to the rule of separate legal personalities as applying in instances of evasion – see Petrodel Resources Ltd v Prest [2013] UKSC 34, [2013] 2 AC 415 and its discussion in Chapter 1, particularly 1.18–1.20. ‘A cannot, as a general rule, bring an action against B to recover damages or secure relief on behalf of C for an injury done to C by B’: Prudential Assurance Co Ltd v Newman Industries (No 2) [1982] Ch 204, CA, at 210D–210E. [1950] 2 All ER 1064, CA, at 1066. At 1066–1067. This definition was summarised and approved by the Court of Appeal in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, CA, at 210F–211B.

128

The rule in Foss v Harbottle 5.6

5.4 There are four exceptions to the rule and they were succinctly stated by Templeman J in Daniels v Daniels10 as follows: ‘The exceptions are four in number, and only one of which is of possible application in the present case. The first exception is that a shareholder can sue in respect of some attack on his individual rights as a shareholder; secondly, he can sue if the company, for example, is purporting to do by ordinary resolution that which its own constitution requires to be done by special resolution; thirdly, if the company has done or proposes to do something which is ultra vires; and fourthly, if there is fraud and there is no other remedy. There must be a minority who are prevented from remedying the fraud or taking any proceedings because of the protection given to the fraudulent shareholders or directors by virtue of their majority.’ 5.5 In order to fall within the fourth exception, the fraud requires either personal benefit to the party alleged to be in breach of duty or a deliberate and dishonest breach of duty.11 5.6 The meaning, extent and application of the rule in modern times was summarised with precision by Peter Gibson LJ in Barrett v Duckett12 as follows:13 ‘The general principles governing actions in respect of wrongs done to a company or irregularities in the conduct of its affairs are not in dispute: 1. The proper plaintiff is prima facie the company. 2. Where the wrong or irregularity might be made binding on the company by a simple majority of its members, no individual shareholder is allowed to maintain an action in respect of that matter. 3. There are however recognised exceptions, one of which is where the wrongdoer has control which is or would be exercised to prevent a proper action being brought against the wrongdoer: in such a case the shareholder may bring a derivative action (his rights being derived from the company) on behalf of the company. 4. When a challenge is made to the right claimed by a shareholder to bring a derivative action on behalf of the company, it is the duty of the court to decide as a preliminary issue the question whether or not the plaintiff should be allowed to sue in that capacity. 5. In taking that decision it is not enough for the court to say that there is no plain and obvious case for striking out; it is for the shareholder to establish to the satisfaction of the court that he should be allowed to sue on behalf of the company. 6. The shareholder will be allowed to sue on behalf of the company if he is bringing the action bona fide for the benefit of the company for wrongs to the company for which no other remedy is available. Conversely if the action is brought for an ulterior purpose or if another adequate remedy is available, the court will not allow the derivative action to proceed.’ 10 11 12 13

[1978] 2 WLR 406, at 408 G–H, approved by the Court of Appeal in Harris v Microfusion 20032 LLP [2016] EWCA Civ 1212, [2017] 1 BCLC 305, CA, at [51]. Harris v Microfusion 2003-2 LLP [2016] EWCA Civ 1212, [2017] 1 BCLC 305, CA, at [31] and Homes for England v Nick Sellman Holdings Ltd [2020] EWHC 936 (Ch), [2020] BCC 607, at [39] and [46], applying Abouraya v Sigmund [2014] EWHC 277 (Ch), [2015] BCC 503, ChD. [1995] 1 BCLC 243, CA. At 249h–250c.

129

5.7  Who is in Control? The Rule in Foss v Harbottle

Although the board of a company are to some extent protected by the principle of majority rule, that does not of itself prevent their conduct being unfair so as to found a petition for unfair prejudice under section 994 of the 2006 Act.14

THE RESPECTIVE POWERS AND ROLES OF DIRECTORS AND MEMBERS IN RELATION TO LITIGATION 5.7 The effect of the rule is that the shareholder has entrusted the management of the company’s right of action to its decision-making organs, including, ultimately, the majority of members voting in general meeting.15 In Foss v Harbottle itself, the case proceeded on the basis, then correct, that the shareholders would determine whether litigation was commenced in the name of the company and exercise control over such litigation. In practice, these days, control of the management of the company, including any litigation, is usually in the hands of the directors pursuant to the terms of the articles of association of the company. Most companies currently in existence will have been incorporated under the 1985 Act and have articles of association based on the Table A  form under that Act. Article  70 of the Companies (Tables A  to F) Regulations 1985, SI 1985/805, includes provision that management of the company shall be carried out by the directors, who may exercise all the powers of the company. Article 80 of Table A under the 1948 Act made similar provision, as does article 3 of the Companies Act 2006 model articles for both private and public companies.16 Each of these forms of article has the effect that the commencing and management of litigation is in the hands of the directors, at least unless it is overridden by a special resolution of the shareholders, who hold the ultimate power. 5.8 When considering the position where article  80 of the 1948 Act Table A  applied, Harman J  considered, in Breckland Group Holdings Ltd v London & Suffolk Properties Ltd,17 that the power to commence litigation resided solely with the board of directors. The primacy of the directors in the commencement and conduct of litigation, where the articles of association give them the power of management, is based on the principle stated by Lord Loreburn LC in Quin & Axtens Ltd v Salmon18 that:19

14 See Chapter 9. Lord Hoffmann stated in Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, CA, at 18c, that giving the court a means to ‘outflank’ the rule in Foss v Harbottle was one of the purposes of the introduction of the statutory unfair prejudice remedy. 15 As Lord Reed explained when giving the judgment of the majority in Marex Financial Ltd v Sevilleja [2020] UKSC 31, [2020] 3 WLR 255, at [81]. 16 Under the 2006 Act, Schs 1 and 3 to the Companies (Model Articles) Regulations 2008, SI 2008/3229, provide for similar articles. Model Articles 3 and 4 were considered and the same conclusion reached in Muniment Ltd v Priestley Homes Ltd [2019] 7 WLUK 406 at [49]–[54]. 17 [1989] BCLC 100, ChD, at 106a–106c. See also Muniment Ltd v Priestley Homes Ltd [2019] 7 WLUK 406 at [43]. 18 [1909] AC 442. 19 At 443. The power of the directors to refuse to implement a resolution in general meeting to sell the undertaking of the company, where they did not consider it in the best interest of the company to do so, was upheld in Automotive Self-Cleansing Filter Syndicate Company Ltd v Cuninghame [1906] 2 Ch 34.

130

The respective powers and roles of directors and members in relation to litigation 5.10

‘The bargain made between the shareholders is contained in articles 75 and 80 of the articles of association, and it amounts for the purpose in hand to this, that the directors should manage the business; and the members of the company, therefore, are not to manage the business unless there is provision to that effect.’20 5.9 Without board authority, an action commenced in the name of the company by a shareholder, even a shareholder or shareholders with a large majority interest, is liable to be struck out21 and any shareholder who started it ordered to pay the costs.22 In these circumstances, a majority of the shareholders may be able to achieve the same ends by calling a general meeting and passing a special resolution either replacing the board or changing the company’s articles of association to give the shareholders the requisite power.23 It remains open to the board to adopt the action and, if it does so, the commencement of the action will be ratified with retrospective effect so that the action will be treated as having been properly brought from the outset.24 If a question arises of whether a claim was properly brought by someone with authority to bring the claim in the name of the company, the point should be raised at an early stage in the proceedings and the claim will ordinarily be stayed pending its determination.25 The court may direct that a board meeting is held to see whether, if asked at the time that the action was commenced, the board would have agreed to it.26 5.10 The shareholders in general meeting can probably authorise the bringing of proceedings where the directors are unable to act, for instance because they are in deadlock or because there are no directors or insufficient directors to constitute a quorum.27 The shareholders will not have this power where there is a board of directors capable of such authorisation or where the board has declined to bring proceedings.28

20

The standard Table A articles under the Companies Acts 1948 and 1985 include provision that the directors shall manage the business of the company, as do the model articles introduced by the 2006 Act. 21 In Breckland Group v London & Suffolk, Harman J did not strike out the claim, as there was a meeting of directors pending, but indicated (at 106d–106g) that, if the board did not ratify the decision to commence the action, it should be struck out. 22 La Compagnie de Mayville v Whiteley [1896] 1 Ch 788. 23 As suggested by Greer LJ in John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113, CA. 24 John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113, CA. See also Danish Mercantile Co Ltd v Beaumont [1951] Ch 680, CA. 25 Breckland Group Holdings Ltd v London & Suffolk Properties Ltd [1989] BCLC 100, ChD. 26 Per Jenkins LJ in Danish Mercantile Co Ltd v Beaumont [1951] Ch 680, CA, at 687A–687B. This was stated to be the purpose of calling the meeting, rather than for the declared purpose of ex post facto ratification. Contrast Lord Kilbrandon in Alexander Ward & Co v Samyang Navigation Co Ltd [1975] 1 WLR 673, HL, at 683, whose speech refers to ratification of the commencement of the action, although in that case by a liquidator following his appointment. 27 See Alexander Ward & Co v Samyang Navigation Co Ltd [1975] 1 WLR 673, HL, per Lord Kilbrandon at 683. 28 This follows from the principle stated by Lord Loreburn LC in Quin & Axtens Ltd v Salmon [1909] AC 442, as applied in Breckland Group Holdings Ltd v London & Suffolk Properties Ltd [1989] BCLC 100, ChD. The decision that the shareholders in general meeting could override the board in Marshall’s Valve Gear Company Ltd v Manning, Wardle & Co Ltd [1909] 1 Ch 267 was expressed to be based on the construction of the relevant article in that case and, to the extent that it departs from Quin & Axtens, is incorrect and unlikely to be followed.

131

5.11  Who is in Control? The Rule in Foss v Harbottle

MAJORITY RULE AMONG MEMBERS 5.11 As was made clear in Foss v Harbottle itself, and is explained by Jenkins LJ in Edwards v Halliwell29, where a wrong done against the company is one that is capable of ratification and has been ratified by a majority of the members, no action in respect of it may be brought by the company, as the company has adopted the act (or omission); and, consequently, no action may be brought in respect of it by a disaffected minority shareholder in the name of the company. The rule can apply to a wide range of acts. For instance, in Hogg v Cramphorn Ltd30 it was indicated that it could apply to the issue of preference shares by directors in an attempt to block a takeover bid. In that case, Buckley J rejected the contention that shareholders in general meeting could always ratify a breach of duty by directors, but considered that they could ratify an exercise of a fiduciary power by directors for an improper purpose in issuing the shares.31 In Hogg v Cramphorn Ltd,32 there was no suggestion of the directors being motivated by personal gain but, even where they are, ratification will be potentially possible. As Lord Russell observed in the well-known case of Regal (Hastings) Ltd v Gulliver,33 ratification by the members in general meeting could have exonerated the liability of directors to account for profits to the company. Both of these cases were cited by Harman LJ in Bamford v Bamford,34 who regarded the ratification of irregular acts of directors by a majority of shareholders in general meeting as ‘commonplace’.35 A wrongdoer director who is also a shareholder is, at common law,36 entitled to vote, and as a shareholder does not owe the fiduciary duties that he owes when acting as a director. This was explained in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2),37 applying the decision of the Privy Council in North-West Transportation Company Ltd v Beatty;38 Vinelott J as trial judge stated:39 ‘As I  see it all that Beatty’s case shows is that a contract between a company and a majority shareholder which is authorised or ratified in general meeting, the resolution being passed by the use of the controlling shareholder’s votes, will not be set aside unless it is shown to have been an improper one. That proposition follows from the principle that a majority shareholder in exercising his votes in general meeting in relation to a transaction in which he is involved does not owe any fiduciary duty to the company or to the other shareholders.’ This part of Vinelott J’s judgment was not questioned by the Court of Appeal.40

29 [1950] 2 All ER 1064, CA. See the relevant passage at 5.3. 30 [1967] Ch 254. 31 At 268B–268F. 32 [1967] Ch 254. 33 [1967] 2 AC 134 at 150A–150B. 34 [1970] Ch 212, CA. 35 At 238. 36 The position is different where the issue is ratification of a breach of duty by a director since 1 October 2007, when s 239 of the 2006 Act applies, and votes of the director and anyone who is a ‘connected person’ with the director are disregarded. 37 [1981] Ch 257. 38 (1887) 12 App Cas 589. 39 [1981] Ch 257 at 309H–310A. 40 [1982] Ch 204, CA. See also Pender v Lushington (1877) LR 6 ChD 70.

132

The exceptions to majority control – a derivative claim 5.14

5.12 It will be apparent that there are two conditions that must be satisfied for majority rule to block a claim being brought in the name of the company by a disgruntled minority shareholder. First, the wrong done against the company must be one that is capable of ratification. Accordingly, the rule has no application in relation to a wrong that is ultra vires the company, because a vote of a majority of shareholders is irrelevant if the company does not have the power to do the act complained of. That does not necessarily mean that, although unable to ratify an ultra vires transaction, the majority are also unable to resolve that no action be taken in respect of it and thereby prevent a disgruntled minority from pursuing a complaint in the name of the company.41 Second, it is necessary that the wrong is in fact ratified; it is not enough that it is capable of being ratified,42 even if it is clear that, if asked to ratify, the requisite majority of shareholders would have done so. The Duomatic43 principle cannot be relied on by directors to avoid a claim in these circumstances.

NO APPLICATION TO BREACH OF SHAREHOLDER’S PERSONAL RIGHTS 5.13 The rule in Foss v Harbottle and the principle of majority rule is not relevant where a shareholder complains of breach of their personal rights, and does not seek to bring a claim in the name of the company.44 These will frequently be claims based on rights conferred on the shareholder by the articles of association. It may be possible to bring what, at first sight, appears to be a claim vested in the company as a claim for a breach of a personal right. For instance, in Re Sherborne Park Residents Co Ltd,45 Hoffmann J regarded a shareholder’s challenge to the exercise of powers in breach of fiduciary duty by directors, to cause a company to issue new shares, as primarily a personal claim based on a breach of the articles of association rather than a breach of fiduciary duty.

THE EXCEPTIONS TO MAJORITY CONTROL – A DERIVATIVE CLAIM 5.14 The circumstances in which a minority shareholder can bring a claim in the name of the company are not limited to cases where the wrong complained of is an ultra vires act or where the majority have not in fact ratified it. The common law recognises that there are cases where minority shareholders should be able to pursue wrongdoers in the name of the company where the company is the victim of the wrong doing. In appropriate circumstances, as an exception to the rule in Foss 41 See Taylor v National Union of Mineworkers (Derbyshire Area) [1985] BCLC 237, ChD, at 254– 256. 42 Which, as stated at 5.11, was a reason why the directors failed to escape liability in Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, HL, per Lord Russell at 150A–150B. 43 Emanating from Re Duomatic Ltd [1969] 2 Ch 365. See the discussion at 3.16–3.17. 44 Pender v Lushington (1877) 6 Ch D 70 at 80–81, Moffatt v Farquhar (1877–78) 7 Ch D 591; Kaye v Croydon Tramways Co Ltd [1898] 1 Ch 358 per Vaughan Williams LJ at 376–377; Edwards v Halliwell [1950] 2 All ER 1064, CA. See also Feetum v Levy [2006] Ch 585, CA, which makes the same point in relation to a limited liability partnership. 45 (1986) 2 BCC 99528, ChD.

133

5.14  Who is in Control? The Rule in Foss v Harbottle

v Harbottle and the principle of majority control, the common law has permitted minority shareholders to bring derivative actions in the name of the company to recover a remedy for the company. In the case of wrongs committed against a company after 1 October 2007, the availability of a right to bring a derivative action is governed by the 2006 Act. Where the wrong was committed prior to that date, the right to bring a derivative action still depends on the common law. The availability of and procedure for bringing a derivative action, both at common law and under the 2006 Act, are dealt with in Chapter 6.

134

Chapter 6

Derivative Claims

Contents Introduction 6.1 The common law Ultra vires acts Breach of fiduciary duty or negligence by a director combined with personal benefit to the director Personal benefit or equitable fraud is necessary Wrongdoer control Where the complainant has personally benefited from the breach of duty Discretion ‘Double’ or ‘multiple’ derivative claims

6.3 6.4 6.5 6.7 6.8 6.11 6.12 6.15

Derivative claims under the 2006 Act Scope and application The statutory procedure – two hurdles The first hurdle The second hurdle

6.17 6.18 6.21 6.22 6.27

The court’s powers when deciding whether to give permission to continue a derivative claim Company’s indemnity as to costs and the rule in Wallersteiner v Moir Derivative claims and insolvent companies Derivative claims and foreign companies

6.46 6.47 6.49 6.50

INTRODUCTION 6.1 The general principle that, where a wrong has been done to a company, only the company acting by its proper organ – usually the board of directors – can bring an action in respect of the wrong (ie the rule in Foss v Harbottle)1 is analysed in the previous chapter. There are exceptions to the rule in Foss v Harbottle where a minority shareholder can bring a claim on behalf of the company in the company’s name.2 These are derivative claims. They may only be brought by a shareholder and any question of whether the claimant has standing to advance a derivative claim

1 2

[1843] 67 ER 189; (1843) 2 Hare 461, ChD. Only a holder of the legal or the beneficial interest in shares will have standing to advance a common law derivative claim. A lesser equitable claim than a beneficial interest in shares will be insufficient: Boston Trust Co Ltd v Verhoef [2021] EWCA Civ 1176.

135

6.2  Derivative Claims

should be resolved before the question of whether they should have permission to advance the claim is determined.3 6.2 Where a wrong was done to the company prior to 1  October 2007, the question of whether a derivative action may be brought by a minority shareholder is the subject of transitional provisions,4 which provide that a claim may proceed as a derivative claim only if or to the extent that it would have been allowed to proceed as a derivative claim before that date. In other words, it is necessary to see whether permission would be given under the current statutory regime and, if so, to see if permission would have been given under the common law. Only if both tests are satisfied will permission to pursue the claim as a derivative claim be granted.5 If the wrong was done after September 2007, the test and procedure in Part 11 of the Companies Act 2006 (‘the 2006 Act’) apply. Any derivative action is a departure from one of the key principles of company law, namely that the majority rules. In order to meet the requirements for bringing a derivative action, the minority shareholder bringing the claim needs to establish that there is good reason why, in the circumstances of the case, the usual principle of majority rule should be departed from.6 The approach that was taken at common law continues to influence the reasoning and approach taken to questions of permission arising under Part 11 of the 2006 Act7 and to the granting of relief in the form of a derivative claim under section 996 of the 2006 Act. The common law test also remains applicable to so-called ‘double derivative’ and ‘multiple derivative’ claims, and to claims relating to overseas companies.8 Common law derivative claims also continue to apply to claims relating to LLPs.9 The indications are that the introduction of the statutory regime has led to a slight increase in the number of derivative claims being brought,10 but not the huge increase that some commentators feared. The relatively small number of reported decisions under the statutory regime tends to indicate that those fears have not been realised.

THE COMMON LAW 6.3 It is now clear that so-called ‘double derivative’ and ‘multiple derivative’ claims survived the introduction of the statutory regime in the 2006 Act.11 While falling outside of it, common law derivative claims remain relevant and important in 3 4

It is a ‘threshold question’: Boston Trust Co Ltd v Verhoef [2021] EWCA Civ 1176 at [42]–[43]. See Companies Act 2006 (Commencement No 3, Consequential Amendments, Transitional Provisions and Savings) Order 2007 (SI 2007/2194), Sch 3, art 20(3). 5 As explained in Hughes v Weiss [2012] EWHC 2363 (Ch) at [32]. 6 The rule requiring permission to bring such a claim is primarily for the protection of the company rather than the other shareholders; Wilton UK Ltd v Shuttleworth [2017] EWHC 2195 (Ch) at [43] and [62]. 7 See eg the frequent reference to and consideration of common law cases by Lewison J when applying the statutory regime in Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2011] 1 BCLC 498, ChD. 8 See 6.50. 9 Homes for England v Nick Sellman (Holdings) Ltd [2020] EWHC 936 (Ch), [2020] BCC 607. 10 At least according to Professor David Milman in Sweet & Maxwell’s Company Law Newsletter Issue 323 (October 2012), and this is consistent with indications from the law reports and the anecdotal evidence of practitioners. 11 See 6.15–6.16 for a discussion of double and multiple derivative claims.

136

The common law 6.5

practice for those claims and for claims relating to overseas companies. A derivative action may be brought by a shareholder at common law where one of the exceptions to the rule in Foss v Harbottle applies. These exceptions apply where the majority are not permitted to ratify the wrong done to the company, and are generally described as cases where the wrong can be characterised as ‘fraud’ within the meaning of that term in equity,12 and the alleged wrongdoers are in control of the company. It is necessary for a prima facie case that these requirements are met and be shown by the applicant in order to obtain permission.13 In practice, the obstacle of needing to fall within one of these exceptions is generally a substantial one, and at common law relatively few claims to bring a derivative action have succeeded.14 A review of some of the main requirements and authorities applicable to an applicant for permission to bring a derivative claim at common law was carried out relatively recently by Morgan J in Bhullar v Bhullar.15 The circumstances in which these requirements may be made out are considered below.

Ultra vires acts 6.4 As explained in Chapter 5,16 a minority shareholder cannot bring a claim in the name of the company where the majority have ratified the wrong complained of.17 However, that does not necessarily mean that the majority cannot also block the bringing of a derivative claim by resolving to take no action in respect of the alleged wrong to the company.18

Breach of fiduciary duty or negligence by a director combined with personal benefit to the director Breach of fiduciary duty 6.5 Where directors of a company act in breach of a fiduciary duty in a manner which brings personal benefit to them, a minority shareholder may bring a derivative action in the name of the company. This was the conclusion of Templeman J, following a detailed examination of the then existing authorities, in Daniels v Daniels.19 This is the position whether or not the directors were aware that they were acting in breach of duty. The combination of breach of duty and personal benefit is sufficient. Fraud is not necessarily required. As Templeman J said:20 12 See Chapter 5 at 5.11–5.12 and Harris v Microfusion 2003-2 LLP [2016] EWCA Civ 1212, [2017] 1 BCLC 305, CA. 13 See eg Gill v Thind [2020] EWHC 2973 (Ch), where the allegations pleaded failed to disclose a prima facie case. 14 Rare examples of successful derivative actions are Knight v Frost [1999] 1 BCLC 364, ChD, and Clark v Cutland [2003] EWCA Civ 810, [2004] 1 WLR 783, CA. See also the discussion of double and multiple derivative claims at 6.15–6.16 below. 15 [2015] EWHC 1943 (Ch), [2016] 1 BCLC 106, ChD. 16 See 5.11–5.12. 17 Edwards v Halliwell [1950] 2 All ER 1064, CA, at 1066G–1067A; Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, CA, at 210F–211B. 18 See Taylor v National Union of Mineworkers (Derbyshire Area) [1985] BCLC 237, ChD, at 254i–256a. 19 [1978] 2 WLR 73, ChD. 20 At 413H–414A.

137

6.6  Derivative Claims

‘The authorities which deal with simple fraud on the one hand and gross negligence on the other do not cover the situation which arises where, without fraud, the directors and majority shareholders are guilty of a breach of duty which they owe to the company, and that breach of duty not only harms the company but benefits the directors. In that case it seems to me that different considerations apply. If minority shareholders can sue if there is fraud, I see no reason why they cannot sue where the action of the majority and the directors, though without fraud, confers some benefit on those directors and majority shareholders themselves.’ This passage was cited with approval by Vinelott J21 in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2).22

Negligence 6.6 In Prudential Assurance Co Ltd v Newman Industries Ltd (No 2), Vinelott J stated that:23 ‘… the exception [to the rule in Foss v Harbottle] does not apply if all that is alleged is that directors who control a company are liable to the company for damages for negligence, it not being shown that the transaction was one in which they were interested or that they have in fact obtained any benefit from.’ Accordingly, mere breach of a duty of care, like breach of fiduciary duty alone, is not enough for a derivative action. As an alternative to personal benefit to the directors accruing from their breach of duty, where it can be shown that the directors not only acted negligently but also acted in bad faith, a minority shareholder may be permitted to bring a derivative claim. In Estmanco (Kilner House) Ltd v Greater London Council,24 Megarry V-C considered the authorities, including Daniels v Daniels,25 and stated that, in addition to directors benefiting themselves at the company’s expense:26 ‘… the essence of the matter seems to be an abuse or misuse of power. “Fraud” in the phrase “fraud on a minority” seems to be being used as comprising not only fraud at common law, but also fraud in the wider equitable concept of fraud on a power.’ Fraud on power does not require dishonesty but only exercise of a fiduciary power ‘for a purpose or with an intention beyond the scope of, or not justified by, the instrument creating the power’.27 21 22

23 24

25 26 27

The case proceeded to the Court of Appeal, reported at [1982] Ch 204, CA; but, due to a change of circumstances in the meantime, this issue was not considered on appeal. [1981] Ch 257. Vinelott J also relied on some earlier cases of ‘self-dealing’ by directors where derivative actions had been successfully brought, including Alexander v Automatic Telephone Co [1900] 2 Ch 56, CA (where the directors used their powers to obtain benefits not available to other shareholders), and Cook v Deeks [1916] 1 AC 554, PC (directors diverting a contract from the company and taking it in their own names). At 316E. This part of the judgment was not considered by the Court of Appeal. [1982] 1 WLR 2, ChD (Sir Robert Megarry V-C). The facts of the case were unusual. It concerned a claim by tenants who held non-voting shares in the management company of a block of flats. The council had covenanted with the company to dispose of all flats in the block on long leases but intended to break the covenant. The council sought to use its control of the voting shares in the company to prevent action being taken for breach of the covenant. [1978] 2 WLR 73, ChD. [1982] 1 WLR 2, ChD, at 12F–12G. Vatcher v Paull [1915] AC 372, HL, per Lord Parker at 378.

138

The common law 6.7

On the facts of Estmanco, Megarry V-C found that the exercise of its voting power by the council was used, not in order to promote the best interests of the company, ‘but in order to bring advantage to itself and disadvantage to the minority’.28 He therefore concluded that the combination of negligence and bad faith amounted to a fraud on the minority, which entitled the minority to bring a derivative action in spite of the majority vote approving the breach of duty.

Personal benefit or equitable fraud is necessary 6.7 As will be apparent from the decisions in Daniels v Daniels29 and Prudential Assurance Co Ltd v Newman Industries Ltd (No 2),30 referred to in more detail above, at common law the authorities indicate that mere breach of duty without personal gain or an element of equitable fraud will not be sufficient to give minority shareholders the right to bring a derivative claim. These decisions stem from that of Dankwerts J in Pavlides v Jensen.31 The decision in that case has been criticised inter alia on the ground that it was not necessary for Dankwerts J to decide Pavlides v Jensen on the basis that there was no fraud on a minority, as there was no allegation in that case of an appropriation of assets or of other action which would amount to equitable fraud. While there is a compelling argument that any cause of action which is based on loss caused to the company by a breach of duty should be capable of being pursued by way of derivative action where wrongdoer control is shown, Pavlides remains good law. It was cited with approval by Dillon LJ in Multinational Gas & Petrochemical Co v Multinational Gas & Petrochemical Services Ltd32 who stated that Dankwerts J ‘was in my judgment right’ in restricting the scope of the exception to the rule in Foss v Harbottle as he did.33 More recently, the principle has been applied by David Richards J  in Abouraya v Sigmund34 and by McCombe LJ in Harris v Microfusion 2003-2 LLP.35 In Abouraya David Richards J stated that it is a requirement in cases of equitable fraud that there is also personal gain for the wrongdoers.36 It is respectfully doubted that this is consistent with all of the earlier decisions, or the underlying basis for the derivative claims that they exist as a procedural device designed to prevent wrongdoing without a remedy, as stated by Briggs J in Universal Project Management Service Ltd v Fort Gilkicker Ltd 37 or the reasoning of Deputy High Court Judge Mark Anderson QC in Cullen Investments Ltd v Brown,38 in a judgment handed down a fortnight after the judgment in Abouraya. It is also inconsistent with the general approach of equity to the breach of fiduciary duties by those owing a duty of loyalty where a strict holding to account does not generally depend on showing personal benefit. The general principle of English law that where there is wrongdoing there should be a remedy unless there is a good reason to withhold one is an admirable one, and it is to be 28 [1982] 1 WLR 2, ChD, at 15H. 29 [1978] 2 WLR 73, ChD. 30 [1981] Ch 257. 31 [1956] Ch 565. 32 [1983] Ch 258, CA. 33 At 289C. 34 [2014] EWHC 277 (Ch), [2015] BCC 503, ChD, at [57]. 35 [2016] EWCA Civ 1212, [2017] 1 BCLC 305, CA. 36 At [24]. 37 [2013] EWHC 348 (Ch), [2013] Ch 551 at [24] and [44]. 38 [2015] EWHC 473 (Ch), [2016] 1 BCLC 491, ChD, at [61].

139

6.8  Derivative Claims

hoped that on this point the previous understanding will continue and Abouraya will not be followed, so that where equitable fraud is present personal benefit need not also be shown. It is considered that this is likely.

Wrongdoer control 6.8 A  long-standing requirement for a derivative claim at common law is establishing that the wrongdoers are in control of the company. It was necessary to show that ‘the persons against whom the relief is sought themselves hold and control the majority of the shares in the company, and will not permit an action to be brought in the name of the company’.39 However, it is not necessary to show that the wrongdoers hold the majority of the shares, but only that they are in ‘control’ of the company in a broad sense, and can thereby prevent the company from bringing an action.40 In Prudential Assurance Co Ltd v Newman Industries (No 2),41 the Court of Appeal recognised that ‘control’ embraces a range of circumstances, the most obvious and clear-cut of which is a situation where the wrongdoer holds a majority of votes, to circumstances where the wrongdoer has effective control using his own votes combined with those who vote with him, or will not vote against him as a result of ‘influence or apathy’.42 It is also clear that the requirement of wrongdoer control is satisfied where the control of the subject company is equally split between the applicant and the wrongdoer(s).43 It is not necessary that all of those who exercise control be joined as defendants to the claim, provided they are all implicated in the wrongdoing alleged against the defendant.44 6.9 A  detailed analysis of what wrongdoer ‘control’ requires, and of the judgment of the Court of Appeal in Prudential, was undertaken by Knox J in Smith v Croft (No 2).45 Knox J explained why the word ‘control’ was placed in inverted commas by the Court of Appeal and has generally been so placed since:46 ‘In my judgment the word “control” was deliberately placed in inverted commas by the Court of Appeal in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, 219 because it was recognised that voting control by the defendants was not necessarily the sole subject of investigation. Ultimately the question which has to be answered in order to determine whether the rule in Foss v Harbottle applies to prevent a minority shareholder seeking relief as plaintiff for the benefit of the company is “Is the plaintiff being improperly prevented from bringing these proceedings on behalf of the company?” If it is an expression of the corporate will of the company by an appropriate independent organ that 39 40

41 42 43 44 45 46

Burland v Earle [1902] AC 83, PC, per Lord Davey at 93. De facto control may be achieved by a numerical minority of shares, appropriately (ie by a provision in the articles) weighted to increase voting power, thereby controlling resolutions of the company. See Re Ravenhart Service (Holdings) Ltd [2004] EWHC 76 (Ch), [2004] 2 BCLC 376, ChD (Etherton J); Alvona Developments Ltd v The Manhattan Loft Corporation (AC) Ltd [2005] EWHC 1567 (Ch), [2006] BCC 119 (Ch) per Peter Smith J at [59]. This passage in the 2nd edition of this work was referred to and approved by the Court in Gill v Thind [2020] EWHC 2973 (Ch) at [44]. [1982] Ch 204. See also Smith v Croft (No 2) [1988] Ch 114 at 185A–185B. Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, CA, at 219E–219F. Abouraya v Sigmund [2014] EWHC 277 (Ch), [2015] BCC 503, ChD, at [17]. Bhullar v Bhullar [2015] EWHC 1943 (Ch), [2016] 1 BCLC 106, ChD at [37]. [1988] Ch 114. At 184H–185E.

140

The common law 6.10

is preventing the plaintiff from prosecuting the action he is not improperly but properly prevented and so the answer to the question is “No”. The appropriate independent organ will vary according to the constitution of the company concerned and the identity of the defendants who will in most cases be disqualified from participating by voting in expressing the corporate will. … I  remain unconvinced that a just result is achieved by a single minority shareholder having the right to involve a company in an action for recovery of compensation for the company if all the other minority shareholders are for disinterested reasons satisfied that the proceedings will be productive of more harm than good. If Mr. Potts’ argument is well founded once control by the defendants is established the views of the rest of the minority as to the advisability of the prosecution of the suit are necessarily irrelevant. I find that hard to square with the concept of a form of pleading originally introduced on the ground of necessity alone in order to prevent a wrong going without redress. I therefore conclude that it is proper to have regard to the views of independent shareholders.’ On the facts of that case, the alleged wrongdoers controlled the votes of the board of directors but were unable to pass a special resolution at a general meeting without the support of an independent shareholder. The largest independent shareholder opposed the bringing of an action by the company against the alleged wrongdoers, and the court was not satisfied that the independent shareholder took that view other than in what it believed were the best interests of the company. Applying his conclusions to those facts, Knox J continued:47 ‘In my judgment in this case votes should be disregarded if, but only if, the court is satisfied either that the vote or its equivalent is actually cast with a view to supporting the defendants rather than securing benefit to the company, or that the situation of the person whose vote is considered is such that there is a substantial risk of that happening. The court should not substitute its own opinion but can, and in my view should, assess whether the decision making process is vitiated by being or being likely to be directed to an improper purpose.’ The effect of this decision was to treat the view of the majority of the independent shareholders in the company as being decisive of the question of whether the company should pursue the alleged wrongdoers. As the majority of independent shareholders would vote against the bringing of the intended claim, it was therefore not a claim that was being prevented from being brought solely as a result of the control of the wrongdoers. 6.10 Four particularly important points are apparent from these passages from the judgment of Knox J. First, it is always necessary to decide whether the claimant is being improperly prevented from bringing the proceedings on behalf of the company. Second, if what is preventing the proceedings is an expression of the corporate will by an independent organ, such prevention will not be improper. Third, it must be remembered that the derivative action was originally introduced on the ground of necessity, in order to prevent a wrong from going without redress. Finally, the court’s role is to analyse the decision-making process to see whether it has been, or is or is likely to be, used for an improper purpose, and not to judge whether what was voted for is the same conclusion as the court would have reached. 47

At 186E–186F.

141

6.11  Derivative Claims

Where the complainant has personally benefited from the breach of duty 6.11 Where the shareholder seeking to bring the derivative action has personally benefited from the alleged breach of duty, for instance by participating in a wrongly declared dividend, he will not be able to bring a derivative action complaining about the action from which he has benefited, at least unless he returns any benefit which he received from the alleged breach before he commences the claim. This was the view of the majority of the Court of Appeal in Towers v African Tug Company.48 Vaughan Williams LJ also considered that, even if they return the benefit after commencing the action but before trial, the shareholder cannot pursue a claim.49

Discretion 6.12 A  derivative action is a creation of equity. It was created to prevent the injustice of majority shareholders or management using their legal power to control the affairs of a company to prevent the company from obtaining a remedy against them to which it would be entitled. It was created for use only in cases of necessity, where a wrong would otherwise go without redress.50 Like all equitable remedies, it is therefore subject to the court’s very wide discretion as to when it should be granted, and as to any conditions that may be imposed on its being granted. The court will attach substantial weight to what it considers that the attitude of an independent board of directors of the company would be to the bringing of the claim51 and in doing so will take into account the same matters as fall to be considered when that question arises in the case of a statutory derivative claim.52 6.13 As might be expected, it follows that the court will not exercise its discretion to permit a derivative action to be brought where, applying the established principles of equity, it would be inequitable to do so. For example, where the claimant has benefited himself from the conduct about which he now complains, or where he seeks to bring the claim for an ulterior motive, permission will not be granted.53 Another example is where the real purpose of the applicant is not his interest as a shareholder but to advance his interest as a creditor, it has been held to be inappropriate for the court to exercise its discretion to grant permission, as it is not a proper use of the derivative claims procedure.54 As is the case for claims now brought under the 2006 Act, at common law a claimant needs to show at least a prima facie case in order to obtain permission.55 48 [1904] 1 Ch 558, CA. 49 At 567. 50 Smith v Croft (No 2) [1988] Ch 114 at 185 and Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] EWHC 348 (Ch), [2013] Ch 551 at [19] and [24]. 51 Bhullar v Bhullar [2015] EWHC 1943 (Ch), [2016] 1 BCLC 106, ChD, at [38]. This passage in the 2nd edition of this work was referred to and approved by the Court in Gill v Thind [2020] EWHC 2973 (Ch) at [45]. 52 See 6.32–6.45 and Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2011] 1 BCLC 498, ChD, per Lewison J at [85]. 53 See eg Towers v African Tug Co [1904] 1 Ch 558, CA; Barrett v Duckett [1995] 1 BCLC 243, CA. 54 Abouraya v Sigmund [2014] EWHC 277 (Ch), [2015] BCC 503, ChD, at [59]–[60]. 55 Prudential Assurance v Newman Industries (No 2) [1982] Ch 204, CA, at 221F–222B; Bhullar v Bhullar [2015] EWHC 1943 (Ch), [2016] 1 BCLC 106, ChD, at [20].

142

The common law 6.14

The availability of an alternative remedy was for a long time generally regarded as a bar to the availability of a derivative action at common law. Frequently, a petition based on unfair prejudice will be available to the complaining member. However, more recent cases have emphasised that, provided the court is satisfied that the applicant is acting bona fide,56 the potential availability to the applicant of an unfair prejudice petition will not be a bar to a permission where there are good reasons for the applicant to proceed by way of a derivative claim, such as that a petition would be slower or much more expensive57 or that the likely remedy of a buyout is not what the applicant wants.58 In practice, permission will often be refused to a member seeking to bring a derivative claim on behalf of the company when there is available to him a direct personal remedy.59 Although, where the alternative claim is uncertain, for instance because it depends upon a contested oral agreement60 or faces legal complications,61 permission will be given for a derivative claim rather than putting the applicant to the risks that those alternative claims carry. Permission for a derivative action will not usually be granted where the member is able to bring a petition for a just and equitable winding up of the company to obtain a remedy for the wrong in issue.62 However, as where the remedy of an unfair prejudice petition is available, where the circumstances make the petition a more difficult or unsuitable remedy, it should not operate as a bar to permission being granted. Where an independent liquidator has been appointed and could bring the claim, or would be able to do so in the near future, permission will generally not be granted to a member to bring a derivative action in the name of the company.63 6.14 Where the bringing of a derivative claim would not be inequitable and there is no suitable alternative remedy available to the complaining member, the court needs to be satisfied that ‘a reasonable board of directors could’ decide to bring the claim that the member seeks permission to bring as a derivative claim on behalf of the company.64 It is not necessary for the court to be satisfied that such a board would do so. If granted, permission to continue a derivative claim should generally

56 57 58

59 60 61 62 63 64

Bhullar v Bhullar [2015] EWHC 1943 (Ch), [2016] 1 BCLC 106, ChD, at [45]. Bhullar v Bhullar [2015] EWHC 1943 (Ch), [2016] 1 BCLC 106, ChD, at [44]. Hook v Sumner [2015] EWHC 3820 (Ch), [2016] BCC 220, ChD, at [129]–[136]. This was a case brought under the 2006 Act where the importance of the availability of an alternative remedy is arguably less important, but it seems unlikely that the court’s conclusion on this point would have been different had it been an application made under the common law. Jafari-Fini v Skillglass Ltd [2005] EWCA Civ 356, [2005] BCC 842, CA; Certain Limited Partners in Henderson PFI Secondary Fund II LP v Henderson PFI Secondary Fund II LLP [2012] EWHC 3259 (Comm), [2013] QB 934. Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] EWHC 348 (Ch), [2013] Ch 551 at [56]. Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] EWHC 348 (Ch), [2013] Ch 551 at [57] and [58]. Barrett v Duckett [1995] 1 BCLC 243, CA; Mumbray v Lapper [2005] EWHC 1152 (Ch), [2005] BCC 990, ChD. Fargro Ltd v Godfroy [1986] 1 WLR 1134, ChD. Airey v Cordell [2006] EWHC 2728 (Ch), [2007] BCC 785, ChD. This formulation of Warren J is preferable to that of HHJ Reed QC in Mumbray v Lapper [2005] EWHC 1152 (Ch), [2005] BCC 990, ChD, of whether an independent board would sanction the bringing of the claim. Warren J’s approach is to require the court to do what a court can do – judge what a range of reasonable management decisions would be – rather than, in effect, to take the decision and decree that any other decision taken by the board would be wrong and is the one applied by Morgan J in Bhullar v Bhullar [2015] EWHC 1943 (Ch), [2016] 1 BCLC 106, ChD, at [38].

143

6.15  Derivative Claims

be unconditional. The granting of conditional permission is possible but should be highly exceptional.65

‘Double’ or ‘multiple’ derivative claims 6.15 Derivative claims may potentially be brought by shareholders in respect of companies of which they are not a member, where the company concerned is connected to the company of which they are a member. A ‘double’ derivative claim is a claim pursued by a member of a company in respect of a breach of duty owed to the company’s subsidiary. If the claim is brought in respect of a breach of duty owed to a subsidiary’s subsidiary, it is a ‘triple’ derivative claim, and so on down the corporate chain where there are more companies that are subsidiaries of a holding company in which the member is interested. Such claims are properly viewed as a single claim and not two or three or more claims. 6.16 Following the enactment and coming into force of Part 11, Chapter 1 of the 2006 Act, there was some doubt as to whether double or multiple derivative claims remained possible under English law. The first edition of this book expressed the view that they were, and this has since been confirmed. In Universal Project Management Services Ltd v Fort Gilkicker Ltd 66 Briggs J  stated that the derivative claim is a procedural device designed to prevent wrongdoing without a remedy67 and that as a matter of construction of the 2006 Act, the common law right to bring double or and multiple derivative claims was not taken away by it.68 The continued existence of a right to bring double and multiple derivative claims in English law following the introduction of the statutory scheme in the 2006 Act has also been recognised in subsequent cases and the analysis of Briggs J endorsed.69 The fact that the holding company of which the applicant is a member may be an LLP does not operate as a bar to a double derivative claim at common law.70 The decision of Briggs J was the subject of some academic criticism71 but as was stated in the previous edition, both the strict construction of the statutory provisions and the CPR support it, and these were reasons relied upon by Briggs J in reaching his conclusion, together with the policy reason for the creation of derivative claims as a procedural device to avoid injustice. In the case of a double or multiple derivative claim, it remains necessary for financial or other loss to the shareholders at least including the claimant shareholder, albeit normally in the nature of reflective loss, to give the applicant shareholder sufficient interest in the proceedings to make him a suitable claimant on behalf of the company, 65 66 67 68 69 70 71

Boston Trust Co Ltd v Verhoef [2021] EWCA Civ 1176 at [40]. [2013] EWHC 348 (Ch), [2013] Ch 551. At [24]. At [44]–[47]. Subsequently, double derivative claims have been brought and the jurisdiction relating to them not questioned, eg Popely v Popely [2019] EWHC 1507 (Ch), [2019] BCC 1089; Gill v Thind [2020] EWHC 2973 (Ch); Boston Trust Co Ltd v Verhoef [2021] EWCA Civ 1176. Such as Abouraya v Sigmund [2014] EWHC 277 (Ch), [2015] BCC 503, ChD; and Bhullar v Bhullar [2015] EWHC 1943 (Ch), [2016] 1 BCLC 106, ChD. Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] EWHC 348 (Ch), [2013] Ch 551 at [51]–[52]. For example, Gore Browne on Companies para 18-39 (update 108) which was a work which had previously argued that the effect of the introduction of the statutory regime was to abolish double and multiple derivative claims in English law.

144

Derivative claims under the 2006 Act 6.18

whether he is a member of the company or of one of its holding companies.72 The need for permission to continue double or multiple derivative claims applies, even though they are not within the scope of CPR 19.9.73

DERIVATIVE CLAIMS UNDER THE 2006 ACT 6.17 On 1  October 2007, Part 11 of the 2006 Act came into force. Chapter  1 of that Part (sections 260–264) makes provision for derivative claims in England, Wales and Northern Ireland. A  similar but slightly different regime applying to derivative claims in Scotland is set out in Chapter 2 of Part 11.74 These provisions broadly follow the Law Commission’s recommendations in its report ‘Shareholders’ Remedies’.75 The 2006 Act in fact includes two distinct (and probably mutually exclusive) regimes with regard to derivative claims. The remainder of this chapter is concerned with claims brought under Part 11, Chapter 1. However, the bringing of a derivative claim is a form of relief available under section 996, pursuant to an unfair prejudice petition.76 In Re Charnley Davies (No 2),77 Millett J observed that:78 ‘[t]he very same facts may well found either a derivative action or a sec 459 [of the 1985 Act]79 petition. But that should not disguise the fact that the nature of the complaint and the appropriate relief is different in the two cases.’ The nature of the complaint and the relief sought, along with the substantial procedural differences, will indicate which is the more appropriate route in any given case. There is no authority under English law as to whether a shareholder can opt to obtain relief in the form of a derivative claim being brought via an unfair prejudice petition where the claim falls within the scope of Part 11, Chapter 1 of the 2006 Act. However, it seems likely that such circumvention of the particular procedure set out in that chapter will not be permitted where the cause of action arises from the default of a director.80

Scope and application 6.18 Section 260(1) defines a derivative claim as ‘proceedings in England and Wales or Northern Ireland by a member of a company – (a) in respect of a cause of action vested in the company, and (b) seeking relief on behalf of the company’. This definition applies throughout Part 11, Chapter 1. Section 260(2) provides that a derivative claim as defined may only be brought under Chapter  1 of Part 11 or pursuant to an order of the court in proceedings brought under section 994 of the 2006 Act (unfair prejudice petition). Section 996(2)(c) gives the court the power to authorise a derivative claim without following the procedure set out in Part 11. 72 Abouraya v Sigmund [2014] EWHC 277 (Ch), [2015] BCC 503, ChD, at [25] and [56]. 73 Boston Trust Co Ltd v Verhoef [2021] EWCA Civ 1176 at [18]–[20]. 74 The law in Scotland is outside the scope of this work. 75 Law Comm 246, Cm 3769. 76 See Chapter 10. 77 [1990] BCLC 760, ChD. 78 At 784a. 79 The predecessor of s 994 of the 2006 Act. 80 This has been stated to be the case in respect of equivalent provisions in Hong Kong in Re Shun Tak Holdings Ltd [2009] 5 HKLDD 743.

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A  derivative claim may only be brought under Part 11, Chapter  1 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’.81 The scope of the relevant duties is accordingly wide. For example, a director’s breach of duty may be a breach of a duty arising under a contract, including a breach of a fiduciary duty arising under a contract.82 In other words, the cause of action which it is sought to pursue by way of a derivative claim must arise from a breach of duty by a director of the company. For this purpose, a director of the company includes both a former director and a shadow director.83 However, the cause of action pursued need not be against a director; it is only necessary that the cause of action arises from a director’s actual or proposed act or omission.84 Where the complaint falls outside this definition, it is not one that can be pursued by way of a ‘derivative claim’ under Part 11, Chapter 2 of the 2006 Act.85 However, it may be possible for the shareholder to obtain an order under section 996 compelling the company itself to pursue such a claim86 or to effectively obtain relief of a derivative nature.87 The definition is wider than the common law, in that it includes a claim that was capable of ratification by the shareholders by ordinary resolution. However, it is also narrower, in that it does not extend to so-called ‘double’ or ‘multiple’ derivative claims. 6.19 It follows that any derivative claims falling outside this definition, being derivative claims relating to overseas companies88 and ‘double’ or ‘multiple’ derivative claims,89 are also outside the statutory scheme. Therefore, they continue to be subject to the common law principles. 6.20 A statutory derivative claim may be brought by any member of the company and also anyone who, although not a member as defined by the 2006 Act,90 is someone to whom shares in the company have been transferred or transmitted by operation of law.91 It may not be brought by someone who is a beneficial owner of shares under a trust; as such a person does not have legal title to shares and a right to be registered as a member.92 Provided the cause of action arises from a proposed or actual act or omission of a director, it does not matter whether the cause of action arose before or after the member bringing a claim became a member, or received shares by transfer or transmission.93 However, where the applicant acquired shares with knowledge of the events giving rise to the cause of action, that may be an important factor for the court when deciding whether to exercise its discretion to permit the bringing of the derivative claim. 81 82 83 84 85

Section 260(3). Hughes v Burley [2021] EWHC 104 (Ch) at [111]–[113]. Section 260(5). See 2.4–2.8 for a discussion of shadow directors. Section 260(3). As explained by Lewison J in Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2011] 1 BCLC 498, ChD, at [73]–[78]. 86 Iesini, per Lewison J at [82]. 87 See the discussion of s 996 in Chapter 10. 88 See 6.3. 89 See 6.15–6.16. 90 See s 112 and the discussion at 9.19–9.29. 91 Section 260(5)(c). 92 McEneaney v Stevens [2017] 5 WLUK 10, ChD. 93 Section 260(4).

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The statutory procedure – two hurdles 6.21 The statutory procedure consists of two separate hurdles which a member wishing to bring or take over a derivative claim needs to overcome.94 Separate but similar provision is made in the 2006 Act for the member commencing a derivative claim,95 taking over a claim brought by the company and continuing it as a derivative claim,96 and taking over an existing derivative claim being pursued by another member and pursuing it as a derivative claim.97 Whilst it was indicated in one case that the statutory procedure should be carefully followed in the interests of efficient case management,98 in another the two-stage process was ignored on the ground that it was ‘unduly elaborate’.99 The importance of following the statutory procedure precisely is likely to depend, in practice, on the facts of the particular case and the temperament of the particular judge. Where a derivative claim within the scope of the statutory regime is commenced without first obtaining the necessary permission, the effect of the 2006 Act is that the claim is invalid, as are all steps taken in it.100 However, the court has the power to retrospectively validate steps taken in the proceedings and will exercise the power in appropriate cases.101 The power to retrospectively validate arises under the 2006 Act.102

The first hurdle 6.22 In each case, the first hurdle is to demonstrate that the application discloses a prima facie case for giving permission to the applicant member to continue the claim as a derivative claim.103 The application is made and considered on paper with the applicant having the right to an oral hearing to request that any decision to dismiss the application is reconsidered.104 The purpose of the introduction of this initial test was to seek to ensure that frivolous claims were dismissed as soon as possible, without involving the company in time and cost.105 If the application does not disclose a prima facie case, the court must dismiss the application, and no question of the exercise of a discretion arises. If the court is satisfied that the application does disclose a prima facie case, the application passes the first hurdle and moves to the second hurdle, which involves the court in a more careful consideration of specified factors (substantially mirroring the factors applicable at common law), and weighing up the application to decide whether the claim is an appropriate one to be pursued as 94

It has been suggested that the first hurdle is so low as to serve no real purpose other than to add delay and costs. See eg David Gibbs, ‘Has the statutory derivative claim fulfilled its objectives? A prima facie case and the mandatory bar’, Comp Law 2011, 32(2), 41–45. 95 Section 261. 96 Section 262. 97 Section 264. 98 Langley Ward Ltd v Trevor [2011] EWHC 1893 (Ch) at [62]. 99 Stimpson v Southern Private Landlords Association Ltd [2009] EWHC 2072 (Ch), [2010] BCC 387, ChD, at [3]. 100 Wilton UK Ltd v Shuttleworth [2017] EWHC 2195 (Ch), per HHJ Davis-White QC at [64]. 101 Boston Trust Co Ltd v Verhoef [2021] EWCA Civ 1176. 102 Wilton UK Ltd v Shuttleworth [2017] EWHC 2195 (Ch), per HHJ Davis-White QC at [64]. 103 This was a minimum requirement at common law, as stated by the Court of Appeal in Prudential Assurance v Newman Industries (No 2) [1982] Ch 204, CA, at 222A. 104 See CPR 19.9 and Chapter 13 for a discussion of the applicable procedure. 105 According to Lord Goldsmith who guided the legislation though the House of Lords: Hansard, HL Vol 681, col 883 (9 May 2006).

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derivative claim by the particular applicant member. The first hurdle is one that will usually be attempted by way of a paper application, so the absence of reported cases on it is unsurprising.106 However, the concept of a prima facie case is a familiar one to English law, and in a number of the cases which have come before the courts at the second hurdle, where it is also a relevant factor (as explained below), comments have been made about it.107 The 2006 Act makes separate provision for each type of application to continue a claim as derivative claim. There are separate, though similar, provisions in relation to the first hurdle for each type of claim. These provisions are considered in turn, before the second hurdle is considered.

Application to continue a derivative claim commenced by the applicant member 6.23 Section 261 of the 2006 Act requires anyone bringing a derivative claim under the Act to apply for permission to continue it. In other words, proceedings are commenced and then permission to continue with those proceedings must immediately be applied for. On the hearing of the application for permission to continue the claim, the court may give permission to continue the derivative claim on any terms it considers fit, refuse permission and dismiss the claim, or adjourn the application and give directions.108 The applicant is required to establish a prima facie case for permission.109 If a prima facie case for permission is not established, the court must dismiss the application for permission to continue the claim.110 If the court dismisses the application for permission, it can make consequential orders as it considers appropriate.111 Such orders are likely to relate to costs but also may, for example, provide for the claim to be continued in a different form,112 such as by changing one or more of the parties, or directing that statements of case be amended. The court may adjourn the proceedings when the application is heard.113 This gives it flexibility to direct that further evidence is filed or other steps are taken.

Converting a claim commenced by the company into a derivative claim 6.24 Section 262 of the 2006 Act enables a member to apply to the court to take over a claim commenced by the company, and continue it as a derivative 106 In some cases the first hurdle has been bypassed and the application listed for the second stage; see eg SDI Retail Services Ltd v King [2017] EWHC 737 (Ch) where this was ordered by consent. 107 For example, Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2011] 1 BCLC 498, ChD; Stimpson v Southern Private Landlords Association Ltd [2009] EWHC 2072 (Ch), [2010] BCC 387, ChD, where there was a single hearing at which both stages were addressed, and HHJ Pelling QC ignored the first hurdle and moved straight to the second; Bhullar v Bhullar [2015] EWHC 1943 (Ch), [2016] 1 BCLC 106, ChD where Morgan J discussed the precise meaning of the phrase and concluded that there is no clear statement of its meaning but that the application of the test arising from the phrase does not cause difficulty in practice at [20]–[26], see further n 127 below. 108 Section 261(3). 109 See 6.22 and n 107 above. 110 Section 261(2). 111 Section 261(4)(c). 112 Section 261(4)(a). 113 Section 261(4)(c).

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claim where the claim is one that could be pursued as a derivative claim under Part 11, Chapter  1 – that is, a claim based on 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 director114 of the company. A  member of the company115 may apply to the court for permission to continue the claim. The member will need to establish  that: (a) the manner in which in the company commenced or continued the claim amounts to an abuse of process of the court; or (b) the company has failed to prosecute it diligently; and (c) it is appropriate for the member to continue the claim as a derivative claim. If the manner in which the company has commenced or continued the claim amounts to abuse of process, the claim would be liable to be struck out. The member would therefore be applying to take over the claim in order to keep it alive. An application under section 262 may be made by a member as part of the response to an application by a defendant to an action to have it struck out as an abuse of process. The Law Commission favoured provision for a member taking over an action brought by the company where the company’s real intention in bringing the proceedings was to prevent a successful claim from being brought.116 It is probable that, in practice, applications are more likely to be made where a member considers that the company has failed to prosecute a claim diligently, for instance by failing to comply with rules or directions, by seeking to discontinue the action, or by consenting to an application against the company for summary judgment or to strike out its claim. A member who is able to establish one or other of these requirements will then need to satisfy the court that it is appropriate for him to take over the action as a derivative action.

Taking over a claim commenced by the company – procedure 6.25 The member may apply within the company’s claim by filing an application notice, supported by a witness statement containing the evidence on which he relies. At the hearing of the application, the court will consider whether the member has established a prima facie case for giving permission to take over the claim and pursue it as a derivative claim. If the court is not satisfied that the evidence filed by the member discloses a prima facie case for giving such permission, the court must dismiss the application.117 If the court is satisfied that the application does disclose a prima facie case, it may give directions as to evidence to be provided by the company and may adjourn the application for that purpose.118 In most cases, the court is likely to want to consider any evidence that the company wishes to file. If the company opposes the application, it will usually wish to justify its conduct of the claim to date and is likely to need to file evidence to do so.

114 Or former director or shadow director (s 260(5)). 115 Which includes someone to whom shares in the company have been transferred or transmitted by operation of law (s 260(5)(c)). 116 Law Commission Report No 246 (Cm 3769), para 6.63. 117 Section 262(3). 118 Section 262(4).

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Taking over a derivative claim brought by another member 6.26 Section 264 of the 2006 Act permits a member of a company to take over a derivative claim being pursued by another member. The provisions of section 264 are similar to section 262, except that they relate to the taking over of a claim being already pursued by another member, rather than by the company itself. The grounds for applying to take over a derivative claim pursued by another member are the same as for taking over a claim brought by the company: that the manner in which the claim was brought or is being pursued amounts to an abuse of process, or that the claimant is failing to prosecute the claim diligently; and that it is appropriate for the applicant member to continue the claim as a derivative claim.119 The court must consider whether the application discloses a prima facie case.120 If it does not, the application must be dismissed.121 If the application is not dismissed at that stage, the court may give directions as to evidence to be provided by the company and adjourn the application for such evidence to be provided.122 The court is likely to want to consider evidence from the company because it will be concerned to satisfy itself that the claim needs to be pursued by way of a derivative claim and not by the company itself.

The second hurdle 6.27 The second hurdle is the exercise by the court of its discretion as to whether to grant permission to continue a claim as a derivative claim. Section 263 of the 2006 Act governs this exercise of discretion for applications for permission made under section 261 or 262.

The court’s approach to the decision whether to grant permission 6.28 Section 263 of the 2006 Act sets out how the court must approach the question of whether to grant permission to a member to continue a derivative claim where an application has been made under section 261 or 262. 6.29 Section 263 also requires the court to engage in a two-stage process when considering the application. First, it must consider whether: (a) a person acting in accordance with the duty to promote the success of the company (under section 172) would not seek to continue the claim; or (b) where the cause of action arises from an act or omission that is yet to occur, whether the act or omission has been authorised by the company; or (c) where the cause of action arises from an act or omission that has already occurred, that the act or omission was either (i) authorised by the company, or (ii) has been ratified by the company since it occurred. If the court is satisfied that one or more of (a), (b) or (c) is shown, it must refuse permission to continue with the claim as a derivative claim.123 119 Section 264(2). 120 See 6.22 and n 107. 121 Section 264(3). 122 Section 264(4). 123 Section 263(2).

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6.30 These hurdles are not particularly high. Where valid authorisation or ratification by the company has occurred, that would be a complete defence to the claim, so it is not permitted to continue as a derivative claim.124 Other than authorisation by the company, the only complete bar is where a reasonable director acting properly in accordance with section 172 ‘would not seek to support the claim’. This requires, in practice, a conclusion that no director acting lawfully in accordance with section 172 could properly authorise the company to continue with the claim.125 Where some directors would pursue the claim and some would not, the hurdle is overcome.126 The hurdle is likely to be an effective barrier where the claim has no reasonable prospect of success. It might also apply where no reasonable director could consider that pursuing the claim would be in the interests of the company, for instance: because the likely costs of doing so exceed the likely recovery127; where the company is unable to fund the pursuing of the claim to trial; where the defendant is known to be unable to meet a judgment; or where the act of pursuing the claim will cause damage to the company. It will therefore be necessary for the applicant, in his evidence in support of his application, to show that the company has not authorised or ratified the act or omission complained of and that a reasonable director acting lawfully could seek to continue the claim. In practice, the question of whether a director acting properly would not seek to continue the claim is often closely linked with the important discretionary factor of the importance that such a notional director would attach to continuing it,128 as the attitude of the notional reasonable director to the claim is in issue in each case.129

Wrongdoer control 6.31 Unlike at common law, the applicant is not required to establish wrongdoer control in order to engage the court in the exercise of its discretion. Whether the alleged wrongdoers are in control is, however, likely to be highly relevant at the discretion stage. This was noted by HHJ Pelling QC in Stimpson v Southern Private Landlords Association.130 The judge expressly rejected a submission that, because wrongdoer control is not mentioned in section 263, it is irrelevant, and stated that the absence of wrongdoer control is a potential factor and is ‘at least a powerful one that negatives the giving of permission and may be overwhelming’.131 In Cinematic Finance Ltd v Ryder132 it was held that permission to bring a derivative 124 In Re Singh Brothers Contractors (North West) Ltd [2013] EWHC 2138 (Ch), [2014] 1 BCLC 649, ChD, authorisation or ratification was found to have occurred on a hearing at the second stage and therefore permission to continue was refused, but there were no particular consequences flowing from the failure to identify this flaw in the application at the first stage. It must have been the result of a failure by the applicant at that point. 125 See Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2011] BCLC 498, ChD, per Lewison J at [86] and Stainer v Lee [2010] EWHC 1539 (Ch), [2011] 1 BCLC 537, ChD, per Roth J at [28]. See also 6.22 and n 107. 126 As explained by HHJ Behrens in Parry v Bartlett [2011] EWHC 3146 (Ch), [2012] BCC 700, ChD, at [75]. 127 For example, Zavahir v Shankleman [2016] EWHC 2772 (Ch), [37]–[39]. 128 Section 263(3)(b) and 6.38–6.40. 129 For example, Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2011] 1 BCLC 498, ChD, per Lewison J at [102]. 130 [2009] EWHC 2072 (Ch), [2010] BCC 387, ChD. 131 At [46]. 132 [2010] EWHC 3387 (Ch), [2012] BCC 797, ChD, and partially reported at [2010] All ER (D) 283 (Oct).

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claim would only be given to a majority shareholder in exceptional circumstances, and Roth J, understandably,133 found it difficult to envisage what such exceptional circumstances might be. The same judge did indicate in Bamford v Harvey 134 that, where there was uncertainty as to whether the alleged wrongdoer could prevent the company from bringing its own alternative claim, a derivative claim may be appropriate, adopting the ‘flexible approach’ referred to by Lord Reed in Wishart v Castlecroft Securities Ltd.135 It would not be for the claimant to involve the company in difficult arguments about the availability of the alternative claim. However, on the facts in Bamford, there was an available alternative claim open to the company, which appeared to have simply been overlooked when the derivative claim was commenced.136 Accordingly, wrongdoer control is, at least in theory, not an absolute requirement for a statutory derivative claim to be brought, but in practice is likely to need to be shown; otherwise, there is no good reason why the company should not bring the claim itself, rather than by someone else on its behalf. As Roth J stated in Bamford:137 ‘When proceedings clearly can be brought in the name of the company and there is no objection raised on that ground, they should be brought in the name of the company.’

Court’s consideration of whether to give permission 6.32 Provided the court is satisfied that none of the three bars to permission in section 263(2) is present, the court must consider whether to give permission. Section 262(3) sets out six matters which the court is required to take into account in so considering. The section provides that the court must take these matters into account ‘in particular’. Accordingly, the list of matters is not exhaustive. The list does set out matters which are to be given special weight,138 but they are only ‘to be taken into account’. None of them will necessarily be determinative of any application for permission. The six matters are: (a) Whether the member is acting in good faith in seeking to continue the claim. (b) The importance that a person acting in accordance with section 172 (duty to promote the success of the company) would attach to it. (c) Where the cause of action results from an act or omission that is yet to occur, whether the act or omission could be, and in the circumstances would be likely to be– (i) authorised by the company before it occurs, or (ii) ratified by the company after it occurs.

133 As the majority shareholder can mostly achieve what he wants in general meeting by exercising his vote. 134 [2012] EWHC 2858 (Ch), [2013] BCC 311, ChD, at [29]. 135 [2010] BCC 161 (CSIH). Roth J indicated that it would be desirable that the interpretation of the equivalent provisions in both England and Scotland should be the same, and at [29] stated that, although not binding on him, he found Wishart to be ‘very persuasive authority’ and noted that it had not been cited to him in Cinematic Finance v Ryder. 136 At [29]. 137 At [32]. 138 This is the effect of the words in the section and was confirmed in Franbar Holdings Ltd v Patel [2008] EWHC 1534 (Ch), [2009] 1 BCLC 1, ChD, at [31].

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(d) Where the cause of action arises from an act or omission that has already occurred, whether the act or omission could be, and in the circumstances would be likely to be, ratified by the company. (e) Whether the company has decided not to pursue the claim. (f) Whether the act or omission in respect of which the claim is brought gives rise to a cause of action that the member could pursue in his own right rather than on behalf of the company. 6.33 As it was put by Lord Reed in the Scottish case of Wiscart v Castlecroft Securities Ltd:139 ‘The fundamental issue which the court has to determine is whether it should interfere in the management of the company by overriding the decision of those responsible under the company’s articles for the management of its affairs, so as to permit proceedings to be brought on its behalf, by the member, in order to enforce the company’s rights.’ The court will consider these factors when, as Lewison J explained in Iesini v Westrip Holdings Ltd,140 in considering whether to grant permission, the court needs to go beyond satisfying itself that a prima facie case has been made out, as that is the purpose of the first stage.141 He continued:142 ‘At the second stage something more must be needed. In Fanmailuk.com Ltd v Cooper [2008]  EWHC  2198 (Ch); [2008]  BCC  877 Mr. Robert Englehart QC said that on an application under s.261 it would be “quite wrong … to embark on anything like a mini-trial of the action”. No doubt that is correct; but on the other hand not only is something more than a prima facie case required, but the court will have to form a view on the strength of the claim in order properly to consider the requirements of s.263(2)(a) and 263(3)(b). Of course any view can only be provisional where the action has yet to be tried; but the court must, I think, do the best it can on the material before it.’ The intention behind the section appears to have been that all of the factors identified in it and any others identified by the court be considered together.143 This was the approach taken by Roth J in Stainer v Lee.144 6.34 The parliamentary intention behind the provisions was expressed to include the avoidance of mini-trials,145 but in practice this has sometimes proved difficult to achieve. In practice it is very difficult to see how a court can properly satisfy itself that a person acting in accordance with section 172, the duty to promote the success of the company, would attach appropriate importance to the claim without going into it in some detail. In Iesini itself, it appears that about four days were spent considering the evidence, which included that of experts who were instructed

139 [2010] BCC 161, CSIH, at [19]. 140 [2009] EWHC 2526 (Ch), [2011] 1 BCLC 498, ChD. 141 At [79]. Lord Reed made the same point in Wishart v Castlecroft Securities Ltd [2010] BCC 161, CSIH, at [22]. See also Brannigan v Style [2016] EWHC 512 (Ch) at [43]. 142 At [79]. 143 According to Lord Goldsmith when the section was considered as part of the debate in the Bill in the House of Lords: Hansard, HL Vol 679, col GC25 (27 February 2006). 144 [2010] EWHC 1539 (Ch), [2011] 1 BCLC 537, ChD, at [29]. 145 Hansard, HL Vol 679, col GC22 (27 February 2006).

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and had reported at length for the purpose of the hearing, several rounds of written evidence and voluminous documentation. In Wishart v Castlecroft Securities Ltd,146 Lord Reed expressed the view that:147 ‘It is true that the range of factors which the court is entitled to take into account is not limited by the legislation: although s 268(2) lists factors which must be taken into account, that list is prefaced by the words “in particular”, and is therefore non-exhaustive. Nevertheless, it does not appear to us that the strength of the proposed case was intended ordinarily to be addressed as a separate consideration. That is not to say that the strength of the proposed case is irrelevant.’ And, further:148 ‘… The court is thus required by s 268(2)(b) to give some consideration to the strength of the proposed case, at both the first stage and the second stage. We find it difficult to conceive of the court’s doing other than to refuse the application if it considered, at either stage, that there was not an arguable case against the proposed defenders. In so far as the Lord Ordinary’s opinion might be understood as meaning that, if the court is satisfied at the first stage that the derivative claim is arguable, the merits of the claim then drop out of further consideration, that is not in our opinion the correct approach. Nor is the court’s consideration at the first stage confined to the two matters mentioned by the Lord Ordinary: as we have explained, the range of matters which the court may take into account is not restricted by the legislation, but those matters must in any event include the considerations listed in s  268(2) (and, in relation to the competency of the application, the considerations arising from s 266)’. He completed the analysis as follows:149 ‘… As we have explained, the merits of the proposed derivative proceedings bear on the issue raised by s 268(2)(b), in particular. It is not however appropriate that the merits should be investigated in detail. It is clear from the Law Commission report that one of the objectives underlying their recommendations was to avoid a detailed investigation into the merits of the case taking place at the leave stage, since such a “mini-trial” would be time-consuming and expensive.’ In Stainer v Lee,150 Roth J considered what Lewison J had said in Iesini and, while endorsing the approach described by Lewison J, stated:151 ‘It seems to me possible, with respect, that the court might revise its view as to a prima facie case once it has received evidence and argument from the other side, so the antithesis between s 261(2) and 263 may not be so stark. But in any event, I consider that s 263(3) and (4) do not prescribe a particular standard of proof that has to be satisfied but rather require consideration of a range of factors to reach an overall view. In particular, under s 263(3)(b), as regards the hypothetical director acting in accordance with the s 172 duty, if the case seems very strong, it may be appropriate to continue it even if the likely level of recovery is not so large, since 146 147 148 149 150 151

[2010] BCC 161, CSOH, a Scottish case concerned with similar provisions to section 268. At [36]. At [38]. At [39]. [2011] 1 BCLC 537, ChD. At [29].

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such a claim stands a good chance of provoking an early settlement or may indeed qualify for summary judgment. On the other hand, it may be in the interests of the company to continue even a less strong case if the amount of potential recovery is very large. The necessary evaluation, conducted on, as Lewison J  observed, a provisional basis and at a very early stage of the proceedings, is therefore not mechanistic.’ These cases indicate that the court will, as with most other interlocutory applications, seek to avoid conducting a mini-trial. However, it will consider the evidence with some care and, if appropriate, will re-visit the previous view that a prima facie case has been established in the light of the further evidence now available to come to a provisional view on the strength of the claim.152 There is an increasing tendency to scrutinise the evidence put forward on the application (and draw an inference from what is not put forward).153 This is likely to lead to an increase in the amount of evidence generally put forward on both sides, and therefore to longer hearings. The absence of evidence in response to the putative claim may lead the court to presume, for the purposes of the application, that there is no real need to revisit the conclusion reached at an earlier stage that there is a prima facie case to answer, and tend to favour permission to continue the derivative claim being granted.154 However, that does not meet the test as it is clear that at the second stage something more than a prima facie case is required to be shown.155 The approach should not be mechanistic or required to meet a set threshold but in the nature of an overall view as to whether pursuing the claim would be in the interests of the company.156 The extent of the merits of the claim are however highly relevant to the consideration of whether the hypothetical director whose views fall to be considered under section 263(3)(b) would attach importance to pursuing the claim. The English courts have been more inclined to look beyond the applicant’s own evidence than the approach in Scotland as indicated by Lord Reed in Wishart. For example, in Hook v Sumner157 HHJ David Cooke expressed scepticism about evidence, including expert evidence, adduced by both sides, before concluding that the applicant could show that there was a reasonably arguable claim of value for which permission should be granted, even if it was not precisely the same claim and with the same likely value as the applicant had contended. The respondent’s argument that if the court rejected the applicant’s evidence on an issue then it must accede to

152 SDI Retail Services Ltd v King [2017] EWHC 737 (Ch) at [69]. 153 See eg Robert Glew & Denton & Co Trustees Ltd v ARPI Matossian-Rogers [2019] EWHC 1507 (Ch), [2019] BCC 1089 and Hughes v Burley [2021] EWHC 104 (Ch). The failure of the respondent’s evidence to engage with the merits of the claim put forward by the applicant was highly significant in the decision to grant permission reached in SDI Retail Services Ltd v King [2017] EWHC 737 (Ch) at [70]. 154 Kiani v Cooper [2010] EWHC 577 (Ch), [2010] 2 BCLC 427, ChD, at [30]; Phillips v Fryer [2013] BCC 176, ChD. Where the absence of further information as to the claim is the result of the respondents refusing to provide it that will generally favour permission to continue – see eg SDI Retail Services Ltd v King [2017] EWHC 737 (Ch). 155 Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2011] 1 BCLC 498, ChD, at [79]; Brannigan v Style [2016] EWHC 512 (Ch) at [43]. But the court need not be satisfied that it is a ‘strong case’: Saatchi v Gijjar [2019] EWHC 3472 (Ch) at [29]. 156 As recommended by the Law Commission in its Report on Shareholder Remedies (Law Com No 246) and stated by Roth J Stainer v Lee [2010] EWHC 1539 (Ch), [2011] 1 BCLC 537, at [29] and Newey J in Kleanthous v Paphitis [2011] EWHC 2287 (Ch), [2012] BCC 676, ChD, at [41]– [42]. 157 [2015] EWHC 3820 (Ch), [2016] BCC 220, ChD.

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the respondent’s contention that it had acted properly was expressly rejected.158 The difficulty that the court generally faces where the evidence is limited and the scope for testing it similarly limited has tended to mean that a relatively generous view of the merits of an underlying claim is taken for the purposes of the consideration of permission to continue a derivative claim. 6.35 As observed by Roth J  in Stainer,159 the court’s discretion involves a balancing of the relevant factors in the round, giving particular weight to the matters identified in the section. There is no particular standard of proof to be met.160 Given the mandatory bars to permission in section 263(2), and the court’s being directed to ‘take into account’ other listed matters, it must follow that no other single factor is necessarily decisive. 6.36 Unlike at common law, a director’s negligence or breach of fiduciary duty alone may be enough to found a derivative claim. The absence of wrongdoer control of the company, personal gain by the director concerned, or some other species of equitable fraud will not necessarily mean that permission to pursue a derivative claim will be refused.

Section 263(3)(a) – whether the member is acting in good faith 6.37 This is a matter which was important at common law.161 It is necessary that the member is bringing the claim for the benefit of the company. This means preserving the value of the shares in the company as a whole. It does not, though, mean that the claim may only be brought for the sole benefit of the company. It is no bar that the member (or some third party who may or may not be connected with the member) also stands to benefit from the claim being brought as a derivative claim, as was explained by Lewison J in Iesini v Westrip Holdings Ltd.162 What is essential is that the pursuing of the claim will be to the real benefit of the company, even if the complaining shareholder also has an ulterior motive. In Stimpson v Southern Private Landlords Ltd,163 HHJ  Pelling QC did not determine that the fact that a member wished to bring a claim to prevent the company losing its identity and prevent his losing control of it meant that he definitely did not act in good faith, but indicated that he tended to think it did. This was regarded as a matter relevant to the exercise of the discretion, the list of matters to be considered in section 263(3) not being exhaustive.164 The judge also carefully considered the member’s own conduct in relation to the company and matters giving rise to the claim in assessing his good faith.165 In Hook v Sumner the fact that the only person to benefit from the claim would be the applicant did not mean that he was acting in bad faith and the conclusion that the applicant was acting for a proper motive on behalf of the company meant that he must be considered to be acting in good faith.166 In SDI Retail Services Ltd 158 159 160 161 162 163 164 165 166

At [53]–[54]. At [29]. SDI Retail Services Ltd v King [2017] EWHC 737 (Ch) at [64]. See eg Nurcombe v Nurcombe [1985] 1 WLR 370, CA; Barrett v Duckett [1995] 1 BCLC 243, CA. [2009] EWHC 2526 (Ch), [2011] 1 BCLC 498, ChD, at [121]. See also eg SDI Retail Services Ltd v King [2017] EWHC 737 (Ch) at [66]. [2009] EWHC 2072 (Ch), [2010] BCC 387, ChD, at [44]. At [44]. At [44]. [2015] EWHC 3820 (Ch), [2016] BCC 220, at [126].

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v King167 the court took the view that even if there was doubt about the applicant’s good faith, as the success of the derivative claim was necessary for the survival of the company, any such doubt would be overridden.168 It will often be difficult at an early interlocutory stage to say whether the applicant lacks good faith. Where the court is unable to conclude that the applicant lacks good faith it will generally proceed on the assumption that he is acting in good faith.169 Where there is no evidence that the applicant is seeking to obtain some unfair advantage that would indicate bad faith, good faith will be presumed.170 However, in marginal cases, where the court concludes that the applicant is really motivated by a wish to remove or buy out the respondents, that may be relevant to the exercise of the court’s discretion.171

Section 263(3)(b) – the importance that a director acting in accordance with section 172 would attach to continuing the claim 6.38 If the court concludes that a director acting in accordance with his duty to act in the best interests of the company would attach great importance to continuing the claim, or indeed to not continuing the claim, the court will itself attach significant weight to what it finds would be the hypothetical director’s view. Whether the court will often be able to reach such a clear conclusion may be doubtful.172 This is the most difficult to evaluate of the particular matters identified in the section. It involves a detailed analysis of the factors at an early stage in the proceedings and may need to be done based on very limited evidence. The section does not indicate whether the test of the hypothetical director is an objective or subjective one. The cases decided under the section do not expressly say so either. The section refers to ‘a person acting in accordance with section 172’ and not the actual directors. Floyd J stated in Mission Capital plc v Sinclair173 that it was ‘… of course not the actual board of the company’ which was referred to by the section. It cannot be purely subjective, nor is it a purely objective test either. A ‘one size fits all’ approach would ignore particular features of the company involved, including the legitimately reached short- and long-term aims of its shareholders and management, and factors such as its size, market position and commercial imperatives, all of which would no doubt be matters properly weighed in the balance by a director acting in accordance with section 172 and some of which inherently require a subjective judgment to be made.174 Section 172 includes a subjective element in requiring the director to ‘act in the way he considers in good faith’ and hence recognises a subjective element. A purely objective approach would also increase the potential for the court to superimpose its own commercial 167 168 169 170 171

[2017] EWHC 737 (Ch). At [66]. McAskill v Fulton [2014] 10 WLUK 950, Ch per Norris J at [40]. Hughes v Burley [2021] EWHC 104 (Ch) at [131]. Robert Glew and Denton & Co Trustees Ltd v ARPI Matossian-Rogers [2019] EWHC 3183 (Ch) at [97]. 172 However, sometimes it can, as Lewison J did in Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2011] 1 BCLC 498, ChD, at [102]. 173 [2008] EWHC 1339 (Ch), [2010] 1 BCLC 304, ChD. 174 This appears to be consistent with the intentions of Parliament, or at least of Lord Goldsmith, when piloting the 2006 Act through the House of Lords, as he spoke of the standard and approach taking into account the features of the particular company: Hansard, HL Vol 679, Col GC26 (27 February 2006).

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judgments above those of the directors. This was not the intention and not something the courts would wish to do, as indicated in the following paragraph. The question is one that the court will form a judgment about in the round, after taking into account all of the relevant matters in the particular case.175 6.39 The factors that the hypothetical director should take into account when considering his decision will inevitably be to some extent fact-specific, but Lewison J in Iesini v Westrip Holdings Ltd176 indicated that there are some that are likely to be relevant in most cases:177 ‘They include: the size of the claim; the strength of the claim; the cost of the proceedings; the company’s ability to fund the proceedings; the ability of the potential defendants to satisfy a judgment; the impact on the company if it lost the claim and had to pay not only its own costs but the defendant’s as well; any disruption to the company’s activities while the claim is pursued; whether the prosecution of the claim would damage the company in other ways (eg by losing the services of a valuable employee or alienating a key supplier or customer) and so on. The weighing of all these considerations is essentially a commercial decision, which the court is ill-equipped to take, except in a clear case.’ Part of this analysis involves a consideration of the strength of the claim; and, therefore, the question whether there is a prima facie case will arise again. Clearly, no director acting in accordance with section 172 would pursue a claim where no prima facie case was made out. If this is apparent at the second stage, permission must be refused in accordance with section 263(2). However, something more than merely establishing a prima facie case is required at the second stage.178 At this stage, there is more likely to be evidence in opposition to the claim. In Kiani v Cooper179 the absence of opposing evidence of substance was a factor in the decision to allow the claim to proceed as a derivative claim, and led to Proudman J’s conclusion that, on the evidence she heard, a reasonable director would be bound to purse the claim in issue there. The absence of documentary evidence to support the director’s witness statement was given some weight in that case, but in Franbar Holdings Ltd v Patel180 it appears that witness statements alone were enough to satisfy the court not to let the claim continue. The approach taken by the courts to this question has become more forensic and there is an increasing tendency to scrutinise carefully the evidence put forward on the application (and draw inferences from what is not put forward), requiring more than just assertions of fact in witness statements.181 The reasonable 175 Brannigan v Style [2016] EWHC 512 (Ch) per Asplin J at [93]. 176 [2009] EWHC 2526 (Ch), [2011] 1 BCLC 498, ChD. 177 At [85]. A similar list was identified by William Trower QC sitting as a Deputy Judge in Franbar Holdings Ltd v Patel [2008] EWHC 1534 (Ch), [2009] 1 BCLC 1, ChD, at [36], and by Lord Reed in Wishart v Castlecroft Securities Ltd [2010] BCC 161, CSOH, at [37]. 178 Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2011] 1 BCLC 498, ChD, at [79]; Brannigan v Style [2016] EWHC 512 (Ch) at [43]. 179 [2010] EWHC 577 (Ch), [2010] 2 BCLC 427, ChD, at [30]. 180 [2008] EWHC 1534 (Ch), [2009] 1 BCLC 1, ChD. 181 See eg Robert Glew & Denton & Co Trustees Ltd v ARPI Matossian-Rogers [2019] EWHC 1507 (Ch) and Hughes v Burley [2021] EWHC 104 (Ch). The failure of the respondent’s evidence to engage with the merits of the claim put forward by the applicant was highly significant in the decision to grant permission reached in SDI Retail Services Ltd v King [2017] EWHC 737 (Ch), [70]. See also Saatchi v Gajjar [2019] EWHC 3472 (Ch) at [57]–[58], where the absence of any evidence to support the respondent’s assertions was a factor in the court granting permission for the derivative claim to be continued.

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director will generally be treated as attaching considerable importance to pursuing a strong claim.182 Although there is no fixed threshold for the strength of the claim to meet in order for permission to be granted,183 where the court regards the case being put forward by the claimant as a fairly strong one on the then available evidence, this may be given significant weight in the exercise of the court’s discretion in practice.184 It is a matter of balancing the relevant circumstances. The stronger the case appears to be the lower the likely size of the claim need be to justify a decision to pursue it. Lewison J’s observation that the court is ill-equipped to take commercial decisions suggests that the views of independent board members may carry significant weight, but where the claim is against one of their own it is likely that a court would attach less importance to the views of the other directors even if they are not implicated in the matters giving rise to the claim or connected with the offending director. Permission may be given to pursue a speculative claim where the applicant is willing and able to fund it and produces evidence that it can.185 However, permission may be refused even where there is a good claim, where the claim is not shown to be of substantial monetary value or of real importance to the company going forward.186 Where the matters complained of will spell the end of the company’s business if not reversed or prevented, the hypothetical director would be likely to attach significant importance to continuing the claim unless it were obviously weak,187 even if at the time of consideration there was a shortage of information to base the decision on.188 However, where the pursuing of the derivative claim is likely to inhibit the company’s ability to raise finance which it needs for its business, that will be an important factor to which the hypothetical director would have regard and weigh significantly against the grant of permission.189 The costs of pursuing the claim and the availability of funds190 to do so are likely to be important. It is desirable that some evidence of both is before the court considering the application.191 If the likely costs will match or exceed the claim then permission will be refused.192 However the fact that the costs are likely to be high will not be a matter of great weight if the likely value of the claim is significantly higher and the evidence indicates that the defendants are likely to be good for the amount of the claim and the costs.193 Where the applicant is willing to fund the claim and indemnify the company, that will only carry weight where 182 Eg as in Parry v Bartlett [2011] EWHC 3146 (Ch), [2012] BCC 700, ChD, at [77] and Cullen Investments Ltd v Brown [2015] EWHC 473 (Ch), [2016] 1 BCLC 491, ChD. 183 Kleanthous v Paphitis [2011] EWHC 2287 (Ch), [2012] BCC 676, ChD, at [42]. 184 As appeared to be the case in Hughes v Weiss [2012] EWHC 2363 (Ch) at [34], even though the judge was careful to note (at [71]) that the trial judge may take a different view of the merits of what is alleged; and in Parry v Bartlett [2011] EWHC 3146 (Ch), [2012] BCC 700, ChD, at [77] and [94]. It was considered that the hypothetical director would take into account inconsistencies in the respondent’s evidence in concluding that the claim was a strong one in Saatchi v Gajjar [2019] EWHC 3472 (Ch) at [51]. 185 Hughes v Burley [2021] EWHC 104 (Ch) at [141]–[142]. 186 Robert Glew and Denton & Co Trustees Ltd v ARPI Matossian-Rogers [2019] EWHC 3183 (Ch). 187 SDI Retail Services Ltd v King [2017] EWHC 737 (Ch) at [52], [73]. 188 SDI at [53]. 189 Robert Glew and Denton & Co Trustees Ltd v ARPI Matossian-Rogers [2019] EWHC 3183 (Ch). 190 Brannigan v Style [2016] EWHC 512 (Ch) at [91]. 191 Brannigan v Style [2016] EWHC 512 (Ch) at [84]. 192 See eg Zavahir v Shankleman [2016] EWHC 2772 (Ch). 193 Hook v Sumner [2015] EWHC 3820 (Ch); [2016] BCC 220, ChD, at [120].

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there is evidence before the court of its ability to do so.194 However, the inability of an applicant to fund the company’s costs, for instance by reason of impecuniosity, should not be a factor weighing against the granting of permission.195 The absence of evidence that the defendants are likely to be good for the amount of the claim is something that a hypothetical director would take into account and will also be a pointer against permission being granted.196 6.40 Stimpson v Southern Private Landlords Ltd197 is an example of a case where the particular nature of the company concerned and its business gave rise to some very fact-specific matters which needed to be given due weight. The company was a not-for-profit organisation, formed to represent the interests of private landlords through lobbying, providing information and advice, and providing services such as bulk negotiation of insurance and finance. In that case, the continued ability of the company to provide those services in the future, and the potential effect of continuing (or not continuing) the claim on its ability to do that, was given weight.198 As this was the purpose of the company, it was a matter that a director acting in accordance with section 172 would be expected to attach great weight to. However, as the company was one limited by guarantee and a not-for-profit organisation, it was rather easier for the court to confidently identify its objectives than will usually be the case for a company limited by shares and trading with a view to making a profit and the maximisation of shareholder value. In Stimpson, the court gave fairly detailed consideration to the different parts of the claim being put forward, identifying one part as strong and others as weak, before carrying out a balancing of the stronger and weaker heads of claim, and the amount likely to be recovered compared with the likely costs of pursuing the matter.199 Some weight was also given to the interests of employees.200 This is, of course, something that the director would be required by section 172 to have regard to, as well as the interests of other stakeholders in the company. The effect of pursuing the claim on the company’s reputation and future performance may also be given weight as matters that would be considered important by the hypothetical director.201

194 Robert Glew and Denton & Co Trustees Ltd v ARPI Matossian-Rogers [2019] EWHC 3183 (Ch) at [90]; Hughes v Burley [2021] EWHC 104 (Ch) at [141]–[142], where the absence of such evidence may have been decisive in leading to permission to continue being refused. 195 Ritchie v Union of Construction, Allied Trades and Technicians [2011] EWHC 3613 (Ch), per Proudman J at [62]. 196 Robert Glew and Denton & Co Trustees Ltd v ARPI Matossian-Rogers [2019] EWHC 3183 (Ch) at [91]. 197 [2009] EWHC 2072 (Ch), [2010] BCC 387, ChD. 198 At [28]. 199 Stimpson was procedurally unusual, in that the first hurdle was never addressed. A single hearing took place at which both hurdles were to be considered. However, the judge regarded the twostage process as ‘unduly elaborate’ in the circumstances that had arisen, and moved straight to consideration of the second hurdle: [2009] EWHC 2072 (Ch), [2010] BCC 387, ChD, at [3]. 200 At [37]. 201 Kleanthous v Paphitis [2011] EWHC 2287 (Ch), [2012] BCC 676, ChD, at [72]–[73]. However, where the company will not survive if the claim is not pursued this will be immaterial: SDI Retail Services Ltd v King [2017] EWHC 737 (Ch) at [75].

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Section 263(3)(c) and (d) – whether the act or omission on which the cause of action is based could be and would be likely to be authorised or ratified by the company 6.41 The court is directed to take particular account of whether the act or omission giving rise to the cause of action could be, and in the circumstances would be likely to be, authorised before it occurred, or ratified after it occurred. There is a significant difference between the situations where the act or omission has been authorised or ratified, and where it could be and would be likely to be. Where actual authorisation has been given, permission to continue a derivative claim must be refused. Where it could be and would be likely to be, that is merely a factor to be taken into account by the court in exercising its discretion. Ratification must mean ratification in accordance with the provisions of the 2006 Act.202 Where the breach is one that there is a good arguable case is incapable of ratification, or where the ratification attempt is otherwise ineffective, the purported ratification will not be relevant to the application.203 Any such ratification would be of a director’s conduct amounting to negligence, default, or breach of duty, and therefore will be subject to section 239 of the 2006 Act. That section precludes the director concerned, or anyone connected with him, from voting on the resolution to ratify. The question of whether the relevant act or omission could and would be likely to be ratified therefore needs to be considered in the light of the provisions of section 239. Where such ratification is possible, and the members will have the opportunity to consider the issue in the near future, the court might be expected to await consideration by the members of a resolution to ratify.

Section 263(3)(e) – whether the company has decided not to pursue the claim 6.42 This factor is one to be taken into account where the company has made a decision not to pursue the claim, but has not actually authorised or ratified the director’s breach that gives rise to the cause of action. The 2006 Act gives no guidance on what a ‘decision’ is for this purpose. Decisions about pursuing litigation will ordinarily be taken by the directors rather than the members. The court might be expected to attach greater weight to a decision by the members not to pursue litigation than to a decision by a board of directors not to pursue one of their own. It might also be expected that the court will be concerned to establish how and why the company has reached a decision whether or not to pursue the claim.204 The mere fact of the decision, in isolation from the reasons, seems unlikely to be very influential. However, where a company has obtained independent advice and established a committee to consider whether to pursue the claim, considerable weight is likely to be attached to the company’s decision not to pursue the claim. This was the case in Kleanthous v Paphitis, where Newey J  considered that the committee of directors was ‘better placed than I  am to assess where the company’s commercial interests

202 Brannigan v Style [2016] EWHC 512 (Ch) per Asplin J at [70]. 203 Hook v Sumner [2015] EWHC 3820 (Ch), [2016] BCC 220, ChD, at [92]–[95]. 204 Roth J took account of the reasons why the company would be unlikely to bring proceedings: Stainer v Lee [2010] EWHC 1539 (Ch), [2011] 1 BCLC 537, ChD, at [53].

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lie’.205 However, in many cases there will be a range of reasonable decisions which a board of directors might reach in the relevant circumstances and decisions to pursue or not to pursue the claim may both be reasonable ones.206 Again, the weight to be attached to such a decision will usually be fact-specific.

Section 263(3)(f) – whether there is an alternative remedy open to the member in his own right 6.43 This reflects the position at common law where the availability of a personal remedy to the complaining member was usually held to be a bar to permission to bring a derivative claim.207 For a statutory derivative claim, the existence of a personal cause of action is only a matter to be taken into account.208 The alternative remedy most likely to be available is an unfair prejudice petition under section 994 of the 2006 Act. Substantial weight has been attached to the availability of an alternative remedy under section 994,209 whether or not the member had already in fact commenced such an alternative claim.210 This was one of the main reasons given by Newey J for refusing permission in Kleanthous v Paphitis.211 The court will also be influenced by the very broad range of remedies available under section 996 where unfair prejudice is shown, meaning it will have a wide range of potential routes to achieve a just result. However, it is not a decisive factor. Where the applicant was clear that he did not wish to be bought out and the establishing of the amount of loss suffered by the company appeared to be more problematic and the extent of the disclosure obligations in a petition were likely to be materially different, the applicant’s preference for a derivative claim rather than proceeding under section 994 was considered a reasonable one and the availability of that remedy did not prevent permission being granted.212 Similarly, in Bhullar v Bhullar, where Morgan J  considered that the applicant was acting bona fide, the court did not regard the 205 [2011] EWHC 2287 (Ch), [2012] BCC 676, ChD, at [74]–[75]. 206 As Warren J observed in Airey v Cordell [2006] EWHC 2728 (Ch), [2007] BCC 785, ChD, at [69]. 207 See 6.13 and Jafari-Fini v Skillglass Ltd [2005] EWCA Civ 356, [2005] BCC 842, CA; Barrett v Duckett [1995] 1 BCLC 243, CA; Mumbray v Lapper [2005] EWHC 1152 (Ch), [2005] BCC 990, ChD, and Fargro Ltd v Godfroy [1986] 1 WLR 1134, ChD. However, the better view now appears to be that it was not an absolute bar – see Hughes v Weiss [2012] EWHC 2363 (Ch) at [61]– [62]; Bhullar v Bhullar [2015] EWHC 1943 (Ch), [2016] 1 BCLC 106, ChD; Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] EWHC 348 (Ch), [2013] Ch 551. 208 See s 263(3) and Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2011] 1 BCLC 498, ChD, at [123]; Langley Ward Ltd v Trevor [2011] EWHC 1893 (Ch) (where winding up was the apparent and logical solution to the problem). 209 Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2011] 1 BCLC 498, ChD, at [126]; Kleanthous v Paphitis [2011] EWHC 2287 (Ch), [2012] BCC 676, ChD, at [81]; Franbar Holdings Ltd v Patel [2008] EWHC 1534 (Ch), [2009] 1 BCLC 1, ChD, at [53], [54]; Goodwin v Cook [2018] 6 WLUK 425 at [74]–[75]. 210 See eg Franbar Holdings Ltd v Patel [2008] EWHC 1534 (Ch), [2009] 1 BCLC 1, ChD, where such a claim had already been commenced, and Mission Capital Plc v Sinclair [2008] EWHC 1339 (Ch), [2010] 1 BCLC 304, ChD, where it had not been commenced but clearly could be. 211 [2011] EWHC 2287 (Ch), [2012] BCC 676, ChD, at [76]–[81]. It was also the main reason in Goodwin v Cook [2018] 6 WLUK 425 at [83] where the company had ceased trading, disposed of its assets and was insolvent, and the real dispute was one of accounting as between three individual members/directors. See also Gill v Thind [2020] EWHC 2973 (Ch), where permission to continue a head of claim was refused as the real dispute was between quasi-partner shareholders and not between the company and the director, at [88]–[90]. 212 Hook v Sumner [2015] EWHC 3820 (Ch), [2016] BCC 220, ChD, at [129]–[136].

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Derivative claims under the 2006 Act 6.44

availability of proceedings under section 994 as reason to refuse permission where those proceedings would be significantly wider and hence slower and more expensive than a derivative claim. Morgan J was clear that the potential alternative remedy was a factor to be considered, but neither determinative nor the most important factor.213 As section 263(3) provides, it was only a matter to be taken into account. An alternative claim that is more difficult to bring, whether legally or factually, will not be a reason to refuse permission.214 Where the applicant wished to add a derivative claim to an existing claim in response to a defence which raised the risk that the company rather than the shareholder may be entitled to some of the relief sought, the application was granted as the court considered that the derivative claim was being added as a precaution against potential injustice and therefore being used in accordance with the underlying rationale for derivative claims.215 An unfair prejudice claim has also been considered to be not a true alternative to a derivative claim where the interests of creditors are important as the company is approaching insolvency, since it does not address their position.216 Where the nature of the claim and relief sought are a claim by the company for misfeasance and reimbursement and payment of compensation to the company, a derivative claim may be more suitable than a section 994 petition, or the pursuing of a remedy by a future liquidator.217 This may be so, even where the company is no longer trading and the substance of the dispute is one between shareholders, as those entitled to the company’s assets on a solvent winding up.218 Where the complaining member has already commenced a claim under section 994, in an appropriate case he may still be permitted to change his mind and bring the claim as a derivative claim instead,219 particularly where it appears that the matter could be more quickly and cost effectively resolved if it proceeded as a derivative claim rather than as an unfair prejudice petition.220 If a just and equitable winding up is available and considered a more appropriate way to proceed on the facts, permission to pursue a derivative claim is likely to be refused.221

Section 263(4) – the views of members with no interest in the matter 6.44 This factor is something to which section 263(4) directs the court to have particular regard. It reflects the common law position as set out in Smith v Croft 213 Bhullar v Bhullar [2015] EWHC 1943 (Ch), [2016] 1 BCLC 106, ChD, at [44]. 214 Cullen Investments Ltd v Brown [2015] EWHC 473 (Ch), [2016] 1 BCLC 491, ChD, at [59]–[61]; McAskill v Fulton [2014] 10 WLUK 950, Ch, per Norris J at [44]. Although in Ritchie v Union of Construction, Allied Trades and Technicians [2011] EWHC 3613 (Ch) permission was refused by reason of the availability of an alternative remedy even though the applicant appeared to be unable to afford to pursue it, because an independent board would not have pursued such a derivative claim. 215 Cullen Investments Ltd v Brown [2015] EWHC 473 (Ch), [2016] 1 BCLC 491, ChD, at [61]. 216 McAskill v Fulton [2014] 10 WLUK 950, Ch, per Norris J at [45]. 217 Saatchi v Gajjar [2019] EWHC 3472 (Ch) at [80]–[84]. 218 Hughes v Weiss [2012] EWHC 2363 (Ch) at [58]–[69]. 219 Phillips v Fryer [2013] BCC, ChD. 220 Phillips v Fryer [2013] BCC, ChD. In that case, evidence which emerged during the s 994 proceedings pointed towards a derivative claim, and both the derivative claim and the petition could be heard together. 221 Langley Ward v Trevor [2011] EWHC 1893 (Ch).

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6.45  Derivative Claims

(No 2).222 However, in practice it may not be easy to apply. Other members may have conflicting views. The court may lack evidence on the views of the other members and may also be unable to satisfy itself that such members are in fact people with no direct or indirect personal interest in the outcome.223 Further, the views of such people may not be based on accurate or complete information, thereby meaning that little weight can be attached to them.224 Accordingly, though it is potentially very important, in many cases this factor may in practice carry little weight and it will of course be inapplicable where there are no such members of the company. However, where the court can be satisfied of the independence of other members and that they have a clear and reasoned view, it is a factor which may be given significant weight. Even where the court is not sure that another member is someone with no personal interest in the matter, some weight may be given to his views where his shareholding is a significant one, as Newey J did in Kleanthous v Paphitis.225

Other factors 6.45 The factors identified in section 263 are not exhaustive. Other factors which the court will take into account in exercising its discretion will usually be highly fact-specific. Examples of other factors that appear to have carried significant weight include: that the claimant himself participated in the wrong complained of or brings the action to escape the consequences of his own misdeeds;226 whether there is wrongdoer control of the company;227 and where the effect of granting leave would be that the company would have to indemnify the member even if the proceedings were unsuccessful.228 Where the applicant holds shares as a nominee and the beneficial owner opposes the derivative claim, the court will as a matter of discretion not be willing to grant permission as the applicant has no legitimate interest in pursuing it.229 It also seems that an inability to otherwise obtain access to necessary books and records of the company may be a relevant factor.230 It is likely that factors that influenced the court in the exercise of its discretion at common law will generally be accorded weight when the court exercises its statutory discretion to grant permission to continue a derivative claim. These may include case management factors, which could point towards or against granting permission231 and the conduct of the applicant in advancing the proceedings where that conduct may bear on whether it

222 [1988] Ch 114 at 184H–185E. See the passages set out at 6.9. 223 As noted by Lewison J in Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2011] 1 BCLC 498, ChD, at [130]. 224 In Stainer v Lee [2010] EWHC 1539 (Ch), [2011] 1 BCLC 537, ChD, such independent shareholders had formed a view without the benefit of up-to-date information so weight was not attributed to them – at [49]. 225 [2011] EWHC 2287 (Ch), [2012] BCC 676, ChD, at [83]. 226 Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2011] 1 BCLC 498, ChD, at [122]. This reflects the common law position – see Nurcombe v Nurcombe [1985] 1 WLR 370, CA. 227 See 6.31 and Stimpson v Southern Private Landlords Association Ltd [2009] EWHC 2072 (Ch), [2010] BCC 387, ChD, at [46]. 228 Wishart v Castlecroft Securities Ltd [2010] BCC 161, CSOH, at [61]. 229 Abouraya v Sigmund [2014] EWHC 277 (Ch), [2015] BCC 503, ChD, at [10]. 230 Cinematic Finance Ltd v Ryder [2010] EWHC 3387 (Ch), [2012] BCC 797, ChD, at [15]. 231 Phillips v Fryer [2013] BCC 176, ChD at [20]; Abouraya v Sigmund [2014] EWHC 277 (Ch), [2015] BCC 503, ChD, at [61]; and see also Cullen Investments Ltd v Brown [2015] EWHC 473 (Ch), [2016] 1 BCLC 491, ChD, at [62].

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The court’s powers when deciding whether to give permission 6.47

is appropriate to grant him permission to advance a derivative claim.232 Where the company is a charity, the failure to obtain permission of the Charity Commission before applying to the court will be fatal to an application. However, the supervision of charities provided by the Commission and by the Attorney-General means that a derivative claim to pursue misconduct is unlikely to be necessary, so permission to pursue one will usually not be appropriate.233

THE COURT’S POWERS WHEN DECIDING WHETHER TO GIVE PERMISSION TO CONTINUE A DERIVATIVE CLAIM 6.46 As well as simply giving or refusing permission to continue, the court may grant permission subject to conditions or limitations. Sections 261(4), 262(5) and 264(5) of the 2006 Act expressly give the court power to grant permission on terms, or to adjourn the proceedings with directions. For instance, permission may be granted to continue the claim as a derivative claim only up to a specified stage in the proceedings, such as until conclusion of disclosure,234 or until exchange of witness statements. At that point, the applicant member would need to return to the court to obtain further permission to continue. A condition that the claim may only be settled or discontinued with the approval of the court may also be included.235 This may be desirable where there is a real concern that there may be collusion in the future between the claimant member and the defendant, or a risk that the action may be settled on terms that benefit the claimant member rather than the company. The court may also adjourn the application for permission. It may wish to do so in order that further evidence can be obtained. Alternatively to enable members of the company and/or the board of directors to consider whether the company should itself pursue the proceedings, or whether to ratify the act or omission that gives rise to the cause of action that the applicant seeks to pursue.236 In practice, the granting of permission subject to conditions or limitations has so far been fairly unusual.

Company’s indemnity as to costs and the rule in Wallersteiner v Moir 6.47 Where the court orders that a derivative claim may be brought in the name of a company, the action will be brought for the benefit of that company. In such circumstances, the member bringing the claim may be able to obtain an order that the company indemnifies him for the costs of so doing. This was set out and explained by the Court of Appeal in Wallersteiner v Moir (No 2).237 It was stated to be analogous to those which operate for the benefit of agents and of trustees.238 It is based on a 232 Bridge v Daley [2015] EWHC 2121 (Ch) at [86], 233 Mohamed v Abdelmahmoud [2018] EWCA Civ 879. 234 As occurred in Kiani v Cooper [2010] EWHC 577 (Ch), [2010] 2 BCLC 427, ChD. 235 See CPR r 19.9. 236 In Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2011] 1 BCLC 498, ChD, at [108], Lewison J adjourned the application in part so that the board could reconsider their decision not to pursue a particular head of claim. 237 [1975] QB 373, CA. 238 Per Lord Denning MR at 391H.

165

6.48  Derivative Claims

principle of equity and applies, whether the action succeeds or fails, if the action was reasonably brought. Lord Denning MR continued:239 ‘But what if the action fails? Assuming that the minority shareholder had reasonable grounds for bringing the action – that it was a reasonable and prudent course to take in the interests of the company – he should not himself be liable to pay the costs of the other side, but the company itself should be liable, because he was acting for it and not for himself. In addition, he should himself be indemnified by the company in respect of his own costs even if the action fails. It is a well known maxim of the law that he who would take the benefit of a venture if it succeeds ought also to bear the burden if it fails. … This indemnity should extend to his own costs taxed on a common fund basis. In order to be entitled to this indemnity, the minority shareholder soon after issuing his writ should apply for the sanction of the court in somewhat the same way as a trustee does: see In re Beddoe, Downes v Cottam [1893] 1 Ch. 547, 557–558. In a derivative action, I would suggest this procedure: the minority shareholder should apply ex parte to the master for directions, supported by an opinion of counsel as to whether there is a reasonable case or not. The master may then, if he thinks fit, straightaway approve the continuance of the proceedings until close of pleadings, or until after discovery or until trial (rather as a legal aid committee does). The master need not, however, decide it ex parte. He can, if he thinks fit, require notice to be given to one or two of the other minority shareholders – as representatives of the rest – so as to see if there is any reasonable objection. (In this very case another minority shareholder took this very point in letters to us). But this preliminary application should be simple and inexpensive. It should not be allowed to escalate into a minor trial. The master should simply ask himself: is there a reasonable case for the minority shareholder to bring at the expense (eventually) of the company? If there is, let it go ahead.’ 6.48 This approach is reflected in the provisions of CPR rule 19.9E. The applicant member’s wish for an indemnity as to his costs must be stated in his application for permission and, preferably, his claim form.240 The ordering of an indemnity, where permission to pursue a derivative claim on behalf of the company is granted, has been said to be ‘normal’.241 However, as explained below, more recent authorities indicate that an indemnity will not simply follow on from the grant of permission to pursue a derivative claim in the name of the company. The indemnity may be limited in amount, at least initially, particularly where, for example, there is doubt about what might ultimately be recovered and concern that there is a risk that costs may become disproportionate.242 The fact that the applicant member is himself capable of funding the claim from his own resources is not a bar to an indemnity being granted, and not a factor against granting such an indemnity where the court is satisfied that the claim is an appropriate one for the member to pursue on behalf of the company.243 However, 239 At 392B–392F. 240 PD 19C, para 2. 241 Stainer v Lee [2010] EWHC 1539 (Ch), [2011] 1 BCLC 537, ChD, at [56] and Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2011] 1 BCLC 498 at [125]. 242 Eg Stainer v Lee [2010] EWHC 1539 (Ch), [2011] 1 BCLC 537, ChD, at [56], where the amount of the indemnity was limited to £40,000. 243 See eg Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2011] 1 BCLC 498, ChD, at [124]–[125], and Jaybird Group Ltd v Greenwood [1986] BCLC 319, ChD, at 327h–327i.

166

The court’s powers when deciding whether to give permission 6.49

where the company is insolvent a costs indemnity is likely to be inappropriate even if the applicant believes that there is benefit in seeking one.244 There is no invariable rule, and the question of whether an indemnity will be ordered will be a matter of discretion and will depend upon the particular facts.245 A detailed review of the authorities on when an indemnity should be ordered was carried out by Morgan J  in Bhullar v Bhullar.246 In that case it was noted that in Wallersteiner v Moir (No 2) the application for an indemnity was made relatively late in the proceedings and in the context of the Court of Appeal considering the question of whether the company should bring the claim, which is a different question to the one arising on the current law, being whether a reasonable director could think that the claim should be brought.247 Morgan J also observed that more recent decisions indicate that the court should exercise considerable care when deciding to order a preemptive indemnity and only do so where it has a high degree of assurance that such an order would be the proper one to make following a trial of the claim.248 It of course remains open to the court to order such an indemnity after the conclusion of the trial even if one is refused at an earlier stage. The more recent authorities249 indicate that it is no longer accurate to say that where permission to pursue a derivative claim is granted, the additional granting of an indemnity in relation to costs can be said to be the ‘normal’ order. Where the question arises in the context of what is in essence a dispute between shareholders, the court will be influenced by the fact that had the petition route been followed no indemnity would have been available and regard that as a significant factor pointing against the additional ordering of an indemnity.250 Where the underlying dispute is between shareholders as to how they are to share the assets on a solvent winding up, a costs indemnity will generally be inappropriate.251 In an appropriate case, the court may make an order that the applicant’s own costs be borne by the company without also granting an indemnity against any adverse costs order252 or grant an indemnity subject to a cap.253

Derivative claims and insolvent companies 6.49 As explained above,254 there was authority at common law255 that, where a company had gone into liquidation, a derivative action could not be brought by a 244 Watts v Midland Bank plc [1986] BCLC 155, ChD, at [22]. 245 Hughes v Weiss [2012] EWHC 2363 (Ch) where, on the facts, the claim was being brought by the claimant on a conditional fee basis and with ATE (After the Event) insurance. 246 [2015] EWHC 1943 (Ch); [2016] 1 BCLC 106, ChD, at [53]–[69]. 247 At [68]. 248 At [69]. 249 In particular the detailed analysis in Bhullar. 250 Hook v Sumner [2015] EWHC 3820 (Ch), [2016] BCC 220, ChD, at [141]; and Bhullar v Bhullar [2015] EWHC 1943 (Ch), [2016] 1 BCLC 106, ChD, at [70]. See also Halle v Trax BW Ltd [2000] BCC 1020, ChD; and Mumbray v Lapper [2005] EWHC 1152 (Ch), [2005] BCC 990, ChD. 251 Hughes v Weiss [2012] EWHC 2363 (Ch) at [55]. 252 As occurred in Kiani v Cooper [2010] EWHC 577 (Ch), [2010] 2 BCLC 427, ChD, where Proudman J so ruled at [48]. 253 As Roth J ordered in Stainer v Lee [2010] EWHC 1539 (Ch), [2011] 1 BCLC 537, ChD. 254 See 6.13. 255 Fargro Ltd v Godfrey [1986] 1 WLR 1134, ChD.

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6.50  Derivative Claims

member. The 2006 Act does not include any reference to a derivative claim being pursued where the subject company has gone into liquidation. The courts may therefore decide not to follow the common law position, although it seems likely that the existence of an alternative remedy available to an independent liquidator may be taken into account by the court when exercising its discretion whether to grant permission under section 263 of the 2006 Act. The question of whether a statutory derivative claim may be brought where the company is in liquidation is accordingly very uncertain.256 A  member may encounter particular difficulty in obtaining an indemnity for costs in these circumstances.257 Insolvency of the company is not of itself a bar, however. Permission to pursue a derivative claim where it was alleged that directors had benefited themselves via a pre-pack administration which amounted to an unlawful means conspiracy was granted in one case.258 A  derivative action cannot be brought against a receiver for breach of a duty owed to the company, as the company itself is the proper claimant in such a case.259 Where the company has been dissolved or struck off, it is not possible for a derivative claim to be brought for its benefit since the company does not exist.260 However it is possible for the company to be restored to the register for the purpose of such a claim being brought.261

Derivative claims and foreign companies 6.50 There is authority that, prior to the 2006 Act, a derivative claim in respect of a foreign company may be brought in England. This was the conclusion in Konamaneni v Rolls Royce (Industrial Power) India Ltd.262 However, it was held that the question of whether a derivative action is available is a question of substantive law and thus governed by the law of the state in which the company was incorporated. Accordingly, the state of incorporation will usually be the appropriate forum for such a claim, so permission to pursue it as a derivative claim in England will not usually be granted.263 A  claim relating to a foreign company is outside the definition of a derivative claim in the 2006 Act, as noted above.264 However, despite some initial uncertainty, it seems that a derivative claim in respect of a foreign company remains available under English law following the coming into force of the derivative claims provisions of the 2006 Act.265

256 In Australia derivative claims are not available where the company is in liquidation. See Chapter 16. 257 For obvious reasons. See also Watts v Midland Bank plc [1986] BCLC 155, ChD, at [22]. 258 Montgold Capital LLLP v Ilska [2018] EWHC 2982 (Ch), [2019] BCC 309. 259 Watts v Midland Bank plc [1986] BCLC 155, ChD, at [22]. 260 Clarkson v Davies [1923] AC 100, PC (Canada). 261 Parry v Bartlett [2011] EWHC 3146 (Ch), [2012] BCC 700, ChD. 262 [2002] 1 WLR 1269, ChD. 263 This analysis was followed by Lewison J in Reeves v Sprecher [2007] EWHC 117 (Ch), [2007] 2 BCLC 614, ChD. 264 See 6.17. 265 See Abouraya v Sigmund [2014] EWHC 277 (Ch), [2015] BCC 503, ChD, per David Richards J at [15]. It follows from the conclusion of Briggs J in Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] EWHC 348 (Ch), [2013] Ch 551 that the introduction of the statutory regime for derivative claims did not replace the common law derivative claim in cases falling outside the statutory definition of such a claim.

168

Chapter 7

Personal Claims

Contents Introduction 7.1 Personal rights conferred by statute

7.4

Rights relating to company registers Register of members Where directors refuse to register a transfer of shares in reliance on power contained in the articles Procedure and costs

7.5 7.5 7.27 7.30

Rights relating to company meetings Members’ power to require a general meeting to be held The power of the court to order a meeting Class rights

7.33 7.33 7.38 7.43

Rights relating to takeover offers ‘Squeeze-out’ ‘Sell-out’ Shareholders opposing squeeze-out notices

7.53 7.54 7.55 7.56

Rights relating to the removal of directors

7.63

Non-statutory rights and limitations on rights: shareholders’ agreements 7.67 Third parties 7.73

INTRODUCTION 7.1 There is no single definition of a shareholder’s personal claim. The term is used to describe the enforcement of rights arising: (a) (b)

under statute, specifically the Companies Act 2006 (‘the 2006 Act’) (other than the unfair prejudice remedy available under section 994);1 or from an agreement between shareholders themselves, or between shareholders and the company itself.

7.2 As these rights are personal rights of the shareholder, they do not depend on the shareholder seeking to enforce rights belonging to the company so are not

1

Which is the subject of Chapter 9.

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7.3  Personal Claims

barred or limited by the rule in Foss v Harbottle.2 These claims, therefore, avoid the need to become embroiled in the procedure applicable to derivative claims3 and do not face the limitations of the reflective loss principle where financial compensation is claimed.4 7.3 The non-applicability of the rule in Foss v Harbottle makes these claims more attractive to shareholders, both procedurally and because they bring a personal remedy. Accordingly, when a shareholder has a potential choice between pursuing a personal claim or a claim belonging to the company, the personal claim will invariably be preferable.5

PERSONAL RIGHTS CONFERRED BY STATUTE 7.4 The personal rights conferred on shareholders by the 2006 Act may be classified as: (a) (b) (c) (d) (e)

rights relating to company registers; rights relating to company meetings; class rights; rights relating to takeover offers;6 rights relating to removal of directors.

RIGHTS RELATING TO COMPANY REGISTERS Register of members (a) Inspection 7.5 Every company is required by section 113 of the 2006 Act to keep a register of its members. The register records the name and address of shareholders, the number of shares they hold, and when they were registered (and ceased to be registered) as holders of their shares. Every member of a company has a right to inspect the company’s register of members and to receive a copy of that register, or of any part of it.7 The company may choose to provide a copy of the register of members in lieu of providing inspection of it. The register is to be kept at the registered office8 or some other place specified in regulations.9

2

67 ER 189, (1843) 2 Hare 461. The non-application of the rule in Foss v Harbottle to such claims follows as a matter of logic and has been frequently stated: see eg Edwards v Halliwell [1950] 2 All ER 1064, CA; Heyting v Dupont [1964] 1 WLR 843, CA; Heron v Lord Grade [1983] BCLC 244, CA. 3 See Chapter 6. 4 See Chapter 8. 5 The existence of a personal claim may in practice operate as a bar to the bringing of a derivative claim (see Chapter 6 and the discussion at 6.13 and 6.43). 6 The ‘squeeze-out’ and ‘sell-out’ provisions. 7 See ss 116–121. 8 Section 114. 9 Relevant regulations may be made under s 1136 of the 2006 Act.

170

Rights relating to company registers 7.7

7.6 Since 30  June 2016,10 a private company has had the power to elect to keep information as to membership on the central register kept by the Registrar of Companies, rather than keep its own register of members. This right was introduced by section 128A of the 2006 Act. The election may be made by written notification to the Registrar11 and only takes effect when the election is registered by the Registrar.12 It continues until either the company notifies the Registrar of the withdrawal of its election13 or it ceases to be a private company.14 The company is required to inform the Registrar of any and all information relevant to what appears on the central register as soon as practicable and at least as soon as it would have been required to reflect that information in its own register of members.15 The election to keep information on the central register means that the company no longer needs to maintain and update its own register from when the election takes effect, but does not affect its obligation to maintain the historic register recording the position prior to that, nor does it affect the application of those parts of the 2006 Act which apply to the register maintained by the company prior to the election coming into effect, such as rights of inspection and rectification as referred to below.16 However, those provisions will of course only apply to the historic register so are likely to be less important in practice where an election to use the central register has been made, as shareholders are more likely to be concerned about the current state of the register and hence the central register. 7.7 The right of inspection of the register and index of members’ names is a right which the 2006 Act gives to everyone, not just members of the company, although the right ends at the commencement of a winding up of the company.17 Members are entitled to such inspection free of charge,18 whereas others may be charged a fee.19 There is a simple procedure to be followed. However, the requirements contained in section 116 as to the information to be provided by an applicant must be strictly followed in order to oblige the company to either provide access or take steps to entitle it to refuse access.20 On receipt of a request to inspect, the company must comply with the request within five working days, or apply to the court for an order that it need not comply.21 The court will only do this if it is satisfied that the inspection is not being sought for a proper purpose.22 The 2006 Act gives no guidance as to what is not a proper purpose.23 If the court is so satisfied, it can order the person making the request to pay the company’s costs of the application, even though that person was not a party to the application.24 The company is required to give the person making

10 11 12 13 14 15 16 17

By the Small Business, Enterprise and Employment Act 2015. Section 128B of the 2006 Act. Section 128C of the 2006 Act. In accordance with s 128J of the 2006 Act. Section 128C of the 2006 Act. Section 128E of the 2006 Act. Section 128D of the 2006 Act. Re Kent Coalfields Syndicate Ltd [1898] 1 QB 754, CA. However, s 155 of the Insolvency Act 1986 provides a route to the same information from that point on. 18 However, a member is not entitled to himself take extracts and make copies without paying a fee: Re Balaghat Gold Mining Co Ltd [1901] 2 KB 665, CA. 19 Section 116 of the 2006 Act. 20 Burberry Group Plc v Fox-Davies [2017] EWCA Civ 1129 at [23], [31]. 21 Section 117(1) of the 2006 Act. 22 Section 117(3) of the 2006 Act. 23 See 7.10. 24 Section 117(3) of the 2006 Act.

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7.8  Personal Claims

the request notice of the application, but need not make them a party to it.25 The provision for the company to apply to the court for an order that it need not comply was not present in earlier legislation on this subject and has been referred to as the ‘no-access provision’.26 7.8 If the company fails to comply with the request within five days, or to make an application to the court, the company and every officer of it who is in default commits a criminal offence.27 More importantly for the shareholder seeking inspection, the court may compel an immediate inspection or provision of a copy of the register of members.28 It is important to note that the provisions give the court discretion to order inspection. It will usually do so, but will not be bound to in all cases. 7.9 The right to inspect and/or obtain a copy is not an unqualified right.29 Both members of the company and members of the public may have legitimate grounds for obtaining access to the information on the register but they may also seek access for illegitimate reasons. The 2006 Act introduced a right for the company to apply to the court where it believes that a request fails a ‘proper purpose’ test. For this reason, the applicant seeking to inspect or obtain a copy of the register must state in their application the purpose of the request.30 They should also include details of those to whom the information will or may be disclosed.31 Failure to include such details or to include a statement that they do not intend to disclose the information to a third party32 will be fatal to the application, and if omitted from the application form cannot be remedied by a subsequent statement to that effect.33 If the applicant states a materially misleading, false or deceptive purpose, they commit a criminal offence.34 7.10 Although the ‘no-access’ provision was new under the 2006 Act, the principle that an applicant may be denied access where they seek it for an improper purpose is not. The predecessor provision in the Companies Act 1985 (‘the 1985 Act’) was considered by the Court of Appeal in a case relating to a company with charitable objects, Pelling v Families Need Fathers Ltd.35 The applicant had applied to the court to enforce his right when the company had refused to provide access. Mummery LJ, giving the judgment of the court, made clear that ordinarily such inspection would be granted, but the court’s discretion must be exercised judicially, in accordance with established legal principles and with regard only to relevant considerations.36 In that case, the reason for the application was the member’s wish to circulate information to all members of the company. At the appeal hearing, the 25 26 27 28 29 30 31 32 33 34 35 36

Section 117(2) of the 2006 Act. Burry & Knight Ltd v Knight [2014] EWCA Civ 604, [2014] 1 WLR 4046, CA, at [4]. Section 118 of the 2006 Act. Section 118(3) of the 2006 Act. Consistently with Armstrong v Sheppard & Short Ltd [1959] 2 QB 384, CA, per Lord Evershed MR at 396. Section 116 of the 2006 Act. Burberry Group Plc v Fox-Davies [2017] EWCA Civ 1129 at [31]. A statement of intention in that regard was found to be sufficient to comply with the section by HHJ Paul Matthews in Sir Henry Royce Memorial Foundation v Hardy [2021] EWHC 714 (Ch) at [35]. Sir Henry Royce Memorial Foundation v Hardy [2021] EWHC 714 (Ch) at [40]–[44]. Section 119 of the 2006 Act. [2002] 2 All ER 440, CA. The court indicated that, for example, where inspection had already been provided or where ordering it would be otiose, an order for inspection would be refused.

172

Rights relating to company registers 7.11

company offered an undertaking to circulate the information itself to the members. The court accepted this undertaking and declined to order inspection to be permitted, as the applicant’s purpose could be met without an order being made. The court attached weight to the company’s concerns about confidentiality in the particular circumstances of the charitable company in that case, and made clear that it would, in a suitable case, be prepared to order limited inspection, or inspection on terms, such as that the applicant keep the details confidential. 7.11 The provisions under the 2006 Act and specifically, the question of when the court should permit a company to deny access to the register because access is required for an improper purpose were considered by the Court of Appeal for the first time in Burry & Knight Ltd v Knight.37 That decision has since been applied by the Court of Appeal in Burberry Group Plc v Fox-Davies38 and Houldsworth Village Management Co Ltd v Barton.39. The judgments of the Court of Appeal in these cases currently provide the best guidance as to the application of the statutory inspection regime. The effect of the first two of these decisions was summarised in Hut Group v Zedra Trust co (Jersey) Ltd40 in a form which was accepted by the parties and the court in Houldsworth41 as follows: ‘(a) The criminal penalties imposed by section 118 of the Act emphasise the importance the legislature attached to the right of access to the share register: Burry42 para 24. (b) The expression ‘proper purpose’ in section 117 (3) ought to be given its ordinary and natural meaning: Burry para 18. (c) The purpose should first be identified. That will normally be described in the request but the court is not restricted to the purpose in the request: Burry para 21 and Fox-Davies para 34. The court will determine the purpose of the request on the balance of probabilities on the evidence before it. (d) After the purpose is established, the court will consider whether it is proper. The test whether a purpose is proper is an objective one made by the court on the basis of the evidence before it and will often depend on the precise facts and circumstances: Fox-Davies43 paras 35 and 47. (e) The court may have regard to a guidance note issued by the Institute of Chartered Secretaries and Administrators (‘the ICSA  Guidance’) which might provide useful guidance in a particular case: Burry para 19. (f) The test for whether a purpose is proper does not depend on whether it is in the interests of shareholders: Fox-Davies paras 48 and 50. The person (whether a shareholder or not) making the request may have his own interests in making the request.

37 [2014] EWCA Civ 604, [2014] 1 WLR 4046, CA. 38 [2017] EWCA Civ 1129. 39 [2020] EWCA Civ 980, [2020] BCC 953. 40 Although cited as Unreported, 28 November 2017, it was indeed reported at [2017] 11 WLUK 683 (Terence Mowschenson QC). 41 Per Floyd LJ at [16]. 42 ‘Burry’ refers to In re Burry & Knight Ltd [2014] EWCA Civ 604; [2014] 1 WLR 4046. 43 Burberry Group Plc v Fox-Davies [2017] EWCA Civ 1129.

173

7.12  Personal Claims

(g) The onus is on the claimant company to satisfy the court on the balance of probabilities that the request is improper: Burry para 22. (h) If the court is in any doubt it should not make a no-access order: Burry para 25. (i) It is for the person making the request, rather than the court, to consider whether access will be of value to that person: Burry para 25.’ 7.12 In Burry Arden LJ pointed out that the court should not rule out access on discretionary grounds but only where it is satisfied that access is not sought for a proper purpose.44 She also emphasised that the words ‘proper purpose’ should be given their ordinary natural meaning and that a proper purpose would be one that generally in the case of a member of the company, relates to the member’s interest in that capacity and to the exercise of shareholder rights.45 However, this is not a rigid requirement, but simply a reflection of the fact that such will frequently be the case and is likely to amount to a proper purpose.46 A purpose may be improper not only because of the intended ends but also because of the way in which it is intended to achieve them.47 However, while a proper purpose could be and would usually be in in the interests of the company or its shareholders, in Burberry David Richards LJ accepted that it would not necessarily be fatal if it were not.48 Although the purpose of the request will be stated by the applicant in the application, the court is not restricted to the purpose as there stated and will be entitled to consider other relevant evidence in deciding what the purpose is49 and will make a finding as to the real purpose on a balance of probabilities, rather than carry out a review of the subjective view of the company as to the request.50 7.13 When a company makes an application under section 117(3) in order to avoid providing access to the register, it will be for the company to establish that the request is made for an improper purpose.51 This may not be easy where the applicant is a shareholder52 as the statutory provisions indicate a strong presumption in favour of shareholder democracy and corporate transparency.53 When it has reached its conclusion what as a matter of fact the purpose of the request is, the court will then evaluate objectively whether that purpose is a proper one.54 Where the court is satisfied that it should make an order that the applicant have no access to the register, it can also order that the company should not comply with other requests for a similar purpose.55 The company’s costs of the application may also be recoverable from the party who sought access on the usual basis that the successful applicant recovers its costs from the unsuccessful respondent.56

44 45 46 47 48 49 50 51 52 53 54 55 56

Burry at [26]. Burry at [18]. Houldsworth Village Management Co Ltd v Barton [2020] EWCA Civ 980, [2020] BCC 953, at [17]. Burry at [87]. Burberry Group Plc v Fox-Davies [2017] EWCA Civ 1129 at [48]–[50]. Burry at [21]. Burberry Group Plc v Fox-Davies [2017] EWCA Civ 1129 at [34], [47]. Burry at [22]. Where the applicant is not a shareholder these presumptions do not apply – see 7.14. Burry at [24]. Burberry Group Plc v Fox-Davies [2017] EWCA Civ 1129 at [34]. Section 117(4) of the 2006 Act and Burry at [30]. Sir Henry Royce Memorial Foundation v Hardy [2021] EWHC 817 (Ch).

174

Rights relating to company registers 7.16

7.14 In Burry a no-access order had been made by the Registrar and that order was upheld by the Court of Appeal. The company’s shareholders were predominantly members of a family and the stated purpose of applicant’s wish to have access to the register in 2012 related to historic allegations about the conduct of the company’s business in the 1980s and 1990s. The court was influenced by the fact that the matters raised were historic and that the applicant had been inactive for about ten years in pursuing the allegations.57 This led to the conclusion that there was no corporate purpose in pursuing them. The further investigation of them could be of no possible benefit to the company or the shareholders, or indeed the applicant himself.58 The Registrar had concluded that the evidence for the allegations which the applicant wished to circulate to shareholders was thin and that the applicant was really motivated by an historic family dispute and the applicant’s wish to vindicate his own integrity. The Court of Appeal did not disagree with these conclusions but based its decision on the lack of benefit to the company and its shareholders,59 rather than its view of the allegations which the applicant wished to pursue, which it acknowledged were not capable of being adjudicated on by a summary procedure. The court considered that applications should usually be considered summarily.60 7.15 In Houldsworth the company was a management company whose sole purpose was the management of a block in which the applicant was a long leaseholder. The fact that the applicant shareholder’s purpose was to seek to remove the directors and managing agents to assist his position under his lease did not mean that his purpose was improper. The court considered that although rights as a leaseholder are distinct from those as a shareholder, the content of those rights is not necessarily mutually exclusive.61 The fact that the company in general meeting could pass a resolution at the instigation of a shareholder to remove the managing agents demonstrated that the applicant’s purpose in seeking to obtain support for such a resolution was a proper one.62 7.16 Where there is more than one purpose of a request to inspect the register, the court will not be satisfied that the request is for a proper purpose simply because one of the purposes is a proper one. Therefore the court would make a no-access order if any one of the purposes is found to be improper.63 However, the Court of Appeal in Burry expressly endorsed the approach taken by the court in Pelling64 and by the Registrar in directing that a draft letter prepared by the applicant’s solicitors and approved by the company’s solicitors be sent by the company to the shareholders without the applicant being informed of the shareholders’ contact details.65 The company’s contention that the form of order made in Pelling under the 1985 Act could not be made under section 117 of the 57 58 59 60 61 62 63 64 65

Section 128(1) of the 2006 Act sets a ten-year time limit on claims arising from the making, deleting or failing to make an entry. Burry at [111]. Burry at [109]. Burry at [113]. Houldsworth at [32]. As both a shareholder and a leaseholder, the applicant can choose which right he wishes to exercise to achieve his ends, provided the ends are proper ones. Houldsworth at [36]. Burry at [82]. See at 7.10. Burry at [85].

175

7.17  Personal Claims

2006 Act was expressly rejected.66 This route may be particularly appropriate where more than one purpose is established and those purposes include both a proper and an improper one. 7.17 Attempts by tracing agents to have access to the register in order to inform shareholders of their entitlement to shares and associated benefits in exchange for a fee are becoming common. There is no blanket ban on applications by tracing agents and the 2006 Act draws no distinction between applications by members of the company and those by others. However, such applications will as a practical matter, be more likely to be regarded as improper. The purpose of using the information to make money from the tracing of a lost member has been found to be an improper one.67 7.18 In Burry, Arden LJ considered that it may be helpful for a court in appropriate cases to have regard to the guidance for its members produced by the Institute of Chartered Secretaries and Administrators as to what would and would not be likely to be improper purposes.68 In Burberry the court had regard to this guidance.69 Whilst the guidance has no legal status, given its endorsement by the Court of Appeal it is likely to be followed. The guidance gives as examples of what would not be a proper purpose: ‘•• • • •

•

any purpose that could be unlawful (eg obtaining personal information for the purposes of identity fraud or purposes that might abuse someone’s rights under the DPA 1998); any representation or communication to members that the company considers would threaten, harass or intimidate members or would otherwise be an unwarranted misuse of the member’s personal information; offers relating to securities; requests from agencies which specialise in identifying and recovering unclaimed assets for their own commercial gain by then contacting and extracting commission or fees from the beneficiaries, where the company is not satisfied that such activity is in the interests of shareholders; any other purpose not related to the members in their capacity as members of the company or to the exercise of their shareholder rights (eg commercial mailings).’

7.19 When a person inspects the register of members or is provided with a copy of it, the company is required to state the most recent date (if any) on which alterations were made to the register and that there were no further alterations made after that date.70 When a person inspects the index of members’ names, the company must inform him whether there is any alteration to the register which is not reflected in the index.71 Entries relating to former members may be removed from the register of members where more than 10 years have passed since the former member ceased his membership.72

66 Burry at [87]. 67 Burberry Group Plc v Fox-Davies [2017] EWCA Civ 1129 at [50]. 68 Burry at [19]. 69 Fox-Davies at [47] and [48]. 70 Section 120. 71 Section 120. 72 Section 121.

176

Rights relating to company registers 7.22

7.20 The issues as to inspection will not apply in the case of the central register where the company has elected to keep information there rather than on its own register, as access to it will be open to the public. However, when someone inspects or requests information relating to the company held on the central register they can also require the company to confirm that the information held on the central register is up to date and contains all of the information that the company is required to deliver to the Registrar.73

(b) Rectification 7.21 Perhaps the most basic personal right of a shareholder in a company is the right of membership itself. Section 112(1) of the 2006 Act determines that the subscribers to the company’s memorandum become members on registration of the company and entitled to be entered as such in the register of members, whilst section 112(2) provides that ‘Every other person who agrees to become a member of a company, and whose name is entered in its register of members, is a member of the company’. Section 127 provides that the register of members is prima facie evidence of any matters which are directed or authorised by the 2006 Act to be included in it.74 It is therefore necessary for a shareholder to be included in the register of members of a company not only to enjoy the benefits of exercising voting rights in connection therewith and to receive dividends, but also to be able to enforce any rights which shareholders have, whether as regards derivative actions,75 just and equitable winding up,76 or unfair prejudice petitions. 7.22 The right to apply to the court to have the register rectified and to determine any question as between the company and a shareholder, former shareholder or putative shareholder as to whether his name should or should not be included in the register of members, is long standing. Section 125 of the 2006 Act gives the court the power to rectify the register of members if any person is wrongly omitted, wrongly included, or where part of their holding is not accurately recorded in the register.77 The power may be exercised even after the company has gone into liquidation78 and a post-winding up order may operate retrospectively.79 Any ‘person aggrieved’,80 which extends to any person legitimately interested in

73 Section 128F. 74 That the effect of a change to the register of members must operate to change the shareholding, and hence may mean one company ceases to be a subsidiary of its former holding company as a result, was confirmed by the Supreme Court in the Scottish case of Enviroco Ltd v Farstad Supply [2011] 1 WLR 921. 75 See Chapter 6. 76 See Chapter 11. 77 See Re Transatlantic Life Assurance Co Ltd [1980] 1 WLR 79, ChD (rectification granted to remove part of a member’s holding issued in breach of exchange control legislation); Re Cleveland Trust plc [1991] BCLC 424, ChD (bonus issued shares based on erroneous declaration of dividend removed from the register). 78 Insolvency Act 1986, s 148(1); and see Oakes v Turquand (1867) LR 2 HL 325. 79 See Re Sussex Brick Co Ltd [1904] 1 Ch 598, CA. 80 As to which, see Attorney General of the Gambia v N’jie [1961] AC 617, PC (West Africa), at 634, on the meaning of the phrase in the context of a person entitled to bring a complaint of breach of rules of professional discipline.

177

7.23  Personal Claims

the membership of the company, as well as any member and the company itself,81 may apply to the court in reliance on this section. This includes the personal representatives of a deceased member even if they have not yet obtained a grant of representation.82 However, it would only be in exceptional circumstances that the court would order the removal of a deceased member and the registration of his executors in his place. Where such a step is essential, because there is no power otherwise to appoint a director in place of the deceased who was the sole director, so that the future of the company is in jeopardy due to its inability to take essential steps, such an order will be made.83 The court will act in such a case even where the executors have not obtained or even applied for a grant of probate, where such prompt action is required to safeguard the company.84 7.23 The section may also be relied on where the company delays in entering on the register the fact that a person has ceased to be a member. Relief under sections 125(1) and 128G is not automatic where the requirements of the relevant provision are made out, but is a matter of discretion.85 The right to such a remedy does not last indefinitely. Delay in making application may be relevant to the exercise of the discretion and, without prejudice to any other relevant limitation period, any claim against the company arising from the making, deleting, or failing to make any entry in the register of members is not enforceable more than ten years after the date when the entry was made, deleted, or when the failure first occurred.86 The equivalent provision in respect of entry on the central register is section 128G. It is in virtually identical terms to section 125, save that the remedy is not direct rectification of the register but a court order requiring the company to deliver to the Registrar information necessary to rectify the register. 7.24 An application under these sections may be made using the Civil Procedure Rules 1998 (‘CPR’) Pt 8 procedure. When hearing an application under the sections, the court may order rectification or the delivery of information to

81

82 83

84

85 86

It may be appropriate for the company itself to bring an application where it has notice of a relevant dispute and requires its determination by the court – see eg Re Indo China Steam Navigation Co Ltd [1917] 2 Ch 100. Where a company has lost its register or the register has been destroyed, it may (and arguably should) obtain a new blank register and apply to the court for an order for rectification before writing up the ‘new’ register, per Vinelott J in Re Data Express Ltd (1987) The Times, 27 April. Goodman v Goodman [2013] EWHC 758 (Ch), [2014] Ch 186. See Kings Court Trust Ltd v Lancashire Cleaning Services Ltd [2017] EWHC 1094 (Ch) where there was no power otherwise to appoint a director in place of the deceased and no company secretary, meaning that the company had no officer in place capable of acting on its behalf and faced the need for imminent payment of wages and taxes to HMRC so that an order was necessary to ensure the survival of the company. Elliott v Cimarron UK Ltd [2017] EWHC 2172 (Ch). Also in Williams v Russell Price Farm Services Ltd [2020] EWHC 1088 (Ch), [2020] BCC 636. In the latter case, HHJ Paul Matthews required the named executors to personally undertake to pay the inheritance tax necessary to obtain the grant of probate. Such a requirement seems excessive and an unreasonable burden for volunteers who had probably already taken too many steps to renounce. It was not required by HHJ David Cooke in King v Clear Facilities Management Ltd, unreported, 23 October 2020, who, having had Russell Price drawn to his attention, was content with an undertaking by the applicant executors to bring the matter back before the court if they had not obtained a grant within six months. He accepted a submission that by reason of the steps that they had already taken in making the application the executors would be unable to renounce. Re Piccadilly Radio plc [1989] BCLC 683, ChD. See s 128.

178

Rights relating to company registers 7.25

the registrar necessary for rectification (as the case may be) 87 of the register of members and may order the payment by the company of damages sustained by any party aggrieved.88 However, damages may only be ordered where the court orders rectification.89 Accordingly, sections 125 and 128G do not assist an applicant who does not seek rectification, but only damages. The damage is measured as at the time of the refusal to register.90 The starting point, where the complaint is the failure to register the applicant as the holder of shares, will be the value of the shares. This was ordered in Re Ottos Kopje Diamond Mines Ltd.91 In that case it appears that the applicant who was not put onto the register had applied to be, and had been prevented from selling the shares by the unjustified failure to register him as a member, so it is easy to see why the value of the shares was the appropriate measure of his loss. However, where an applicant in fact obtains rectification so that he is added to the register as a member, his loss will invariably be different. The true measure of damage in most cases will be fact specific and arrived at by applying the general compensatory principle92 of putting the applicant into the position he would have been in if the wrong of which he complains had not occurred. That will be likely to include compensation in lieu of any dividends forfeited whilst not registered as member. 7.25 The court may also decide, on hearing an application under sections 125(3) or 128G(4), any question relating to the title of a person who is party to the application to have his name entered in or omitted from the register, whether the issue arises between members or between a member or members and the company itself.93 Sections 125 and 128G give the court power to decide any question necessary or expedient to be decided for rectification of the register.94 Where rectification is necessary to enable a petitioner to have standing to pursue an unfair prejudice petition under section 994, the court may stay the petition proceedings pending the determination of the rectification application95 or determine the issue of rectification of the register as preliminary issue in the petition proceedings.96 Where the court concludes that a person’s name should be removed from the register of members as he was never a member of the company, the order may provide that it operates retrospectively and not only from the date of the order.97

87

Rectification may be from the date of the determination of the application or, in appropriate case, may be retrospective – Re Sussex Brick Co [1904] 1 Ch 598, CA. 88 Under ss 125 and 128G, the court only has power to order the company itself to pay compensation. Where compensation is sought from some other person, such as a director, another procedural route will be necessary. 89 Re Ottos Kopje Diamond Mines Ltd [1893] 1 Ch 618, CA, at 624–625. 90 Re Ottos Kopje Diamond Mines Ltd [1893] 1 Ch 618, CA, at 626. 91 [1893] 1 Ch 618, CA. 92 As stated by Lord Blackburn in Livingstone v Rawyards Coal Co (1850) 4 App Cas 25 at 49. 93 The section is concerned with the right to appear in the register and hence with legal rather than beneficial title to shares. It only assists an applicant with an existing legal title (or right to legal title) and not someone seeking to assert a prospective right. For the significance of this distinction in a case brought under the similar legislation in the British Virgin Islands see Nilon Ltd v Royal Westminster Investments SA [2015] UKPC 2, [2015] 2 BCLC 1, PC. 94 Sections 125(3) and 128G(4)(b) of the 2006 Act. 95 As occurred in Re Starlight Developers Ltd [2007] EWHC 1660 (Ch), [2007] BCC 929, ChD. 96 As in Re I Fit Global Ltd [2013] EWHC 2090 (Ch), [2014] 2 BCLC 116, ChD. 97 See Barbor v Middleton (1988) 4 BCC 681, CSOH.

179

7.26  Personal Claims

7.26 The width of the discretion granted by section 125(3)98 was emphasised by the Court of Appeal in Re Hoicrest Ltd.99 The court held that the effect of the predecessor section in the same terms was to give a very wide discretion to resolve any disputes as to entitlement to shares, albeit that an order which would require the company to register a transfer without the delivery of a proper instrument of transfer, as required by statute,100 would not be made. However, the section creates a summary jurisdiction which is unsuitable for deciding substantial factual disputes.101 To the extent that Re Hoicrest Ltd indicated that the section gave jurisdiction to decide questions of the beneficial title to shares (as opposed to legal title and hence the right to be included on the register) it was said by the Privy Council in Nilon Ltd v Royal Westminster Investments SA102 to be wrong. This is logical given that the section is concerned with the register and hence not with the beneficial interest in shares. It remains to be seen whether the appellate courts of England and Wales will follow Nilon and limit the scope previously expressed in Hoicrest, which remains binding on courts at first instance.103

Where directors refuse to register a transfer of shares in reliance on power contained in the articles 7.27 Articles of association frequently grant to the directors a power to refuse to register a transfer of shares.104 Such provisions are especially common in the articles of small private companies. The precise nature of the power will be a matter of construction of the relevant article, but the most common form, stating that the directors ‘may decline to register …’, requires the directors to make a positive decision to decline to register the transfer by passing a resolution to that effect.105 However broad the discretion granted by the article, it must be exercised within a reasonable time. The directors simply failing to register but passing no particular resolution will mean that the power will lapse. For these purposes, a reasonable time is not more than the two-month period provided by statute,106 now section 771 of the 2006 Act. 7.28 Where the directors do act within a reasonable period and resolve to decline to register a transfer, provided they act in accordance with the terms of the relevant provision in the articles, the court will not interfere unless the complainant can establish that the directors have not acted bona fide in the interests of the company.107 98 99

And it follows, s 128G(4). [2000] 1 WLR 414, CA. See also Re Starlight Developers Ltd [2007] EWHC 1660 (Ch), [2007] BCC 929, ChD. 100 Now s 770 of the 2006 Act. 101 Nilon Ltd v Royal Westminster Investments SA [2015] UKPC 2, [2015] 2 BCLC 1, PC, at [37]. 102 [2015] UKPC 2, [2015] 2 BCLC 1, PC, at [51]. See also Chen v Ng [2017] UKPC 27, which limited the scope of Nilon at [24] where the defendant had applied to join the action on the basis that the real dispute was between shareholders and not a dispute with the company. 103 Applying established principles of precedent, as Nilon was a decision of the Privy Council on BVI law: Willers v Joyce [2016] UKSC 44, [2018] AC 843. 104 See eg Companies (Model Articles) Regulations 2008 (SI 2008/3229), Sch 1, art 28(3), and Companies (Tables A to F) Regulations 1985 (SI 1985/805), Table A, reg 24. 105 Re Swaledale Cleaners Ltd [1968] 1 WLR 1710, CA. 106 Re Swaledale Cleaners Ltd [1968] 1 WLR 1710, CA; Re Zinotty Properties Ltd [1984] 1 WLR 1249, ChD; Popely v Planarrive Ltd [1997] 1 BCLC 8, ChD. 107 See Hitchins v Hitchins (Hatfield) Ltd (unreported, 25 May 2012), ChD.

180

Rights relating to company registers 7.29

The court will presume that the directors acted bona fide in the interests of the company in all cases where the decision was one which a reasonable board could have considered to be in the interests of the company.108 Cases where rectification of the register of members will be granted will vary widely and depend on their particular facts. Circumstances where rectification of the register of members has been granted in the past include: where the issue or allotment of the shares was irregular;109 where an instrument of transfer was ineffective or made in bad faith;110 where a former registered owner could show good grounds why its name should not have been removed;111 and where shares were issued in contravention of valid rights of pre-emption112 or otherwise invalidly allotted.113 Where the company erroneously treated as ineffective a transfer notice marked ‘without prejudice’ and transferred the subject shares without regard to the notice, the transfer to the other member was ineffective and the register rectified accordingly.114 Where shareholders were estopped by convention from relying on their pre-emption rights the company was ordered to rectify the register to record a transfer of shares which the pre-emption rights could otherwise have prevented.115 7.29 An application under section 125 using the CPR Pt 8 procedure is not the only way of challenging the accuracy of the register of members and obtaining an order for its rectification. Proceedings may be brought seeking other relief which will lead to the same ends, such as a claim for a declaration, an injunction or for specific performance. Damages can also be claimed in the same proceedings.116 Where, in the course of a derivative action or unfair prejudice petition, a dispute arises about the membership of the petitioner affecting his standing, the usual approach is to allow that dispute to be resolved first, without dismissing the main proceedings on grounds of lack of standing.117

108 Popely v Planarrive Ltd [1997] 1 BCLC 8, ChD; Mactra Properties Ltd v Morshead Mansions Ltd [2008] EWHC 2843 (Ch), [2009] 1 BCLC 179, ChD. 109 For example, Re Portuguese Consolidated Copper Mines Ltd (1889) 42 ChD 160; Re International Society of Auctioneers and Valuers [1898] 1 Ch 110; Re Transatlantic Life Assurance Co Ltd [1980] 1 WLR 79, ChD; Re Cleveland Trust plc [1991] BCLC 424, ChD; Re Thundercrest Ltd [1995] 1 BCLC 117, ChD; Jordan v Roberts [2009] EWHC 2313 (Ch). 110 For example, Re Bank of Hindustan China and Japan exp. Kintrea (1869–70) LR 5 Ch App 95; Romer-Ormiston v Claygreen Ltd [2005] EWHC 2032 (Ch), [2006] 1 BCLC 715, ChD; Re Dunstans Publishing Ltd [2010] EWHC 3850 (Ch), [2012] BCC 515, ChD. 111 Re Bahia and San Francisco Railway Co Ltd (1867–68) LR 3 QB 584; Re Diamond Rock Boring Co Ltd (1876–77) LR 2 QBD 463; Bellerby v Rowland & Marwood’s Steamship Co Ltd [1902] 2 Ch 14, CA; International Credit and Investment Co (Overseas) Ltd v Adham [1994] 1 BCLC 66, ChD; Smith v Charles Building Services Ltd [2006] EWCA Civ 14, [2006] BCC 334, CA. 112 Cotrell v King [2004] EWHC 397 (Ch), [2004] 2 BCLC 413, ChD. 113 Re Homer District Consolidated Gold Mines ex p Smith (1888) 39 Ch D 546; Re International Society of Auctioneers and Valuers [1898] 1 Ch 110; Avenue Road Developments Ltd v Reggiesco Ltd [2012] EWHC 1625 (Ch); Re Transatlantic Life Assurance Co Ltd [1980] 1 WLR 79, ChD; Re Cleveland Trust plc [1991] BCLC 424, ChD. 114 Re Dunstans Publishing Ltd [2010] EWHC 3850 (Ch), [2012] BCC 515, ChD. 115 Blindley Heath Investments Ltd v Bass [2015] EWCA Civ 1023, [2016] 4 All ER 490, CA. 116 This route may be used for a claim for damages against anyone responsible, including, but not limited to, the company itself. 117 Re Starlight Developers Ltd [2007] EWHC 1660 (Ch), [2007] BCC 929, ChD; Re Garage Door Associates Ltd [1984] 1 WLR 35, ChD. See the discussion at 9.28.

181

7.30  Personal Claims

Procedure and costs 7.30 The appropriate procedure will usually be to follow CPR  Pt  8. The respondents will be the company and other person(s) whose entry in the register of members would be affected if the relief sought were granted. The directors should not be made a party unless the applicant wishes to seek costs against them,118 or they themselves wish to be added as parties.119 7.31 In more complex cases, or where third parties may be affected and so should have the opportunity to be before the court, the summary procedure provided for in section 125(1) may not be appropriate.120 However, where the court decides that an application under section 125 and the CPR Pt 8 procedure is inappropriate, for instance because there are some substantial disputes of fact in issue, the court will exercise its case management powers under CPR r 1.4 and usually, rather than strike out the claim on procedural grounds, will direct that it proceeds as an action under CPR Pt 7.121 Such claims will then proceed as a Pt 7 action with exchange of evidence, including disclosure by the company of relevant documents.122 7.32 A  successful applicant for rectification of the register of members will usually recover costs from either the company or the other defendant, depending upon which caused the need for the application. As the court has power to join parties for the purposes of making costs orders against them, it is not necessary to include the directors of the company as a defendant to the application at the outset, solely to be able to obtain a costs order against them. The court can do so if it considers that costs are recoverable from the directors. That will be likely to be the case where it is the conduct of the directors that gave rise to the application, even if they acted in good faith and relied upon legal advice.123 Where the respondent’s conduct caused the application and the incurring of costs by the company of which he is in control, he may also be ordered to indemnify the company for its costs of the application.124

RIGHTS RELATING TO COMPANY MEETINGS Members’ power to require a general meeting to be held125 7.33 The calling of a general meeting of members should usually be the starting point of any attempt to resolve issues and disputes between members or between 118 Which may be awarded in appropriate cases; see Re Keith Prowse & Co Ltd [1918] 1 Ch 487, where costs were not awarded against directors personally, and Morgan v Morgan Insurance Brokers Ltd [1993] BCLC 676, ChD, where costs were awarded against the directors personally rather than the company. 119 See Re Copal Varnish Co Ltd [1917] 2 Ch 349. 120 Re R W Peak (Kings Lynn) Ltd [1998] 1 BCLC 193, ChD. 121 Re Hoicrest Ltd [2000] 1 WLR 414, CA. 122 See Cory v Cory [1923] 1 Ch 90, CA. 123 Morgan v Morgan Insurance Brokers Ltd [1993] BCLC 676, ChD. 124 As was ultimately ordered in Re Dunstan’s Publishing Ltd [2010] EWHC 3850 (Ch), [2012] BCC 515, ChD. 125 Shareholders can also challenge the validity of meetings called without giving the required notice, and will not be regarded as having agreed to short notice unless there is an unqualified agreement by them which is objectively established: see eg Schofield v Schofield [2011] EWCA Civ 154, [2011] 2 BCLC 319, CA.

182

Rights relating to company meetings 7.35

members and the company. The 2006 Act contemplates that most private companies will not hold formal general meetings. Private companies are not required by the 2006 Act to hold such meetings unless either their articles of association require general meetings to be held126 or they are ‘traded companies’ under the EU  Shareholders’ Rights Directive.127 A ‘traded company’ is one, any shares in which carry rights to vote at a general meeting, and are admitted to trading on a regulated market in an EEA State by or with the consent of the company.128 7.34 If members representing at least 5 per cent of the paid-up share capital of any company129 request them to do so, the directors are obliged to call a general meeting.130 The request may be in hard copy131 or in electronic form,132 and must be authenticated133 by the persons making it.134 Such a request must state the general nature of the business to be dealt with at the meeting and may include text of any intended resolution to be proposed at the meeting.135 The directors are required to consider whether the proposed resolution(s) may properly be moved and is intended to be moved at the meeting.136 A resolution may be properly moved at a meeting unless it would, if passed, be ineffective for any reason, or is defamatory or is frivolous or vexatious.137 7.35 Where the requirements of section 303 are met, the directors must call a general meeting within 21 days, and the meeting must take place within a further 28 days.138 If the requests identify a resolution intended to be moved at the meeting, the notice of the meeting must include notice of the resolution.139 If the resolution is to be proposed as a special resolution, the directors are treated as not having called the meeting if they do not give notice of the resolution as required by section 283. Delay by the directors in convening a meeting, when asked by shareholders, which is unreasonable and unjustified may be the basis for a petition under section 994 of the 2006 Act.140 Where the requesting members wish to move a special resolution, it will be important to have included in the request the text of the intended resolution and that it is intended to be a special resolution. Otherwise, their proceeding with their resolution at the meeting may be prevented by the absence of proper notice of the special resolution having been given. Where the members have included this 126 A positive requirement to hold general meetings is required; it is not enough that the articles include provision for directors’ retirement at an annual general meeting. 127 Directive 2007/36/EC. 128 Section 360C of the 2006 Act. 129 Such shareholders must appear in the register of members or the central register. Shares held through a nominee company give the nominee company rather than the ultimate beneficial owners the right; Eckerle v Wickeder Westfalenstahl GmbH [2013] EWHC 68 (Ch), [2014] Ch 196. 130 Section 303(2) of the 2006 Act. 131 Hard copy means in a ‘paper copy or similar form capable of being read’: s 1168(2). 132 Electronic form means a document sent by electronic means such as e-mail or fax, and any other means while in electronic form, such as by sending a disc: s 1168(3). See also s 1168(4)–(6). 133 Section 1146 sets out how authentication may be made. 134 Section 303(6). 135 Section 303(4). 136 Kaye v Oxford House Management Co Ltd [2019] EWHC 2181 (Ch), [2020] BCC 117, at [93]. 137 Section 303(5). The phrase is not defined but in Kaye v Oxford House Management Co Ltd [2019] EWHC 2181 (Ch), [2020] BCC 117 it was held at [94] to be a protection against individuals who wish to abuse the requisition process as a means of causing trouble, or trying to obtain publicity for causes that are only indirectly associated with the business and affairs of the company. See also 7.61 as to the meaning of the phrase when used in s 986(5). 138 Section 304(1). 139 Section 304(2). 140 See eg McGuiness v Bremner plc (1988) 4 BCC 161, CSOH. See also Chapter 9.

183

7.36  Personal Claims

information in their request, the directors become responsible for ensuring that the requirements of section 283 in relation to notice of special resolutions are met. 7.36 If the directors fail to call a general meeting when required to by section 304, the members requesting the meeting, or any of them representing more than half of the voting rights of those making the request, may call the meeting.141 Similarly, if the directors call a meeting to consider some but not all of the matters specified in the request made by the members, the members may ignore the directors’ steps and call their own meeting, relying on section 304.142 Once the directors have called a meeting to consider particular resolutions, the directors may not reconsider and withdraw a resolution or part of a resolution from the meeting. From the point of the calling of the meeting, only the shareholders can consider the resolutions which the meeting has been called to consider.143 The directors cannot postpone the meeting144 and the chairman of the meeting does not have the power to stop or adjourn the meeting unless it is necessary to retain order or the meeting so resolves.145 Where the requests included the text of a resolution, the members’ notice of the meeting must include that text.146 The meeting must be called for a date not more than three months after the date on which the directors became subject to the requirement to call the meeting.147 The meeting must be called in the same manner, or as nearly as possible, as that in which meetings are required to be called by the directors,148 and the business which may be dealt with at the meeting includes any resolution of which notice was given in accordance with section 305.149 Any reasonable expenses incurred by the members requesting the meeting, by reason of the failure of the directors to call a meeting, must be reimbursed to them by the company,150 and any sum so reimbursed shall be retained by the company out of any sums due or to become due from the company by way of fees or other remuneration to the directors who were in default.151 7.37 Section 338A of the 2006 Act gives shareholders in ‘traded companies’152 the power to add matters to the business to be transacted at the annual general meeting of the company. The holders of 5 per cent of the shares, or 100 shareholders in number who would be entitled to vote on a resolution to which the additional matter relates, can require the matter to be added to the agenda for the meeting. However, this right does not extend to the adding of a resolution, and matters need not be added to the agenda if they are frivolous, vexatious or defamatory.153 A qualifying request to add business must be received by the company not later than six weeks before the meeting, and must follow the procedure set out in section 338A. 141 Section 305(1). 142 See Isle of Wight Railway Co Ltd v Tahourdin (1883) 25 ChD 320, CA. 143 Kaye v Oxford House Management Co Ltd [2019] EWHC 2181 (Ch), [2020] BCC 117, at [99]– [103]. 144 Kaye v Oxford House Management Co Ltd [2019] EWHC 2181 (Ch), [2020] BCC 117, at [102]– [104]. 145 National Dwellings Society v Sykes [1894] 3 Ch 159. 146 Section 305(2). 147 Section 305(3). 148 Section 305(4). 149 Section 305(5). 150 Section 305(6). 151 Section 305(7). 152 A ‘traded company’ is defined in section 360C of the 2006 Act as one, any shares in which carry rights to vote at a general meeting and are admitted to trading on a regulated market in an EEA State by or with the consent of the company. 153 Section 303(5). And see 7.62.

184

Rights relating to company meetings 7.40

The power of the court to order a meeting 7.38 Section 306 gives the court power to order that a meeting of the company be called. It is a procedural section, intended to enable the company to conduct business which is required to be conducted at a general meeting, to allow the company to get on with conducting its own affairs.154 It applies where, for any reason, it is impracticable to call a meeting of the company in any manner in which meetings of the company may be called, or to conduct the meeting in the manner prescribed by the articles.155 If it is not impracticable, the jurisdiction is not engaged.156 A potential conflict of interest for the chairman of the meeting does not make the calling of the meeting or transacting of business at it impractical.157 The court may order the calling of a meeting of its own motion, or on the application of a director, or of a member who would be entitled to vote at the meeting.158 The procedure is designed to be a ‘relatively speedy one’.159 7.39 It has been said that the court has absolute discretion as to whether a meeting should be held,160 although, as indicated below,161 in some circumstances the court’s jurisdiction is effectively ousted. The section has perhaps been most frequently used where there is a deadlock making it otherwise impossible to call a valid meeting because of quorum requirements.162 It may also be used when there is no director in place to be able to call a meeting under section 303(1).163 If it decides to order a meeting, the court may make any ancillary or consequential directions as it considers expedient.164 These include a direction that one member of the company present at the meeting may be deemed to constitute a quorum.165 This ensures that the effectiveness of a meeting ordered by the court cannot be blocked by any member or members seeking to make the meeting inquorate by simply staying away, so may be of particular assistance to minority shareholders. A  meeting called, held and conducted in accordance with an order made under section 306 is deemed for all purposes to be a meeting of the company, duly called and conducted.166 7.40 The approach to be taken to such an application was considered by Peter Gibson LJ in Union Music Ltd v Watson167 and helpfully summarised by Richard Snowden QC (sitting as a Deputy High Court Judge) in Vectone Entertainment

154 Ross v Telford [1998] 1 BCLC 82, CA; Union Music Ltd v Watson [2003] EWCA Civ 180, [2003] 1 BCLC 453, CA, at [32]. 155 Section 306(1), and see Monnington v Easier plc [2005] EWHC 2578 (Ch), [2006] 2 BCLC 283, ChD. 156 See the conclusion of Lindsay J in Might SA v Redbus Interhouse plc [2003] EWHC 3514 (Ch), [2004] 2 BCLC 449, ChD. 157 Might SA v Redbus Interhouse plc [2003] EWHC 3514 (Ch), [2004] 2 BCLC 449, ChD. 158 Section 306(2). 159 Smith v Butler [2011] EWHC 2301 (Ch), [2012] 1 BCLC 444, ChD, at [112 (point 3)] (approved by the Court of Appeal: [2012] EWCA Civ 314, [2012] BCC 645 at [54]). 160 Ross v Telford [1998] 1 BCLC 82, CA. 161 See 7.41 and 7.42. 162 For a recent example, see Wheeler v Ross [2011] EWHC 2527 (Ch). 163 Puzitskkaya v St Paul’s Mews (Islington) Ltd [2017] EWHC 905 (Ch). 164 Section 306(4). 165 Section 306(4). 166 Section 306(5). 167 [2003] EWCA Civ 180, [2003] 1 BCLC 453, CA.

185

7.41  Personal Claims

Holding Ltd v South Entertainment Ltd168 addressing section 371 of the 1985 Act, which was in identical form to the current section 306, as follows: ‘(a) Section 371 of the Companies Act 1985 is a procedural section intended to enable company business which needs to be conducted at a general meeting to be so conducted. A company should be allowed to get on with managing its affairs without being frustrated by the impracticability of calling or conducting a general meeting in the manner prescribed by the articles and the Act. (b) Where there is a majority shareholder and no class rights attaching to a particular class of shares which the convening of a general meeting is designed to override, the court in exercising its discretion under s 371 will consider whether the company is in a position to manage its affairs properly and will take into account the ordinary right of the majority shareholder to remove or appoint a director in exercise of his majority voting power. (c) The fact that quorum provisions in the articles require two members’ attendance is not in itself sufficient to prevent the court making an order under s 371 to break a deadlock in favour of a majority shareholder who is seeking a proper order, such as the appointment of a director, which he has the right to procure in ordinary circumstances. (d) Section 371 is a procedural section not designed to affect substantive voting rights or to shift the balance of power between shareholders in a case where they had agreed that power should be shared equally and where the potential deadlock is something which must be taken to have been agreed for the protection of each shareholder. However, a quorum provision is not in itself sufficient to constitute such an agreement.’ This summary and that of Anthony Mann QC in Re Woven Rugs Ltd169 were reviewed and applied by HHJ  Behrens in Smith v Butler;170 and the judge’s analysis and exercise of his discretion to order a meeting in that case were approved by the Court of Appeal.171 7.41 However, the court will not exercise its discretion in a manner that is inconsistent with a shareholder’s established rights. In Harman v BML  Group Ltd,172 the Court of Appeal ruled that the predecessor section was not intended to override class rights, even the rights of a minority shareholder. In that case, a single shareholder held the B shares in the company and had a right under a shareholders’ agreement to be present at all general meetings of the company. An attempt to use the statutory power of the court to order a meeting which would override the rights of the B shareholder under the shareholders’ agreement was refused, and Dillon LJ expressly stated that the section should not be invoked to override class rights.173 The same principle would be likely to apply to other class rights entrenched by a shareholders’ agreement or the articles of association of the company.174

168 [2004] EWHC 744 (Ch), [2004] 2 BCLC 224, ChD. 169 [2002] 1 BCLC 324, ChD, at [14]. 170 [2011] EWHC 2301 (Ch), [2012] 1 BCLC 444, ChD, at [107]. 171 [2012] EWCA Civ 314, [2012] BCC 645 at [54]. 172 [1994] 1 WLR 893, CA. 173 At 898F. 174 See Dillon LJ at 898G–898H and Henry LJ at 898H–899A.

186

Rights relating to company meetings 7.44

7.42 In Harman v BML  Group Ltd,175 Dillon LJ made clear that the existence of a section 994 petition does not automatically mean that the court’s jurisdiction is ousted,176 but is an important factor to be taken into account by the court when exercising its discretion. The fact that the holding of the proposed meeting is likely to lead to what is alleged to be unfairly prejudicial conduct and to lead to the presentation of a petition under section 994 will also be a factor that will bear on the court’s exercise of its discretion, but not on the existence of the discretion.177 The court may exercise its discretion to call a meeting subject to conditions intended to protect minority shareholders, such as by limiting the powers that may be exercised at the meeting, and/or the powers that may be exercised by any director to be appointed at the meeting, to essential matters such as the laying of accounts and appointment of directors.178 However, it will not necessarily do so. For instance, a meeting may be ordered with the expressed purpose of the removal of a director, even though the director intends to pursue a petition based on unfair prejudice under section 994 of the 2006 Act. Significant weight will be attached to the general principle that a director will not be forced upon a company.179 Such an order was made where the court was satisfied that the application was not made tactically in response to a petition or threatened petition, and where the respondent had not been involved in management for a lengthy period and her petition sought an order that her shares be purchased.180

Class rights 7.43 Sections 630–634 of the 2006 Act provide for the variation of class rights. These provisions make no substantive changes to the previous law. Any variation of class rights must comply with these provisions. Disputes around the subject of class rights are usually concerned with one or both of the questions of whether particular rights are class rights at all; and, if they are, whether what is proposed amounts to a variation of them.181

Which rights are class rights? 7.44 Section 629 of the 2006 Act provides that shares are of the same class if the rights attached to them are ‘in all respects uniform’. For this purpose, different rights

175 [1994] 1 WLR 893, CA. 176 At 897E–897F. See also Re Whitchurch Insurance Consultants Ltd [1993] BCLC 1359, ChD, and Re Woven Rugs Ltd [2002] 1 BCLC 324, ChD, at [14]. 177 See Re Opera Photographic Ltd [1989] 1 WLR 634, ChD; Re Sticky Fingers Restaurant Ltd [1992] BCLC 84, ChD; and Re Woven Rugs Ltd [2002] 1 BCLC 324, ChD. 178 As was the case in Re Sticky Fingers Restaurant Ltd [1992] BCLC 84, ChD. In Smith v Butler [2011] EWHC 2301 (Ch), [2012] 1 BCLC 444, ChD, at [112], undertakings were offered and conditions were made (approved by the Court of Appeal: [2012] EWCA Civ 314, [2012] BCC 645 at [54]). 179 Pringle v Callard [2007] EWCA Civ 1075, [2008] 2 BCLC 505, per Arden LJ at [33]; Schofield v Jones [2019] EWHC 803 (Ch) at [40]. 180 Schofield v Jones [2019] EWHC 803 (Ch), [2019] BCC 932. 181 The variation of class rights with the approval of the court via schemes of arrangement under s 899 of the 2006 Act is a separate topic and outside the scope of this work.

187

7.45  Personal Claims

to dividends in the first 12 months immediately following the allotment of the shares may be ignored.182 7.45 The leading authority on the meaning and extent of class rights remains the decision of Scott J  in Cumbrian Newspapers Group Ltd v Cumberland and Westmoreland Herald Newspaper and Printing Co Ltd.183 In that case, both parties were publishers of local newspapers. Both were concerned that a national newspaper might seek to take over the defendant company and both hoped to prevent such a takeover. Their method was for the claimant company to take about 10 per cent of the issued shares in the defendant and to alter the articles of the defendant company so that the claimant had a right of pre-emption over the remaining ordinary shares. The claimant was also given rights over the unissued shares and the right to have a director on the board of the defendant company. The dispute arose when the defendant’s directors gave notice of an intention to vary the defendant company’s articles to remove the rights of pre-emption, the rights in respect of the unissued shares and the right to board representation. The claimant contended that the existence of these rights meant that its shares were of a special class, so that the rights could only be removed if approved by a class meeting. In other words, these rights were class rights. Scott J agreed, and made a declaration to that effect. 7.46

Scott J identified three categories of rights conferred on shareholders:184

‘First, there are rights or benefits which are annexed to particular shares … If articles provide that particular shares are to carry particular rights not enjoyed by the holders of other shares, it is easy to conclude that the rights are “attached to a class of shares”. A  second category of rights or benefits which may be contained in articles (although it may be that neither “rights” nor “benefits” is an apt description), would cover rights or benefits conferred on individuals not in the capacity of members or shareholders of the company but, for ulterior reasons, connected with the administration of the company’s affairs or the conduct of its business … That leaves the third category. This category would cover rights or benefits that, although not attached to any particular shares, were nevertheless conferred on a beneficiary in the capacity of member or shareholder of the company.’ Scott J concluded that rights in the first and third categories constituted class rights, while those in the second category did not. He held that the rights in issue in the Cumbrian Newspapers case fell into the third category. 7.47 Rights falling into the first and third categories are rights attaching to the shares by virtue of the contract between the shareholders and between the shareholders and the company contained in the articles.185 As such, they cannot be varied without the agreement of the holders of those rights, save to the extent that the articles themselves provide for such variation. That the first category of rights constitutes class rights is unsurprising and fairly straightforward to apply. Care needs 182 183 184 185

Section 629(2). [1987] Ch 1. See also the discussion at 3.23. At 15E–17A. However, rights in the third category, and possibly also the first, could be contained in a shareholders’ agreement, but will be treated as if contained in the articles: see Harman v BML Group Ltd [1994] 1 WLR 893, CA.

188

Rights relating to company meetings 7.49

to be taken to distinguish between the second and third categories. The important distinction between them is the capacity in which they were conferred. Scott J gave two examples of earlier cases which he considered would have fallen into the third category, and therefore would have constituted class rights. They were the decisions in Bushell v Faith186 and Rayfield v Hands.187 7.48 In Bushell v Faith, the articles of the company included provision that, on a resolution at a general meeting for the removal of any director from office, any shares held by that director should carry the right to three votes. The rights were not attached to any particular share or shares, but were conferred on the relevant directors in their capacity as shareholders, so that the articles in effect created two classes of shareholders: those who were current directors, and those who were not. In Rayfield v Hands, the company’s articles included provision that each and every shareholder had the right to sell their shares to the directors at a fair valuation. These rights were held to be enforceable and hence were obligations which fell on the directors from time to time, in their capacity as shareholders. Accordingly, non-director members had in effect a put option to sell their shares to the directors, but the directors did not have equivalent rights. In Cumbrian Newspapers, Scott J stated that this meant that the shares held by non-directors had class rights falling within his third category.188 It will be apparent that, in both of these cases, the rights in issue did not attach to particular shares, but were rights exercisable by particular shareholders in respect of any shares that they might happen to hold. Scott J made the point quite clearly:189 ‘In my judgment, if specific rights are given to certain members in their capacity as members or shareholders, then those members become a class. The shares those members hold for the time being, and without which they would not be members of the class, would represent, in my view, a “class of shares” …’ This means that, as Scott J  observed: ‘This construction of section 125 has the consequence that shares may come into or go out of a particular class on acquisition or disposal of the shares by a particular individual’.190 However, he saw no conceptual difficulty with this. 7.49 By contrast, Scott J gave as an example of the second category the decision in Eley v Positive Government Security Life Assurance Co.191 In that case, the articles of the company included a provision that the company should employ a named shareholder as its solicitor, for life, unless he was guilty of misconduct. Scott J explained that these rights were not class rights, as they were not rights attaching to a class of shares on any view.192 This meant in that case that the breach of the rights was not enforceable as a breach of the articles, and the affected shareholder could not rely on the articles as an enforceable contract with regard to those rights.193

186 [1970] AC 1099, HL. 187 [1960] Ch 1. 188 [1987] Ch 1 at 17. 189 [1987] Ch 1 at 22. 190 [1987] Ch 1 at 22. 191 [1875] LR 1 Ex D 20. 192 [1987] Ch 1 at 16. 193 On the contractual enforceability of ‘other’ rights contained in the articles, see also Hickman v Kent or Romney Marsh Sheep-Breeder’s Assocn [1915] 1 Ch 881; and Beattie v E&F Beattie Ltd [1938] Ch 708, CA.

189

7.50  Personal Claims

Variation 7.50 The provisions of sections 630–633 of the 2006 Act affect the ability to vary or abrogate class rights, and require compliance with those sections for such variation to be made. Unless the articles include express provision for what will constitute a variation of class rights,194 the question will be determined by the court after considering what is proposed and its effect on the rights concerned. The approach of the courts to what constitutes a variation of class rights has been quite restrictive. A distinction is drawn between a variation affecting the rights themselves and a variation merely affecting the enjoyment of those rights. In White v Bristol Aeroplane Co Ltd,195 the Court of Appeal rejected a claim that class rights were varied because the rights themselves would remain unchanged, even though the enjoyment of the rights and capacity to make them effective would be reduced.196 In both that case and in Re John Smith’s Tadcaster Brewery Co Ltd,197 it was held that a proposed increase in capital by the issue of new shares to holders of only one of the existing classes of share did not constitute a variation of class rights. It is also well established that a reduction in share capital does not of itself necessarily constitute a variation of class rights.198 It would not amount to a variation of class rights unless it involves a variation of the rights attaching to a class of shares, or involves a cancellation of shares or return of capital other than in the manner that would be applicable on a winding up.199

Consent and objection to variation 7.51 Section 630 provides that variation of class rights may be made where consent is obtained in accordance with the provision of the company’s articles permitting such variation or, if there is no such provision, the holders of threequarters in nominal value of the issued shares200 of that class consent in writing, or a special resolution is passed at a separate meeting of the holders of the class of shares affected.201 7.52 Section 633 sets out a procedure by which the holders of not less in aggregate than 15 per cent of the issued shares of the class affected (all of whom must not have voted in favour of the resolution for variation) may apply to the court to have the 194 195 196 197 198

As was the case in Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286, CA. [1953] Ch 65, CA. Per Lord Evershed MR at 74. [1953] Ch 308, CA. See eg the Scottish House of Lords decision of Scottish Insurance Corp Ltd v Wilsons & Clyde Coal Co Ltd [1949] AC 462; and, more recently, House of Fraser plc v ACGE Investments Ltd [1987] AC 387, HL; Re Northern Engineering Industries plc [1994] 2 BCLC 704, CA. 199 Re Northern Engineering Industries plc [1994] 2 BCLC 704, CA, at 706; Re Saltdean Estate Co Ltd [1968] 1 WLR 1844, ChD, at 1849H. 200 Excluding shares held as treasury shares within s 724 of the 2006 Act. 201 When a class meeting is held by direction of the court in connection with the sanctioning of a scheme of arrangement, where there is evidence of impropriety, the court may investigate to ensure that the required statutory majority was achieved by members voting bona fide for the benefit of the class as a whole and not those of individual members only; British American Nickel Corp Ltd v MJ O’Brien Ltd [1927] AC 369; Re Holders Investment Trust [1971] 1 WLR 583; Re Dee Valley Group Plc [2017] EWHC 184 (Ch); Re Imagination Technologies Group Plc (unreported, 2 November 2017). However, such class consent is required under the differently worded section 899 rather than section 630.

190

Rights relating to takeover offers 7.55

variation cancelled. The application must be made within 21 days of the date when consent to the change was given or the relevant resolution passed.202 The application may be brought by one or more shareholders appointed in writing by the objectors to do so on behalf of them all. The company will be the defendant to the application. The court will hear from both the applicants and any other interested parties, including the company itself, and decide whether it is satisfied that the variation would unfairly prejudice those whom the applicant represents. If it is so satisfied, it will disallow the variation; otherwise, it will confirm the variation.203 The court’s decision on the application is final.204

RIGHTS RELATING TO TAKEOVER OFFERS 7.53 Statutory provisions applying to takeover offers205 and applying to the compulsory acquisition of the shares of a dissenting minority were introduced in the Companies Act 1929.206 Provisions potentially enabling dissenting shareholders to compel the purchase of their shares in the event of a takeover were introduced in the Companies Act 1948.207 Rather more detailed provision now appears in the 2006 Act at Part 28, Chapter 3, in particular at sections 976–982 (dissenting holders forced to sell) and 983–985 (offeror forced to purchase). Supplementary provisions dealing with procedural matters are at section 986. The provisions have been said ‘to be calculated to preserve and enhance that necessary balance between possibly conflicting interests and concerns’208 of bidders and of dissenting shareholders.

‘Squeeze-out’ 7.54 Sections 979–982 apply where an offeror has made a takeover offer and has acquired or contracted to acquire at least 90 per cent in value of the shares (and 90 per cent of any voting rights carried by those shares) to which the offer relates, or at least 90 per cent in value of the class of shares (and voting rights) in any class to which the offer relates. The sections set out a detailed procedure by which the offeror may give notice to acquire the remaining shares. Where a notice compliant with the provisions is served by the offeror, it becomes bound to purchase those shares on the terms of the notice. This regime is known as ‘squeeze-out’, as the effect is to force the dissenting minority shareholders to sell their shares to the offeror and thus be forced out of the company.

‘Sell-out’ 7.55 Sections 983–985 make similar provision to enable holders of shares not acquired or contracted to be acquired to give written notice to the offeror requiring the acquisition of the shareholder’s shares in cases where a takeover offer has been 202 203 204 205 206 207 208

Section 633(4) of the 2006 Act. Section 633(5) of the 2006 Act. Section 633(5) of the 2006 Act. Section 974 defines a takeover offer for these purposes. Section 155 of the Companies Act 1929. Section 209 of the Companies Act 1948. Re Greythorn Ltd [2002] 1 BCLC 437, ChD, at [51].

191

7.56  Personal Claims

made and the same 90% thresholds have been met. In this situation, it amounts to a sell-out.209

Shareholders opposing squeeze-out notices 7.56 Section 986 provides for a disgruntled dissenting shareholder, who has received a squeeze-out notice from an offeror under section 979, to apply to the court for an order that the purchase of his shares proceed on different terms to those specified in the notice, or that the compulsory purchase is not to proceed at all. The application is made by a CPR Pt 8 claim form supported by a witness statement. 7.57 On such an application, the burden is on the applicant dissenting shareholder to give a good reason why his shares should not be acquired. In practice, this means that it is necessary to show that the terms of the proposed acquisition of his shares are unfair. This means the scheme ‘has to be shown affirmatively, patently, obviously and convincingly to be unfair’.210 It will be readily apparent that, where an offer has been accepted by at least 90 per cent of his fellow shareholders, it will generally not be easy for the dissenting shareholder to establish such unfairness. The court will start from the view that the scheme in general is fair, as it has been accepted by the vast majority of the relevant shareholders.211 The burden on such an applicant has, unsurprisingly, been described as a heavy one,212 and requires the applicant shareholder to show ‘that he, being the only man in the regiment out of step, is the only man whose views ought to prevail’.213 7.58 If the offeror and the 90 per cent who have accepted the offer are the same, the burden is reduced. The dissenting shareholder may be able to establish that the offeror is not in fact within the true scope of the squeeze-out provisions but, rather, is attempting to use the section for an ulterior purpose, namely to force the minority out of the company.214 However, the burden may not be reduced if there is evidence that the dissenting shareholder had previously agreed to the principle of a sale to a purchaser with whom the 90 per cent were connected.215 7.59 Strict compliance by the offeror with the requirements of section 979 will be required for the offeror to be able to rely on its notice as being effective to ‘squeezeout’ dissenting shareholders.216 Accordingly, dissenting shareholders may be able to challenge the squeeze-out notice on the ground that it does not fully comply with the section, so cannot be relied on to compel them to sell their shares, on the terms offered or at all.

209 However, there is no general principle of EU law under which minority shareholders are protected by an obligation on the dominant shareholder, when acquiring or exercising control of a company, to offer to buy their shares under the same conditions as those agreed when the shareholding conferring or strengthening the control of the dominant shareholder was acquired: Audiolux SA v Groupe Bruxelles Lambert SA (GBL) (C-101/08) [2011] BCC 814, ECJ. 210 Re Sussex Brick Co Ltd [1961] 1 Ch 289, per Vaisey J at 292. 211 Re Hoare & Co Ltd (1933) 150 LT 374, per Maugham J at 375. 212 Per Hoffmann J in Re Lifecare International plc [1990] BCLC 222, ChD, at 224g–224h. 213 Re Sussex Brick Co Ltd [1961] 1 Ch 289, per Vaisey J at 291. 214 Re Bugle Press Ltd [1961] Ch 270, CA, at 287. 215 See Re Charterhouse Capital Ltd [2014] EWHC 1410 (Ch), where the comments of Aspin J at [325] so indicate. 216 Re Chez Nico (Restaurants) Ltd [1992] BCLC 192, ChD.

192

Rights relating to takeover offers 7.61

7.60 Faced with the high hurdle of showing that the terms of an offer already accepted by holders of 90 per cent of the shares are unfair, dissenting shareholders have tended to focus on the offeror’s failure to provide them with full and complete information about either the full terms of the offer or about the company, in each case meaning that the dissenting shareholders have insufficient information to enable them to make an informed decision about the offer.217 This will include complying with applicable regulatory requirements as to disclosure of information, such as the City Code.218 In Re Diamix plc,219 Peter Leaver QC, sitting as a Deputy High Court Judge, reviewed several of the main authorities, and distilled a number of general principles: ‘First, the onus is on the claimants to give a reason why their shares should not be acquired by the defendants …220 Secondly, in order to discharge that onus the claimants have to establish affirmatively that, notwithstanding the view of the majority, the offer is unfair …221 Thirdly, however, caution must be exercised in taking too literally those first two principles …222 … it seems to me that the relationship between the offeror and the target or between shareholders or officers of the offeror and the target may be relevant in deciding whether the offer should be held to be unfair, or may amount to, as Maugham J put it,223 “special circumstances in special cases” …224 Fourthly, and in any event, the court has a discretion whether or not to make an order under s. 430C, that is, either to order that the claimants’ shares should not be acquired at all or by permitting acquisition but on different terms, or by dismissing the application so that the shares are acquired on the terms of the offer.’225 7.61 Exactly what information is required to enable the necessary informed decision to be made will be, to a degree, fact specific. However, some general guidance was provided in Re Diamix plc:226 ‘It is neither necessary nor desirable to attempt to identify what information would enable a shareholder to make an informed decision. Much will depend on the facts of any particular case. However, typically, the information will include details of the offeror company, its most recent accounts showing the assets and liabilities of the company, the profit and loss account and the balance sheet, and an auditor’s 217 For example, Re Evertite Locknuts [1945] Ch 220; Re Chez Nico (Restaurants) Ltd [1992] BCLC 192, ChD; Re Greythorn Ltd [2002] 1 BCLC 437, ChD; Re Diamix plc [2002] EWHC 770 (Ch), [2002] 2 BCLC 123, ChD. 218 Per Browne-Wilkinson VC in Re Chez Nico (Restaurants) Ltd [1992] BCLC 192, ChD, at 209g–209i. The City Code may also be relevant, even where it does not apply, as an indication of good practice: Re Diamix plc [2002] EWHC 770 (Ch), [2002] 2 BCLC 123, ChD, at [34]. See further discussion of the City Code at 4.29–4.34. 219 [2002] EWHC 770 (Ch), [2002] 2 BCLC 123, ChD. 220 At [11]. 221 At [12]. 222 At [15]. 223 In Re Hoare & Co Ltd (1933) 150 LT 374. 224 [2002] EWHC 770 (Ch), [2002] 2 BCLC 123, ChD, at [19]. 225 At [20]. 226 [2002] EWHC 770 (Ch), [2002] 2 BCLC 123 at [35].

193

7.62  Personal Claims

or an accountant’s report. In some cases, the information will include similar information in relation to the target company. That will often be the case where a majority shareholder is acquiring the balance of shares in the target company.’ 7.62 Although the burden on the applicant dissenting shareholder is a heavy one, section 986(5) provides that no order for costs or expenses will be made against an applicant unless: (a) the application was unnecessary, improper or vexatious; (b) there has been unreasonable delay in making the application; or (c) there has been unreasonable conduct on the shareholder’s part in making the application. These provisions were considered by the Court of Appeal in Re Britoil.227 The court overturned the first instance decision of Hoffmann J, and concluded that an unsuccessful application, even if relatively weak, would not be ‘unnecessary, improper or vexatious’ unless it was, or at least approached, amounting to an abuse of process.228 In that case, it was found that the unsuccessful application fell short of that standard, as there was material worthy of serious consideration and investigation by the judge.229

RIGHTS RELATING TO THE REMOVAL OF DIRECTORS 7.63 A company’s articles may make provision for the removal of directors in particular circumstances. Directors may also be removed in accordance with the terms of their service contracts or by reason of relevant breaches of those contracts. Directors may also retire, although there is no maximum age for directors of private companies. A  simple majority of the shareholders also has the statutory power to remove any director. 7.64 Section 168 of the 2006 Act provides that a company may, by ordinary resolution, remove a director, regardless of any provision in any agreement between the director and the company. The company must give special notice of the resolution to do so.230 The requirement for special notice means that at least 28 days’ notice of the intention to move the resolution must be given.231 The company must give notice of the intended resolution to any director who may be removed by it.232 Any such director is entitled to be heard on the resolution at the meeting.233 Alternatively, such a director may make representations in writing, which the company is then obliged to either circulate to the members or, if the representations are received too late for such circulation, ensure that they are read out at the meeting.234 Exercise of the power to remove a director by special resolution does not affect any right which 227 [1990] BCC 70, CA. 228 Per Nourse LJ at 75E–75F. 229 Hoffmann J also considered the question of costs in Re Lifecare International plc [1990] BCLC 222, ChD, at 225i–226c. 230 Section 168(2) of the 2006 Act. 231 Section 312(1) of the 2006 Act. 232 Section 169(1) of the 2006 Act. 233 Section 169(2) of the 2006 Act. 234 Section 169(3), (4) of the 2006 Act.

194

Non-statutory rights and limitations on rights: shareholders’ agreements 7.67

the director would otherwise have to compensation or damages by reason of the removal,235 and the statutory power is without prejudice to any other right or power to remove the director, such as may be contained in the articles or in a shareholders’ agreement.236 The statutory power to remove directors overrides any provision in the articles restricting such a right to remove a director. 7.65 Australian authority237 indicates that the power may be used by shareholders to remove all present directors of a company, at least if the form of resolution provides that it only takes effect when a new director has been appointed. It may also be possible to pass an effective resolution to remove a number, or even all, of the directors by such a resolution, with the effect that the number in office falls below the statutory minimum,238 so long as the required number is swiftly restored.239 7.66 In the case of private companies, it is possible to make the statutory power to remove directors by ordinary resolution of little practical value, by including in the articles provision for weighted voting rights on such a resolution.240

NON-STATUTORY RIGHTS AND LIMITATIONS ON RIGHTS: SHAREHOLDERS’ AGREEMENTS 7.67 A  shareholders’ agreement241 is a contract between all or some of the members of a company and usually (but not necessarily) the company itself. The rights given to members by such an agreement are therefore ordinarily contractual rights, governed by the law of contract.242 The general principle of privity of contract applies. The shareholders’ agreement will ordinarily only be enforceable by and against parties to the agreement and will not be capable of amendment without the agreement of all parties to it, unless the agreement itself provides for its amendment in some other way.243 However, where a shareholders’ agreement is made between all of the members and includes any provision which, in the absence of such agreement, would have required the passing of a resolution of the company, that agreement becomes part of the constitution of the company.244 It is therefore binding on those who subsequently become members, even though they were not parties to it,245 and it is required to be forwarded to the registrar of companies within 15 days of it being made.246 Failure to comply is a criminal offence committed by the company and its

235 236 237 238 239

Section 168(5) of the 2006 Act. Section 168(5) of the 2006 Act. Taylor v Mcnamara [1974] 1 NSWLR 164, SC (NSW). The statutory minimum is one for a private company and two for a public company; s 154. See the Australian decision DUT Holdings Ltd v Bigshop.co.au Ltd (2002) 42 ACSR 378, SC (NSW). 240 Bushell v Faith [1970] AC 1099. 241 See also 3.18-3.21. 242 A helpful analysis of the authorities relating to the construction of shareholders’ agreements, articles of association and commercial agreements was set out by Rimer LJ in McKillen v Misland (Cyprus) Ltd [2012] EWCA Civ 179, [2012] BCC 575, CA, at [43]–[55]. 243 This may only be feasible where the shareholders’ agreement does not become part of the constitution; see 3.19 and 3.21. 244 Section 29(1). 245 Section 33(1). 246 Section 30.

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7.68  Personal Claims

officers.247 A copy is also required to be provided to all members of the company.248 There is no authority specifically addressing the point, but it seems unlikely that the failure to register the agreement would render it unenforceable as between the parties to it, although it would not bind non-parties.249 7.68 The effect of those shareholders’ agreements which do not become part of the constitution of the company on the rights of non-parties is considered separately below. 7.69 Shareholders may enter into shareholders’ agreements for a variety of reasons. The common ones are: (a)

to protect rights of minority shareholders conferred by the articles, for instance to give a minority shareholder a right of approval or power of veto over certain matters, which may include certain alterations to the articles; (b) to grant to shareholders rights which would not be enforceable if contained in the articles, typically personal rights, such as a right to payment for services provided, which the shareholder might provide to the company or to a third party at its direction or a right to a special earn-out on the sale of the company to a third party; (c) to make provision for particular relationships between shareholders which are not directly concerned with the company’s administration. A further potential advantage of shareholders’ agreements over the articles is that their provisions may be kept confidential where they do not form part of the constitution of the company,250 whereas the contents of the articles are necessarily a matter of public record. 7.70 Shareholders’ agreements frequently provide that, where there is a conflict between any provision of the agreement and the articles of association of the company, the agreement prevails. Such a provision will generally be effective as between the parties to the agreement. Consistently with the principle of freedom of contract, the courts will not ordinarily interfere with any private contractual rights and obligations freely made between shareholders.251 Where the shareholders’ agreement becomes part of the constitution of the company, it will of course be binding on all of the members, whether or not they are parties to it; and, where it conflicts with the company’s articles, it will have the effect of altering them. There is an important distinction to be drawn between the shareholders agreeing as a matter of contract how they will and will not exercise their voting rights, and the company itself agreeing how it will or will not exercise its statutory powers. Whilst the courts will ordinarily uphold an agreement between the shareholders as to how they will or will not act, they will not enforce against the company an agreement by it to limit its exercise of its statutory powers. This was the crucial issue in Russell v Northern Bank Development Corp Ltd,252 where the House of Lords agreed that a provision in a shareholders’ 247 Section 30(2). 248 Section 32. 249 It is, however, prudent to provide for registration and any consequences as between the parties of failure to register in the agreement itself. 250 Although they will often do so. See further 3.22. 251 See eg Welton v Saffery [1897] AC 299, HL, per Lord Davey at 331; and Russell v Northern Bank Development Corporation Ltd [1992] 1 WLR 588, HL (Northern Ireland), per Lord Jauncey at 594H–595A. 252 [1992] 1 WLR 588, HL (Northern Ireland).

196

Non-statutory rights and limitations on rights: shareholders’ agreements 7.71

agreement to which the company was a party, and which purported to prevent the company from issuing new shares, was ineffective to so fetter the statutory power of the company, but upheld the agreement as between the shareholders whereby they agreed not to exercise their votes to cause the company to so act. As, in that case, the provision purporting to restrict the company’s exercise of its statutory power was severable, the court proceeded to enforce the private agreement to restrict the exercise of voting rights made between the shareholders.253 7.71 The duties owed between contracting shareholders will not usually extend beyond those contractual duties contained in the shareholders’ agreement itself. Allegations of fiduciary duties arising from shareholders’ agreements, governing matters such as the exercise by members of voting rights, have been unsuccessful.254 Even where the shareholders’ agreement purports to create an agency relationship, attempts at the imposition of fiduciary duties onto contractual ones have failed. Patten J in Halton International Inc (Holdings) Sarl v Guernroy Ltd255 rejected a claim that fiduciary duties were owed where an examination of the terms of the agreement did not indicate that the agent had agreed to act in the interests of the principal. He cited with approval the comments of Mason J in the High Court of Australia in Hospital Products Ltd v United States Surgical Corp:256 ‘In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.’ In other words, in the absence of a term of the agreement by which the agent undertook the duty of loyalty generally required for a fiduciary relationship to exist,257 fiduciary duties were not owed, only contractual ones.258 Where the effect of the shareholders’ agreement is to give rise to a joint venture, the position may be different.259 Such cases will be fact specific. There are fairly recent cases where a fiduciary relationship has been found on the facts,260 and where a fiduciary relationship has been rejected,261 253 Per Lord Jauncey at 594G–595A. 254 See also 3.2. 255 [2005] EWHC 1968 (Ch), [2006] 1 BCLC 78, ChD, affirmed by the Court of Appeal [2006] EWCA Civ 801, where this point was not really analysed. 256 (1984) 156 CLR 81 at 97. See, for the comparable position in partnerships, F&C Alternative Investments (Holdings) Ltd v Barthelemy [2012] 3 WLR 10, ChD. 257 Classically described by Millett LJ in Bristol & West Building Society v Mothew [1998] Ch 1 at 18A–18C. 258 The circumstances in which fiduciary duties may arise and their nature and content were considered in the context of an LLP agreement by Sales J in F&C Alternative Investment Holdings Ltd v Barthelemy [2011] EWHC 1731 (Ch), [2012] 3 WLR 10, ChD at [221]–[254], where there is a fairly detailed review of the authorities as they stood at July 2011. 259 See eg Attorney-General for Hong Kong v Reid [1994] 1 AC 324, PC (New Zealand); Tang Man Sit v Capacious Investments [1996] AC 514, PC (Hong Kong). 260 For example, by Etherton J in Murad v Al Saraj [2004] EWHC 1235 (Ch) and by Morgan J in Ross River Ltd v Waveley Commercial Ltd [2012] EWHC 81 (Ch) approved by the Court of Appeal at [2013] EWCA Civ 910, [2014] 1 BCLC 545, CA. 261 For example, Cullen Investments Ltd v Brown [2017] EWHC 1586 (Ch); Baturina v Chistyakov [2017] EWHC 1049 (Comm); Miller v Stonier [2015] EWHC 2796 (Ch).

197

7.72  Personal Claims

despite the shareholders’ agreement containing express obligations of good faith imposed on the parties’ conduct towards one another.262 7.72 As might be expected, the remedies available for breach of a shareholders’ agreement are the usual contractual ones263 of damages and, in appropriate cases where the necessary features of the contract and the surrounding circumstances are present, injunction and/or an order for specific performance. A company cannot, by being party to a shareholders’ agreement (or otherwise), bind itself not to alter its articles of association, but that does not prevent its liability for breach of contract if it does so,264 although the only available remedy against it for such a breach will be damages.

Third parties 7.73 Where a shareholders’ agreement affects the constitution of the company, members who were or are not party to it will be able to rely on it and may be subject to it.265 Where a shareholders’ agreement is not part of the constitution of the company, non-parties will not be directly subject to it. However, shareholders’ agreements frequently provide that a member of the company who is a party to the agreement may not complete the transfer of their shares until the transferee has signed up to the shareholders’ agreement. Even where it is not part of the constitution, such a shareholders’ agreement may in practice affect transferees or putative transferees of shares who are not parties to the agreement. In such a case, a transferee of shares who was aware of the terms of the shareholders’ agreement may be liable for the tort of interference with contractual relations where he acted with the intention of his own economic advantage and knowing that, in doing so, he would be likely to induce a breach of contract.266 In such circumstances, the transferee would be likely to be liable as a result of acting in a way that amounts to a knowing violation of a legal right.267 However, a transferee unaware of a shareholders’ agreement which has not become part of the constitution of the company will not be bound by it.268

262 McKillen v Misland (Cyprus) Investments Ltd [2012] EWHC 521 (Ch), per David Richards J; Ross River Ltd v Cambridge City Football Club Ltd [2007] EWHC 2115 (Ch), [2008] 1 All ER 1004, ChD. 263 Which may be available against the company, if a party, as well as the shareholder parties. See eg the decision in Lloyd v Popely [2000] 1 BCLC 19, ChD, per Peter Lever QC, upheld by the Court of Appeal on 15 November 2000 (unreported). 264 Punt v Symons & Co Ltd [1903] 2 Ch 506. 265 Section 33 of the 2006 Act. 266 However, making out such liability is not straightforward and will be governed by the principles set out by the House of Lords in OBG Ltd v Allan [2008] 1 AC 1, HL, which are far from easy to apply in many of the factual circumstances where they may be relevant. 267 Quinn v Leathem [1901] AC 495, per Lord Macnaghten at 510. 268 See eg Blindley Heath Investments Ltd v Bass [2015] EWCA Civ 1023, [2015] Ch 389.

198

Chapter 8

Reflective Loss

Contents Essence of the ‘no reflective loss’ rule Prudential Marex Gore Wood and its treatment in Marex Gore Wood after Marex The fate of Giles v Rhind, Gardner v Parker and Perry v Day Marex – conclusions Developments after Marex

8.1 8.5 8.8 8.11 8.14 8.16 8.22 8.23

Onus of proof

8.28

Practical application Claim vesting in company only Claims vesting in both company and shareholder Claims vesting in shareholder to the exclusion of the company

8.29 8.30 8.34 8.38

ESSENCE OF THE ‘NO REFLECTIVE LOSS’ RULE 8.1 Many of shareholders’ personal claims1 will be directed at recovering loss or damages suffered at the hands of third parties, including directors. In English law the aim of the court in awarding ordinary compensatory damages is to put the claimant in the same position it would have been in if it had not sustained the wrong;2 this has come to mean that the claimant’s loss is limited to that which was foreseeable, caused by the wrong and not excluded from recovery by public or social policy.3 However, a shareholder – in that capacity – is usually not permitted to recover any loss or damage if it overlaps with, or is reflective of, any loss suffered by the company arising out of the wrongdoing. If a duty owed to a shareholder is breached, the matter is fairly simple: the shareholder may claim for his loss. If a duty owed to both the company and the shareholders is breached, a resultant loss may theoretically be suffered by both company and shareholders – in the latter instance because of the loss of share value which was diminished by the loss suffered by the company to the 1 For which see Chapter 7. 2 See Livingstone v Rawyards Coal Co (1880) 5 App Cas 25 at 39. 3 Absolute Lofts South West London Ltd v Artisan Home Improvements Ltd [2015] EWHC 2608 (IPEC), [2017] ECDR 6; in reliance on Gerber Garment Technology Inc v Lectra Systems Ltd [1997] RPC 443, CA, at 452. And see as regards foreseeability Hadley v Baxendale (1854) 9 Ex 341. For an example where foreseeability was not established, see Energenics Holdings Pte Ltd, Neuftec Ltd v Hazarika [2014] EWHC 1845 (Ch), at [57]–[59].

199

8.2  Reflective Loss

extent that the company’s loss is reflected in the drop of share value. It is especially under these circumstances where the no reflective loss rule operated: having to face two claimants, the tort-feasor stood exposed to up to double the loss suffered by the company. Breach of a duty owed to a company only, should, in principle, allow only the company to recover its loss. However, such loss does not only affect the company’s balance sheet, but will usually have, to some extent, the effect of a diminution of its share price or share value, something shareholders will experience in their pocket.4 Since a company’s assets are its own and not the shareholders’, recovery of the asset in the form of a right of recovery (or chose in action) has to be pursued by the company itself for its own benefit. The economic interests of shareholders will be served by the company’s replenishment of its assets on a successful recovery, by benefiting from one or more of an improved share price or value, the payment of dividends, or the declaration of enhanced dividends.5 Ordinarily, shareholders are not entitled to recover the company’s loss. Any diminution of the share price or value suffered by shareholders should therefore in principle be corrected by a successful recovery by the company. 8.2 Over time, case law deviated from the no reflective loss principle by allowing shareholders to claim for loss suffered by the company, inter alia in Giles v Rhind,6 Gardner v Parker7 and Perry v Day8. The correction and a return to fundamental principles of company law arose in Marex Financial Ltd v Sevilleja9 (‘Marex’), where the Supreme Court reconsidered the proper basis upon which the no reflective loss rule applies. An enlarged panel of the Supreme Court, convened with the objective of examining the rationale for the reflective loss principle and coherence of the law in this area,10 held by a narrow majority that the reflective loss rule does not have its justification in avoiding double recovery (and resultant hardship for a defendant) but because shareholders are adequately served by the application of existing fundamental principles of company law. First and foremost the rule in Foss v Harbottle11 – that the only person who can sue in respect of a wrong done to a corporation is the corporation itself – was restored to its rightful place. What if the company refuses or refrains from recovering the loss and thereby thwarts Foss v Harbottle to the detriment of shareholders? The answer for shareholders lies in other established fundamental company law principles: •

Disgruntled shareholders may, if they are able to garner majority support, by democratic process replace the board of directors with a board favourable to

4

Since shares are not the property of a company but the property of shareholders, a diminution of share value may be detrimental to the shareholders only. 5 The position may, of course, differ markedly from one company to another. Recovery of, say, £1m for a smallish domestic quasi-partnership company is likely to have a direct effect on the quasipartners’ share value. A similar size recovery for a UK bank will most likely not have any effect whatsoever on its share price or value. 6 [2003] Ch 618, CA. 7 [2005] BCC 46, CA. 8 [2005] 2 BCLC 405. 9 [2020] UKSC 31, delivered on 15 July 2020. It was followed in Nectrus Ltd v UCP PLC [2021] EWCA Civ 57, Broadcasting Investment Group Ltd v Smith [2021] EWCA Civ 912 and Primeo Fund (In Official Liquidation) v Bank of Bermuda (Cayman) Ltd [2021] UKPC 22. 10 Marex Financial Ltd v Sevilleja [2020] UKSC 31, as stated by Lord Sales at [115]. 11 See Chapter 5.

200

Essence of the ‘no reflective loss’ rule 8.5

•

instituting legal proceedings for the recovery of the company’s loss and so, indirectly, achieve a recovery of shareholders’ losses. If the aggrieved shareholder is unable to garner sufficient support to change decisions of the board, it may have recourse to a derivative action,12 section 994 proceedings,13 or winding up.14

8.3 There are two related primary issues when the applicability of the reflective loss rule is considered: (a) where the loss fell; and (b) to whom the duty which was breached was owed. Far from being discouraged from claiming their loss (even when it amounts to a diminution of share value) because of fear of the ‘no reflective loss’ principle, shareholders should be alert to the possibilities of recovering loss for their own benefit. The question really is whether there are any circumstances under which shareholders – in that capacity – may have personal claims distinct from the company’s claims against directors or other professional advisers of the company.15 This possibility has effectively been ruled out by Marex. However, the rule against the recovery of reflective loss, does not extend to claimants other than a shareholder or, for that matter, to a shareholder who might simultaneously be a creditor and claiming in the latter capacity. The rule is one of principle. No discretion is allowed once the facts call for its application.16 8.4 Marex heralded a sea-change regarding the law applicable to reflective loss situations. It: •

approved of Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)17 (‘Prudential’) and dicta of Lord Bingham of Cornhill in Johnson v Gore Wood & Co18 (‘Gore Wood’); • disapproved of certain dicta of Lord Millett in Gore Wood; • overruled Giles v Rhind,19 Gardner v Parker20 and Perry v Day.21

Prudential 8.5 The claimants were minority shareholders of the first defendant (N). The second defendant, B, was, at the material time, the chairman and chief executive of N. The third defendant, L, was a non-executive director and vice-chairman of N. B and L were directors of the fourth defendant, TPG. TPG had acquired the assets of S. S’s shares were beneficially owned by B and L personally. S held shares in both TPG and N. TPG encountered serious financial difficulties. Without the knowledge and consent of N’s board, B and L agreed on behalf of N to buy TPG’s holdings in two companies, for which N paid £215,950. Subsequently, B recommended to the board of N that N should purchase most of TPG’s assets. At a board meeting of N, 12 See Chapter 6. 13 See Chapter 9. 14 See Chapter 11. 15 For which, see Chapter 7. 16 Johnson v Gore Wood [2002] 2 AC 1, HL, at 62E–62G. 17 [1982] Ch 204, CA. 18 [2002] 2 AC 1, 62–67, HL(E). 19 [2003] Ch 618, CA. 20 [2005] BCC 46, CA. 21 [2005] 2 BCLC 405.

201

8.6  Reflective Loss

all the directors save one (M) agreed to accept the recommendation in principle. B  managed to conceal crucial information from N’s accountants who were in the process of undertaking a due diligence exercise. The proposal was put before extraordinary general meetings of both affected companies for approval. N’s board recommended the transaction to its shareholders. The circular conveying the recommendation falsely referred to the payment to TPG as an advance payment for the purchase of TPG’s assets. All the members of a committee of the board approved the letter, except M. The meeting was postponed as a result of pressure exerted by M, the claimants and other institutional investors, to await a report from an investment (merchant) bank. Before the report was received, the meeting reconvened, and passed a resolution approving the purchase of TPG’s assets by N. 8.6 In the High Court,22 Vinelott J  held that B  and L  had, in order to benefit TPG, conspired to injure N  directly and its shareholders indirectly, causing the shareholders loss because N had acquired TPG’s assets at a price much higher than they should have paid for them. He further held that the interests of justice required that the claimants, as minority shareholders in N, should be permitted to prosecute an action on behalf of N, ie a derivative, as opposed to a personal, action. The Court of Appeal questioned the claimant’s motive for instituting a personal action,23 and held that the personal claim was misconceived since shareholders cannot recover reflective losses:24 ‘In our judgment the personal claim is misconceived. It is of course correct, as the judge found and Mr Bartlett did not dispute, that he and Mr Laughton, in advising the shareholders to support the resolution approving the agreement, owed the shareholders a duty to give such advice in good faith and not fraudulently. It is also correct that if directors convene a meeting on the basis of a fraudulent circular, a shareholder will have a right of action to recover any loss which he has been personally caused in consequence of the fraudulent circular; this might include the expense of attending the meeting.25 But what he cannot do is to recover damages merely because the company in which he is interested has suffered damage. He cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a “loss” is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss. His only “loss” is through the company, in the diminution in the value of the net assets of the company, in which he has (say) a 3 per cent shareholding. The claimant’s shares are merely a right of participation in the company on the terms of the articles of association.26 The shares themselves, his 22 23 24 25

26

Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1981] Ch 257. [1982] Ch 204, CA, at 223H–224D. At 222G–223B. Although authority of long standing, and although probably appropriate on the facts of the matter, it cannot be accepted as a general proposition that the potential loss for a shareholder is necessarily limited to the costs of attending an abortive general meeting where a resolution is passed based on fraudulent or negligent misrepresentation. It is certain to be fact-based in each instance. This statement is controversial. It tends to disregard the economic value of the bundle of rights of which a share is comprised of. See, for the classic definition, Borland’s Trustee v Steel Brothers & Co Ltd [1901] 1 Ch 279 at 288 and 1.6; see also Grays Timber Products Ltd v Revenue and Customs Commissioners [2010] 1 WLR 497, SC, at [27] and its discussion at 3.21.

202

Essence of the ‘no reflective loss’ rule 8.7

right of participation, are not directly affected by the wrongdoing. The claimant still holds all the shares as his own absolutely unencumbered property. The deceit practised upon the claimant does not affect the shares; it merely enables the defendant to rob the company.’ Having introduced the analogy of a company having as its sole asset a cash box containing £100,000, the Court of Appeal explained the consequences as follows:27 ‘The company has an issued share capital of 100 shares, of which 99 are held by the claimant. The claimant holds the key of the cash box. The defendant by a fraudulent misrepresentation persuades the claimant to part with the key. The defendant then robs the company of all its money. The effect of the fraud and the subsequent robbery, assuming that the defendant successfully flees with his plunder, is (i) to denude the company of all its assets; and (ii) to reduce the sale value of the claimant’s shares from a figure approaching £100,000 to nil. There are two wrongs, the deceit practised on the claimant and the robbery of the company. But the deceit on the claimant causes the claimant no loss which is separate and distinct from the loss to the company. The deceit was merely a step in the robbery. The claimant obviously cannot recover personally some £100,000 damages in addition to the £100,000 damages recoverable by the company.’ 8.7 The cash was never an asset of the 99% shareholder. The cash was the property of the company at all times. Once stolen, it was for the company to recover the loss by pursuing its chose in action which vested only in it. In this manner the creditors, as well as all the shareholders, would have been sufficiently protected. It is understandable that, on the basis of this elementary example, the share value of the company diminished quite substantially, and it is equally understandable that the shareholder’s loss measured the diminution of their share value, and was likely to have been restored by the recovery of the cash by the company. It should be noted that in Prudential a breach of two separate duties of care occurred, each on a different occasion, with different consequences. The first is that, in their management of N, B and L breached their fiduciary duty to the company by devising a fraud on N. Most of the actions were prepared and executed before the shareholders were misled, as they subsequently were, by the contents of the circular. It is the loss arising from this cause of action which was the company’s loss and in respect of which the shareholders’ diminution of share value was merely reflective. The second occasion arose from their duty towards the shareholders, which was breached by misrepresenting the position to them in the circular in order to complete the fraud. That was but a cog in a bigger fraud machine.28 The latter cause of action was not pursued. In sum, Prudential sets the benchmark for the ‘no reflective loss’ rule: a shareholder has no claim for loss or damage if that loss or damage is merely reflective of the loss suffered by the company. Logically, the company ought to be the claimant; once recovery is made and the capital of the company restored, shareholders should in theory be put in the financial position they would have been had the tort not been committed.

27 At 223C–223E. 28 At 223D.

203

8.8  Reflective Loss

Marex The facts 8.8 The claimant obtained judgment against two companies incorporated in the British Virgin Islands for sums due under a contract. The value of the companies’ assets were found to be significantly less than the judgment debt and the companies subsequently went into liquidation. The claimant alleged that, after the draft judgment had been released, the defendant, a resident of Dubai who was the ultimate beneficial owner and controller of the companies, had dishonestly stripped the companies of their wealth and moved it overseas and out of the claimant’s reach in order to prevent the judgment from being enforced. It also alleged that the companies’ liquidator, funded by the defendant, had taken no steps to recover the companies’ losses. The claimant issued proceedings against the defendant seeking damages in tort for inducing or procuring the violation of its rights under the judgment and intentionally causing it loss by unlawful means. It was given permission to serve the claim form on the defendant out of the jurisdiction. The defendant applied to set aside service of the claim form on the ground, inter alia, that since it remained open to the companies’ liquidator to pursue any claim against the defendant for any sums unlawfully removed, the rule against reflective loss barred the claimant from making the same claim.

Consideration of Prudential by the majority in Marex 8.9

The principle involved is soon enough identified by Lord Reed PSC:29

‘The rule in Prudential, as I shall refer to it, is distinct from the general principle of the law of damages that double recovery should be avoided. In particular, one consequence of the rule is that, where it applies, the shareholder’s claim against the wrongdoer is excluded even if the company does not pursue its own right of action, and there is accordingly no risk of double recovery. That aspect of the rule is understandable on the basis of the reasoning in Prudential, since its rationale is that, where it applies, the shareholder does not suffer a loss which is recognised in law as having an existence distinct from the company’s loss. On that basis, a claim by the shareholder is barred by the principle of company law known as the rule in Foss v Harbottle (1843) 2 Hare 461: a rule which (put shortly) states that the only person who can seek relief for an injury done to a company, where the company has a cause of action, is the company itself.’ [Emphasis added] Having explained why avoidance of double recovery cannot justify the rule in Prudential, the judgment continues to point out the other remedies available in company law:30 ‘That conclusion is also supported by another point. What if the company fails to pursue a right of action which, in the opinion of a shareholder, ought to be pursued, or compromises its claim for an amount which, in the opinion of a shareholder, is less than its full value? If that opinion is shared by a majority of the shareholders, then the company’s articles will normally enable them to direct the company’s course of action by passing a suitable resolution at a general meeting. Even if 29 30

Marex at [10], but equally important is the preceding paragraph [9]. At [34].

204

Essence of the ‘no reflective loss’ rule 8.10

the shareholder finds himself in a minority, he has a variety of remedies available to him, including the bringing of a derivative action on the company’s behalf, equitable relief from unfairly prejudicial conduct, or a winding up on the just and equitable ground, if (put shortly) those in control of the company are abusing their powers. But what if the company’s powers of management are not being abused, and a majority of shareholders approve of the company’s decision not to pursue the claim, or its decision to enter into a settlement? Should the minority shareholder not then be able to pursue a personal action?’ Lord Reed continued to point out that the answer according to Prudential is twofold: first, the rule in Foss v Harbottle would be subverted if the shareholder could pursue a personal action and: ‘… The second aspect of the rule is that “Where the alleged wrong is a transaction which might be made binding on the corporation and on all its members by a simple majority of the members, no individual member of the corporation is allowed to maintain an action in respect of that matter because, if the majority confirms the transaction, cadit quaestio [the question falls]; or, if the majority challenges the transaction, there is no valid reason why the company should not sue.” This second aspect of the rule reflects the fact that the management of a company’s affairs is entrusted to the decision-making organs established by its articles of association, subject to the exceptional remedies mentioned in para 34 above. When a shareholder invests in a company, he therefore entrusts the company ultimately, a majority of the members voting in a general meeting with the right to decide how his investment is to be protected. As the court stated in Prudential at p 224: “When the shareholder acquires a share he accepts the fact that the value of his investment follows the fortunes of the company and that he can only exercise his influence over the fortunes of the company by the exercise of his voting rights in general meeting.”’31 In a concurring judgment, Lord Hodge DPSC32 emphasised the importance of Prudential as follows:33 ‘But the creation of a bright line legal rule, as the Court of Appeal did in the Prudential case, is principled. That judgment has stood for almost 39 years; it was upheld by the House of Lords in Johnson v Gore Wood & Co [2002] 2 AC 1; and it has been adopted in other common law countries. We should not depart from it now.’

Consideration of Prudential by the minority in Marex 8.10 The whole of the enlarged court in Marex was critical of the development of the law since Prudential and the steady widening of the scope of the bar on claims on grounds of reflective loss. The minority concurred as to the result but for different reasons.34 They, if anything, went further than the majority in rowing 31 32 33 34

At [35]. At [95]–[109]. At [109]. Per Lord Sales at [116].

205

8.11  Reflective Loss

back the restrictions on claims and also rejected a general ‘bright line legal rule’ that a shareholder cannot bring a claim in respect of loss which he has suffered in that capacity, which is the consequence of loss sustained by the company, in respect of which the company has a cause of action against the same wrongdoer. They considered that a rule that in such a case the law does not recognise the shareholder as having suffered any loss is contrary to ordinary common law principles and could lead to injustice. The minority would permit a claim by a shareholder who can show that they have suffered loss which is different from any loss suffered by the company. They favoured an approach of working through each case on its particular facts in order to achieve practical justice.35 The minority view would have both widened the scope of potential claims by shareholders and created new areas of uncertainty as to whether such losses would be recoverable in particular cases. However, the decision of the majority to narrow the scope of claims by shareholders barred as being for reflective loss to those claims identified in Prudential and impose a ‘bright line legal rule’, has clarified and significantly simplified the reflective loss principle.

Gore Wood and its treatment in Marex 8.11 Gore Wood addressed the position where a wrongdoer owed a duty to both a company and one of its shareholders and breached that duty.36 The claimant, a businessman, conducted his affairs through a number of companies, including W, in which he had held all but two of the issued shares. He had instructed the defendants, a firm of solicitors, on behalf of W, to act for W  in connection with a proposed purchase of land, which it had planned to develop. In the past, the defendants had also acted not only on the claimant’s personal behalf, but also on behalf of other companies controlled by him. W had an option to purchase the land, and the defendant was instructed to serve a notice exercising the option. They purported to do so. However, service of the notice was followed by a dispute as to its validity, which resulted in an order for specific performance against the vendor. By the time the conveyance was complete, W had suffered substantial loss because of the costs of the litigation (in which the vendor had been legally aided); its inability to recover damages and costs from the vendor; the collapse of the property market; and, lastly, interest charges that it had incurred. In January 1991, W commenced proceedings to recover the loss suffered as a result of the professional negligence of the defendant. Before the action came to trial, W’s solicitors notified the defendant’s solicitors that the claimant also had a personal claim against the defendant, arising from the same facts, which he would pursue in due course. Subsequently, the claimant’s solicitor made it clear to the defendant’s solicitor that the personal claim would follow on conclusion of the company’s claim. W’s proceedings were eventually compromised by the payment of a substantial proportion of the sum claimed by it.

35 36

At [167]. See also Novatrust Ltd v Kea Investments Ltd [2014] EWHC 4061 (Ch) at [55]; Norcross v Georgallides [2015] EWHC 1290 (Comm) at [61]–[65].

206

Essence of the ‘no reflective loss’ rule 8.13

The basis of the claimant’s personal claim was that, since he had retained the defendant solicitors to advise and act for him personally as well as for W, they owed him as well as W a duty of care in contract and tort. 8.12 The defendants applied to strike out parts of the claim and raised the question of whether the damages claimed were recoverable as a matter of principle. The House of Lords held that the claimant was entitled to recover any loss that he had personally suffered which was not merely a reflection of the loss suffered by W. His claims in respect of the diminution in value of his pension and of his majority shareholding in W constituted reflective loss and could accordingly not be sustained.37 A number of other heads of claim survived the striking out application, as there were parts of the claimant’s loss unaffected by the ‘no reflective loss’ rule.38 They were: (a) sums which the claimant invested in certain companies on the advice of the defendant, and lost; (b) the cost of personal borrowings, both as regards loan capital and interest arising out of the obligation to borrow at punitive rates of interest to fund his personal outgoings and those of his businesses; (c) that part of the claim which related to enhancement of the value of his pension as if the contributions had been duly made; (d) the loss of 12.5% of his shareholding in W which he had transferred to a lender as security for a loan, which he was unable to release because of his lack of funds caused by the defendant’s breach of duty; and (e) certain additional tax liabilities. 8.13 The viewpoints expressed by Lord Bingham and Lord Millett respectively in Gore Wood were examined in Marex. Lord Bingham stated the governing principles of reflective loss as being the following:39 ‘(1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder’s shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company’s assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss… (2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding… (3) Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover 37 At 36H. 38 At 36F–37A. 39 At 35E–36B. It is an oft-repeated quotation: see Baturina v Chistyakov [2014] EWCA Civ 1134, [2014] 2 CLC 209, CA, at [72]; BPC Hotels Ltd v Brooke North (A Firm), Brooke North LLP [2014] EWHC 2367 (TCC) at [37].

207

8.14  Reflective Loss

the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other.’ Lord Millett, in essence, expressed the view that a shareholder’s shares are his property and not that of the company; and, if the shareholder suffers a discrete loss in respect thereof, it is not open to the company to pursue such a claim.40 The ‘no reflective loss’ rule extends to the loss of dividends and all other payments which the shareholder might have obtained from the company as a shareholder if it had not been deprived of its funds.41 8.14 As regards paragraph (1) of Lord Bingham’s summary,42 Lord Reed PSC commented in Marex43 that: ‘… the first sentence is a statement of the rule in Foss v Harbottle. The second sentence encapsulates the reasoning in Prudential, and explains why, in the circumstances described, a shareholder who is suing in that capacity and no other cannot bring a claim consistently with the rule in Foss v Harbottle. The third sentence should not be understood as limiting the rule in Prudential to cases where there is an exact correlation between the company’s loss and the fall in share value. As was explained at paras 32-38 above, it is possible to envisage cases where there is not a precise correlation, and where recovery by the company might not therefore fully replenish the value of its shares, but where the rule in Prudential would nevertheless apply.’ Paragraph (2) of Lord Bingham’s summary44 was next considered and approved.45 Where the company has no cause of action of its own, there can be no concurrent claim and the principle in Prudential is accordingly not engaged. As regards paragraph (3) of the summary,46 Marex stated:47 ‘Lord Bingham’s proposition (3), stating (put shortly) that a shareholder can sue to recover a loss which is separate and distinct from that suffered by the company, reflects the fact that the shareholder’s loss, where it does not consist merely of a fall in the value of his shareholding, or in the distributions which he receives by virtue of his shareholding, does not fall within the ambit of the rule in Prudential. This proposition also makes it clear that the rule renders certain heads of loss irrecoverable, rather than barring a cause of action as such.’ 8.15 •

Lord Millett’s theses were rejected in the following terms: It is not correct that a share represents a proportionate part of the company’s net assets, and if these are depleted the diminution in its assets will be reflected in the diminution in the value of the shares.48

40

At 61G–62D. This important point is well illustrated in Heron v Lord Grade [1983] BCLC 244, CA (for a discussion of which, see 8.36), and Pilmer v Duke Group Ltd [2001] 2 BCLC 773; [2001] 5 LRC 417 (HCA). 41 At 66H. 42 See above 8.13. 43 At [42]. 44 See 8.13. 45 At [43]. 46 See 8.13. 47 At [47]. 48 At [49], applying Macaura v Northern Assurance Co Ltd [1925] AC 619, HL (NI).

208

Essence of the ‘no reflective loss’ rule 8.16

•

•

• •

•

The principle that double recovery should be avoided is not in itself a satisfactory explanation of the rule in Prudential: ‘By treating the avoidance of double recovery – a principle of wider application – as sufficient to justify the decision in Prudential, Lord Millett paved the way for the expansion of the supposed reflective loss principle beyond the narrow ambit of the rule in Prudential.’49 Hence the rejection of this notion in Marex. ‘One problem with reasoning based on the avoidance of double recovery is that the principle is one of the law of damages. It does not deny the existence of the shareholder’s loss, as the rule in Prudential does, where the loss falls within its ambit, but on the contrary is premised on the recognition of that loss.’50 It is an unsustainable approach.51 Certain policy considerations relied upon by Lord Millett were also rejected.52 ‘The most serious difficulty with the approach favoured by Lord Millett is that the possibility of double recovery can arise where concurrent claims exist at the instance of companies and of persons who have suffered loss otherwise than as shareholders. As will be explained, Lord Millett’s approach has been interpreted in subsequent cases as extending to such persons the same categorical exclusion of claims as he applied to shareholders. That is not the position on the approach adopted in Prudential: the loss suffered by a creditor, for example, when he cannot recover a debt owed to him by a company because of losses which it has incurred, stands in a different relationship to the company’s loss from the loss sustained by a shareholder whose shares have fallen in value, and raises different issues.’53 And, finally on this topic, Lord Reed PSC concludes:54 ‘In summary, Johnson gives authoritative support to the decision in Prudential that a shareholder is normally unable to sue for the recovery of a diminution in the value of his shareholding or in the distributions he receives as a shareholder, which flows from loss suffered by the company, for the recovery of which it has a cause of action, even if it has declined or failed to make good that loss. Lord Bingham’s speech is consistent with the reasoning in Prudential. On the other hand, the reasoning in the other speeches, especially that of Lord Millett, departs from the reasoning in Prudential and should not be followed.’

It is notable that the minority in Marex also considered that the reasoning in Johnson v Gore-Wood should not be followed.55

The fate of Giles v Rhind, Gardner v Parker and Perry v Day 8.16 Lord Reed PSC analysed these judgments , concluding that they constitute bad law and should no longer be followed. Before returning to Lord Reed’s speech, we briefly refer to the gist of these cases.

49 50 51 52 53 54 55

At [51]. At [52]. At [53]–[57]. At [58]–[59]. At [60] At [67] Per Lord Sales at [194], albeit that their reasoning differed from that of Lord Reed as to the correct analysis.

209

8.17  Reflective Loss

8.17 In Giles v Rhind56 the Court of Appeal held that, in a situation where the wrongdoer has made it impossible for the company to pursue a cause of action belonging to it, the shareholder may step in and pursue the claim personally.57 The breach by the wrongdoer in this instance (a co-director and shareholder) resulted in the complete failure of the company’s business. Following the loss of a key contract, the company went into administrative receivership. The company’s action against the wrongdoer had to be discontinued by reason of the company’s lack of funds to pursue the litigation. Thereafter, the claimant, a director and shareholder of the company, claimed loss of future remuneration which he would have earned as director of the company, as well as for the loss occasioned by the diminution in the value of his shareholding.58 8.18 The Court of Appeal sought to steer between two apparent principles: on the one hand, it would be inequitable to allow the wrongdoer to get away scot-free under circumstances where he had made it impossible for the company to recover loss from him (from which recovery the claimant would have benefited indirectly); on the other hand, a shareholder should ordinarily not be permitted to pursue a claim belonging to the company in his own right and for the benefit of his own pocket. In Giles the claimant successfully demonstrated that there were some losses suffered by him personally, distinct from the loss suffered by the company, which he would have been able to recover in parallel proceedings, even if the company had pursued its claim for damages.59 Waller LJ pointed out that the Court of Appeal in Johnson v Gore Wood had struck out the claimant’s claim in respect of the diminished value of his shareholding, because the company had the opportunity fully to restore its financial position.60 The conclusion of the Court of Appeal was that, on the analogy of a shareholder being able to claim if the company does not have a cause of action to recover that loss, a shareholder should similarly be able to do so in a situation where the wrongdoer has disabled the company from pursuing that cause of action.61 8.19 In Marex Lord Reed held that ‘the fact that a wrongdoer has unmeritoriously avoided his liability in damages to A is not a reason for requiring him to pay damages to B’ and ‘[i]f the shareholder has not suffered a recoverable loss, he has no claim for

56 57

58

59 60 61

[2002] EWCA Civ 1428, [2003] Ch 618, CA. Per Waller LJ at [34], and per Chadwick LJ at [66]. See also Perry v Day [2005] 2 BCLC 405, ChD. The principle is also applicable to claims under the European Convention on Human Rights: GJ v Luxembourg (2003) 36 EHRR 40. As much as it may be relevant post Brexit, the latter judgment should follow the same fate as Giles v Rhind. At [16]. The heads of loss were (1) arrears of remuneration, holiday pay, expenses, pension contributions and loan interest; (2) loss of future remuneration, pension contributions and health insurance, death in service and car benefit for three years from 18 April 1994; (3) loss of the nominal value of convertible loan stock (alternative loss of value of the shares in SHF to which Mr Giles would have become entitled if he had exercised his right of conversion in April 1997); (4) loss of interest on the loan stock between April 1994 and April 1997; and (5) loss of value of his existing holding of 19,900 ordinary shares; less (6) certain payments received from SHF. At [35]. It followed that the shareholders’ diminished share value would have been restored on restoration of the company’s financial position. At [35]. See also Stevenson v Southwark LBC [2011] EWHC 108 (QB), following Giles. However, the case failed because there was no proof of malfeasance on the part of the defendant local authority’s officials.

210

Essence of the ‘no reflective loss’ rule 8.20

damages, regardless of whether, or why, the company may have failed to pursue its own cause of action.’62 Accordingly, Giles v Rhind was overruled by the Supreme Court in Marex and is no longer good authority. The same applies to Perry v Day.63 8.20 Lord Reed, with whom the majority agreed in Marex, held that the reasoning in Gardner v Parker64 was also erroneous.65 In Gardner v Parker the Court of Appeal reconsidered the principle established in Giles v Rhind. The claimant was the minority shareholder in BDC, with the defendant the majority shareholder and sole director. The defendant was also the sole director of Scoutvale, in which BDC had its largest investments. The defendant procured the transfer of shares worth £5.5 million held by Scoutvale to another company at a clear undervalue of £400,000. BDC went into receivership. The receivers assigned all claims by BDC in connection with the transfer of the shares to the claimant. Mr Gardner’s claim was accordingly based on this assignment, and he sought to recover damages which BDC was entitled to recover from the defendant.66 The questions for determination were whether the defendant, when acting on behalf of Scoutvale in transferring the assets, acted in breach of his fiduciary duty to BDC (as a shareholder of Scoutvale) and, further, whether the damages which BDC as shareholder in Scoutvale had suffered were merely reflective of Scoutvale’s losses. The court held that, in this instance, a duty of care was owed by the aberrant director to both the company, Scoutvale, and to the shareholder, BDC. The sources of the duty were different: his liability to the shareholder was attributable to the fact that he was a director of the shareholder, whereas his liability to the company was attributable to the fact that he was a director of the company. Because of the existence of this duty towards the shareholder, the breach of that duty was the first step in avoiding the implementation of the reflective loss rule and granting the shareholder an independent cause of action. The existence of the duty, however, was not enough, because (a) the losses claimed to have been suffered by BDC were losses suffered in its capacity as shareholder in, or creditor of, Scoutvale; and (b) the damages claimed against P, being based on the losses suffered by BDC as a result of the transfer of the shares at a substantial undervalue, were damages which would have been made good if Scoutvale had enforced its rights against P. The shareholder’s loss was accordingly merely reflective of Scoutvale’s loss. It was contended that the defendant, by joining in the 1995 settlement, effectively disabled Scoutvale from bringing proceedings for recovery of its loss and that, as a result, BDC was entitled to do so. The submission was rejected. A  company deliberately deciding on a course of action of bringing an end to proceedings (or refraining from commencing with proceedings) cannot be a justification for evading

62 63 64 65 66

At [70] and, as regards Gardner v Parker the same applies: see [74]. At [71] as regards Perry v Day [2005] 2 BCLC 405, ChD. [2004] EWCA Civ 781, [2005] BCC 46, CA. The minority in Marex also declined to follow Gardner v Parker, again, based on slightly different reasoning, per Lord Sales at [209]–[211]. See, for the validity of such an assignment, Norglen Ltd v Reeds Rains Prudential Ltd [1999] 2 AC 1, HL.

211

8.21  Reflective Loss

the ‘no reflective loss’ principle. The fact that Scoutvale was in administrative receivership did not, without more, mean that it was impecunious. 8.21 Lord Reed’s analysis of Gardner v Parker firstly points out that the finding that the reflective loss principle applied where the wrongdoing took the form of a breach of fiduciary duty rather than the breach of a duty arising under the common law, is uncontentious and still good law.67 On the question whether the reflective loss principle applied to a claim arising from a creditor’s inability to recover a debt owed to it by a company in which the creditor was a shareholder, Lord Reed states: ‘76 As was explained in paras 65-66 above, on the facts of Johnson the claim in respect of lost pension contributions was a claim for a loss of distributions, brought by Mr Johnson in the capacity of a shareholder. It therefore fell within the scope of the reasoning in Prudential, and Lord Bingham’s proposition (1).68 The claim brought by the creditor-shareholder in Gardner v Parker did not fall within the scope of that reasoning, or Lord Bingham’s proposition. It should not have been barred as reflective loss. The court might have had to consider the avoidance of double recovery, applying the general principles discussed in paras 2-7 above, if that issue had been raised; but it was not.’69

Marex – conclusions 8.22 Lord Reed and the majority’s re-iteration of the approach in Prudential70 means that: ‘it is necessary to distinguish between (1) cases where claims are brought by a shareholder in respect of loss which he has suffered in that capacity, in the form of a diminution in share value or in distributions, which is the consequence of loss sustained by the company, in respect of which the company has a cause of action against the same wrongdoer, and (2) cases where claims are brought, whether by a shareholder or by anyone else, in respect of loss which does not fall within that description, but where the company has a right of action in respect of substantially the same loss.’71 In cases of the first kind, the shareholder cannot bring a claim in respect of the companies’ loss as they have no legal or equitable interest in the assets of the company and the rule in Foss v Harbottle means that only the company has the necessary cause of action.72 The key point is that the shareholder has not suffered a loss which is regarded by the law as being separate and distinct from the company’s loss, and therefore has no claim to recover it.73 Accordingly, in such cases the shareholder’s loss is reflective loss which it cannot recover personally. In cases of the second kind these features do not apply.74 There remains a risk of double recovery which needs 67 At [73]. 68 See 8.13. 69 At [76]. See also [77]. 70 At [39]. 71 At [79]. The second proposition made in this passage, has been contextualised by the facts and findings in Primeo Fund (In Official Liquidation) v Bank of Bermuda (Cayman) Ltd [2021] UKPC 22, [2021] 8 WLUK 55, delivered on 9 August 2021, discussed at 8.23–8.24. 72 At [80]. 73 At [83]. 74 At [84].

212

Essence of the ‘no reflective loss’ rule 8.24

to be avoided. However, there are other means of avoiding double recovery which will depend upon the particular circumstances of the case and the shareholder is not prohibited from bringing a claim in respect of such loss by reason of the rule barring the bringing of claims for reflective loss.75 Lord Reed finally concluded:76 ‘I would therefore reaffirm the approach adopted in Prudential [1982] Ch 204 and by Lord Bingham in Johnson [2002] 2 AC 1, and depart from the reasoning in the other speeches in that case, and in later authorities, so far as it is inconsistent with the foregoing. It follows that Giles v Rhind [2003] Ch  618, Perry v Day [2005] 2  BCLC  405 and Gardner v Parker [2004] 2  BCLC  554 were wrongly decided. The rule in Prudential is limited to claims by shareholders that, as a result of actionable loss suffered by their company, the value of their shares, or of the distributions they receive as shareholders, has been diminished. Other claims, whether by shareholders or anyone else, should be dealt with in the ordinary way.’

Developments after Marex 8.23 Despite the definitive principles expressed in Marex, specific factual situations in subsequent judgments caused renewed efforts to delineate those principles. In Nectrus Ltd v UCP Plc77 Flaux LJ, sitting as a single judge in an application for leave to appeal, the core issue was the time when the reflective loss rule should be applied: at the date the loss occurred or the date when the claim was made? Flaux LJ preferred the latter.78 However, that view was firmly rejected in Primeo Fund (In Official Liquidation) v Bank of Bermuda (Cayman) Ltd79 (‘Primeo’). The Board, inter alia comprising of Lords Reed and Hodge, held that such an approach would mean ‘that the shareholder can sell its shareholding and then seek to vindicate its own causes of action against the wrongdoer; but this would make the reflective loss rule easy to circumvent and would subvert its intended effect, since the wrongdoer would be wary of settling with the company for fear that, by selling its shares, a shareholder and prospective claimant could free itself to pursue its own claims …’80 8.24 Primeo dealt with claims arising in Bermuda by investors who suffered enormous losses in the infamous Madoff saga. Primeo was a mutual investment fund in which investors were allotted shares. The respondents are professional service providers. In May 2007, Primeo disinvested from the Madoff scheme (‘BLMIS’) and transferred funds to an entity by the name of Herald. The issue was whether Primeo could claim against the respondents for losses which it says it suffered by making direct investments into BLMIS. It was common cause that the money was immediately misappropriated by the Madoff faction upon receipt thereof. In December 2008, the Ponzi scheme operated by Madoff and BLMIS collapsed. Primeo had suffered heavy 75 76 77 78 79 80

At [87]. At [89]. [2021] EWCA Civ 57, [2021] 1 WLUK 165, delivered on 21 January 2021. At [43]. This meant that on the facts of that case, the claim was by an ex-shareholder, which Flaux LJ considered to be outside the scope of the rule against recovery of reflective loss. [2021] UKPC 22, [2021] 8 WLUK 55, at [61]. At [62](b). Accordingly, it was expressly stated that Nectrus was wrongly decided at [61].

213

8.25  Reflective Loss

losses as did Herald and another intermediary, Alpha. Damages for negligence are claimed from the respondents. Primeo’s claims for damages were rejected in the court below on the no reflective loss principle: Primeo’s loss was not separate and distinct from the losses claimed, or capable of being claimed, by Herald and Alpha. If the latter were successful, Primeo would have been paid in full.81 The Board undertook a comprehensive review of the principles in Marex,82 inter alia paragraphs [39] and [79] thereof,83 and concluded:84 ‘In the Board’s judgment, on proper application of the reasoning of Lord Reed and Lord Hodge in Marex, the reflective loss rule has no application to bar Primeo from claiming in respect of the losses it suffered each time it made a direct investment in BLMIS, nor from claiming in respect of the losses it maintains it suffered by loss of the chance to redeem its BLMIS investments down to the time of the Herald Transfer. In the Board’s view, those losses were not suffered by Primeo “in its capacity as shareholder” of Herald. So far as is relevant, at the time Primeo suffered such losses it was not a shareholder in Herald …’ The loss suffered by Primeo was not in its capacity as a shareholder in Herald:85 it was not a shareholder at that time and hence the rule of company law which requires the no reflective loss principle to operate, found no application. ‘The issue is one of the characterisation of the loss, which depends upon its status (that is, whether it is recognised or not by the law) at the time it is suffered.’86 The principle that the reflective loss rule applies only to exclude a claim by a shareholder where what is in issue is a wrong committed by a person who is a wrongdoer both as against the shareholder and as against the company, was confirmed.87 It does not prevent a claim by a shareholder to enforce rights which had already accrued to them before they became a shareholder in the company.88 8.25 In Broadcasting Investment Group Ltd v Smith89 the Court of Appeal investigated the relationship between the reflective loss rule and the provisions of the Contracts (Rights of Third Parties) Act 199990 in respect of a contract that benefited a company, but to which the company was not a party. Having highlighted the salient features of Marex,91 the court pointed out that a right was acquired to enforce the agreement by virtue of section 1(1)(b) of the 1999 Act. It was also not in 81 See [39]. 82 See Primeo at [47] and further. 83 See discussion above at 8.22. 84 At [53]. See also [68]. 85 At [54]. 86 At [56]. 87 At [76]. 88 At [67]. 89 [2021] EWCA Civ 912, [2021] 6 WLUK 254 dated 18 June 2021 and hence preceding Primeo. 90 Sections 1, 4 and 7 of the Act are relevant. Section 1, in short, a person who is not a party to a contract may, in his own right, enforce a term of the contract if the terms purport to confer a benefit on him. Section 4 determines that section 1 does not affect any right of the promisee to enforce any term of the contract. Section 7(1) determines that section 1 does not affect any right or remedy of a third party that exists or is available apart from the Act. The court also considered at [62], but declined to decide, whether the rule against reflective loss applies to claims for specific performance, whilst expressing an initial and tentative view that it does. 91 At [32]–[42].

214

Practical application 8.29

dispute that the appellant, which became a shareholder in that party after the latter was incorporated pursuant to an agreement, was a contractual promisee under the agreement. It was held that the right conferred on a third party under section 1 is additional to any right the contractual promisee has to enforce the contract.92 The court held that the appellant’s claims under the agreement were not barred by the rule in Prudential – they are expressly protected by section 4 of the 1999 Act.93 8.26 In the previous edition we concluded that there was no clear authority as to whether the rule against reflective loss applies to claims brought by shareholders in their capacity as creditors of the company, and the position was arguable either way. Marex resolves this issue: the no reflective loss principle applies to a shareholder only. It is now clear that the reflective loss rule does not apply in respect of ordinary creditors.94 It remains the law that a secured creditor’s position, such as a debenture holder, is fundamentally distinct from that of a shareholder, and reflective loss does not come into play.95 8.27 It follows that one should carefully consider reliance on any judgment preMarex. So, for instance, Webster v Sanderson Solicitors96 falls with Giles v Rhind.

ONUS OF PROOF 8.28 It is not for the shareholder to prove that his loss does not fall foul of the ‘no reflective loss’ rule, but for a defendant to establish that the company has a claim and that the loss claimable by the company will overlap in whole or in part with the alleged loss suffered by the shareholder.97 A shareholder will of course be well advised not to wait for objections from the defendant, but to ensure from the outset, as far as is possible, that the claim lies in his hands for loss that he has suffered separately from any loss the company may have suffered.

PRACTICAL APPLICATION 8.29 Having determined the parameters for the ambit and scope of the rule, its practical application requires analysis, particularly so as to divine those instances where a shareholder may justifiably pursue personal claims.

92 93 94

95

96 97

At [47]. At [54]. The question was left open whether the rule against reflective loss could ever apply to a claim brought by a floating charge holder who had caused his charge to crystallise in a strike out case where the judge considered that it probably did not apply: International Leisure Ltd v First National Trustee Co UK Ltd [2012] EWHC 1971 (Ch), [2013] Ch 346, at [48]–[49]. International Leisure Ltd v First National Trustee Co UK Ltd [2012] EWHC 1971 (Ch), [2013] Ch 346, at [36]–[38]; Fortress Value Recovery Fund I LLC v Blue Skye Special Opportunities Fund LP [2013] EWHC 14 (Comm) at [81]; Erste Group Bank AG, London Branch v JSC ‘VMZ Red October’ [2015] EWCA Civ 379, [2015] 1 CLC 706, CA, [96]–[99]. [2009] EWCA Civ 830, [2009] 2 BCLC 542, CA (Lord Clarke of Stone-cum-Ebony MR, Arden and Lloyd LJJ). Shaker v Al-Bedrawi [2002] EWCA Civ 1452, [2003] Ch 350, CA, at [83].

215

8.30  Reflective Loss

Claim vesting in company only 8.30 The leading case is Marex, restoring Prudential to its proper place.98 It should be kept in mind that, in Prudential, a separate cause of action, with an admittedly unexciting quantum, was available to shareholders, but was not pursued by them.99 Under circumstances of an undisputed misappropriation of assets of the company, Stein v Blake (No 2)100 followed Prudential and held that the misappropriated assets were only recoverable by the company. 8.31 In Ellis v Property Leeds (UK) Ltd,101 it was held, on the facts, that there was no basis on which it could be said that a surveyor and valuer, who had caused loss to a company as a result of a negligent valuation, had a duty of care towards the shareholders of the companies on behalf of which the valuation was given. The shareholders’ claims were accordingly struck out. It is possible that this finding may in future be challenged on the analogous basis of surveyors who are instructed by a bank to value a property, owing a concomitant duty of care to the prospective purchaser/lender, despite the fact that the terms of the valuation may unequivocally state that it is intended only for the purposes of the bank deciding whether to lend and not for the purchaser to rely on.102 Similarly, in a claim against an investment bank, efforts by a shareholder to argue that he was in fact the client in person, failed on the facts. Unless the shareholder could persuade the court that a duty of care was owed to him directly, the loss was exclusively that of the company and concomitantly the only cause of action vested in the company.103 8.32 The influence of a judgment by the New Zealand Court of Appeal in Christensen v Scott,104 on the application of the ‘no reflective loss’ rule in England and Wales, was fortunately short-lived.105 The New Zealand court upheld a claim by shareholders for loss which, on the face of it, flew in the face of the ‘no reflective loss’ rule. A company carried on the business of potato-farming on tenanted land. The landlord defaulted on a mortgage of the land. The mortgagee entered into possession and exercised its power of sale. The company was refused access to the standing 98 See 8.5–8.7. Cf Sivagnanam v Barclays Bank Plc [2015] EWHC 3985 (Comm) at [16]. 99 The costs wasted by shareholders attending a meeting were postulated as the shareholders’ loss. 100 [1998] 1 All ER 724, CA; compare the commentary in Johnson v Gore Wood [2002] 2 AC 1, HL, at 63G–63H. See also Gaetano v Obertor [2009] EWHC 2653 (Ch) at [41], [42]; Rawnsley v Weatherall Green & Smith North Ltd [2009] EWHC 2482 (Ch), [2010] 1 BCLC 658, ChD; Keisner v Terrus Group Ltd [2006] EWHC 2765 (Ch), [2007] 1 BCLC 303, ChD, at [126]; Barclays Bank v Kufner [2008] EWHC 2319 (Comm), [2009] 1 All ER 1 (Comm). 101 [2002] EWCA Civ 32, [2002] 2 BCLC 175, CA. 102 Smith v Eric S Bush [1990] 1 AC 831, HL. This line of argument was ostensibly not raised in Ellis. The scope of this duty was curtailed in Scullion v Bank of Scotland Plc (t/a Colleys) [2011] 1 WLR 3212, CA. 103 Diamantides v JP Morgan [2005] EWCA Civ 1612. Cf the similar situation in Sivagnanam v Barclays Bank Plc [2015] EWHC 3985 (Comm). See also 4.6 and, for a comprehensive discussion of the duty of care owed by an investment banker to shareholders, Johan du Toit SC, ‘In the wake of the Facebook flotation: do Investment Banks owe a duty of care to Shareholders of the Companies they are advising?’ (2012) JIBFL 417. 104 [1996] 1 NZLR 273, CA. 105 It was relied on in inter alia Gerber Garment Technology Inc v Lectra Systems Ltd [1997] RPC 443, CA. It failed to attract a judicial following in Australia: see Thomas v D’Arcy [2005] QCA 68 at [21].

216

Practical application 8.35

crop and was, as a result, unable to harvest it, with disastrous financial consequences. The company went into liquidation and receivership. The receiver and the liquidator brought proceedings for negligence against the company’s professional advisers. The action was settled. The shareholders, who had guaranteed the company’s debts, unsuccessfully opposed the settlement. They brought their own proceedings, alleging that the defendants owed duties of care to them personally, claiming damages representing the diminution in the value of their shareholdings arising from the defendants’ negligence. The judge held that such damages reflected the company’s loss and could not be recovered by the shareholders. The Court of Appeal of New Zealand allowed the shareholders’ appeal. In light of Marex, the judge was correct and the Court of Appeal wrong. 8.33 For purposes of establishing standing under Articles 6 and 13 of the European Convention on Human Rights and of Article 1 of Protocol No 1, shareholders were held not to have been ‘victims’ on the basis that their claim, based on a deprivation of property rights, was reflective of the loss suffered by the company. The company was the only appropriate claimant.106 This position was confirmed in Bank Mellat v HM Treasury:107 ‘In my view the general principle applied by the Strasbourg court is clear. Save in exceptional circumstances, it is the company and not its shareholders who have the status and standing as a victim to bring the claim for the loss sustained by the company; the principle established by the Agrotexim case is very clear. This view is the same as that reached by Flaux J in this case and by Neuberger J  in Humberclyde Finance Group Ltd v Hicks (unreported)108 14  November 2001, para 45. As this is the clear principle there is no basis for contending that Bank Mellat is entitled to recover as a shareholder for the loss sustained by PIB, simply because it has other claims which confer on it victim status. PIB’s loss is recoverable by PIB and no one else.’

Claims vesting in both company and shareholder 8.34 In Walker v Stones,109 the Court of Appeal considered a claim by the beneficiaries of a trust who were severely prejudiced as a result of the dissipation of all the trust assets by a trustee. It was held that, where a defendant’s conduct had breached some legal duty owed to the claimant personally, and had caused the claimant to suffer a personal loss separate and distinct from any loss occasioned to any corporate body in which the claimant might be financially interested, the mere fact that the defendant’s conduct might also have given rise to a cause of action at the suit of that body would not deprive the claimant of its cause of action. 8.35 The infamous demise of Barings Bank offers another instance of a claim by a shareholder co-existing with a claim by the company, because of duties simultaneously owed to both.110 The claimant was the English parent company of 106 107 108 109

Agrotexim v Greece (1996) 21 EHRR 250. [2016] EWCA Civ 452, [2017] QB 67, CA at [28]. A report indeed appears at [2001] All ER (D) 202 (Nov). [2001] QB 902, CA (albeit not finding favour with the Court of Appeal in Gardner v Parker [2004] EWCA Civ 781, [2004] 2 BCLC 554, CA, at [44], [48]). 110 Barings plc v Coopers & Lybrand [1997] 1 BCLC 427, CA (Leggatt, Swinton Thomas and Mummery LJJ).

217

8.36  Reflective Loss

a banking group through BSL, an indirect subsidiary incorporated in the Cayman Islands. BSL’s indirect subsidiary, BFS, carried out futures trading for the group on the Singapore futures exchange. The defendant, a firm of accountants, was responsible for the audit of the group and, accordingly, for the supply of information to the holding company for purposes of approving group financial statements. It failed to detect serious irregularities in BFS, leading to the collapse of Barings. That is where the separate duty of care arose: the defendant knew that their audit of subsidiaries was required, so that the directors of Barings could comply with their obligation to provide accounts which showed a true and fair view of the financial affairs of the group. Specific facts were pleaded in support of the claim that there was an independent and relevant duty of care owed by the defendant to Barings, which was separate from any duty owed to BFS as statutory auditors.111 The court held that Barings (as shareholder of BFS) had a right of action independent of BFS. BFS did have a right of action itself: there was no legal principle that a holding company was unable to recover damages for loss in the value of its subsidiaries, resulting directly from a breach of duty owed to it, as distinct from a duty owed (or not owed, as the case may be) to the subsidiaries.112 Another distinguishing feature is that it was not a claim by the shareholders of Barings against the accountants for loss in the value of their shares resulting from breach of duty owed by the accountants to BFS, nor was it a claim by Barings against the accountants for loss of value in their interest in the group resulting from a breach of duty owed by the accountants to BFS. When, in subsequent proceedings between the same parties, the point came up for consideration in a strike-out application before Evans-Lombe J, it was held that the claims would have failed due to a lack of certain essential averments, but also on the basis of the application of the reflective loss rule as the loss would have been made good if recovered by the subsidiary.113 8.36 In Heron International v Lord Grade,114 Lawton LJ, delivering the judgment of the court, envisaged the possibility of shareholders claiming loss for breach of fiduciary duty by directors owed to shareholders, as a result of which the shareholders had been deprived of the opportunity to realise their shares to greater advantage.115 In the course of a contested takeover bid, the directors of the target company, who owned a majority of the company’s voting shares, were alleged, in breach of their duties both to the company and to its shareholders, to have accepted proposals which would reduce the value of the company’s assets and hence of its share values and induced the shareholders to accept the lower of two rival offers. The Court of Appeal granted the shareholders injunctive relief. It observed that the decision of the directors, if implemented, would cause loss in two directions. First, the company would suffer loss to the extent that the value of its assets would be depreciated. That loss would be borne exclusively by the company. It was not a 111 This was an application regarding the validity of service on the accountants outside the jurisdiction. The test at that stage was simply whether Barings has established a good arguable case. 112 In Johnson v Gore Wood, Lord Millett disagreed (at 65D) with the contention by Leggatt LJ that there was no legal principle which debarred a holding company from recovering damages for loss in the value of its subsidiaries resulting directly from the breach of a duty owed to the holding company as distinct from a duty owed to the subsidiaries. See also Webster v Sandersons Solicitors [2009] EWCA Civ 830, [2009] 2 BCLC 542, CA. 113 Barings plc v Coopers & Lybrand (No 4) [2002] 2 BCLC 364, ChD. 114 [1983] BCLC 244, CA. 115 At [4.2]–[4.5].

218

Practical application 8.38

loss in respect of which the shareholders could recover, even if the market value of their shares fell in consequence. Second, there would be a loss to the pockets of the shareholders because they were deprived of the opportunity of accepting the higher offer. That loss would be suffered exclusively by the shareholders. It was not a loss to the coffers of the company, which would remain totally unaffected. If, as a result of the decision of the board which was impugned, the takeover went through and the entire shareholding in the company became vested in one bidder at a lower price than was available from the other, the recovery of damages by the company would not compensate the former shareholders for their loss. Only a direct action by those shareholders in their own right, and not as a right of the company, could provide the necessary compensation.116 There was, accordingly, one act of wrongdoing by the directors, simultaneously breaching two separate duties of care, with no loss suffered by the respective parties being reflective of the loss suffered by the other. 8.37 In Day v Cook,117 Arden LJ had no hesitation in recognising the principle that a duty of care may be owed to both the company and the shareholder, but may not avail the shareholder if his loss is merely a reflection of the loss suffered by the company:118 ‘It is not simply the case that double recovery will not be allowed, so that, for instance if the company’s claim is not pursued or there is some defence to the company’s claim, the shareholder can pursue his claim. The company’s claim, if it exists, will always trump that of the shareholder.’ The court is accordingly not allowed discretion, not even in an owner-managed company. As a result, only loss relating to a loan, which can be described as a personal loan between the parties, remained to be pursued as a personal claim.119

Claims vesting in shareholder to the exclusion of the company 8.38 In Lee v Sheard,120 one of two directors/shareholders in a typical quasipartnership company was injured in a motor vehicle collision and could no longer carry out his duties. He was the company’s income earner.121 As a result of his indisposition, the company’s turnover fell sharply, resulting in diminished earnings by the directors. This is an instance where the company indeed suffered a loss, but did not have a cause of action to recover that loss from the wrongdoer. There was no breach of a duty owed to the company. The claimant’s personal claim was accordingly granted.122 116 See Johnson v Gore Wood [2002] 2 AC 1, HL, at 64. 117 [2001] EWCA Civ 592, [2002] 1 BCLC 1, CA. Cf Kazakhstan Kagazy Plc v Zhunus [2014] EWCA Civ 381, [2014] 1 CLC, CA, 451. 118 At [38]. 119 Arden LJ’s findings that duties of care were owed to both the company and the claimant, and that the claims could not survive the ‘no reflective loss’ principle, at [69], were not shared by the majority of the court: Tuckey LJ at [93], and Ward LJ at [157]. 120 [1956] 1 QB 192, CA. 121 The other director ran the back-office and was not an income-earner. 122 Contentions such as those found in the judgment of George Fischer (Great Britain) Ltd v MultiConstruction Ltd (see the discussion at 8.41), to the effect that Lee v Sheard and Prudential are irreconcilable, cannot be supported. In Lee v Sheard, there was only one claim by the director, although both the company and the director suffered loss. In Prudential, the company and the shareholders suffered loss but only the company was able to claim.

219

8.39  Reflective Loss

8.39 A seemingly misplaced reliance was put by a defendant on the ‘no reflective loss’ rule in Pearce v European Reinsurance.123 The defendant was a two-man quasipartnership company. Pearce was given notice by the other director and shareholder of the termination of his membership in accordance with the terms of the company’s constitution. The prescribed process involved an accountants’ valuation of the claimant’s shares. It resulted in a valuation of £10,400. The claimant contended that their true value was some £350,000. One of the items of loss claimed by him from the accountants (in a claim alleging their negligence in performing the valuation) was the difference between these two figures. The accountants, in a rather convoluted attempt, sought to rely on the ‘no reflective loss’ principle by contending that what was actually sought was the diminution in value of the shares as a result of subsequent events. Short shrift was made of this contention: if the accountants had performed their duties properly, the claimant’s allegation is that his shares would have been transferred at the higher (proper) value. Therein was his loss. It was not a loss reflective of any loss whatsoever suffered by the company. 8.40 In Dhillon v Siddiqui,124 the claimant, who held all but one of the shares in his very profitable company, sought compensation from his accountants for allegedly negligently advising him personally regarding tax-effective investments. The advice could not be complete without looking at ways and means of dealing with the company’s large profits and the manner in which the claimant could benefit from the application of the profits. The ‘no reflective loss’ rule did not prevent the claimant from pursuing his claims. The defendant did not owe the company a duty of care.125

Company suffering loss but shareholder having cause of action126 8.41 A recurring factual situation involves a breach of a duty owed to a holding company (the shareholder), but with the loss located in a subsidiary company. The facts in George Fischer (Great Britain) Ltd v Multi-Construction Ltd127 demonstrate the problem: the contractual rights of the holding company (and hence of the shareholder) were breached, but the losses were suffered in the hands of the holding company’s subsidiaries, which in turn did not have contractual privity with the counterparty to the contract. The defendant had contracted to design and construct a warehouse and distribution centre for the claimant (the holding company), together with the supply of certain specialist equipment. The design of the equipment was irreparably defective. The defendant admitted liability. The sole issue for determination at the trial before an official referee, and on appeal, was the assessment of the claimant’s damages. The damages included increased costs of the operation of the warehouse and loss of sales. A  wholly owned subsidiary of the claimant, GF Sales, occupied the warehouse and bought goods from two other wholly owned subsidiaries of the claimant (GF  Castings and GF  Plastics). The reduced turnover of GF  Sales thus affected the volume of the sales generated by GF  Castings and GF  Plastics. All three subsidiaries therefore suffered losses of trading profits. The 123 124 125 126

[2005] EWHC 1493 (Ch), [2005] 2 BCLC 366, ChD. [2008] EWHC 2020 (Ch). At [74]. See the discussion of the judgments under this heading in Marex [43]–[46], confirming our analysis in previous editions. 127 [1995] 1 BCLC 260, CA.

220

Practical application 8.42

claimant’s contention that it had suffered indirect loss, in the sense that the value of its shares in its three subsidiaries was diminished by the contractual damages suffered by the latter, was upheld. The Court of Appeal approached the matter on the basis that the issue was not whether the shareholder claimant had a right of action at all, but rather, what heads of damages were recoverable by a party who had a right of action for breach of contract. The court distinguished Prudential on two bases: first, that Prudential dealt with a situation where the company was willing to pursue the matter and that it was unnecessary for the shareholders to have instituted action;128 and, second, that Prudential did not deal with heads of damages recoverable by a party with a right of action for breach of contract. 8.42 Nevertheless, in Barings plc (in administration) v Coopers & Lybrand (a Firm)129 the Court of Appeal confirmed the absence of a legal principle that a holding company was unable to recover damages for loss in the value of its subsidiaries resulting directly from a breach of duty owed to it, as distinct from a duty owed (or not owed, as the case may be) to the subsidiaries. In the same vein, in Gerber Garment Technology Inc v Lectra Systems Ltd130 a holding company was held to have had an enforceable claim where, on the face of it, the loss was suffered by its subsidiaries. The claimant patentees were part of a group of companies of which the ultimate parent was Gerber Scientific Inc. Included in the group were two wholly owned subsidiaries of the patentees, Gerber Garment Technology SA of Belgium and Gerber Garment Technology Ltd of the United Kingdom. The latter two companies were distributors of the patented machinery; they implicitly included limited non-exclusive licences in relation to the patented goods.131 A substantial portion of the loss for which the judge awarded compensation to the patentees was borne, in the first instance, not by them but by the two subsidiaries. The court was unanimous in holding that, in law, the parent of a wholly owned subsidiary can recover damages in respect of the parent’s loss by reason of misfortune that has fallen on the subsidiary. This conclusion was dependent (a) on the fact that the subsidiary had no cause of action against the wrongdoer, and (b) on the assumption that the parent did have a cause of action.132 The defendant appealed against an award of damages to the claimant for infringement of their patents. Having referred in detail to Prudential, Hobhouse LJ continued:133 ‘It is worthwhile at this stage to make two observations about the position of a shareholder in a company which has suffered a loss as a result of the actionable fault of a third party. As the judgment of the Court of Appeal implies, the shareholder will ordinarily have difficulty in proving that he has suffered a loss caused by the 128 The subsidiaries could not rely on breach of contract because they were not the counterparties to the contract. They were unable to claim, so that the rule against double recovery was not offended. 129 [1997] 1 BCLC 427, CA (Leggatt, Swinton Thomas and Mummery LJJ). 130 [1997] RPC 443, CA (Staughton, Hobhouse and Hutchison LJJ). 131 Per Hobhouse LJ at 462. 132 Hobhouse LJ (at 473) relied strongly on Lea v Sheard and considered Christensen v Scott as good authority, and added (at 475) that there is no reason to suppose that this case would have been differently decided in England. That, of course, can no longer be accepted as good authority, in view of the rejection of those principles in Gore Wood at 65H–66F. Christensen v Scott was also not followed in Australia: see Thomas v D’Arcy [2005] QCA 68. 133 At 471. Staughton LJ emphasised the necessity of the parent/shareholder having a cause of action, although he differed on the computation of the loss. Hutchison LJ (at 481) agreed with Hobhouse LJ.

221

8.43  Reflective Loss

fault of the third party. If the company is able to recover from the third party, the company will be indemnified and the value of the shareholder’s shares will not have been reduced. If the company chooses not to exercise its remedy, the loss to the shareholder will have been caused by the decision of the company not to pursue its remedy, not by the defendant’s fault … Secondly, both the rule in Foss v Harbottle and the discussion and application of it in the Prudential case postulate that the company has a cause of action against the third party. If the company has no cause of action then no wrong, in the relevant sense of that word, has been done to the company. No question arises of the company or any other person recovering, as such, the company’s loss. It is axiomatic, and accepted by the claimants in the present case, that (subject to exceptions which are irrelevant to this case) a claimant can only recover in respect of his own loss. But where a claimant claims to have suffered a loss he must prove it. In the words of the Court of Appeal, he will most easily do this by proving a “separate and distinct” loss which has been suffered by himself. If he himself has a cause of action and has himself suffered such a loss caused by the third party’s fault, he may recover from the third party. Neither the rule in Foss v Harbottle nor the decision of the Court of Appeal in the Prudential case decides that he may not.’ 8.43 The principles alluded to in Gerber Garment, were applied in Baturina v Chistyakov.134 The court135 referred to the second principle in Johnson v Gore Wood136 emphasising that it relates to instances where a company suffers loss but has no cause of action to recover that loss. In Norcross v Georgallides137 the claimant relied on the liquidation of the company meaning that the company was unable to pursue any claim. The claim failed as the reflective loss principle applies wherever the company had the opportunity to bring a claim but declined or failed to do so. The fact that the company had become insolvent did not bring it within the exception in Gardner and the company’s failure to bring a claim within the limitation period did not bring it within an exception to the general rule either.138

134 [2014] EWCA Civ 1134, [2014] 2 CLC 209, CA. 135 At [72]. 136 Quoted at 8.13. 137 [2015] EWHC 1290 (Comm). 138 Applying Barings Plc (In liquidation) v Coopers & Lybrand (No 1) [2002] 2 BCLC 364, ChD.

222

Chapter 9

Unfair Prejudice: Section 994

Contents Section 994 of the 2006 Act (‘section 994’) Its predecessors Ambit and scope of section 994 Objective test for construction Forums for section 994 dispute resolution Components for a successful claim

9.1 9.1 9.5 9.8 9.11 9.17

Standing 9.19 ‘Member’ as defined by section 112 of the 2006 Act (‘section 112’) 9.19 Standing under section 994(2) 9.22 Other avenues to standing 9.30 No standing 9.38 Management of the affairs of a company ‘Management’ ‘Company’ The ‘affairs’ of a company

9.40 9.40 9.43 9.47

Members’ ‘interests’ Equitable rights Interests affected other than as member Legitimate expectation not confined to quasi-partnerships

9.73 9.74 9.78 9.81

‘Unfairly prejudicial conduct’ Interpretation and scope Fairness Prejudice Categorisation of unfairly prejudicial conduct Breach of the strict legal rules Equitable considerations overriding the strict legal rules Powers exceeded or exercised for an illegitimate or ulterior purpose An event putting an end to the association

9.83 9.83 9.84 9.86 9.87 9.88 9.122 9.167 9.170

Deadlock inapplicable to section 994

9.173

Procedure 9.176

223

9.1  Unfair Prejudice: Section 994

SECTION 994 OF THE 2006 ACT (‘SECTION 994’) Its predecessors 9.1 From 1 October 2007,1 sections 994 and 996 of the Companies Act 2006 (‘the 2006 Act’) govern the claims by members of companies (and certain nonmembers)2 whose interests have been unfairly prejudiced by the conduct of the de facto controllers of a company. These sections replaced, in substantially the same form, sections 459 and 461 of the Companies Act 1985 (‘the 1985 Act’),3 which were in force until 30 September 2007. Measures providing for the protection of minority shareholders against ‘oppressive conduct’ by the controllers of a company were first introduced by section 210 of the Companies Act 1948 (‘the 1948 Act’). The concept of ‘unfairly prejudicial conduct’ was introduced by section 75 of the Companies Act 1980 (‘the 1980 Act’).

Section 210 of the 1948 Act (‘section 210’) 9.2 The notion of unfairly prejudicial conduct was not articulated as such in section 210. Instead, the trigger for relief was that the affairs of the company were conducted in a manner ‘oppressive’ to some part of the members (including the member in question). ‘Oppression’ was interpreted as ‘burdensome, harsh and wrongful’4 conduct, which had to exist at the time the petition was presented and had to be continuing at the time of the hearing.5

Section 75 of the 1980 Act (‘section 75’) 9.3 The interpretation which the courts attached to the meaning of ‘oppression’ was considered to be too restrictive for the purpose for which the remedy was intended. It resulted in the introduction of the concept of ‘unfair prejudice’, an expression described as ‘deliberately imprecise’ to allow for a more liberal construction of the intended relief.6 This was well illustrated by Slade J, stating in Re Bovey Hotel Ventures Ltd7 that, whilst one could envisage many hypothetical cases that might have fallen within section 75 of the 1980 Act but not within section 210 of the 1948 Act, no case fitting the requirements of section 210 of the 1948 Act would not have

1

By s 1300(2) of the 2006 Act, read with SI 2007/2194. Sub-s (1A) was inserted by the Statutory Auditors and Third Country Auditors Regulations 2007, SI 2007/3494. 2 See s 994(2) of the 2006 Act. 3 The legislative development preceding s 994 of the 2006 Act is comprehensively discussed by Neill LJ in Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, CA, at 28d–30b. 4 See Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324, HL, at 342; Re Jermyn Street Turkish Baths [1971] 1 WLR 1042, CA, at 1059G, and the discussion of these and other authorities regarding oppression under the 1948 Act by Neill LJ in Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, CA, at 28g–29e. 5 Re Stewarts (Brixton) Ltd [1985] BCLC 4, ChD. See also 9.68. 6 Compare the remarks of Hoffmann LJ in Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, CA, at 17d–17f and thereafter, as Lord Hoffmann, in O’Neill v Phillips [1999] 1 WLR 1092, HL, at 1098D. 7 (unreported, 31 July 1981), ChD, per Slade J, quoted with approval by Nourse J in Re R A Noble & Sons (Clothing) Ltd [1983] BCLC 273, ChD, at 290e.

224

Section 994 of the 2006 Act (‘section 994’) 9.5

given rise to such jurisdiction under section 75 of the 1980 Act.8 The same can be said in respect of the subsequent statutory formulations for relief on the basis of unfairly prejudicial conduct.9 For relief under section 75, it had to be shown that the affairs of the company had been, or continued to be, conducted in a manner unfairly prejudicial to the interests of some part of the members (including at least the petitioner) and that any actual or proposed act or omission of the company (including an act or omission on its behalf) would have been unfairly prejudicial to members’ interests.

Section 459 of the 1985 Act (‘section 459’) 9.4 The original formulation of section 459(1) was first interpreted in a manner limiting its scope. The section provided for a member of a company to apply to court by petition on the ground that the company’s affairs were being, or had been, conducted in a manner which was unfairly prejudicial to the interests of some part of the members. It was construed at first to exclude conduct unfairly prejudicial to all the members of a company,10 but was subsequently interpreted to indeed include all the members.11 An amendment to section 459(1)12 clarified the position by making it clear that the conduct complained of had to be unfairly prejudicial to the interests of a company’s members generally (ie all of them), or of some part of its members, including at least the complaining member. The latter formulation found its way into section 994 of the 2006 Act. A further significant departure from section 210 was the introduction of relief in relation to anticipated future unfairly prejudicial conduct.13

Ambit and scope of section 994 9.5

At inception section 994 provided as follows:

‘994 Petition by company member (1) A member of a company may apply to the court by petition for an order under this Part on the ground– (a) 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 (b) 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. (2) The provisions of this Part 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.

8

See also Re a Company (No 005287 of 1985) [1986] 1 WLR 281, ChD, which ascribed a narrower ambit to ‘oppressive’ than to ‘unfair prejudice’. 9 See Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, CA, at 30d–30e. 10 Re a Company (No 00370 of 1987), ex p Glossop [1988] 1 WLR 1068 ChD, at 1074H–1075B. 11 Re Sam Weller & Sons Ltd [1990] Ch 682. 12 Brought about by ss 145 and 213(2) of, and Sch 19, para 11(a) to, the Companies Act 1989. 13 See, for this and other distinguishing features, Re a Company (No 001761 of 1986) [1987] BCLC 141, ChD, at 143a–143g; Re Legal Costs Negotiators Ltd [1999] 2 BCLC 171, CA, at 199i–200a (note that the judgment by the court of first instance commences at 171, and that of the Court of Appeal, albeit under the same reference, commences at 193).

225

9.6  Unfair Prejudice: Section 994

(3) In this section, and so far as applicable for the purposes of this section in the other provisions of this Part, “company” means– (a) a company within the meaning of this Act, or (b) a company that is not such a company but is a statutory water company within the meaning of the Statutory Water Companies Act 1991 (c 58).’ 14 Subsequently the legislature singled out a company’s removal of its auditors from office for special treatment, by providing that such removal on grounds of divergence of opinions on accounting treatments or audit procedures, or on any other improper grounds, shall be treated as being unfairly prejudicial to the interests of some part of the company’s members.15 Of this subsection, it was observed in Re Sunrise Radio Ltd:16 ‘Thus, there can (and, in the case specified in s 994(1A), must) be a finding of unfair prejudice even though the effect of the conduct complained of has no necessary impact on the value of the complaining shareholders’ investment. Moreover, a board acting in good faith may genuinely, and correctly, disagree with (say) the accounting treatments, but removal of the auditor on those grounds will be unfairly prejudicial, reflecting the importance the law attaches to absolute standards of behaviour in the accounting process. Whilst this particular provision is new, I regard it as declaratory (except as to its mandatory application) of the kind of conduct that can amount to unfair prejudice, both today, and in a case concerning events before 2008, as this case does.’ Section 994 cannot be considered in isolation. It is but the gateway to the wide-ranging remedies provided for in section 996.17 On hearing a petition, the court may make such an order as it thinks fit, which may, amongst others, include: the regulation of the company’s affairs in the future; granting of injunctive relief against the company; authorisation of civil proceedings to be brought in the name and on behalf of the company; provision for ordering the purchase of the shares of any members of the company by other members or by the company itself; and, in the case of a purchase of the shares by the company itself, the reduction of the company’s capital. 9.6 Common to all the unfairly prejudicial conduct provisions since the 1980 Act is that they were construed as giving courts a wide discretion based on equitable considerations.18 They were described as encompassing a ‘broad view’;19 that the section’s wide language should not be ‘cut down’;20 as having an ‘elastic quality’;21 14

Subsection (3)(b) was repealed on 26 May 2015 by Deregulation Act 2015 c 20, Sch 23(5), para 28.7. 15 Section 994(1A) of the 2006 Act. Sub-s (1A) was inserted by the Statutory Auditors and Third Country Auditors Regulations 2007, SI 2007/3494 with effect from 6 April 2008. It does not apply to auditors appointed for financial years beginning before 6 April 2008. 16 [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [10]. It is unaffected by the judgment on appeal on a different point: [2013] EWCA Civ 667, [2014] 1 BCLC 427, CA. 17 Its predecessor is s 461 of the 1985 Act. Section 996 of the 2006 Act is dealt with in Chapter 10. 18 For example, in Birdi v Specsavers Optical Group Ltd [2015] EWHC 2870 (Ch) Nugee J stated at [365]: ‘It is common ground that relief under s 994 is discretionary and flexible, and it seems to me wide enough to include a direction that the price payable for a petitioner’s shareholding should include a sum to make good the prejudice which has been unfairly suffered by the petitioner.’ 19 See, amongst others, Gamlestaden Fastigheter AB v Baltic Partners Ltd [2007] UKPC 26, [2007] 4 All ER 164, PC (Jersey), at [35], and the authorities there cited; R & H Electric Ltd v Haden Bill Electrical Ltd [1995] 2 BCLC 280, ChD, at 293c, 293i–294b. 20 Re Little Olympian Each-Ways Ltd [1994] 2 BCLC 420, ChD, at 429f–429h. 21 In Re Macro (Ipswich) Ltd [1994] 2 BCLC 354, ChD, at 404h–404i.

226

Section 994 of the 2006 Act (‘section 994’) 9.7

and that it should not be too narrowly or technically construed.22 Fairness being the norm, discretion nevertheless required, and still requires, judicial application based on rational considerations.23 By introducing the concept of unfairly prejudicial conduct, the legislature intended24 to ‘free the court from technical considerations of legal right and to confer a wide power to do what appeared just and equitable’.25 There are boundaries – however opaque – to the exercise of discretion: discretion does not ‘sit under a palm tree’.26 Appropriately counter-balancing the wideness of the exercise of discretion is the warning heeded that, precisely because of the width of the jurisdiction, it has to be carefully controlled to prevent it from becoming a means of oppression in itself: the threat of unfair prejudice proceedings by dissidents in a quasi-partnership company may have such a chilling financial effect that the majority may succumb to unreasonable demands.27 9.7 A  further corrective check, curtailing the exercise of wide discretion, is that section 994 petitions should not be granted on the basis of trivial or technical complaints:28 ‘It is with such considerations in mind that the principle has evolved that in judging the issue of unfair prejudice, isolated trivial complaints, even when in breach of some legal requirement, having no impact on the value of the petitioner’s shares, or upon any realistic objective assessment of the integrity and competence of the board, will not be visited by the threat of an unfair prejudice petition, but should be left to be dealt with by the regime of sanctions and other remedies the law provides. Likewise, irregularities are more likely to be ignored if the outcome would have been no different if the directors had scrupulously observed their duties, or the constitution (see, for example, Rock (Nominees) Ltd v RCO (Holdings) plc (in liq) [2003]  EWHC  936 (Ch) at [139]–[141], [2003] 2 BCLC 493 at [139]–[141], upheld on appeal at [2004] EWCA Civ 118, [2004] 1 BCLC 439). There is nothing new in this. As Lindley LJ observed in Browne v La Trinidad (1887) 37 Ch D 1 at 17:

22

O’Neill v Phillips [1999] 1 WLR 1092, HL, at 1105G–1105H. Cf Apex Global Management Ltd v FI Call Ltd [2013] EWHC 1652 (Ch), [2014] BCC 286, ChD, at [125]. 23 O’Neill v Phillips [1999] 1 WLR 1092, HL, at 1098E. 24 See Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, CA, at 17b–20h. 25 O’Neill v Phillips [1999] WLR 1092, HL, per Lord Hoffmann at 1098E. See for a recent collation of judgments on the wideness and flexibility of ss 994 and 996, Apex Global Management Ltd v FI Call Ltd [2013] EWHC 1652 (Ch), [2014] BCC 286, ChD, at [123]–[125]. 26 Re J E Cade & Son Ltd [1992] BCLC 213, ChD, per Warner J at 227b–227d. Nevertheless, the courts must act on a principled basis even though the concept is to be approached flexibly: Re Tobian Properties Ltd [2012] EWCA Civ 998, [2013] BCC 98, CA, at [21]–[23]. See also Re Hart Investment Holdings Ltd [2013] EWHC 2067 (Ch) at [37]. 27 Re a Company (No 007623 of 1986) [1986] BCLC 362, ChD, at 367i; endorsed in Re a Company (No 005685 of 1988), ex p Schwarcz (No 2) [1989] BCLC 427, ChD, at 437a – adopted by the Court of Appeal in Rock Nominees v RCO (Holdings) [2004] EWCA Civ 118, [2004] 1 BCLC 439, CA, at 450a–450b. 28 Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [7]; see also [10], unaffected by the appeal [2013] EWCA Civ 667, [2014] 1 BCLC 427, CA; see further Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, HL, at 18i; Re McCarthy Surfacing Ltd [2008] EWHC 2279 (Ch), [2009] 1 BCLC 622, ChD, at [68]; Southern Counties Fresh Foods Ltd [2008] EWHC 2810 (Ch) at [298]; Re BSB Holdings Ltd (No 2) [1996] 1 BCLC 155, ChD.

227

9.8  Unfair Prejudice: Section 994

“I think it is most important that the Court should hold fast to the rule upon which it has always acted, not to interfere for the purpose of forcing companies to conduct their business according to the strictest rules where the irregularity complained of can be set right at any moment.”’ This point of departure has been extended by a reality check provided in Ashdown v Griffin:29 the petitioners, although successful on the merits of a s  994 petition, effectively lost. They obtained an order for their shares to be purchased, but had failed to establish any value in respect thereof and as a result were penalised in costs because they could not be considered the winners. In contrast with the nominal damages cases, the appellants were not ordered to make even a nominal payment. ‘The point of alleging unfairly prejudicial conduct was not to establish the point for its own sake, but to enable the petitioners to realise their shares for more than a nominal amount. In the event, the appellants have not had to pay anything and the petitioners still have their shares. Nor would I  wish to encourage shareholders to present unfair prejudice petitions for uncommercial reasons.’30 The essence of the contents of section 459(1) (at least since its amendment)31 and that of section 994(1) are similar, so that authorities pertaining to section 459 are equally applicable to issues arising under section 994.

Objective test for construction 9.8 Having placed the concept of fairness at the heart of allegations of unfairly prejudicial conduct, the conduct complained of calls for the application of objective norms:32 ‘The test of unfairness must, I think, be an objective, not a subjective, one. In other words it is not necessary for the petitioner to show that the persons who have had de facto control of the company have acted as they did in the conscious knowledge that this was unfair to the petitioner or that they were acting in bad faith; the test, I  think, is whether a reasonable bystander observing the consequences of their conduct, would regard it as having unfairly prejudiced the petitioner’s interests.’ Initially, the application of the ‘reasonable bystander test’33 as the norm for objectivity in this context found some favour. In Re a Company (No 005134 of 1986), ex p Harries,34 Peter Gibson J pointed out that, should the objective bystander observe unfairly prejudicial conduct on the part of the controllers of a company, the fact that the latter acted with a proper purpose and a proper motive would not have prevented that conduct from falling 29 30

[2018] EWCA Civ 1793, [2018] 7 WLUK 697. At [35]. Cf Zagora Management Ltd v Zurich Insurance Plc [2019] EWHC 257 (TCC), [2019] 2 WLUK 242, at [12]. 31 Brought about by ss 145 and 213(2) of, and Sch 19 para 11(a) to, the Companies Act 1989. 32 Per Nourse J in R A Noble & Sons (Clothing) Ltd [1983] BCLC 273, at 290f–291a, quoting with approval from Re Bovey Hotel Ventures Ltd (unreported, 31 July 1981), ChD. Cf Re Little Olympian Each-Ways Ltd (No 3) [1995] 1 BCLC 636, ChD, at 664b–664f, 668b–668c. 33 It is a concept familiar to English law, at least insofar as it is applied to determine whether a term of a contract is to be implied. The implication would follow if the reasonable bystander would answer ‘yes, of course, that is “so obvious that it goes without saying”’: see Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206, CA, at 227, affirmed [1940] AC 701, HL; Associated Japanese Bank (International) Ltd v Credit du Nord SA [1989] 1 WLR 255, QB, at 263G–263H; Graves v Graves [2007] 3 FCR 26, CA; Kyle Bay Ltd (t/a Astons Nightclub) v Underwriters [2007] EWCA Civ 57. 34 [1989] BCLC 383, ChD.

228

Section 994 of the 2006 Act (‘section 994’) 9.10

foul of the provisions of the unfair prejudice provision. The other side of the coin is that, if the objective bystander observed that the respondent acted with an improper purpose or with an improper motive, it might well constitute a relevant consideration in determining whether the conduct was unfairly prejudicial.35 It is therefore neither necessary for the petitioner to show bad faith on the part of the respondent,36 nor to demonstrate a conscious intention to prejudice the petitioner.37 Unintended conduct which is unfairly prejudicial to the petitioner’s interest will qualify as conduct for purposes of a section 994 cause of action. So, for example, although a director was acquitted of any inference of intent to do harm, his conduct of blatantly conducting the affairs of a company, by disregarding its own constitutional formalities or legal obligations, was held to have objectively constituted unfairly prejudicial conduct.38 9.9 A  measure of caution regarding the wisdom of applying the reasonable bystander test was expressed in Re Saul D Harrison & Sons plc:39 ‘Mr Purle, who appeared for the petitioner, said that the only test of unfairness was whether a reasonable bystander would think that the conduct in question was unfair. This is correct, so far as it goes, and has some support in the cases. Its merit is to emphasise that the court is applying an objective standard of fairness. But I do not think that it is the most illuminating way of putting the matter. For one thing, the standard of fairness must necessarily be laid down by the court. In explaining how the court sets about deciding what is fair in the context of company management, I do not think that it helps a great deal to add the reasonable company watcher to the already substantial cast of imaginary characters which the law uses to personify its standards of justice in different situations. An appeal to the views of an imaginary third party makes the concept seem more vague than it really is. It is more useful to examine the factors which the law actually takes into account in setting the standard.’ 9.10 The objective test continued to be applied with or without the aid of the ‘reasonable bystander’.40 The judgment in O’Neill v Phillips41 held that unfairness for the purposes of unfair prejudice petitions was not to be judged by reference to subjective notions of fairness, but rather by testing whether, applying established equitable principles, the majority has acted, or is proposing to act, in a manner which equity would regard as contrary to good faith.42 The objective test should not be 35 36 37 38 39 40

41 42

Re a Company (No 005134 of 1986), ex p Harries [1989] BCLC 383, ChD, at 390a–390b. Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [11]. This dictum was not the subject of the appeal: [2013] EWCA Civ 667, [2014] 1 BCLC 427, CA. Re a Company (No 005134 of 1986), ex p Harries [1989] BCLC 383, ChD, at 389i–390b. See also Re Little Olympian Each-Ways Ltd (No 3) [1995] 1 BCLC 636, ChD. Re a Company (No 00789 of 1987), ex p Shooter [1990] BCLC 384, ChD, at 395b–395c. It has to be treated with circumspection in view of the amendment to s 459 alluded to above in 9.4. See also Edgerley v PW Edgerley Ltd [1997] CLY 3102. [1995] 1 BCLC 14, CA, at 17f–17g. Re Sam Weller & Sons Ltd (Re a Company (No 823 of 1987)) [1990] Ch 682, at 690D–691A; Re Elgindata Ltd [1991] BCLC 959, ChD, at 984c–984d; Re Macro (Ipswich) Ltd [1994] 2 BCLC 354, ChD, at 404a; Re Little Olympian Each-Ways Ltd (No 3) [1995] 1 BCLC 636, ChD; Re Jayflex Construction Ltd [2003] EWHC 2008 (Ch), [2004] 2 BCLC 145, ChD, at [56]. [1999] 1 WLR 1092, HL, at 1098G–1099H. This applies in particular to those rights arising from reasonable expectations, understandings or agreements not forming part of a company’s constitution or the Companies Act. The whole of s 994 must be construed with fairness in mind. See also Re Guidezone Ltd [2000] 2 BCLC 321, ChD, at [175]; Re Quantum Survey Management Ltd [2016] EWHC 3084 (Ch) at [70]–[71]; Fisher v Cadman [2005] EWHC 377 (Ch), [2006] 1 BCLC 499, ChD, at [86].

229

9.11  Unfair Prejudice: Section 994

considered in a vacuum: an assessment of the alleged unfairly prejudicial conduct has to be undertaken against the legal background of the corporate structure comprising of the constitutional documents, which define the rights and obligations of members of the company – the so-called strict legal rights.43 This is subject to the application of established equitable principles which may moderate the exercise of strict legal rights when insistence on the enforcement of such rights would be unconscionable.44

Forums for section 994 dispute resolution Courts 9.11 By the express provisions of section 994, a member of a company may apply to court by petition for relief under the section. In England and Wales, ‘court’ means the High Court or a county court.45 Accordingly, the default position is that courts are the primary forum for resolving section 994 disputes. A relevant question is whether other forums are available to resolve these kind of disputes.

Arbitration 9.12 Shareholders’ agreements may provide for arbitration as the mechanism of choice for the resolution of disputes between them. It may be coupled with an obligation to first submit to mediation. In quasi-partnership companies,46 it is likely that one or more of the parties to a shareholders’ agreement will also be directors of the company and that the relationship between a director and the company is governed by a separate service contract, which may contain an arbitration clause. The question arises whether an arbitration agreement has the effect of ousting the court’s jurisdiction in disputes giving rise to section 994 petitions. 9.13 When the matter was first considered in Re Vocam Europe Ltd,47 Rimer J resolved the issue by giving effect to the arbitration clause. The unfair prejudice petition was accordingly trumped by an application for a stay of proceedings under the provisions of sub-sections 9(1) and 9(4) of the Arbitration Act 1996 (‘AA 1996’). Those provisions permit a party to an arbitration agreement, against whom legal proceedings are instituted by its counter-party in a court, to apply to court to have the proceedings stayed in respect of matters which, under the agreement, have to be dealt with by arbitration. An opposite approach was adopted in Exeter City AFC Ltd v Football Conference Ltd,48 where it was held that the statutory rights conferred on members of a company, to apply to court for relief under unfair prejudice provisions, were inalienable and could not be diminished or avoided by agreement. In Fulham Football Club (1987) Ltd v Richards,49 Vos J favoured the Vocam approach.

43

Grace v Biagioli [2005] EWCA Civ 1222, [2006] 2 BCLC 70, ChD, at [61](1); Cf Re Quantum Survey Management Ltd [2016] EWHC 3084 (Ch) at [76]. 44 Grace v Biagioli [2005] EWCA Civ 1222, [2006] 2 BCLC 70, ChD, at [61](1). 45 Section 1156(1)(a) of the 2006 Act. 46 For a discussion of the concept, see 9.131–9.132. 47 [1998] BCC 396, ChD. 48 [2004] 1 WLR 2910, ChD. This is no longer good authority, in view of the judgment in Fulham Football Club (1987) Ltd v Richards [2011] EWCA Civ 855, [2012] Ch 333, CA. 49 [2011] Ch 208.

230

Section 994 of the 2006 Act (‘section 994’) 9.15

The Court of Appeal had the opportunity to settle the conflicting judgments in an appeal against Vos J’s judgment.50 It favoured the Vocam viewpoint that the arbitration clause can displace the court’s jurisdiction. The court found that there was no express provision in either AA 1996 or the 2006 Act excluding arbitration as a possible means of determining such disputes.51 Contrary to the Arbitration Act 1975, where it was a matter of discretion, AA 1996 gave primacy to the arbitration agreement by making a stay of court proceedings, relating to the same dispute, mandatory.52 9.14 However, there may still be an impediment to arbitration if the relief sought cannot, in law, be the subject of an arbitration award. But the fact that an arbitrator cannot grant all the remedies which a court can, does not afford any reason for treating an arbitration agreement as being of no effect.53 There is an apparent lack of jurisdiction to bind third parties, who were not parties to the arbitration agreement, to an arbitral award. The consent of third parties to subject themselves to arbitration is required before an effective award can be made affecting their interests. A section 994 petition is concerned with the protection of class rights and securing relief which will effectively bind third parties,54 whereas an arbitration award can only bind the parties to the agreement to arbitrate. The real question then arises whether an arbitrator has the jurisdiction to grant the same relief as a court is empowered to do under section 996. It is beyond doubt that an arbitrator cannot grant an order for the winding up of a company (which is a statutory remedy and which, by its nature, affects the rights of creditors – who are unlikely to have been parties to an arbitration agreement in that capacity) and other members who had not signed up to the arbitration agreement, or make orders regulating the affairs of the company which bind other members who were not parties to the arbitration.55 It is therefore necessary to consider carefully the issues referred to arbitration and the relief sought in those proceedings, because relief sought in an arbitration, which cannot be granted for the reasons stated, cannot be the subject of an arbitration award and may constitute ground for refusing a stay of section 994 proceedings. 9.15 In Fulham Football Club, the relief sought was for an injunction against a director respondent, which, if granted, would not have had any effect on the position of third parties and therefore presented no obstacle to arbitration. A dispute between members of a company, or between shareholders and the board of directors, about alleged breaches of the articles of association or a shareholders’ agreement is essentially a contractual dispute, which does not necessarily engage the rights of creditors or impinge on any statutory safeguards imposed for the benefit of third parties.56 It does not follow from the inability of an arbitrator to make a winding-up order (because of its effect on third parties) that members may not, as a prequel to the institution of personal actions, agree to submit discrete disputes to arbitration. It 50 51 52 53 54 55 56

Fulham Football Club (1987) Ltd v Richards [2011] EWCA Civ 855, [2012] Ch 333, CA (Rix, Longmore and Patten LJJ). At [28]. At [31]. Fulham Football Club (1987) Ltd v Richards [2011] EWCA Civ 855, [2012] Ch 333, CA, at [103]; Assaubayev v Michael Wilson and Partners Ltd [2014] EWCA Civ 1491 at [68]. Fulham Football Club (1987) Ltd v Richards [2011] EWCA Civ 855, [2012] Ch 333, CA, at [15]. This is based on the assumption that they were properly joined as parties to court proceedings. At [36]. There is no requirement that all members should be party to an agreement between shareholders. See 3.18. At [77].

231

9.16  Unfair Prejudice: Section 994

is subject to the qualification that it will be necessary to consider, in each case, whether those issues involve third party rights, or constitute an attempt to delegate a matter of public interest which cannot be determined within the limitations of the private contractual process which arbitration is.57 The reasoning is as follows:58 ‘It is therefore open to us to decide whether the provisions of s 994 are to be construed as restricting the resolution of unfair prejudice disputes to the exclusive jurisdiction of the court free of any binding authority. I have already set out my own reasons for preferring the view that disputes of this kind which do not involve the making of any winding-up order are capable of being arbitrated. Although not necessary for the resolution of this appeal, I also take the view, as Austin J did in the ACD Tridon case,59 that the same probably goes for a similar dispute which is used to ground a petition under s 122(1)(g) [of the Insolvency Act 1986] to wind up the company on just and equitable grounds. In those cases the arbitration agreement would operate as an agreement not to present a winding-up petition unless and until the underlying dispute had been determined in the arbitration. The agreement could not arrogate to the arbitrator the question of whether a winding-up order should be made. That would remain a matter for the court in any subsequent proceedings. But the arbitrator could, I think legitimately, decide whether the complaint of unfair prejudice was made out and whether it would be appropriate for winding-up proceedings to take place or whether the complainant should be limited to some lesser remedy. It would only be in circumstances where the arbitrator concluded that winding-up proceedings would be justified that a shareholder would then be entitled to present a petition under s 122(1) (g) [of the Insolvency Act 1986]. In these circumstances the court could be invited to lift any stay imposed on proceedings imposed under s 9(4) [of the Arbitration Act 1996]. In much the same way, it would, I think, be open to an arbitrator who considered that the proper solution to a dispute between a shareholder and the company was to give directions for the conduct of the company’s affairs to authorise the shareholder to seek such relief from the court under s 994. But such cases are likely to be rare in practice. If the relief sought is of a kind which may affect other members who are not parties to the existing reference, I can see no reason in principle why their views could not be canvassed by the arbitrators before deciding whether to make an award in those terms. Opposition to the grant of such relief by those persons may be decisive. Similarly, if the order sought is one which cannot take effect without the consent of third parties, then the arbitrators’ hands will be tied.’

Mediation 9.16 Mediation clauses60 do not have any effect on the jurisdiction of either the courts or arbitration. Mediation is a non-binding process, guided by a mediator, to 57 58 59 60

At [40]. See also [61]. At [83]. The reference is to ACD Tridon v Tridon Australia [2002] NSWSC 896. A mediation clause must determine the rights and obligations of the parties with clarity and not be an agreement to agree: see Sulamerica Cia Nacional De Seguros SA v Enesa Engenharia SA [2012] EWCA Civ 638, [2013] 1 WLR 102, at [33]–[36]. A contractual obligation to participate in mediation is rare but enforceable if properly drafted. However, there can be no contractual obligation to reach a settlement, whether at mediation or otherwise. Proposals for an obligation on all litigants to participate in compulsory mediation are under consideration but it remains to be seen whether any such proposals will be adopted.

232

Standing 9.19

resolve disputes by agreement. No ruling is made; the matter is settled only if the parties reach consensus. The mediator does not have any power to rule on the merits of a dispute. It does not ultimately affect the resolution of disputes in court, or by arbitration, should the mediation process fail to produce a result.

Components for a successful claim 9.17 are:61

The material elements for establishing a successful claim under section 994

(a) standing to bring such a claim; (b) that the acts or omissions, of which a person with the requisite standing complains, consist of: (i) the management of; (ii) the affairs of the company; (c) that the conduct of those affairs has caused prejudice to the petitioner’s interests as a member of the company; and (d) that such prejudice is unfair. 9.18 The procedures are described in Chapter 13. Interim relief is dealt with in Chapter 14. By Civil Procedure Rules 1998 (‘CPR’) r 3.4(2)(a), a court may strike out a statement of case if it appears to the court that it discloses no reasonable grounds for bringing or defending the claim. At this stage of the proceedings, the allegations underpinning the cause of action are considered without any consideration of evidence in support of those allegations. If the application to strike out is refused, the evidence at trial will of course have to support the allegations for relief to follow. These components will be discussed in turn. The categories by which it will be done are not impervious and a measure of overlap is unavoidable.

STANDING ‘Member’ as defined by section 112 of the 2006 Act (‘section 112’)62 9.19 By section 994(1), a ‘member’ may apply by petition for relief.63 Membership is provided for in section 112 of the 2006 Act. By section 112(1), the subscribers to a company’s memorandum are deemed to have agreed to become members of the company and, on its registration, indeed become members and must be entered in either the company’s register of members64 or the central register.65 61 62 63

64 65

Hawkes v Cuddy (No 2) [2007] EWHC 2999 (Ch), [2008] BCC 390, ChD, per Lewison J at [202]; adopted by Warren J in Re Southern Counties Fresh Foods [2008] EWHC 2810, ChD, at [39]. Not only members are entitled to relief – certain non-members may claim relief by virtue of the provisions of s 994(2). See 9.22. See, amongst others, Gamlestaden Fastigheter AB v Baltic Partners Ltd [2007] UKPC 26, [2007] 4 All ER 164, PC, at [24]; Lloyd v Casey [2002] 1 BCLC 454, ChD, at [46]; Re a Company (No 00709 of 1992) (O’Neill v Phillips) [1997] 2 BCLC 739, ChD – this was no longer an issue in the House of Lords: [1999] 1 WLR 1092, HL. In accordance with Pt 8, Ch 2 of the 2006 Act. In accordance with Pt 8, Ch 2A of the 2006 Act. This provides, with effect 30 June 2016, for private companies to be able to elect to make use of the central register.

233

9.19  Unfair Prejudice: Section 994

‘Member’, wherever it appears in articles of association or in sections 112–114, 123, 127 and 318 of the 2006 Act, includes any member registered on the company’s register of members, whether alive or dead, and, if a corporation, whether or not in an insolvency procedure or dissolved.66 It follows that the reference in section 123 of the 2006 Act (dealing with one member companies) to ‘with only one member’ indeed means a limited company with only one registered member.67 If, eg another entry on the register reflects someone who has died, it will not constitute a single member company as a result. Section 112(2) makes provision for membership for all subsequent acquirers of shares.68 The proposition that a member has the required standing is not as simple as it superficially appears. The matter is clear enough if regard is had to section 994(1) read with section 112; however, section 994(2) complicates the issue by providing that ‘[t]he provisions of this Part69 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’.70 This complication is discussed below.71 The focus is first directed at the meaning of ‘member’ in its section 112 context. As from 30 June 2016 subsection (3) has been added72 to section 112, so that the section currently reads: ‘112 The members of a company (1) The subscribers of a company’s memorandum are deemed to have agreed to become members of the company, and on its registration become members and must be entered as such in its register of members. (2) Every other person who agrees to become a member of a company, and whose name is entered in its register of members, is a member of the company. (3) Where an election under section 128B73 is in force in respect of a company – (a) the requirement in subsection (1) to enter particulars of members in the company’s register of members does not apply, and (b) subsection (2) has effect as if the reference to a person whose name is entered in the company’s register of members were a reference to a person with respect to whom the following steps have been taken – 66

Re BW Estates Ltd [2017] EWCA Civ 1201at [71]. It follows that ‘member’ in s 994(1) will bear the same meaning, subject to the flexibility applied when it comes to standing as discussed at 9.19–9.39. 67 Ibid. 68 The provision applies to all corporate bodies which are formed and registered under the 2006 Act. In relation to the similarly worded s 22 of the 1985 Act, see Enviroco Ltd v Farstad Supply A/S [2011] 1 WLR 921, SC. 69 Part 30 (Protection of members against unfair prejudice). 70 Compare the somewhat more elaborate wording of s 459(2): ‘The provisions of this Part 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 those provisions apply to a member of the company; and references to a member or members are to be construed accordingly’. 71 See 9.22–9.29. 72 By Small Business, Enterprise and Employment Act 2015 c 26, Sch 5(2), para 13 (30 June 2016). 73 This section relates to the choice made by a private company to suspend its own register and utilise the central register.

234

Standing 9.20

(i)

the person’s name has been delivered to the registrar under section 128E, and (ii) the document containing that information has been registered by the registrar.’ 9.20 Registration can only take place if: (a) a proper instrument of transfer has been delivered to it; or (b) the transfer (i) is an exempt transfer within the Stock Transfer Act 1982 (c 41), or (ii) is in accordance with regulations under Chapter 2 of Part 21.74 The latter provisions deal with evidencing and transfer of title to securities without a written instrument. Since 30 June 2016, if an election under Chapter 2A of Part 8 is in force in respect of the company, references in section 770 to registering a transfer (or a person) are to be read as references to delivering particulars of that transfer (or person) to the registrar under that Chapter, ie the central register.75 Entry onto a register is a fundamental and immutable principle of company law which would otherwise render shareholders’ rights unworkable.76 There are numerous reasons why registration is so pivotal:77 (a) (b)

voting rights are determined by membership;78 members are bound by alterations to the company’s articles, subject to specified exceptions;79 (c) members are entitled to receive company documents in hard copy form at their addresses as shown in the register;80 (d) a subsidiary cannot be a member of its holding company, which situation is determinable by reference to the membership of the subsidiary;81 (e) the company must send its annual accounts and report to every member;82 (f) distributions may only be made to a member;83 and (g) members incur liability for unlawful distributions made to them.84 Then, of course, membership is the gateway to the various remedies of personal claims (Chapter 7), derivative claims (Chapter 6), unfair prejudice petitions in most instances (Chapter 9), and just and equitable winding up (Chapter 11).

74

Section 770(1) of the 2006 Act. It does not affect any power of the company to register as shareholder or debenture holder a person to whom the right to any shares in or debentures of the company has been transmitted by operation of law. 75 Section 770(3) of the 2006 Act. 76 Enviroco Ltd v Farstad Supply A/S [2011] 1 WLR, 921, SC; National Westminster Bank Plc v Inland Revenue Commissioners [1995] 1 AC 119, HL, per Lord Templeman at 126f–126g, and Lord Lloyd of Berwick at 146h–147a; Jaber v Science and Information Technology Ltd [1992] BCLC 764, ChD. See also Bermuda Cablevision Ltd v Colica Trust Co Ltd [1998] AC 198, PC, at 213C–213D; Re BW Estates Ltd [2017] EWCA Civ 1201. 77 See Enviroco Ltd v Farstad Supply A/S [2011] 1 WLR 921, SC, at [38]. 78 See Pt 13 of the 2006 Act. 79 Section 25 of the 2006 Act. 80 Sch 5, Pt 2 to the 2006 Act. 81 Section 136 of the 2006 Act. 82 Section 423 of the 2006 Act. 83 Section 829 of the 2006 Act. 84 Section 847(2) of the 2006 Act.

235

9.21  Unfair Prejudice: Section 994

The names reflected in the members’ register on inspection thereof85 are the members of the company,86 unless, of course, they were fraudulently or mistakenly registered or omitted from the members’ register, meaning rectification of the register is required.87 The position as regards the central register is slightly different: someone inspecting the central register may ask the company to confirm that all information that the company is required to deliver to the registrar has been so delivered.88 A failure to respond to such a request constitutes the commission of an offence.89 The right to query notwithstanding, the central register is prima facie evidence of any matters about which a company is required to deliver information to the registrar under Chapter 2A.90 An unlawful inclusion in or omission of (inter alia a member’s name) entitles an aggrieved person to a statutory process, parallel to rectification of the register, to set the matter right.91 If names appear in the members’ register in respect of persons who acquired their shares in the process of an illegal creation thereof,92 those names will remain on the register until removed in lieu of an application for rectification under section 125.93 The same will be achieved in respect of the central register, on the basis of section 128G of the 2006 Act. Entries of members as a result of an illegal provision in the articles providing for the registration of widows as members on the death of their husbands (who were members) were held to be void94 and not vesting any rights of membership to the widows.95 9.21 By section 112(2), every person who agrees to become a member of a company, and whose name is entered in its register of members, is a member of the company. The question is: what is sufficient to constitute an agreement for purposes of section 112(2)? The sub-section’s formulation does not imply a bilateral agreement. It refers to ‘[e]very other person who agrees to become a member of a company’, implying unilateral assent from the prospective member. No formalities are required for expressing the act of agreement: the possibility of a written and signed contract or a deed, or a bilateral agreement in a different form, as prerequisite for the agreement required by section 112(2) was unequivocally rejected by the Court of Appeal in Re Nuneaton Borough Association Football Club Ltd96 by holding that the word ‘agrees’ in section 112(2) means nothing more than ‘assent’:97 85

The register must be kept available for inspection. See ss 114 and 116 of the 2006 Act and the discussion at 7.5–7.20. 86 By s 127 of the 2006 Act the members’ register and by s 128H the central register, constitute prima facie evidence of their contents. 87 Section 125 of the 2006 Act provides for rectification of the members’ register. See also 7.21–7.29 for a discussion of the exercise of the right to rectification. 88 Section 128F(1) of the 2006 Act. 89 Section 128F(2) of the 2006 Act. 90 Section 128H of the 2006 Act. 91 Section 128G of the 2006 Act. See further 7.23–7.26. 92 Re Nuneaton Borough Association Football Club Ltd (1989) 5 BCC 792, ChD. 93 See 7.21–7.29. 94 It was in conflict with clause 20 of Table A of the Companies Act 1929, which provided that the legal personal representatives of a deceased sole holder of a share shall be the only persons recognised by the company as having any title to the share. 95 Re Greene [1949] Ch 333. 96 [1989] BCLC 454, CA (Fox, Ralph Gibson and Nicholls LJJ). 97 Per Fox LJ at 456f–456h.

236

Standing 9.22

‘I  do not feel able to agree that a contract is necessary. The section makes no reference to any bilateral element. It merely requires the agreement of the person to become a member. The company, having seen fit to register him as a member, that is then enough until the register is rectified by removal of his name – at which point he ceases to be a member within the section. As a matter of English the word “agrees” is, I  think, satisfied by mere assent. Thus the Shorter Oxford English Dictionary includes among the meanings of “agree”, the meaning to accept favourably … to accede; to consent to. The result seems to me to be workable and reasonable in practical terms and I see no need for a requirement of a contract.’ Hard copy share certificates98 are not conclusive evidence of membership of a company. They only provide prima facie evidence of such membership.99 An entry in the members’ register remains an absolute prerequisite for membership.100 An exception is bearer shares where the bearer is deemed to be a member if the articles so provide.101 A shareholder has no standing in respect of unfairly prejudicial conduct occurring before it became a shareholder, where such conduct had been ratified by the unanimous consent of all the directors and shareholders unless he can establish a legitimate expectation that the members would not consent to such conduct.102 Conversely, a complete sale of shares divests the seller-shareholder from asserting any right under section 994. Where the agreements for the sale of shares were sufficiently certain and there was nothing further to be agreed in respect of the purchase price as the valuation mechanism was clear, the beneficial interest in the shares had passed to the purchaser.103 The seller technically retained standing to bring a claim but would not be entitled to financial relief and would be unable to show that he had suffered relevant prejudice as his interest was in receipt of the purchase price for his shares rather than the shares themselves.104 Logically, a petitioner under section 994 must be a member in order to have standing to petition because that is the basis for an entitlement to assert their rights and enforce obligations in accordance with the articles.105

Standing under section 994(2) 9.22 Section 994(2) expands the categories of shareholders having standing for section 994(1) petitions: first, persons in favour of whom a transfer of shares had been executed but whose names have not yet been entered in the register as members; and, second, persons, such as trustees in bankruptcy or personal representatives, who became entitled to shares in that capacity but have not had their names entered in the company’s register of members.106 98 99 100 101

As opposed to demutualised shares, which are kept in electronic form only. Section 768(1) of the 2006 Act. Alipour v Ary [1997] 1 WLR 534, CA; Re BW Estates Ltd [2017] EWCA Civ 1201. Section 122(3) of the 2006 Act. See Enviroco Ltd v Farstad Supply A/S [2011] 1 WLR 921, SC, at [39]. 102 Re Batesons Hotels (1958) [2013] EWHC 2530 (Ch), [2014] 1 BCLC 507, ChD. 103 Baker v Potter [2004] EWHC 1422 (Ch), [2005] BCC 855, ChD; Re FSC Andrews Ltd [2015] EWHC 4042 (Ch) at [56]–[61]. 104 Baker v Potter [2004] EWHC 1422 (Ch), [2005] BCC 855, ChD. 105 See Axis Football Investments Ltd v Power [2020] EWHC 1171 (Ch), [2020] 5 WLUK 250. 106 See Re McCarthy Surfacing Ltd [2006] EWHC 832 (Ch) at [5].

237

9.23  Unfair Prejudice: Section 994

Transfer of shares executed 9.23 The entitlement of persons in the first category listed in section 994(2) to enforce their rights is dependent on the existence of an executed transfer of their shares. It is apparent from the different formulations in section 112(2) and section 994(2) that different situations are addressed by the respective sections. Section 994(2) requires something more than the mere assent required by section 112(2): it is intended to cover the situation where, for whatever reason, the members’ register (and also the central register where applicable) was not updated by recording the change of hands of shares as a consequence of an executed transfer. What must be established is not a mere hope or expectation of registration: proceedings for rectification of a company’s register of members could only be brought where the applicant had a right to registration by virtue of a valid transfer of legal title and not merely a prospective claim against the company dependent on the conversion of an equitable right to a legal title by an order for specific performance of a contract.107 9.24 Re McCarthy Surfacing Ltd108 affords an illustration of the operation of section 994(2): two duly registered members of the company had executed transfers of their shares to the petitioner. The petitioner had submitted the transfer documents to the company for registration, but the directors had declined to register the petitioner as a member. Without seeking rectification of the share register, the petitioner launched an unfair prejudice petition. The court held that the petitioner was a person to whom the shares had been transferred, with the result that he had the necessary standing to petition, despite his name not appearing in the register as such.109 Accordingly, it was not necessary to be reflected as a member in the register before embarking on unfair prejudice proceedings.110 The nub of the objection was that, not having been registered as a member, the petitioner could not have suffered any impairment of his interests. On a review of earlier judgments,111 Ferris J concluded that this objection represented too narrow a view of the interests sought to be protected by section 459(1) of the 1985 Act.112 9.25 In Re a Company (No  007828 of 1985),113 two of the petitioners alleged that the respondent had agreed a transfer of shares to them, even though their names had not been entered in the members’ register. The respondent sought to strike out the petition. The petitioners relied on the contention that they were persons to whom shares had been transmitted by operation of law within the meaning of section 459(2).114 They argued that the agreement to transfer constituted a constructive trust over the shares, or effected the automatic transmission of the shares to them 107 Nilon Ltd v Royal Westminster Investments SA [2015] UKPC 2, [2015] BCC 521, PC, and for more detail see 7.21–7.29. 108 [2006] EWHC 832 (Ch). 109 This was a matter under the regime of s 459(2) of the 1985 Act, with content similar to that of s 994(2) of the 2006 Act. 110 Re McCarthy Surfacing Ltd [2006] EWHC 832, ChD, at [20], [22]–[25]. 111 Re a Company (No 007828 of 1985) [1986] 2 BCC 98951, ChD; Re a Company [1986] BCLC 391, ChD; Atlasview v Brightview [2004] EWHC 1056 (Ch), [2004] 2 BCLC 191, ChD; Baker v Potter [2004] EWHC 1422 (Ch), [2005] BCC 855, ChD. 112 Re McCarthy Surfacing Ltd [2006] EWHC 832 (Ch) at [18], [19]. The section considered there corresponds with s 994(2) of the 2006 Act. 113 (1986) 2 BCC 98951, ChD. 114 Corresponding with s 994(2) of the 2006 Act.

238

Standing 9.28

by operation of law. Harman J  found this argument wanting. Transmission by operation of law meant some act in law by which the legal estate passed, even though there might have been some further act (such as registration) to be performed. The allegation of the existence of a constructive trust could not amount to a transmission by operation of law. The statute simply did not allow membership on that basis. 9.26 In Re a Company,115 four persons had formed a company on a quasipartnership basis. To avoid a contravention of a covenant in restraint of trade, one of them (F) stood down as a prospective shareholder. His wife became a shareholder and director in his stead, whilst he took up employment with the company. Ostensibly, there was an agreement by which F’s wife would eventually transfer her shares to F, but it never happened. Relations broke down. F was dismissed and his wife removed as a director. They brought unfair prejudice proceedings. F’s standing was justifiably and successfully challenged. He never became a member, nor did he subscribe to the memorandum in accordance with section 112. F was also not a person to whom shares had been transferred or transmitted by operation of law as required by section 994(2) and its predecessors. Hoffmann J held that the word ‘transferred’ in section 459(2) at least required that a proper instrument of transfer should have been executed and delivered to the transferee or the company: a mere agreement to transfer did not suffice.116 9.27 In Re Quickdome Ltd,117 the petitioner claimed to be a transferee within the meaning of section 459(2) by virtue of his possession of a share transfer form completed by a subscribing shareholder, without identifying the claimant by name as transferee. The unfair prejudice petition was struck out as the petitioner, at best, only had an incomplete agreement for transfer rather than an executed transfer in his favour. An instrument of transfer is, accordingly, a prerequisite for standing in terms of the first category identified in section 994(2).118 9.28 The next question is whether a shareholder, whose interests have been detrimentally affected by unfairly prejudicial conduct, is remediless if he is not registered as a member and is not in possession of an instrument of transfer. Such a situation can easily arise. Registration of members entitled thereto does not always happen within a reasonable time119 so that disputes may arise in the period pending registration. It is often only when personal claims are pursued that the apparent lack of standing due to non-registration is discovered. All is not lost in such a situation. Re Starlight Developers Ltd120 provided the solution: a petitioner only discovered at court (however surprising that may be in view of the process of disclosure which must have preceded the appearance) that his name was indeed not reflected in 115 [1986] BCLC 391, ChD. The BCLC report omits the suffix ‘(no 003160 of 1986)’ in the citation. 116 At 393h–393i. 117 [1988] BCLC 370, ChD. 118 Re Zetnet Ltd [2011] EWHC 1518 (Ch) at [149]. 119 This is likely to be relevant only to the smaller, domestic or quasi-partnership company which has not yet adopted, for whatever reason, electronic means of registering transfers. This situation is foreshadowed in respect of the central register, where the accuracy thereof is dependent upon the private company providing information in good time – see s 128E of the 2006 Act. The registration of membership in quoted companies is electronic and particularly effective. 120 [2007] EWHC 1660 (Ch), [2007] BCC 929, ChD. But see the similar, much earlier pragmatic approach adopted by Mervyn Davies J in Re Garage Door Associates Ltd [1984] 1 WLR 35, ChD.

239

9.29  Unfair Prejudice: Section 994

the members’ register. Previous judgments had considered petitions with similar flaws as fatal.121 However, Briggs J  found that the claim to membership was not spurious and granted a stay of the unfair prejudice petition pending finalisation of proceedings to determine membership. This solution commends itself both as a matter of law and procedure. It is settled law that a court may grant rectification of a company’s register of members with retrospective effect.122 Any unfair prejudice suffered as shareholder before effecting the belated entry in the members’ register will, accordingly, fall within the ambit and scope of section 994(1) on retrospective registration.123 The procedural point centres around the principles enshrined in CPR rr 1.1 (stating the overriding objective of the rules as enabling the court to deal with cases justly) and 1.4 (demanding effective case management). Briggs J concluded as follows:124 ‘Following the coming into force of the CPR, Re Hoicrest125 points to a possibly greater incentive to fashion a case management solution to the resolution of disputes which, although not raised by an appropriate form of proceedings, need to be resolved, and a case management solution falling short of the striking out or the dismissal of the inappropriate proceedings if some other solution would avoid an unnecessary increase in costs.’

Personal representatives 9.29 Where duly registered members become unable to deal with their shares personally, by incapacity or death, their rights as members accrue to a trustee or other personal representative. As such, the executors of a deceased member of a company, who had not yet had their shares registered in their own names, were held to have the same right to dissent from a reconstruction scheme adopted under section 192 of the Companies (Consolidation) Act 1908, and to restrain the liquidator from carrying out the scheme without purchasing the shares, as the deceased member would have had if he was still alive.126 In permitting a petitioner to re-amend her section 994 petition, to plead her standing as the court-appointed personal representative of a former director, the court held that when a new personal representative was appointed under section 50 of the Administration of Justice Act 1985, the estate was automatically transferred from the old personal representative to the new.127

121 Re A Company (No 007828 of 1985) (1986) 2 BCC 98951, ChD; Re A Company [1986] BCLC 391, ChD; Re Quickdome Ltd [1988] BCLC 370, ChD. 122 Re Starlight Developers Ltd [2007] EWHC 1660 (Ch), [2007] BCC 929, ChD, at [10]. See also Re Sussex Brick Co [1904] 1 Ch 598, CA. 123 See Lloyd v Casey [2002] 1 BCLC 454, ChD, at [52], [55], [57]. 124 Re Starlight Developers Ltd [2007] EWHC 1660 (Ch), [2007] BCC 929, ChD, at [19]. Starlight Developers does not make reference to Alipour v Ary [1997] 1 WLR 534, CA, where similar flexibility was displayed regarding standing, albeit in the context of a foreign company’s winding up. 125 Re Hoicrest Ltd [2000] 1 WLR 414, CA. 126 Llewellyn v Kasintoe Rubber Estates Ltd [1914] Ch 670, CA. See also Roberts v Letter “t” Estates Ltd [1961] AC 795, PC, at 804. 127 Re AMT Coffee Ltd [2018] EWHC 1562 (Ch), [2018] 6 WLUK 416.

240

Standing 9.31

Other avenues to standing 9.30 One should be mindful that ‘… the requirement that prejudice must be suffered as a member should not be too narrowly or technically construed’.128 The possible extension of the concept of ‘member’, with further classes or categories of persons having standing to claim relief for suffering from unfairly prejudicial conduct, requires definition.

Member as creditor 9.31 Is a petition under section 994 available in circumstances where the company in question is insolvent and will remain insolvent whatever order is made on the petition, and where the relief sought will render no financial benefit to the petitioner in its capacity as member but only in its capacity as creditor? This issue was considered by the Privy Council in Gamlestaden Fastigheter AB v Baltic Partners Ltd.129 Gamlestaden was a member and major creditor of Baltic. It brought unfair prejudice proceedings against Baltic, which was insolvent. The main relief sought by Gamlestaden was for an order directing the directors of Baltic to pay damages to Baltic for breach of duties they had owed to Baltic. If successful, any damages awarded would not have restored Baltic to solvency. Accordingly, there was no prospect of any financial benefit for any of the members of Baltic (in the form of a winding-up dividend or otherwise) as members. A successful claim would, however, have produced a considerable sum available for the benefit of Baltic’s creditors, of which Gamlestaden was one. It would render a result which non-member creditors in their capacity as creditors would never have been able to achieve. Although the relief sought fitted better into the mould of a derivative action,130 it was probably statute barred,131 leaving only the mechanism of an unfair prejudice petition as a possible solution to Gamlestaden’s predicament. The Privy Council found it somewhat artificial to insist that the qualifying loss for purposes of unfair prejudice petitions must, of necessity, comprise loss which has reduced the value of the investor’s equity capital and not a reduction of the investor’s loan capital.132 Lord Scott, who gave the judgment, continued:133 ‘This artificiality was pointed out by Robert Walker J  … in R&H  Electric Ltd v Haden Bill Electrical Ltd [1995] 2  BCLC  280. This was a case where the applicant for section 459 relief was, of course, a shareholder in the company but, 128 O’Neill v Phillips [1999] 1 WLR 1092, HL, at 1105G. See also R & H Electric Ltd v Haden Bill Electrical Ltd [1995] 2 BCLC 280, ChD, and 9.6. 129 [2007] UKPC 26, [2007] 4 All ER 164, PC. The matter originated in Jersey in terms of legislation analogous to s 459 of the 1985 Act and s 994 of the 2006 Act. 130 See, for a discussion of derivative actions, Chapter 6. 131 [2007] UKPC 26, [2007] 4 All ER 164, PC, at [25]. 132 At [30]. See, for the importance of determining whether contributions to the company funds constitute capital investment or a loan, Re Beppler & Jacobson Ltd [2014] EWCA Civ 935. 133 At [30]; see also [31]; O’Neill v Phillips [1999] 1 WLR 1092, HL, at 1105G–1105H, which confirms, with reference to R&H Electric Ltd v Haden Bill Electrical Ltd [1995] 2 BCLC 280, ChD (as relied upon by the Privy Council), that ‘… the requirement that prejudice must be suffered as a member should not be too narrowly or technically construed’. This however would not include matters complained of which had taken place after the petitioner has sold his shares: Re FSC Andrews Ltd [2015] EWHC 4042 (Ch).

241

9.32  Unfair Prejudice: Section 994

via another company that he controlled, had also provided working capital to the company. He was removed by the majority shareholders from any management role and accordingly applied under section 459 for an order requiring the majority shareholders to purchase his shares and, alternatively, petitioned for the company to be wound up on the just and equitable ground. One of the grounds relied on by the majority shareholders for resisting any section 459 relief was that the applicant’s “only real involvement was as an agent for [the other company] which was a loan creditor, not a shareholder … therefore … there was no prejudice to [the applicant] in his capacity as a shareholder.” As to this point Robert Walker J said this: “If [the applicant] himself had been [the company’s] loan creditor, under arrangements made between him and the majority shareholders when the company was first being planned and formed, I should have had little hesitation in coming to the conclusion that the arrangements were a reflection of, and sufficiently closely connected with, [the applicant’s] membership of [the company] as to be within the scope of s 459.” Robert Walker J then addressed the question whether the fact that the loan creditor was not the shareholder applicant, but was the other company that he controlled, mattered. He concluded that it did not: “On the whole I  have come to the conclusion that I  should not treat the separateness of [the applicant] and [the other company] as excluding him from seeking relief under s 459 on the basis that [the other company’s] loans to [the company] were procured by [the applicant] and formed part (and an absolutely essential part) of the arrangements entered into for the venture to be carried on by that company.”’ The Privy Council concluded134 that the statutory unfair prejudice provisions did not rule out the grant of relief simply on the ground that the relief sought would not benefit the member as member. The benefit to Gamlestaden was not required to be in its capacity as member.135 However, the Board accepted that there must, ‘where the only purpose of the application is to obtain payment of a sum of money to Baltic, be some real financial benefit to be derived therefrom by Gamlestaden’.136 Accordingly, in matters where an investor fills the dual role of equity holder and lender, the investor ought to have standing on the ground that the relief would benefit the investor as loan creditor even if not as member.

Third parties Close connection with member 9.32 In the typical quasi-partnership company, those understandings between members which are not part of the company’s constitution may enure for the benefit

134 [2007] UKPC 26, [2007] 4 All ER 164, PC, at [36], [37]. 135 See for an instance where the s 994 petition encompassed a claim for wrongful dismissal, and was permitted to continue even if such relief would not benefit him in his capacity as a member: Wootliff v Rushton-Turner [2016] EWHC 2802 (Ch). 136 At [36].

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Standing 9.34

of a third party, such as a member’s widow.137 Re a Company (No 003160 of 1986)138 is an example: when one of the original corporators, amongst whom the necessary understandings were established, did not take up his shares and became an employee of the company, with his wife as member and director, he was not permitted to proceed with unfair prejudice proceedings because of his non-membership. Despite that finding, it was held that the jurisdiction to remedy unfair prejudice to the interests of members enabled the court to protect not only the rights of members under the constitution of the company, but also the rights, expectations and obligations of individual shareholders inter se. There was no reason why the understanding between the parties should not have included the expectations of a nominee member’s husband and beneficiary.

Nominee shareholders 9.33 Nominee shareholders are reflected in the members’ and central register as members, but they have no underlying right or entitlement to the shares or dividends as their property, although they are entitled to the rights associated with membership, such as voting rights. The proprietary rights remain vested in the beneficial owner. Neither the members’ register nor the central register will provide any information about any holder of shares that elected to use a nominee to be entered as a member. The company and the registrar only recognise the registered member as member; from the shareholder’s point of view, the nominee is an agent, a third party, in the relationship with the company. It creates a quandary: the beneficial owner, and not the nominee, will suffer loss in the event of loss resulting from unfairly prejudicial conduct, but the beneficial owner is not the registered member and may on that ground be non-suited. However, despite the fact that nominee shareholders are not suffering the loss, they do have standing under section 994. 9.34 In Atlasview Ltd v Brightview Ltd,139 Mr Jonathan Crow (sitting as a Deputy Judge of the High Court) was called upon to decide, for purposes of a strike-out application,140 whether it was properly arguable that the ‘interests’ of a nominee shareholder under section 459 were capable of including the economic and contractual interests of the beneficial owners of the shares. He considered that it was; not only on a construction of the language of section 459, but also on certain authorities141 which had held that nominee shareholders are fully entitled to complain under section 459 regarding any diminution in value of shares registered in their names, and that their ‘interests’ are, for these purposes, co-extensive with the interests of the beneficial owners. He continued to state that, had it been necessary to decide the point (which was not necessary, due to the nature of the proceedings before him), he 137 138 139 140

Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, HL, at 19f–19h. [1986] BCLC 391, ChD, discussed more fully at 9.26. [2004] EWHC 1056 (Ch), [2004] 2 BCLC 191 at [35]–[39]. Applications to strike out require a high threshold for success. By CPR r 3.4(2), a strike out will succeed if a statement of claim does not disclose reasonable grounds for bringing a claim, or is otherwise an abuse of the court’s process, or where there has been a failure to comply with a rule. See further at 14.11. 141 Estill v Cowling Swift & Kitchin [2000] Lloyd’s Rep 378, ChD, at [101]; Arrow Nominees Inc v Blackledge [2000] 1 BCLC 709, ChD, reversed on appeal ([2000] 2 BCLC 167, CA); Lloyd v Casey [2002] 1 BCLC 454, ChD, at [48]–[49]; Rock Nominees Ltd v RCO (Holdings) plc [2003] 2 BCLC 493, ChD, at [2]–[3] – affirmed by the Court of Appeal ([2004] EWCA Civ 118, [2004] 1 BCLC 439, CA).

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9.35  Unfair Prejudice: Section 994

would have found that proposition to be correct.142 In Re McCarthy Surfacing Ltd,143 Ferris J pointed out that Mr Jonathan Crow was not limited to a consideration of the standing of the nominee shareholder to present the petition. He also had to consider whether it was arguable that the nominee shareholder could show prejudice to its interests as a member of the company: ‘The fact that he discussed the “interests” point does not, therefore, indicate acceptance on his part that a petitioner will have standing only if he can show prejudice to his interests’.144 9.35 In Lloyd v Casey145 the petitioner (L) was the holder of 44 per cent of the issued shares. The respondent (C) held 51 per cent of the issued shares, while the remaining 5 per cent were held by one H. C held L’s shares in his name in trust for L and, accordingly, was L’s nominee. C managed the company at all times. Many years later, during which time trouble had been brewing between C and L, the nominee shares were transferred to, and registered in the name of, the beneficial owner, L. Thereafter, L complained about a number of management issues constituting alleged unfairly prejudicial conduct by C, most of which occurred whilst he was not the registered member. The issue was whether L  was entitled to claim in respect of that conduct on the elementary premise that the conduct complained of must have prejudiced members in their capacity as such.146 Ferris J concluded that L was entitled to rely on conduct which took place while his shares were registered in the name of C as bare trustee for him. Accordingly, as a general proposition, nominee shareholders do have the necessary standing to present section 994 petitions.

Majority shareholders 9.36 In the ordinary democratic dispensation of a company, the majority should prevail when the body of members is put to the vote.147 Accordingly, there is no apparent need for the majority’s protection under section 994, since they are able to cure unfairly prejudicial conduct by taking control of the company by virtue of their voting power148 – which includes removal of the directors.149 Although the point of departure is that a majority shareholder does not have standing in unfair prejudice petitions, it is not an absolute rule; standing is possible where the majority in number of shares has been deprived of their majority voting power due to the weighting of the minority’s voting power.150 The numerical majority will continue to benefit pro rata their shareholding when a winding-up dividend is paid; but, in practice, in the course 142 Atlasview Ltd v Brightview Ltd [2004] EWHC 1056 (Ch), [2004] 2 BCLC 191, ChD, at [38]. 143 [2006] EWHC 832 (Ch). 144 At [14]. See also Baker v Potter [2004] EWHC 1422 (Ch), [2005] BCC 855, ChD. 145 [2002] 1 BCLC 454, ChD. 146 At [44]–[47]. 147 See Chapter 5 for a discussion of the rule in Foss v Harbottle. 148 See Intermedia Productions Ltd v Patel [2020] EWHC 473 (Ch), [2020] BCC 582. 149 See 7.63–7.66. 150 See Re Ravenhart Service (Holdings) Ltd [2004] EWHC 76 (Ch), [2004] 2 BCLC 376, ChD; Alvona Developments Ltd v The Manhattan Loft Corporation (AC) Ltd [2006] BCC 119, ChD, per Peter Smith J at [59]; Re Macom GmBH (UK) Ltd [2021] EWHC 1661 (Ch) where the petitioner was the majority (60%) shareholder whilst the individual respondents held 20% each. By the terms of the shareholders’ agreement, a minority shareholder had a casting vote on the board of two directors which meant that (with certain exceptions reserved to the shareholders) it was the latter who has control of the company.

244

Standing 9.37

of the life of the company, they are not the de facto controllers of the company. The correct perspective appears to be that the mischief which section 994 seeks to cure is the abuse of power prejudicing members who lack the power to stop such abuse. 9.37 In Re Baltic Real Estate (No 2),151 a majority shareholder was not permitted to proceed with unfair prejudice proceedings. The prejudice relied on by the petitioner was based on the activities of some of the respondents as directors. However, breach of their obligations did not establish unfair prejudice, because the petitioner could, and indeed did, bring that prejudicial state of affairs to an end. A majority shareholder who has voting control, particularly where there is no suggestion of any interference with the exercise of that voting control (eg by blocking a special resolution which the majority shareholder wished to have passed), cannot present an unfair prejudice petition; voting control effectively protects them from unfair prejudice.152 Similarly, majority shareholders (having voting control) were not permitted to complain that a minority shareholder’s refusal to sell his shares to them constituted unfairly prejudicial conduct, because they were in effective control and remained in control of the conduct of the business of the company, notwithstanding the continuing minority shareholding of the member with whom they had experienced a troublesome relationship.153 Peter Goldsmith QC, sitting as a Deputy High Court Judge, endorsed the view in Baltic Real Estate to the effect that, where a petitioner is able to put an end to any unfair prejudice, he has no standing under section 459.154 The Court of Appeal in Re Legal Costs Negotiators (per Peter Gibson LJ), however, considered that Baltic Real Estate was but a solitary example where a court was not prepared to strike out a petition brought purely on the ground of alleged unfair prejudice suffered by a majority shareholder.155 The Court of Appeal considered that the proper perspective on the matter was that, in the event of an imbalance in voting power – ie the voting power not corresponding with the number of shares held – a mere majority shareholding may not be sufficient to allow standing to present an unfair prejudice petition. A majority shareholder by virtue of number of shares held, but deprived by the articles of voting power, is in the same powerless position as a minority shareholder (without enhanced voting rights) when it comes to influencing the affairs of the company by exercising voting rights. It is self-evident that, where shares carry equal voting rights (ie  voting rights are not weighted), a majority shareholder will indeed have the power to stop unfairly prejudicial conduct and, as such, cannot claim under section 994.156 The Court of Appeal left open the question of shareholders seeking relief when the company, through its directors or in general meeting, exercised its powers to conduct the affairs of the company in an unfairly prejudicial manner which failed to give effect to the legitimate expectations of its contributories; a state of affairs which was incapable of being cured by the petitioners through the exercise of powers available to them.

151 [1993] BCLC 503, ChD. 152 At 507f–507i. See also Re HR Harmer [1959] 1 WLR 62, CA. 153 Re Legal Costs Negotiators [1999] 2 BCLC 171, CA, at 193. Note that the judgment of the High Court and the Court of Appeal are published under one reference. The Court of Appeal judgment commences at 193. 154 Re Legal Costs Negotiators [1999] 2 BCLC 171, ChD, at 185f–185g. 155 Re Legal Costs Negotiators [1999] 2 BCLC 171, CA, at 200h. 156 At 199a–199b, also 199g; and see Re Macom GmBH (UK) Ltd [2021] EWHC 1661 (Ch).

245

9.38  Unfair Prejudice: Section 994

However, remote as the possibility might be, the gateway to a claim under section 994 should be left open to a numerically majority shareholder whose interests were injured by unfairly prejudicial conduct. It will be highly relevant whether the majority shareholder could have acted earlier to stop the conduct complained about. If it only became aware of unfairly prejudicial conduct after the event, it would, in principle, seem to be in order to allow it standing. It would be a highly technical approach to contend that only a minority shareholder can bring an application in circumstances where the prejudice affected all of the members of the company equally.157

No standing Name already removed from register 9.38 Despite the liberal construction to be applied to section 994, it seems hard as a matter of principle to envisage a situation where a member who has disposed of its shares,158 and whose name has been removed from the members’ register, will have a right to pursue a section 994 claim. Such a member simply no longer has any interest in the way in which the company is being run and the suffering of pecuniary loss or prejudice is hardly imaginable. Section 994(1) clearly extends to members (in all their variety and taking into account all the exceptions and extensions) who are members at the time when the petition is launched. In Kohn v Meehan,159 an erstwhile member brought an action for damages against the purchasers of his shares on the basis of unfairly prejudicial conduct. The defendants, unsurprisingly, contended that a claim based on unfairly prejudicial conduct could only be brought by a current member.160 The court reluctantly assumed that standing may arise under peculiar circumstances, but nevertheless held that, in that instance, the allegation constituted an abuse of the process of the court, since a declaratory order was sought with retrospective relevance only.161 What was considered to be virtually impossible to happen, came to pass in Re Motion Picture Capital Ltd.162 Deputy ICC Judge Kyriakides found that the applicant who commenced proceedings as member and thereafter disposed of his shares and was in fact removed from the register of members, retained standing to pursue the petition as a matter of construction of section 994(1). No direct authority is cited in support of the conclusion of continued standing which turned on the inclusion of the word ‘apply’ in section 994 (1). On the facts of that case, the shareholder had been involuntarily removed. The court concluded that where the disposal was involuntary, the former shareholder may retain a legitimate interest in pursuing the petition following their removal, unless it is plain and obvious that despite the breadth of the discretion granted to a trial judge under section 996, no relief would be granted to them at trial.163 To date, the judgment has not received any further judicial consideration. 157 Re Ravenhart Service (Holdings) Ltd [2004] EWHC 76 (Ch), [2004] 2 BCLC 376, ChD, at [103]. 158 This may also be the case where the shareholder has divested himself of the shares by a completed sale: see Re FSC Andrews Ltd [2015] EWHC 4042 (Ch). Its successor may of course establish standing under s 994(2) for as long as entry on a register has not been effected. 159 [2003] 1 WLUK 727, (ChD). 160 At [56]. 161 At [90]. 162 [2021] EWHC 2504 (Ch), [2021] 9 WLUK 158 delivered on 17 September 2021. 163 At [58].

246

Standing 9.39

Shares sold but name not yet removed from register 9.39 The question arises whether a member who still appears as a member on a register due to inadvertence, but who has already sold his shares, will have retained any cause of action to pursue under section 994. Since membership is the key to standing, the appearance of a name in a register ought to be sufficient.164 The question arose in Baker v Potter,165 where the court had to address the issue whether the compelling authority of the entries in a members’ register should prevail. There were only two shareholders, B and P. B sold his shares to P, but P did not pay the purchase price in full. B remained registered as a member. B launched a section 459 petition and P counterclaimed for delivery of the shares. David Richards J upheld the basic principle: as long as B remained a member, his rights were determined by that fact; therefore, as long as he remained a member, his permission for the acquisition of property for the company had to be obtained:166 ‘It [the seeking of permission] was not a step which as a matter of law was open to him without the informed consent of Mr Baker as the other shareholder; Regal (Hastings) Ltd v Gulliver [1967] AC  134. Strictly speaking, as Mr Baker still held his share and only part of the purchase price had been paid, his consent was required. Until paid the purchase price, he was not a nominee of his share for Mr Potter but was still entitled to exercise the voting rights attached to his share, subject to fiduciary restraints resulting from his position as a vendor under a specifically enforceable contract of sale: Musselwhite v CH Musselwhite & Son Ltd [1962] Ch 964, Michaels v Harley House (Marylebone) Ltd [1999] BCC 967; [2000] Ch 104.’ Accordingly, B  had standing. An important distinction was, however, drawn when it came to the relief to which the claimant was entitled: if B could establish actual or threatened acts of unfair prejudice, he might well have been entitled to injunctive relief in order to protect the value of his shareholding and his rights as a shareholder, pending completion of the sale and as a precaution if the sale was not completed.167 But, when it came to financial relief, the position was held to be different. By agreeing to sell his shares to P, B  had converted his interest in the company into a chose in action to recover the purchase price from P. If there had been any improper extraction of funds or other assets from the company by P  before the conclusion of the sale agreement, there might have been a case for financial relief in favour of B, notwithstanding the agreement. The agreement would not by itself have amounted to a waiver of any accrued rights. Financial relief was not, however, appropriate in respect of the alleged unfairly prejudicial acts or conduct which occurred after the date of the agreement. Provided that B  was paid the agreed price for his share, he would have suffered no prejudice. That position might well have changed had P been unable, or refused, to complete the purchase and the contract was terminated.168 The petition was accordingly dismissed and the counterclaim succeeded.

164 165 166 167 168

Musselwhite v CH Musselwhite & Son Ltd [1962] Ch 964. [2004] EWHC 1422 (Ch), [2005] BCC 855, ChD. At [105]. At [2]. At [3].

247

9.40  Unfair Prejudice: Section 994

MANAGEMENT OF THE AFFAIRS OF A COMPANY ‘Management’ 9.40 Courts will not lightly interfere in the business decisions of a company by substituting its own views for that of the decision makers. Any material breach of fiduciary duties, the articles, or shareholders’ agreements, or serious mismanagement by the de facto controllers of the company, will naturally be addressed if it resulted in unfair prejudice to members’ interests, but the court is neither a forum for business review nor an appeal body called on to reconsider the merits of corporate business decisions bona fide taken in the interests of the company.169 In Re Sam Weller & Sons Ltd,170 Peter Gibson J, with some reluctance, decided not to strike out allegations of unfair prejudice related to a choice made by directors to provide for capital expenditure in preference to increasing dividends under a parsimonious dividend policy. It is hard to predict what the outcome would have been had the issue been canvassed in evidence at trial. It does not appear as though this approach to a consideration of business decisions by a board of directors will be influenced by the formulation, in section 172 of the 2006 Act, of the duty to promote the success of a company.171 9.41 In Re Elgindata (No 1),172 Warner J held that, in appropriate cases, it would be open to the court to find that serious mismanagement of a company’s business constitutes conduct that is unfairly prejudicial to the interests of minority shareholders. The judge associated himself173 with the approach adopted by Peter Gibson J in Sam Weller,174 adding two further perspectives:175 first, judges are ill-equipped to resolve disagreement between members and management regarding management decisions, but, in any event, there cannot be any unfairness to the petitioners only because those in control of the company’s affairs take a different view from theirs on such matters. Secondly, when acquiring shares, a shareholder takes the risk that management may not be of the highest quality. Short of a breach by a director of his duty of skill and care, there is, on the face of it, no unfairness to a shareholder if the quality of the management turns out to be poor. Such unfairness and prejudice may, however, arise where the majority shareholders persist in retaining a member of their family, albeit demonstrably incompetent, in charge of the management of the company’s

169 The court will not interfere with matters that fall within the bounds of ordinary management activity; per Hildyard in J in Re LCM Wealth Management Ltd [2013] EWHC 3957 (Ch), at [306]. In other cases, by analogy with the recognition of the separation of powers in public law where deference should be shown by courts to government’s exercise of discretion, the phrase a ‘margin of appreciation’ has been used; eg Progress Property Co Ltd v Moore [2010] UKSC 55, [2011] 1 WLR 1, SC, at [28], borrowing from Clydebank Football Club Ltd v Steedman 2002 SLT 109, at [76]. See also 9.112 and the discussion of the Wednesbury principle at 2.26. 170 [1990] Ch 682, at 694B–694C. 171 See the discussion at 2.22–2.26. 172 [1991] BCLC 959, ChD; not disturbed on this point on appeal which only dealt with costs: Re Elgindata (No 2) [1992] 1 WLR 1207, CA. 173 At 993i. 174 Re Sam Weller & Sons Ltd [1990] Ch 682. See also Fisher v Cadman [2005] EWHC 377 (Ch), [2006] 1 BCLC 499, ChD, at [95]; Atlasview Ltd v Brightview Ltd [2004] EWHC 1056 (Ch), [2004] 2 BCLC 191, ChD, at [50]. 175 Re Elgindata Ltd [1991] BCLC 959, ChD, at 994a–994e.

248

Management of the affairs of a company 9.43

business.176 Therefore, if management neglects the business on occasion or lacks the necessary vigour and purposefulness, those shortcomings and human frailties are likely not to amount to unfairly prejudicial conduct, but will be considered as part of the business risks that the shareholders took.177 9.42 Where the conduct complained of indeed amounts to constructive mismanagement rather than a difference of opinion on the desirability of particular commercial decisions, and where such mismanagement is sufficiently serious to justify the court’s intervention, a remedy is available under section 994. To reiterate: a court should be astute not to second-guess legitimate management decisions taken on reasonable grounds, even though, as events transpired, they may not have been the best decisions in the interests of the company.178 The facts in Oak Investment Partners XII, Ltd Partnership v Boughtwood179 indicate that acting in a way that goes beyond making legitimate management decisions may amount to unfair prejudice: the petitioner B had established a company to develop a new kind of electric motor for automobiles. He engaged a venture capital firm as an equity investor. The parties had difficulties working together, which culminated in an attempted ‘coup’ by B, who purportedly removed the new CEO and appointed two additional directors to the board. B  persistently failed to adhere to his management obligations, ignored board decisions, and expended money not budgeted for.180 The Court of Appeal181 characterised the conduct of the director as ‘underhanded and unconstitutional’182 and wrongly trespassing on others’ turf and doing so in a manner seriously destructive of the group’s well-being. He created a poisoned culture that was damaging to the group’s morale’.183 This constituted conduct sufficiently serious to warrant his buyout by the respondent.

‘Company’ 9.43 ‘Company’ means any company within the meaning of the 2006 Act.184 or, before 26  May 2015, any company which is not such a company, but a statutory water company within the meaning of the Statutory Water Companies Act 1991.185 However, companies other than one in which shares are held may come within the ambit of a section 994 order, whereas companies in insolvent winding up merit special mention.

176 At 994e–994f. 177 At 1000h–1000i. See also Fisher v Cadman [2005] EWHC 377 (Ch), [2006] 1 BCLC 499, ChD, at [103]–[105], where neglect to look after the assets of the company properly was held not to constitute grounds for an unfair prejudice petition; Re Addbins Ltd [2015] EWHC 3161 (Ch) at [68] where the director eschewed a company’s best interests in favour of those of another company of which it was the chairman. 178 Re Macro (Ipswich) Ltd [1994] 2 BCLC 354, ChD, at 404i–405a, 406f–406g; Fisher v Cadman [2005] EWHC 377 (Ch), [2006] 1 BCLC 499, ChD, at [95]. 179 [2009] EWHC 176 (Ch), [2009] 1 BCLC 453, ChD. 180 At [329]. 181 Sub nom Boughtwood v Oak Investment Partners XII, Limited Partnership [2010] EWCA Civ 23, [2010] 2 BCLC 459, CA, at [120]–[123]. 182 [2010] EWCA Civ 23, [2010] 2 BCLC 459, CA, at [120]. 183 At [122]. 184 See the discussion at 1.4–1.5. 185 Section 994(3) of the 2006 Act.

249

9.44  Unfair Prejudice: Section 994

Third party companies 9.44 The scope of section 994 was held to extend beyond the company in which a petitioner had held his shares:186 S had held some 20 per cent of the preference shares in a company engaged in the business of supplying holidays. The business was not profitable and S regarded his investment as worthless. M, P and C acquired shares in, and took over management of, the company. Their involvement changed the fortunes of the company for the better. A scheme was devised whereby the company would sell its business to Newco, wholly owned by another company and controlled by the self-same M, P and C to the exclusion of S. The company became a subsidiary of Newco, and M, P and C became directors of Newco. The company’s business was then hived up to Newco in contemplation of the exercise by another company (OAG) of an option to purchase all of Newco’s shares from the company. Newco paid the company £1 for its business, but also assumed responsibility for £3.9 million owed by the company. Under the option agreement, OAG was liable to pay, and did pay, £10 million for Newco’s shares. S petitioned under section 459 on the ground that the transactions were unfairly prejudicial, seeking relief against, inter alia, Newco. The court held that it could properly include in its order not only those in de facto control of the company at the relevant time, but also (or alternatively) a second company, under the same, or substantially the same, de facto control, to which the assets of the first company (of which the petitioner was a member) had been transferred at an undervalue. In this instance, Newco was under the same de facto control as the company, and was deemed to have acted with knowledge of the directors’ prejudicial conduct towards the petitioner. An unfair prejudice petition was accordingly available against a company of which the petitioner was not a member.

Insolvent companies 9.45 In the event of a situation calling for relief under section 994 against, or in relation to, a company which is in insolvent winding up (apart from any other individual wrongdoers such as directors), there is an apparent lack of financial benefit to be gained by a member in an unfair prejudice petition. A  section 994 petition might still be successful if the member was also a creditor of the company.187 It must be emphasised that this position was arrived at in a manner more befitting of a derivative action,188 since the effect of the order was that the directors were ordered to pay the compensation to the insolvent company, thus creating a fund from which creditors’ claims could be partially satisfied. The default position for a company in insolvent winding up is that there is no net asset value and most likely no share value. In those circumstances, an order for the buy-out of shares does not present a satisfactory remedy because valueless shares will pass hands. Such an order is likely to be seen as the imposition of a fine on the members compelled to buy out, and therefore unfair, since they get nothing of value 186 Re Little Olympian Each-Ways Ltd (No 3) [1995] 1 BCLC 636, ChD. 187 Gamlestaden Fastigheter AB v Baltic Partners Ltd [2007] UKPC 26, [2007] 4 All ER 164, PC, at [29]–[37]; compare Re Tobian Properties Ltd [2012] EWCA Civ 998, [2013] BCC 98, CA, at [21]–[24], applied in Re Addbins Ltd [2015] EWHC 3161 (Ch) at [67]; and see R&H Electric Ltd v Haden Bill Electrical Ltd [1995] 2 BCLC 280, ChD. 188 Compare Re Hailey Group Ltd [1993] BCLC 459, ChD; Lowe v Fahey [1996] 1 BCLC 262, ChD.

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Management of the affairs of a company 9.47

in return for the purchase price.189 The other side of the coin is that the vendor may unjustly benefit from such a windfall. 9.46 A different approach was adopted in Re Woven Rugs:190 despite the insolvency of the company, it was held to be no impediment to an order for the purchase of shares, as long as the date for the valuation was an appropriate date earlier than the date of the order. It seems somewhat artificial, and does appear to amount to a penalty, since the buyer would receive no value for the shares that it purchased as a result of the order. The artificiality does not disappear under circumstances where it was held that, as long as the petition was presented prior to the company’s winding up and was sustainable in itself, it could not fail simply by reason of a supervening winding up.191 A buy-out was authorised where the company was declared insolvent in Austria, with the shares to be valued on the date of unlawful expulsion of the petitioner, at which time the company was still solvent.192

The ‘affairs’ of a company General 9.47 To bring itself within the ambit of section 994, a member has to establish that the company’s affairs are being, or have been, conducted in an unfairly prejudicial manner to members, or that any actual or proposed act or omission of the company (including an act or omission on its behalf) is, or would be, so prejudicial.193 It calls for a careful analysis to determine what those ‘affairs’ comprise.194 There is ample authority for the proposition that ‘affairs’ should be given a generous interpretation.195 The meaning of ‘affairs’ is, despite its potentially very wide meaning, limited by the context in which it is used in section 994. ‘Affairs’ are first and foremost (and logically) qualified by the fact that they must be those ‘of the company’.196 Affairs personal to a member do not matter for the purposes of section 994 – personal affairs must be resolved by the law of contract or tort.197 The second limitation is that, to be of relevance for relief under section 994, the company’s affairs are only those which are unfairly prejudicial to a member or a class of members. 189 190 191 192 193

194 195 196 197

Re Hailey Group Ltd [1993] BCLC 459, ChD, at 473d. [2010] EWHC 230 (Ch) at [173]. Edgerley v PW Edgerley Ltd [1997] CLY 3102. Re Via Servis Ltd [2014] EWHC 3069 (Ch). Section 994(1)(a) and (b). See also Re a Company (No 001761 of 1986) [1987] BCLC 141, ChD, at 144e–144g; Re Leeds United Holdings plc [1996] 2 BCLC 545, ChD, at 560a–560d; Re Legal Costs Negotiators Ltd [1999] 2 BCLC 171, CA, at 196c; Re Phoneer Ltd [2002] 2 BCLC 241, ChD, at 249f; Re Unisoft Group Ltd (No 3) [1994] 1 BCLC 609, ChD, at 611d–611g, 611c–611d, 623c–623f, 622g–623c; emphasised again in Rembert v Daniel [2018] EWHC 388 (Ch), [2019] BCC 167, at [19]–[20]. Re a Company (No 001761 of 1986) [1987] BCLC 141, ChD, at 144e–144f. See Re Unisoft Group Ltd (No 3) [1994] 1 BCLC 609, ChD, at 611e–611f. See, amongst many others, R v Board of Trade [1965] 1 QB 603. For discussion of ‘company’, see 1.4–1.5. Re Coroin Ltd [2012] EWHC 2343 (Ch) at [626], affirmed on appeal [2013] EWCA Civ 781, [2013] 2 BCLC 583, CA. However, see the approach adopted in relation to a wrongful dismissal claim which was allowed to go forward as part of a s 994 petition: Wootliff v Rushton-Turner [2016] EWHC 2802 (Ch); see also 9.33.

251

9.47  Unfair Prejudice: Section 994

There is a multitude of activities which are performed in the ordinary course of a company’s business which do not, or do not remotely have the potential to, constitute unfairly prejudicial conduct affecting the interests of a member.198 The Court of Appeal put the position as follows:199 ‘The expression “the company’s affairs” in subs (1)(a) is of wide ambit and plainly covers all matters decided by the board of directors. Equally plainly, it does not extend to matters which are neither effected by the company nor on its behalf but, for example, concern activities of shareholders solely in that personal capacity and as between themselves. Accordingly, actions or omissions in compliance or contravention of the articles of association of a company may or may not constitute the conduct of the company’s affairs within s 994(1) depending on the precise facts…’ The notion of ‘affairs’ in itself suggests a wide variety of activities. There are ‘myriad different ways in which the affairs of a company may in practice be carried on’.200 Judicial interpretation has not so far ventured a comprehensive definition, but includes a rather self-evident description that ‘affairs’ encompass ‘business affairs’.201 More useful is the description of ‘affairs’ as including a company’s ‘goodwill, its profits or losses, its contracts and assets including its shareholding in and ability to control the affairs of a subsidiary, or perhaps … a sub-subsidiary … and its power in virtue of that shareholding to control the board of that subsidiary …’.202 The affairs of a company do not only encompass those matters which may come before its board for consideration. Depending on the facts, matters that are not considered by the board are indeed capable of being part of its affairs.203 Non-compliance with a pre-emption provision ordinarily constitutes a private affair and is not the company’s business.204 Where directors’ remuneration would consist of dividend and not salary, the size of a director’s shareholding would dictate his reward for his work on the company’s business. The way in which directors were to be remunerated and the company’s distributions policy do fall within the conduct of the company’s affairs. Therefore, to deny a shareholder his right of pre-emption when he was still a director and thereby reduce his remuneration, constitutes interference in the manner in which the parties had agreed that the company would remunerate its directors and falls within the ambit of section 994(1).205 For the purposes of pre-emption provisions either in a company’s articles of association or in a shareholders’ agreement, a parent company does not have an ‘interest’ in shares held by its subsidiary and a sale of the subsidiary does not involve

198 See Re Unisoft Group Ltd (No 3) [1994] 1 BCLC 609, ChD, at 611e–611f. 199 Re Charterhouse Capital Ltd [2015] EWCA Civ 536, [2015] 2 BCLC 627, CA, at [45]. 200 Oak Investment Partners XII, Limited Partnership v Boughtwood [2009] EWHC 176 (Ch), [2009] 1 BCLC 453, ChD, at [13], a point not affected by the partially successful appeal – [2010] EWCA Civ 23, [2010] 2 BCLC 459, CA. 201 R v Board of Trade [1965] 1 QB 603 at 613b. 202 At 613c. 203 Re Neath Rugby Ltd (No 2) [2009] EWCA Civ 291, [2009] 2 BCLC 427, CA, per Stanley Burnton LJ at [50]. 204 Re Unisoft Ltd (No 3) [1994] BCC 766, [1994] 1 BCLC 609, ChD; and Re Coroin Ltd [2013] EWCA Civ 781, [2013] BCC 583, CA; Graham v Every [2014] EWCA Civ 191, [2015] 1 BCLC 41, CA, at [29]–[31]. 205 Graham v Every [2014] EWCA Civ 191, [2015] 1 BCLC 41, CA, at [40].

252

Management of the affairs of a company 9.49

a transfer of an interest in the shares held by the subsidiary which will trigger the pre-emption provisions.206 9.48 The facts in Lloyd v Casey207 underline the need to distinguish between the affairs of the company and personal affairs. The claimant contended that no funds ought to have been distributed by the company. The fact that the claimant left the defendant in charge of the company, with power (amongst other things) to cause the company to pay bonuses, was held to constitute concurrence with the arrangement under which the company paid bonuses to the defendant. The conduct permitting the company to pay such bonuses was part of the conduct of the affairs of the company.208 The claimant further complained that he had not received his full share of the bonuses from the defendant. That complaint was rejected:209 it was a complaint in respect of the defendant’s conduct of his own affairs, not those of the company. 9.49 In Hawkes v Cuddy (No  2),210 the claimant alleged unfairly prejudicial conduct by the defendant in relation to the Neath Rugby Football Club (‘Neath’). Due to a re-organisation of Welsh rugby, the defendant sought to acquire Neath. The claimant and the defendant agreed to set up a new company (N) (of which they would be the directors) in order to buy the assets of Neath. The claimant would focus on managing Neath, while the defendant would concentrate on the management of a regional rugby side (S). For that purpose, N would nominate the defendant as one of the two directors of the new entity established to own and manage S. To avoid personal embarrassment arising out of a possible winding up of another company of which the defendant was a director, his wife was appointed as a director of N, along with the claimant. This was merely a front, since the defendant personally took part in the management of N. One of the issues was whether the defendant – when he concurred as director of S to institute hostile legal proceedings against Neath – was conducting the affairs of Neath. Lewison J considered that he was not: the institution of legal proceedings is quintessentially an arm’s length matter and, if the defendant believed that it was in the best interests of S to take such proceedings, he was entitled, if not bound, to support them.211 However, by using confidential information which he had obtained from Neath internally, he could be considered to have been conducting the affairs of Neath in passing that information on to S.212 Although express provision is made in section 994(1)(b) for acts and omissions by the company, it is nevertheless significant to note that passive and negative conduct may also constitute the affairs of the company: ‘Misconduct in the affairs of a company may be passive conduct, neglect of its interests, concealment from the minority of knowledge that it is material for the company to know’.213 Failure to promote the business of a company and, instead, diverting business which rightfully belongs to 206 Re Coroin Ltd [2012] EWCA Civ 179, [2012] 2 BCLC 611, CA. 207 [2002] 1 BCLC 454, ChD. 208 In this instance, it was not unfairly prejudicial to L because it was either part of the original arrangement between L and C, or it was something which L knew about and which he was content to let happen. 209 Lloyd v Casey [2002] 1 BCLC 454, ChD, at [73], [74]. 210 [2007] EWHC 2999 (Ch), [2008] BCC 390, ChD. 211 At [216]. 212 At [267]–[270]. Confirmed by the Court of Appeal (Re Neath Rugby Ltd (No 2) [2009] EWCA Civ 291, [2009] 2 BCLC 427, CA at [66], [67]). 213 Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324, HL, at 362. The description remains valid for present purposes: see Whillock v Henderson [2009] BCC 314, CSOH, at [15].

253

9.50  Unfair Prejudice: Section 994

it to a rival set up by a director of the company constitutes negative conduct of the affairs of a company. Such conduct is aggravated by the aberrant director arranging for labour and materials to be supplied to the new company by the existing company, but then failing to effect payment in respect thereof.214

The dividing line Examples of companies’ affairs which are not personal affairs 9.50 The boundary between the affairs of a company and the affairs of a member respectively may be difficult to distinguish. A company may act or conduct itself in a manner affecting a shareholder’s rights by, for instance, the directors refusing to sanction a transfer of shares for improper reasons.215 The actions of the board will constitute conduct of the affairs of the company and may trigger claims under section 994. In addition, members who exercise their personal rights, to vote their shares as they please, may cause the company to perform an act by passing a resolution in general meeting in a manner which may be unfairly prejudicial to the interests of other members. If the collective exercise of voting rights results in an act or omission by the company causing unfair prejudice to the interests of members, it will be the affairs of the company, and not those of the individual shareholders who had exercised their vote, on which a petition may be founded.216 9.51 In Re Phoneer Ltd217 the shareholders in a quasi-partnership company entered into an agreement whereby each party would become a director, each would hold 23 shares, and each would lend the company £250,000 interest free, repayable on demand. In compliance with the agreement, each one would draw, and continue to draw, equal salaries and receive dividends. W managed the affairs of the company and developed its business. He had committed himself to serve the company for five years. X  was the bookkeeper and acted mainly in an administrative capacity. W  became dissatisfied with the performance of X  and insisted on a renegotiation of the agreement: deadlock ensued.218 Mr Roger Kaye QC (sitting as Deputy Judge of the High Court) held219 that the agreement related to the conduct of the affairs of the company, as well as the manner in which the affairs of the company would be regulated. W breached that agreement: first, by requiring his duties towards the company to be renegotiated; and, secondly, because he had engineered the ensuing deadlock. That conduct amounted to a departure from the terms of the agreement which regulate the conduct of the affairs of the company and not the affairs of the shareholders who were party to the agreement. Odd as it may seem, where a shareholder/director assaulted his co-shareholder/ director in an altercation about the former’s remuneration, it was considered to be an aspect of the conduct of the company’s affairs and not personal affairs.220 214 Re Stewarts (Brixton) Ltd [1985] BCLC 4, ChD, at 8f–9b. See also Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324, HL, at 362. 215 Re Unisoft Group Ltd (No 3) [1994] 1 BCLC 609, ChD, at 623c–623d. See also Re Last Lion Holdings Ltd [2018] EWHC 2347 (Ch). 216 At 623d–623e. 217 [2002] 2 BCLC 241, ChD. 218 For a discussion of deadlock, see 9.173–9.175. 219 At 252c–252f. 220 Re Home & Office Fire Extinguishers Ltd [2012] EWHC 917 (Ch).

254

Management of the affairs of a company 9.52

If one quasi-partner so denigrates the activities of another quasi-partner as regards the latter’s conduct of the company’s affairs as to make their constructive continuation in quasi-partnership unrealistic, that may well suffice as the affairs of the company.221

Examples of members’ personal affairs which are not the companies’ affairs 9.52 The right of a shareholder to vote his shares is a right of property which the shareholder is free to exercise in his own best interests.222 Members owe no fiduciary duty to each other223 and need therefore not fear retribution if they freely exercise their vote in a manner prejudicing other members. Consequences may, of course, follow if the vote is cast in breach of a shareholders’ agreement. In Re a Company (No 005685 of 1988), ex p Schwarcz (No 2),224 Peter Gibson J emphasised the personal nature of exercising a vote:225 ‘At this point let me turn to the law on the passing of resolutions by a company in general meeting to alter the articles of a company. All resolutions must be passed bona fide for the benefit of the company as a whole, but that requirement does not have the same content for a board of directors, all of whom are fiduciaries, as it does for a general meeting of the company. The law is not so foolish as to prevent a shareholder from voting in his own private interests provided that the resolution is not discriminatory.’ If the exercise of those rights results in the adoption of a resolution, the resolution (collectively passed by a majority) becomes an act of the company.226 A section 994 petition concerned with the voting control of the company by members in general meeting (and hence acting in their capacity as shareholders) accordingly did not fall within the ambit and scope of affairs of the company and was struck out as a result.227 Emphasising the point that ‘shareholders must be kept distinct from the company so far as their private position as shareholders is concerned’, Harman J reasoned as follows:228 ‘It is important to remember that shareholders’ rights to deal with or vote their shares are separate from the rights of the company as a corporate entity and shareholders’ relationships with it. Shareholders are entitled to sell their shares, to vote their shares, to take any course they like in general meeting without regard to any other person’s rights or position. In my judgment the law is that a shareholder may act with malice in voting his shares against a particular resolution and there can be no objection to that, just as in Bradford Corp v Pickles [1895] AC 587, a landowner acted on his own land with malicious intent to harm his neighbour, but was not in breach of any legal obligation … 221 Stated obiter by Hildyard J in Apex Global Management Ltd v FI Call Ltd [2015] EWHC 3269 (Ch) at [48]. 222 Re Astec (BSR) plc [1998] 2 BCLC 556, ChD, at 584c–584d; Re Unisoft Group Ltd (No 3) [1994] 1 BCLC 609, ChD, at 622i–623b. 223 Halton International Inc (Holdings) Sarl v Guernroy Ltd [2005] EWHC 1968 (Ch), [2006] 1 BCLC 78, ChD, affirmed by the Court of Appeal [2006] EWCA Civ 801. See also 3.2 and 7.71. 224 [1989] BCLC 427, ChD. 225 At 449c–449d. 226 Re Unisoft Group Ltd (No 3) [1994] 1 BCLC 609, ChD, at 611b–611c. 227 Re Unisoft Group Ltd (No 3) [1994] 1 BCLC 609, ChD. 228 At 622g–623h, quoted with approval in Re Astec (BSR) plc [1998] 2 BCLC 556, ChD, at 585c–586a. See also Fowler v Gruber [2010] 1 BCLC 563, CSOH, at [108].

255

9.53  Unfair Prejudice: Section 994

In my judgment, it is vitally important to hold that shareholders’ disputes concerning dealings with their shares are not the same as unfair conduct of the company’s business. Shareholders must be kept distinct from the company so far as their private position as shareholders is concerned.’ A shareholder’s repeated requests for the transfer of shares, or for the resignation of directors, are matters of personal interest and not related to the conduct of the affairs of the company.229 Requesting a meeting of shareholders, or seeking answers to an excessive number of questions, remains the affair of the shareholder and not of the company.230 9.53 Affairs arising out of commercial relationships between a company and its members in capacities other than members do not fall within the ambit of the affairs of a company for purposes of section 994:231 a claim disguised as a mere creditor’s claim will not pass muster;232 nor does a claim by a freehold landowner who happened to be a member of the company.233 A  failure by a company to pay rental and management charges to the petitioner cannot be classified as affairs of the company;234 and a claim for a transfer of shares failed when the underlying problem related to the payment of bonuses – an aspect relevant to the petitioner’s position as an employee and not as a member.235 9.54 In Arrow Nominees v Blackledge,236 the majority shareholder was also a major creditor of and supplier to a subsidiary. It effectively exerted control in its capacity as creditor, since the subsidiary did not have alternative sources of funding. The alleged unfairly prejudicial conduct amounted to oppressive conduct by the majority shareholder in its capacities as supplier or lender and, as such, did not amount to allegations of oppressive conduct by it in its role as majority shareholder. There was no evidence of unfair conduct on the part of the majority shareholder in that capacity.237 Chadwick LJ (Roch and Ward LJJ concurring) held:238 ‘It is important to keep in mind that the basis upon which the court grants relief on a petition under section 459 of the Companies Act 1985 is that “the company’s affairs” are being or have been conducted in a manner which is unfairly prejudicial to its members or to some part of its members. The fact (if it be established) that the affairs of some other company (say, company B) which is a member of the company (company A) in respect of which the petition is presented and which is, 229 Re a Company (No 001761 of 1986) [1987] BCLC 141, ChD, at 146e–146f. 230 Re Legal Costs Negotiators Ltd [1999] 2 BCLC 171, CA, at 196c. 231 It may be a fine distinction, but it is a very important one to draw: commercial relationships of a member, in his capacity as provider of loan capital to the company, may be so intertwined with his membership that prejudice may be suffered if the member’s broader but integrated interest in his loan capital is unfairly prejudicially affected. See Gamlestaden Fastigheter AB v Baltic Partners Ltd [2007] UKPC 26, [2007] 4 All ER 164, PC, and the discussion at 9.31. 232 Re a Company (No 003843 of 1986) [1987] BCLC 562, ChD, at 572h–573a. The only obligations which the claimant sought to enforce were obligations on the part of the company to pay him. That had no bearing on his interests as a member. The only remedy he could ever properly have pursued was a financial remedy which did not necessitate an unfair prejudice petition. 233 Re JE Cade & Son Ltd [1992] BCLC 213, ChD, at 229d–229i. See R&H Electric Ltd v Haden Bill Electrical Ltd [1995] 2 BCLC 280, ChD, at 292c. 234 Re Unisoft Group Ltd (No 3) [1994] 1 BCLC 609, ChD, at 626a–626c. 235 O’Neill v Phillips [1999] 1 WLR 1092, HL. 236 [2000] 2 BCLC 167, CA. 237 At [49]. 238 At [21].

256

Management of the affairs of a company 9.57

for example, a supplier or a lender to company A are being conducted in a way which is prejudicial to company A is, of itself, no basis for relief. It is necessary to show that company B is using its position as a member of company A to obtain some advantage for itself; and that, in doing so, it is acting contrary to the articles of association or to some collateral agreement on the basis of which it (or others) became a member (or members) of company A, or is using its powers as a member of company A in a way which equity would regard as contrary to good faith.’ The actions of a member who repaid a company’s loan to the bank without notifying the company, and who, in addition, took an assignment of the bank’s loan and legal charge and procured the combination of the company’s bank accounts, were considered not to involve the affairs of the company.239 9.55 The unwillingness of a minority shareholder to dispose of his shares to the majority, in the absence of any legal duty to do so, does not constitute the affairs of the company on which section 994 relief can be based, but is a matter personal to the shareholder.240 Similarly, an expectation that a shareholder will not sell his shares without the consent of other shareholders does not relate in any way to the conduct of a company’s affairs. Allegations bordering on the absurd, or at least trivial in nature, found their way into unfair prejudice petitions, but were rightly deprived of any merit as constituting the affairs of a company: asking for money on behalf of a company from a customer in an abrasive manner; a director asking a secretary to park a car; and alleged aggressive and unhelpful conduct towards a client.241

Blurring the dividing lines: cross-pollination of companies’ and subsidiaries’ affairs Introduction 9.56 Parent (or ‘holding’) companies control their subsidiaries, either by means of voting control in general meeting, or through a majority of directors appointed to the subsidiary who are then able to conduct the business of the subsidiary on a dayto-day basis. It appears that somewhat different rules developed when distinguishing between the affairs of a parent and its subsidiary as opposed to the relationship between members who are not holding companies and their company. Complex corporate structures are part and parcel of modern economic life. The commonality of economic and financial purpose in such a corporate structure logically results in the same, or substantially the same, directors who manage the parent, also directly or indirectly managing the affairs of the subsidiaries. Control is essential for coherent management and the protection of the parent’s investments. However, it creates the potential for conflict between the interests of parents and that of subsidiaries being managed by the same, or predominantly the same, directors. 9.57 Earlier judgments, which had held that unfair prejudice provisions had to be strictly interpreted to limit their application to the affairs of the company only, did 239 Re a Company (No 001761 of 1986) [1987] BCLC 141, ChD. The dividing line seems to have been stretched very thinly in this instance. 240 Re Legal Costs Negotiators Ltd [1999] 2 BCLC 171, CA, at 197h. 241 Re a Company (No 001761 of 1986) [1987] BCLC 141, ChD, at 145c–145f.

257

9.57  Unfair Prejudice: Section 994

not survive subsequent construction of later equivalent provisions. As early as 1986, Harman J held242 that ‘[a]ll these cases together, in my judgment, lead one clearly to the understanding that the conduct to be complained of must be in the affairs of the very company in respect of which the petition is presented’. This trend, if ever there was one,243 was reversed by the Court of Appeal in Rackind v Gross.244 It followed on from developments in the Australian judgments of Norvabron Pty Ltd (No 2)245 and Re Dernacourt Investments Pty Ltd.246 Nourse J (sitting as a judge of the Court of Appeal), delivering the judgment of the court, agreed with Judge Weeks QC in the court below: first, that the affairs of one company can also be the affairs of another;247 and, secondly, that Harman J was ‘not considering a group structure in that case248 and did not have to deal with the proposition that the conduct of one company’s affairs may also be the conduct of another company’s affairs’.249 Emanating from this approach, two fundamental guidelines developed:250 • •

the conduct of a holding company, or of such of its directors who are directors of the relevant subsidiary, towards a subsidiary, may constitute conduct of the affairs of that subsidiary;251 in appropriate cases, the conduct of a subsidiary, or that of all or some of its directors who also happen to be directors of the holding company, may be regarded as part of the conduct of the affairs of the holding company.252

A third guideline should be added: ‘affairs’ of a company do not only encompass matters which may come before a board for consideration, and are not limited to those that actually come before the board. Matters that are not specifically considered by the board are indeed capable of constituting part of the company’s affairs.253 Accordingly, the affairs of a company may include the affairs of a subsidiary, and vice versa, especially where the directors of the holding company who necessarily control the affairs of the subsidiary also represent a majority of the directors of the subsidiary.254 They are more likely to do so where the subsidiary is fully owned by the parent company and they share exactly the same directors.255 242 At 144f–144g. 243 It seems as if the same approach was followed in only one other judgment, a decade later: Re Blackwood Hodge plc [1997] 2 BCLC 650, ChD, at 673f. 244 [2005] 1 WLR 3505, CA, at [28], [29]. 245 (1986) 11 ACLR 279. 246 (1990) ACSR 553 at [24]. 247 As laid down in (1990) ACSR 553 at [24]. See also Hawkes v Cuddy (No 2) [2008] BCC 390, ChD, at [203]–[213], confirmed on appeal (Re Neath Rugby Ltd (No 2) [2009] EWCA Civ 291, [2009] 2 BCLC 427, CA); Oak Investment Partners XII, Limited Partnership v Boughtwood [2009] EWHC 176 (Ch), [2009] 1 BCLC 453, ChD, not affected by the partial successful appeal ([2010] EWCA Civ 23, [2010] 2 BCLC 459, CA). 248 Re a Company (No 001761 of 1986) [1987] BCLC 141, ChD. 249 Rackind v Gross [2005] 1 WLR 3505, CA, at [27]. 250 Summarised in Re Dernacourt Investments Pty Ltd (1990) ACSR 553; adopted, as having persuasive force, in Rackind v Gross [2005] 1 WLR 3505, CA, at [29]. 251 See also Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324, HL, per Lord Morton at 346, 367; Re Blackwood Hodge plc [1997] 2 BCLC 650, ChD, at 676c–676d. 252 Re Norvabron Pty Ltd (1986) ACLR 33; Norvabron Pty Ltd (No 2) (1986) 11 ACLR 279. 253 Re Neath Rugby Ltd [2009] EWCA Civ 291, [2009] 2 BCLC 427, CA, per Stanley Burnton LJ at [50]. 254 Rackind v Gross [2005] 1 WLR 3505, CA, at [26], [33]. See also Irvine v Irvine (No 1) [2006] EWHC 406 (Ch), [2007] 1 BCLC 349, ChD, at [259]. 255 Re Ravenhart Service (Holdings) Ltd [2004] EWHC 76 (Ch), [2004] 2 BCLC 376, ChD, at [104].

258

Management of the affairs of a company 9.59

In running day-to-day operations a director of a subsidiary is not acting on behalf of the parent group but acting pursuant to his fiduciary duty owed to the subsidiary and pursuant to no other duty.256

The meaning of ‘subsidiary’ 9.58 By section 1159(1) of the 2006 Act, a company is a ‘subsidiary’ of another company – its ‘holding company’ or ‘parent’ – if the parent holds a majority of the voting rights in it, or is a member of it and has the right to appoint or remove a majority of its board of directors. The same will apply if the parent is a member of the subsidiary and, pursuant to an agreement with other members, controls a majority of the voting rights in it, or if it is a subsidiary of a company that is itself a subsidiary of the other company. A company is a wholly owned subsidiary of another company if it has no members except the other and the other’s wholly owned subsidiaries, or persons who act on behalf of that other or its wholly owned subsidiaries.257

Duties owed by the parent company 9.59 A parent is obliged to deal fairly with its subsidiary. In Scottish Co-operative Wholesale Society Ltd v Meyer,258 the respondent was a rayon expert and adviser to the appellant. It was considered advantageous to establish a subsidiary in which the respondent would have a minority shareholding, while the appellant would hold the majority, giving it control of its subsidiary. The appellant society had the right to appoint three of the five directors to the board of the subsidiary. Viscount Simonds adopted the views of President Cooper (presiding in the court below) that: ‘… whenever a subsidiary is formed as in this case with an independent minority of shareholders, the parent company must, if it is engaged in the same class of business, accept as a result of having formed such a subsidiary an obligation so to conduct what are in a sense its own affairs as to deal fairly with its subsidiary.’259 The appellant Society dismally failed in this duty:260 ‘… [N]ominees of a parent company upon the board of a subsidiary company may be placed in a difficult and delicate position. It is, then, the more incumbent on the parent company to behave with scrupulous fairness to the minority shareholders 256 Thompson v The Renwick Group plc [2014] EWCA Civ 635, [2014] 2 BCLC 97, CA, at [25], following Re Smith & Fawcett Ltd [1942] Ch 304; Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324, Re Neath Rugby Ltd; Hawkes v Cuddy [2009] EWCA Civ 291, [2009] 2 BCLC 427, CA. 257 Section 1159(2) of the 2006 Act. See further Chapter 3 of Part 8; s 1159(3) of, and Sch 6 to, the 2006 Act for further detail on subsidiaries. 258 [1959] AC 324, HL. 259 At 343; also expressly adopted by Lord Keith of Avonholm in his speech at 362. However, there are limitations to this duty: although it was possible that a shareholder as a member could be prejudiced by directors deciding or failing to decide on a matter concerning the conduct of the company’s business, they could not complain that their interests had been prejudiced by the directors considering a scheme whereby the company’s resources could be used to diversify its business through a subsidiary of the company. The duty of directors was to consider proposals for carrying out their duty of using the company’s assets to the best advantage of the company. See Re a Company (No 4475 of 1982) [1983] Ch 178 at 190G–191B. 260 [1959] AC 324, HL, at 341.

259

9.60  Unfair Prejudice: Section 994

and to avoid imposing upon their nominees the alternative of disregarding their instructions or betraying the interests of the minority. In the present case the society pursued a different course. It was ruthless and unscrupulous in design and it was effective in operation, and, as I have said, it was promoted by the action or inaction of the nominee directors.’ It was held that the parent acted in a manner oppressive to the affairs of its subsidiary. It was not possible to separate the transactions of the parent from those of the subsidiary – every step taken by the subsidiary was informed by the policy of the parent.261 9.60 Despite an apparently contradictory view held by Lord Morton on this point,262 the views expressed by Lord Denning are compelling:263 ‘But, so soon as the interests of the two companies were in conflict, the nominee directors were placed in an impossible position. Thus, when the realignment of shareholding was under discussion, the duty of the three directors to the textile company was to get the best possible price for any new issue of its shares (see per Lord Wright in Lowry v Consolidated African Selection Trust Ltd),264 whereas their duty to the co-operative society was to obtain the new shares at the lowest possible price – at par, if they could. Again, when the co-operative society determined to set up its own rayon department, competing with the business of the textile company, the duty of the three directors to the textile company was to do their best to promote its business and to act with complete good faith towards it; and in consequence not to disclose their knowledge of its affairs to a competitor, and not even to work for a competitor, when to do so might operate to the disadvantage of the textile company (see Hivac Ltd v Park Royal Scientific Instruments Ltd),265 whereas they were under the self-same duties to the co-operative society. It is plain that, in the circumstances, these three gentlemen could not do their duty by both companies, and they did not do so. They put their duty to the co-operative society above their duty to the textile company in this sense, at least, that they did nothing to defend the interests of the textile company against the conduct of the co-operative society. They probably thought that “as nominees” of the cooperative society their first duty was to the co-operative society. In this they were wrong. By subordinating the interests of the textile company to those of the cooperative society, they conducted the affairs of the textile company in a manner oppressive to the other shareholders.’ Accordingly, nothing prevents a director from serving on the boards of both the parent and the subsidiary, as long as he exercises his best judgment in favour of the company that he is serving at the given time.266

261 At 342. 262 See 346–347. 263 At 366–367. 264 [1940] AC 648. 265 [1946] Ch 169, CA. 266 Hawkes v Cuddy (No 2) [2007] EWHC 2999 (Ch), [2008] BCC 390, ChD, at [193]; see also the authorities referred to at [184]–[191] (confirmed by the Court of Appeal: Re Neath Rugby Ltd (No 2) [2009] EWCA Civ 291, [2009] 2 BCLC 427, CA); Re Stewarts (Brixton) Ltd [1985] BCLC 4, ChD, at 8f–8g.

260

Management of the affairs of a company 9.62

Control is key267 9.61 In Re Grandactual Ltd,268 the shareholders were members of a company operating a restaurant. The first, second and third respondents and the fourth petitioner had been involved in the management of its affairs in various capacities. The company entered into a licensing agreement with a company based in the Isle of Man (‘IL’) under which it paid an annual licensing fee for logos and trademarks. The first, second and third respondents were shareholders of IL. One of the allegations in the petition was that the capital structure of IL did not mirror the capital structure of the company, as had been envisaged by the prospectus when the company was formed. An application to strike out that allegation succeeded. Sir Donald Rattee, having analysed the Court of Appeal judgments of Re a Company (No  002470 of 1988), ex p Nicholas269 and Rackind v Gross,270 concluded:271 ‘The essence of the decisions of the Court of Appeal in the two cases I have cited was in my view that it may in certain cases be possible to say that conduct of the affairs of one company also constitute conduct of the affairs of another when the first company either is controlled by or has control of the other. That, if I may say so, is perfectly understandable. However, that principle is of no avail to the petitioners in the present case, in which IL had no power to control the company and was subject to no power of control by the company. Mr Green sought to argue that the first to third respondents as directors of the company had control over IL. This they clearly did not. They had control over IL but as shareholders of that company. In my judgment, the fact that they also had control over the company cannot be said to make the affairs of one company the affairs of the other, and I so decide…’

Parent giving preference to own affairs 9.62 The facts in the saga of Neath Rugby Ltd (‘Neath’)272 were as follows: Neath was a company with two issued shares: one held by H, and the other by C (although registered in the name of a nominee, Mrs C). Neath owned the assets of Neath Rugby Football Club, one of the two equal shareholders of Neath-Swansea Ospreys Limited (‘Ospreys’). Ospreys owned the Ospreys regional rugby team. The other shareholder of Ospreys was the Swansea Rugby Football Ltd (‘Swansea’). H  was one of the directors of Neath. The other director was nominally Mrs C, but was in fact C. H had day-to-day management control of Neath. C was one of the two directors of Ospreys,

267 Attention is drawn to amendments to the 2006 Act with effect from 26 May 2015 by the Small Business, Enterprise and Employment Act 2015 c 26, which introduced inter alia s 12A (Statement of Initial Control) and Part 21A (Information about People with Significant Control). It applies to companies other than: (a) companies with voting shares admitted to trading on a regulated market; and (b) companies of any description specified by the Secretary of State by regulations (s 790B – amended, together with the definition of ‘regulated market’ in s 1173, to cater for the UK’s exit from the EEA). 268 [2005] EWHC 1415 (Ch), [2006] BCC 73, ChD. 269 [1992] BCC 895, CA. Also cited as Nicholas v Soundcraft Electronic Ltd [1993] BCLC 360, CA. 270 [2005] 1 WLR 3505, CA. 271 At [29]. 272 On the merits (there having been a number of other interlocutory skirmishes), in the court of first instance, Hawkes v Cuddy (No 2) [2007] EWHC 2999 (Ch), [2008] BCC 390, ChD, and thereafter in the Court of Appeal: Re Neath Rugby Ltd (No 2) [2009] BCLC 427, CA.

261

9.63  Unfair Prejudice: Section 994

having been nominated by Neath; the other director, B, had been nominated by Swansea. A situation of deadlock ensued; H launched an unfair prejudice petition. Lewison J held that the remedy afforded by section 459 was essentially a remedy for the unfair management of the internal affairs of a company. It was not designed to deal with the situation where one company dealt with another on an arm’s length basis, despite the fact that many decisions made on an arm’s length basis may have an enormous impact on the other.273 The fact that Neath and the Ospreys were both interested in the allocation of players, the merchandising of Ospreys’ branded goods and the venues for the Ospreys’ matches did not support the general proposition that the affairs of the Ospreys should count as the affairs of Neath. The court relied on the formulation in Grandactual274 and emphasised the importance of effective control before it could be said that the affairs of another company are being conducted unfairly prejudicially. Commonality of directors is also an important feature. These features were absent in Neath. The argument that there was negative control, in the sense that Neath was able to veto any action by the Ospreys by instructing its nominee director to dissent from any proposal made by the other, was rejected, for two reasons: first, Neath would not have been entitled to instruct its nominee director to cast his vote in a particular way, particularly not to vote against something that he believed was in the best interests of the Ospreys. Secondly, the concept of negative control is not one that appears in the cases: ‘Even a 26 per cent shareholder has a form of negative control in the sense that he can block a special resolution, but in such a case I do not consider that that form of negative control would make the affairs of the one company the affairs of the other’.275 This approach resulted in findings that C did not conduct the affairs of Neath when he concurred in the decision of the Ospreys’ board to take hostile legal proceedings against Neath, the institution of which was described as ‘quintessentially an arm’s length matter’.

Parent involvement in subsidiary’s affairs276 9.63 In Nicholas v Soundcraft Electronic Ltd,277 75 per cent of the issued share capital of a subsidiary was held by the parent, with the remainder held equally between the petitioner and another. There were four directors of the subsidiary: the two minority shareholders as executive directors, and two directors nominated by the parent. The parent was obliged to support the subsidiary financially until the latter became self-sufficient. The petitioner claimed that the parent was in breach of its obligations by withholding financial support. The court of first instance278 rejected the claim and held that the parent did not conduct the affairs of the subsidiary when it, for its own self-preservation, withheld financial support to enable it to meet its own creditors’ demands. Fox LJ disagreed and held that it was not a case of a parent 273 Re Hawkes v Cuddy (No 2) [2007] EWHC 2999 (Ch), [2008] BCC 390, ChD, at [214]. 274 [2005] EWHC 1415 (Ch), [2006] BCC 73, ChD. 275 Hawkes v Cuddy (No 2) [2007] EWHC 2999 (Ch), [2008] BCC 390, ChD, at [213], confirmed on appeal (Re Neath Rugby Ltd (No 2) [2009] EWCA Civ 291, [2009] 2 BCLC 427, CA)). 276 See the position as regards torts in 1.25 and in particular Lungowe v Vedanta Resources Plc [2019] UKSC 20, [2019] 2 WLR 1051 as regards the liability of a parent for the negligence of its subsidiary. 277 [1993] BCLC 360, CA. 278 Re a Company (No 002470 of 1988), ex p Nicholas [1991] BCLC 480, ChD.

262

Management of the affairs of a company 9.65

conducting its own affairs in a manner harmful to the interests of other shareholders in its subsidiary.279 To the contrary, by withholding payments from the subsidiary, the parent was doing so as part of the general control of the financial affairs of the subsidiary. It was accordingly conducting the affairs of the subsidiary. Ralph Gibson LJ added that ‘the mere fact’ that a parent failed to pay a debt which was due to a subsidiary does not, without more, amount to an act comprising conduct of the business of the subsidiary:280 ‘… [T]he failure to pay by Electronics was not “the mere fact” of failure to pay, but the decision by a parent company which controlled the foreign sales of its subsidiary and received the full proceeds of them, to retain, in addition to the management charge which it imposed, such parts of those proceeds as it deemed convenient to keep having regard to the financial position of the parent company.’ The appeal nevertheless failed because it was found that such conduct was not unfairly prejudicial to the subsidiary. The parent’s nominated directors on the board of its subsidiary were not to blame for their inaction in persuading the parent to effect payment. Those directors had no need to take preventative steps, since it was obvious to them that it was inevitable that the subsidiary had had to accept what the parent had done for its own self-preservation under the circumstances.281 In Re Audas Group Ltd282 where the respondents (in charge of the parent company) had committed, and had caused the holding company to commit, serious breaches of their contractual good faith obligations under the shareholders’ agreement in dismissing the petitioner as an employee of a subsidiary company, Nicholas was followed. The holding company controlled the subsidiary and conducted its affairs as a group undertaking. Therefore, each of the material breaches was committed in respect of the conduct of the holding company’s affairs as well as those of the subsidiary. The petition accordingly succeeded. 9.64 In Re Brenfield Squash Racquets Club Ltd,283 three directors of the parent were also directors of the subsidiary. They were held to have failed to draw a proper distinction between the affairs of the subsidiary and the parent by, amongst other things, causing the subsidiary to allow the parent’s bank to take security over the subsidiary’s assets without there being any possible benefit to the subsidiary.

Conclusion: conduct of affairs of one company can amount to conduct of the affairs of another 9.65 To conclude: the conduct of the affairs of one company may constitute the conduct of the affairs of another company for purposes of section 994. Corporate structures being run as a single business may therefore, as a matter of practical reality, be said to be run by a central control structure.284 It does not offend the separate 279 Nicholas v Soundcraft Electronic Ltd [1993] BCLC 360, CA, at 364h–364i. 280 At 370i–371a. 281 At 370h–370i. See also Moordene Ltd v Transglobal Chartering Ltd [2006] EWHC 1407 (Ch) at [52], [53]. 282 [2019] EWHC 2304 (Ch) at [131], [132]. 283 [1996] 2 BCLC 184, ChD. 284 Oak Investment Partners XII, Limited Partnership v Boughtwood [2009] EWHC 176 (Ch), [2009] 1 BCLC 453, ChD.

263

9.66  Unfair Prejudice: Section 994

existence of a company from its shareholders; it is simply a consequence of effective management structures and the exigencies of modern business practices.

By whom the affairs are conducted 9.66 A variety of bodies and persons potentially conduct the affairs of a company relevant for section 994 petitions. They include: the shareholders in general meeting as an organ of the company; directors acting as a board on behalf of the company; executive directors acting in terms of the company’s constitution and/or by virtue of authority granted by the board of directors on behalf of the company or in terms of a service agreement; senior managers; and countless employees and agents of the company, depending on its size and the nature of its business. Although, broadly speaking, all of these activities comprise the conduct of the affairs of the company, not all of them are relevant for the purposes of invoking the provisions of section 994. It requires separating the chaff from the wheat. A rather robust test developed to determine which functionary’s conduct of the affairs of a company is relevant, namely ‘practical reality which obtains on the ground in relation to the conduct of a company’s affairs’.285 ‘Practical reality’ dictates that a broad distinction should be drawn between the conduct of the affairs of quoted or large public companies on the one hand, and a private quasi-partnership company on the other: the quoted or large public company is likely to have a plethora of employees or agents in non-executive and non-managerial positions, acting on express authority of the company and whose acts or omissions bind the company. The performance of their duties will concern the affairs of the company but will rarely, if ever, constitute unfairly prejudicial conduct for purposes of section 994, due to the lack of control they exert regarding crucial management decisions of a company. Board resolutions are most relevant, whilst those of senior executives may constitute relevant conduct. Irrespective of the precise nature and size of a company, the conduct of the affairs of a company by its directors,286 those in positions of control287 of the company’s affairs, those authorised to act as its organs,288 or – usually in quasi-partnership companies – other shareholders,289 may result in relevant actionable unfairly prejudicial conduct to the interests of a petitioning member. 9.67 In Oak Investment Partners XII, Limited Partnership v Boughtwood,290 the question arose whether a shareholder who sought to exert managerial powers in the conduct of the business of a company which went well beyond the agreement between him and the petitioner, thereby disrupting the management team and distracting 285 At [15]; a point not disturbed on appeal ([2010] EWCA Civ 23, [2010] 2 BCLC 459, CA). 286 Re Blackwood Hodge plc [1997] 2 BCLC 650, ChD, at 673f–673g. 287 Lord Denning employed this term in his speech in Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324, HL, at 366. 288 Re Legal Costs Negotiators Ltd [1999] 2 BCLC 171, CA, at 193. 289 See Re Bird Precision Bellows Ltd [1986] Ch 658, CA, at 669D–669E, where Oliver LJ said that the very wide discretion conferred on the court to do what it considered fair and equitable is ‘in order to put right and cure for the future the unfair prejudice which the petitioner has suffered at the hands of the other shareholders of the company’. See also Apex Global Management Ltd v FI Call Ltd [2013] EWHC 1652 (Ch), [2014] BCC 286, ChD, at [122]–[125]. In a sequel it was held that members had breached their fiduciary duties, failed to keep company records and misled members and investors: Apex Global Management Ltd [2015] EWHC 3269 (Ch) at [137]–[138]. 290 [2009] EWHC 176 (Ch), [2009] 1 BCLC 453, ChD, not affected by the reversal in part on appeal: [2010] EWCA Civ 23, [2010] 2 BCLC 459, CA, at [122] (Rix, Moses and Rimer LJJ).

264

Management of the affairs of a company 9.67

them from their focus to advance the company’s business, constituted conduct of the affairs of the company. Sales J answered in the affirmative. He held that the conduct of a significant shareholder in a management role was sufficient to constitute conduct of the affairs of a company within the meaning of section 994 and that such conduct need not have manifested itself through a company organ:291 ‘In my view, in an appropriate case, where a significant shareholder such as the first respondent (who, as a result of being such a shareholder, is appointed to a management role within the company) then engages in a course of conduct in that role involving improper assertion of rights of control over the practical management of the affairs of the company, that conduct is capable of being conduct of the affairs of the company in an unfairly prejudicial manner for the purposes of section 994. Such conduct seems to me to fall squarely within the language of section 994(1)(a). Such an interpretation also accords with the broad equitable jurisdiction which that provision is intended to confer upon the court, which is required to take account of all the myriad different ways in which the affairs of a company may in practice be carried on.’ Sales J continued to delineate the boundaries between those whose actions ought to be considered as conducting the affairs of the company and those who do not:292 ‘14 The precise distribution of management decision-making authority in any particular company may be a matter of chance. In some companies, the board itself may take a wider range of day-to-day management decisions than in others, where greater scope is left to the directors or employed managers acting alone. It is difficult to see why the application of section 994 should turn upon such fortuitous matters: the jurisdiction under that provision is above all a jurisdiction concerned with substance rather than form. In my view, conduct of a shareholder/director who acted in breach of fiduciary duty in the carrying on of his company’s affairs (but not through use of any company organ) would be conduct capable, in principle, of attracting relief under section 994. There is often a very fine line between duties of employees engaged as senior managers of a company and the fiduciary duty of skill and care owed by a director of a company carrying out similar tasks. I can see no reason in principle why, in an appropriate case, conduct by a person employed as a senior manager in a business, even if not a director, should not be relevant to the grant of relief under section 994. Moreover, the cases on mismanagement of a company’s affairs referred to in para 10 above contemplate that complaint may be made under section 994 even if the mismanagement is not the product of business decisions taken by the board of a company, but by individual directors or others. 15 … [T]here is no sound reason to exclude the possibility that what someone does in exercising or purporting to exercise managerial powers as a director or senior employee should not in principle qualify as conduct of the affairs of a company for the purposes of that provision.’ In a nutshell, the business conducted by the de facto controllers of a company comprises the relevant ‘affairs’ for purposes of section 994. The de facto controllers are not necessarily the numerical majority of shareholders. A numerical minority may, as a result of provisions in the articles or a shareholders’ agreement, be endowed with 291 Oak Investment Partners XII, Limited Partnership v Boughtwood [2009] 1 BCLC 453, ChD, at [13]. 292 At [14]–[15].

265

9.68  Unfair Prejudice: Section 994

weighted voting powers and therefore be in a position of commanding their control by outvoting the numerical majority.293 Mismanagement of the affairs of a company, by a person in a dominant position as director and quasi-partner in charge of the office side of a company’s business, amounted to oppressive conduct under the 1948 Act;294 and, if repeated, would certainly constitute unfairly prejudicial conduct under section 994.

Past, present or future affairs? 9.68 By determining, as section 210 of the 1948 Act did, that consequences will follow only if the affairs of a company ‘are being’ conducted in an oppressive manner, a complaint under that Act was restricted to conduct which was still continuing when the petition was presented to court.295 It left no scope for remedying oppressive conduct which had occurred in the past, and it did not provide for protection from anticipated future oppressive conduct. Justifiably so, the section’s successors296 broadened the scope of the time of occurrence of the unfairly prejudicial conduct to include the past and the future. Section 994 concerns itself not only with affairs which ‘are being conducted’, but also with affairs which ‘have been conducted’. It also expressly relates to future conduct: relief will be granted in respect of any proposed act or omission by the company (including an act or omission on its behalf) which affects the affairs of a member in an unfairly prejudicial way.297 This broadened scope assists courts with the exercise of wide discretion ‘in order to put right and cure for the future the unfair prejudice which the petitioner has suffered at the hands of the other shareholders of the company’.298 9.69 It no longer matters that the conduct complained of has ceased at, or before, the time of presenting the petition.299 In Re Kenyon Swansea Ltd300 the position was that, at the date of presentation of a petition under the 1985 Act, an extraordinary general meeting had already been convened to consider certain offending and potentially prejudicial resolutions. It was immaterial whether, at the date of presentation, there was any immediate threat that the resolutions would be passed. In the normal course, it was sufficient to found a petition on the basis that an act had been proposed which, if carried out or completed, would be prejudicial to the interests of the petitioner. Vinelott J  considered it as immaterial that there was no immediate threat that the offending resolution would be passed:301 ‘It is in my judgment sufficient to found a petition that an act has been proposed which if carried out or completed would be prejudicial to the interests of the petitioner. Similarly, to found a petition it is sufficient that the affairs of the company have in the past been conducted in a way which was unfairly prejudicial to the 293 See the discussion at 9.36–9.37. 294 Re Stewarts (Brixton) Ltd [1985] BCLC 4, ChD. 295 Ibid. 296 Section 75 of the 1980 Act, s 459(1) of the 1985 Act and s 994 of the 2006 Act. 297 See Bermuda Cablevision Ltd v Colica Trust Co Ltd [1998] AC 198, PC, at 212B–212C, although the judgment deals with similar provisions in the comparable Bermudan legislation. 298 Per Oliver LJ in Re Bird Precision Bellows Ltd [1986] Ch 658, CA, at 669D. 299 Re a Company (No 001761 of 1986) [1987] BCLC 141, ChD, at 143c. 300 [1987] BCLC 514, ChD. 301 Re Kenyon Swansea Ltd [1987] BCLC 514, ChD, at 521a–521b; Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [135], not affected by an appeal on aspects of valuation – [2013] EWCA Civ 667, [2014] 1 BCLC 427, CA.

266

Management of the affairs of a company 9.70

petitioner even though at the date of the petition the unfairness has been remedied. The question whether an order is required to protect the interests of the petitioner from the consequences of unfair conduct or of an act which has been proposed and which may again be proposed is one to be answered at the hearing of the petition.’ In similar circumstances,302 Mummery J pointed out that the question for the court to address was whether the affairs of the company were being or had been conducted in a manner which was unfairly prejudicial, or whether the actual or proposed act or omission complained of was or would have been unfairly prejudicial. If the answer to that question was ‘yes’, the court might make such an order as it thinks fit in respect of the matter complained of.303 9.70 However, in Re Legal Costs Negotiators Ltd,304 Peter Gibson LJ (with whom Henry and Roch LJJ concurred) interpreted Vinelott J’s remarks in Re Kenyon Swansea Ltd as having been made in the context that what had happened in the past could recur. Indeed, ‘[i]f the remedying of the unfairness was carried out in such a way that the objectionable conduct could not recur, then there is no scope for giving relief under section 461 in respect of the matters complained of’.305 This is understandable; if the unfairly prejudicial conduct lies in the past, and has no continuing effect on the complainant, and there is no reasonable fear of such conduct recurring, there is no need for a remedy. Of course, if there is evidence of continuous conduct unfairly prejudicing a member’s interests, appropriate relief can and should be granted.306 The request by a petitioner to withhold information which might be unfairly prejudicial to him does not cease to be maintainable on the ground that the information was supplied subsequent to the presentation of the petition.307 The mere potential for an abuse of power by the de facto controllers of the company is insufficient to warrant relief.308 Consideration by directors of the utilisation of available funds for future capital expenditure, as opposed to other possible uses, should ordinarily not result in complaints of unfairly prejudicial conduct as regards the future. It is the duty of a board of directors to oversee the management of the business of the company and they must do so, duly considering all proposals and suggestions put forward.309 It must be emphasised that the role played by directors 302 Re a Company (No 000314 of 1989) [1991] BCLC 154, ChD. 303 See also Re John Reid & Sons (Strucsteel) Ltd [2003] EWHC 2329 (Ch), [2003] 2 BCLC 319, ChD, at [40]–[43]. 304 [1999] 2 BCLC 171, CA. 305 At 198a–198d. See also 196e–196f. 306 Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [135]. The appeal [2013] EWCA Civ 667, [2014] 1 BCLC 427, CA, did not deal with this point. 307 Re a Company (No 00314 of 1989), ex p Estate Acquisitions and Development Ltd [1991] BCLC 154, ChD, at 160h. See also Re John Reid & Sons (Strucsteel) Ltd [2003] EWHC 2329 (Ch), [2003] 2 BCLC 319, ChD, at [40]. 308 Re Gorwyn Holdings Ltd (1985) 1 BCC 99479, CA; Arrow Nominees Inc v Blackledge [2000] 2 BCLC 167, CA, at [51]; Fowler v Gruber [2010] 1 BCLC 563, CSOH, at [135]. 309 Re a Company (No 004475 of 1982) [1983] Ch 178, at 190h–191b. See also Peskin v Anderson [2001] 1 BCLC 372, CA, where the shareholders were found not to be entitled to be kept abreast of each and every strategic step devised by the board. This extends to an administrator not owing a duty of care to creditors in circumstances where a director would not owe such a duty to shareholders: in each case the relevant duties were, absent special circumstances, owed exclusively to the company – Oldham v Kyrris [2003] EWCA Civ 1506, [2004] 1 BCLC 305, CA, at [142]; Fabb v Peters [2013] EWHC 296 (Ch) at [8]. See further Sharp v Blank [2015] EWHC 3220 (Ch) for an exposition of the limited scope for holding that directors owe fiduciary duties to shareholders and not only to the company; see further the analysis at Chapter 4.

267

9.71  Unfair Prejudice: Section 994

may vary greatly depending on the nature and size of the business and issues such as the expertise of executive directors, particularly in the quasi-partnership type of company. 9.71 In Re Astec (BSR) plc,310 a shareholder’s threats to use his voting power to cause the company to cease paying future dividends (which might or might not have amounted to unfairly prejudicial conduct) came to nothing, as he eventually voted in favour of a final dividend.311 On the date of presentation of the petition, there was no act or omission by the company in relation to future dividends which could or would have been unfairly prejudicial to the petitioner’s interests. Jonathan Parker J held that something more was required:312 ‘In my judgment, even assuming that the petitioner’s alleged concerns as to the future are legitimate concerns, the mere existence of those concerns does not provide any basis for an allegation of future unfair prejudice for the purpose of section 459. To found a case under section 459 there must be some proposed act or omission by or on behalf of the company which can arguably be so characterised …’ 9.72 In Re Clark Construction Initiatives Ltd,313 the petitioner was originally a majority shareholder who alleged unfairly prejudicial conduct occurring at a stage before he had sold his entire shareholding. After a passage of time, he became a member again by acquiring a minority stake. In the course of holding the latter bundle of shares, further unfairly prejudicial conduct allegedly occurred. The court held that the petitioner was not permitted to rely on the conduct complained of prior to the sale of his majority shareholding.314 By having sold his entire shareholding and receiving the purchase price, the price obtained would have discounted the effects of the unfairly prejudicial conduct on the value of the shares. Any cause of action which might have existed prior thereto had been compromised by the sale. The shareholder/ petitioner had received the agreed value for the shares. He could not benefit twice by claiming compensation for loss, in addition to the purchase price he had already received.

MEMBERS’ ‘INTERESTS’ 9.73 Section 994 is available to members if the company’s affairs are being, or have been, conducted in a manner unfairly prejudicial to the interests of members generally (ie all of them) or of some part of its members (including at least himself). Members’ interests are informed by the nature of the rights that is sought to be protected: broadly speaking, strict legal rights, and equitable rights respectively. The strictly legal rights involve an expectation that the de facto controllers of a company will conduct the affairs of the company in accordance with its constitution315 and, where required, the applicable Companies Act, in compliance with their fiduciary duties towards the company. They are the so-called ‘strict legal rules’. Breach of the 310 [1998] 2 BCLC 556, ChD. 311 At 571a–571c. 312 At 578c. 313 [2009] EWHC 315 (Comm). 314 At [20], [41], [42]. 315 See 3.6–3.7; Hickman v Kent or Romney Marsh Sheep-Breeders’ Association [1915] 1 Ch 881.

268

Members’ ‘interests’ 9.74

conduct expected of them, as prescribed by the law governing their position, is prima facie detrimental to members’ interests. Therefore, resolutions passed by a company inconsistent with provisions of its constitution (and thus in breach thereof) warranted an injunction prohibiting the company from acting on them;316 and, in another instance, a director/member who was prevented from attending board meetings by force had a right to sue, since it affected his interests as member.317

Equitable rights 9.74 The equitable rights relate to the use of the strict legal rules in a manner which equity would regard as contrary to good faith – those understandings and expectations prevalent in quasi-partnership companies which are superimposed on the strict legal rules and governed by equity – breach of which will affect the interests of members. The linking of ‘unfair prejudice’ with ‘interests’ in section 994 predicates a wider range of complaints than merely the infringement of a member’s legal rights under the strict legal rules. In Ebrahimi v Westbourne Galleries Ltd,318 the House of Lords explained that the principle that the constitution of a company is determinative of shareholders’ interests (the strict legal rules) was expanded by contextualising the relationships within a quasi-partnership company as being something more than a mere abstract legal entity. The rights, expectations and obligations of the individuals in such a company are not necessarily merged in its structure:319 ‘My Lords, in my opinion these authorities represent a sound and rational development of the law which should be endorsed. The foundation of it all lies in the words “just and equitable” and, if there is any respect in which some of the cases may be open to criticism, it is that the courts may sometimes have been too timorous in giving them full force. The words are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The “just and equitable” provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; 316 Quin & Axtens Ltd v Salmon [1909] AC 442, CA. 317 Pulbrook v Richmond Consolidated Mining Co (1878) 9 ChD 610. Compare Hayes v Bristol Plant Hire Ltd [1957] 1 WLR 499 (Ch): although the articles did not require a director to have any shareholding in the company or confer on a director any fixed remuneration, the claimant director was in fact a shareholder. As the rights of a director under article 26 amounted to more than a mere spes successionis (an expectation to succeed to property) and indeed constituted a sufficient proprietary interest, the preliminary point failed. 318 [1973] AC 360, HL. See also Re a Company (No 00477 of 1986) [1986] BCLC 376, ChD, at 378h–378i; Re a Company (No 00314 of 1989), ex p Estate Acquisitions and Development Ltd [1991] BCLC 154, ChD, at 160g; Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, CA, at 17i–18b (per Hoffmann LJ); and 31c–31e; 31h–31i (per Neill LJ). 319 Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, HL, per Lord Wilberforce at 379A–379C. See the further discussion regarding the ‘just and equitable’ requirement at 11.5–11.9.

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considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.’ 9.75 Having referred to the passage in the paragraph above, Hoffmann LJ developed the proposition in Re Saul D  Harrison & Sons plc320 in the following manner: ‘Thus the personal relationship between a shareholder and those who control the company may entitle him to say that it would in certain circumstances be unfair for them to exercise a power conferred by the articles upon the board or the company in general meeting. I have in the past ventured to borrow from public law the term “legitimate expectation” to describe the correlative “right” in the shareholder to which such a relationship may give rise. It often arises out of a fundamental understanding between the shareholders which formed the basis of their association but was not put into contractual form, such as an assumption that each of the parties who has ventured his capital will also participate in the management of the company and receive the return on his investment in the form of salary rather than dividend. These relationships need not always take the form of implied agreements with the shareholder concerned; they could enure for the benefit of a third party such as a joint venturer’s widow. But in Re Westbourne Galleries Lord Wilberforce went on to say: “It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. Certainly the fact that the company is a small one, or a private company, is not enough. There are very many of these where the association is a purely commercial one, of which it can safely be said that the basis of association is adequately and exhaustively laid down in the articles. The superimposition of equitable considerations requires something more …” Thus, in the absence of “something more”, there is no basis for a legitimate expectation that the board and the company in general meeting will not exercise whatever powers they are given by the articles of association.’ The ‘something more’ was lacking in Re Coroin Ltd:321 ‘In my judgment, there is no room for equitable considerations of this kind in the present case. The company was formed by a group of highly sophisticated and experienced business people and investors with a view to the purchase of a well-known group of hotels for a price running into many hundreds of millions of pounds and to retaining and managing some of those hotels. There was little prior relationship between many of the investors and some were unknown to each other until a few days before the company was formed. More importantly, articles of association and a shareholders agreement were negotiated and drafted, containing lengthy and complex provisions governing their relations with each other and with the company. I find it hard to imagine a case where it would be more inappropriate 320 [1995] 1 BCLC 14, CA, at 19h–20b. 321 [2012] EWHC 2343 (Ch) at [636]; confirmed on appeal [2013] EWCA Civ 781, [2013] 2 BCLC 583, CA. See also Re Migration Solutions Holdings Ltd [2016] EWHC 523 (Ch) where the petitioner had entered into a business relationship with a private equity investor on a commercial, arm’s length basis, with the benefit of legal advice. There was therefore no basis to describe the relationship between the parties as a quasi-partnership.

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to overlay on those arrangements equitable considerations of the sort discussed by Lord Wilberforce and Lord Hoffmann.’ 9.76 In O’Neill v Phillips,322 Lord Hoffmann elaborated on the foundation for the expansion of ‘interests’ to include those based on legitimate expectations. He first pointed out that a company is an association of persons for an economic purpose, usually entered into with legal advice and some degree of formality, and resulting in the formal documentation comprising the company’s constitution and often also collateral agreements between the shareholders. Agreement is the basis of those founding documents. Secondly, company law has developed ‘seamlessly’ from the law of partnership. Partnership was treated by equity as a contract of good faith: one of the traditional roles of equity was to restrain the exercise of strict legal rights in certain relationships in which it considered that it would be contrary to good faith. These principles were inherited, with appropriate modification, by company law. Lord Hoffmann continued:323 ‘The first of these two features leads to the conclusion that a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted. But the second leads to the conclusion that there will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers. Thus unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith.’ The second of these conclusions accordingly widens the scope of interests to those affected by a breach of the rules, or by use of the rules in a manner which equity would regard as contrary to good faith. 9.77 ‘Interests’ refer to the interests of members as members.324 The position is explained in a practical manner by Hoffmann J in Re a Company (No 00477 of 1986):325 the managing director of a quoted company with a small shareholding will have clear distinguishable rights flowing from his contract of employment with the company which will not be regarded as interests held as a member. In the typical quasipartnership company, the interests of a member who has invested his own capital in the venture are likely to include a legitimate expectation that he will continue to be employed as a director. Exclusion from the management of the company is therefore likely to constitute unfair prejudice to the shareholder’s interest.326 The extension 322 [1999] 1 WLR 1092, HL, at 1098G–1098H. 323 O’Neill v Phillips [1999] 1 WLR 1092, at 1098H–1099B. See also the statement by Jonathan Parker J in Re Astec (BSR) Plc [1998] 2 BCLC 556, ChD, at 588d–588e: ‘… in order to give rise to an equitable constraint based on “legitimate expectation” what is required is a personal relationship or personal dealings of some kind between the party seeking to exercise the legal right and the party seeking to restrain such exercise, such as will affect the conscience of the former’. 324 Re a Company [1983] BCLC 126, ChD; Re a Company (No 004475 of 1982) [1983] Ch 178, at 189E–189F; Re a Company (No 00477 of 1986) [1986] BCLC 376, ChD, at 378h–378i; Re a Company [1986] BCLC 382, ChD, 387b; Re a Company (No 00314 of 1989), ex p Estate Acquisitions and Development Ltd [1991] BCLC 154, ChD, at 160f–160g; Re JE Cade & Son Ltd, [1992] BCLC 213, ChD, at 229d–229i; Re Unisoft Group Ltd (No 3) [1994] 1 BCLC 609, ChD, at 623f. 325 [1986] BCLC 376, ChD, at 379b–379d. Note, however, as discussed at 9.31, 9.38, 9.39 and 9.78, that an extended meaning may attach to ‘members’. 326 For exclusion cases, see 9.149–9.152.

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does not apply to the interests of persons who merely happen to be members;327 although, as Hoffmann J  pointed out, where broader equitable considerations apply, membership cannot be too strictly interpreted. Another example of a more accommodative approach appears from obiter remarks made by Hoffmann J in Re a Company (No  003160 of 1986):328 the husband of a nominee shareholder was correctly found not to have had any interests as a member and accordingly had no standing under section 459. Referring to the principle that, at least insofar as corporate quasi-partnerships are concerned, expectations that a member will be able to participate in the management of the company and share in its profits through salaried employment are frequently entirely justified, Hoffmann J said that he could not see why, if such was the understanding between the parties, it should not also include an expectation that a nominee member’s husband and beneficiary should enjoy such rights and benefits. It may be considered that this is a stretch too far, if the warning by the same judge is heeded that ‘… the very width of the jurisdiction means that unless carefully controlled it can become a means of oppression’.329

Interests affected other than as member 9.78 A claim disguised as a mere creditor’s claim will not suffice as a token of a member’s interests.330 In the instant matter, the only obligations which the claimant sought to enforce were obligations on the part of the company to pay him. That had no bearing on his interests as a member. The only remedy he could ever properly have sought was a financial remedy, for which purpose unfairly prejudicial proceedings were inappropriate. This situation must be distinguished from instances where the interests of a member as lender of capital to the company are impaired by unfairly prejudicial conduct as regards the loan capital. The choice to capitalise a company by providing loan capital, instead of taking up further equity, puts a member only acquiring equity and a shareholder providing loan capital in very much the same position for the purposes of section 994 proceedings. In R&H Electric Ltd v Haden Bill Electrical Ltd,331 P had held 25 per cent of the shares in Haden Bill. Another company (‘R&H’), of which P was a director and shareholder, was a loan creditor of Haden Bill and had provided the whole of Haden Bill’s working capital. Robert Walker J  found that Haden Bill was planned, formed and set up in business on the basis of mutual trust, and P did have a legitimate expectation of being able to participate in the management thereof, at least for as long as R&H  remained a significant loan creditor (and as long as P was closely associated with R&H). The interests of an entity other than the member were therefore given full effect under the circumstances. The fact that P and R&H were separate legal persons did not exclude P from seeking relief under section 459, on the basis that R&H’s loans to Haden Bill were procured by P and formed an absolutely essential part of the arrangements entered into for the venture to be carried on by it. If P, in his personal capacity, had been Haden Bill’s loan creditor under arrangements made between him and the majority shareholders when 327 Re a Company (No 00477 of 1986) [1986] BCLC 376, ChD, at 378g–378i. 328 [1986] BCLC 391, ChD. 329 Re a Company (No 007623 of 1984) [1986] BCLC 362, ChD, at 367j. 330 Re a Company (No 003843 of 1986) [1987] BCLC 562, ChD, at 572h–573a. 331 [1995] 2 BCLC 280, ChD, applying Tay Bok Choon v Tahansan Sdn Bhd [1987] 1 WLR 413, PC.

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the company was first being planned and formed, the court held that it would likely have concluded that the arrangements were a reflection of, and sufficiently closely connected with, P’s membership of Haden Bill, bringing it within the scope of section 459.332 R&H Electric was approved and followed in Gamlestaden Fastigheter AB v Baltic Partners Ltd333 and applied to the joint venturers as follows:334 ‘… If the company is a joint venture company and the joint venturers have arranged that one, or more, or all of them, shall provide working capital to the company by means of loans, it would, in their Lordships’ opinion, be inconsistent with the purpose of these statutory provisions to limit the availability of the remedies they offer to cases where the value of the share or shares held by the applicant member would be enhanced by the grant of the relief sought. If the relief sought would, if granted, be of real, as opposed to merely nominal, value to an applicant joint venturer, such as Gamlestaden, in facilitating recovery of some part of its investment in the joint venture company, that should, in their Lordships’ opinion, suffice to provide the requisite locus standi for the application to be made.’ The conclusion, as a matter of principle, is that the interests of a creditor who has funded a quasi-partnership type of company, and who is also a member or closely connected to a member, may give grounds for relief in a section 994 petition if the relationship between the member and creditor vis-à-vis the company is so intertwined that they are virtually indistinguishable. It is an approach fully justified by economic realities in setting up and funding companies. 9.79 Further instances, where unfair prejudice claims were unsuccessfully brought because membership and the affected interests were merely coincidental, are: a claim by a freehold landowner;335 failure by a company to pay rental and management charges to the petitioner as shareholder;336 and a claim for a transfer of shares when the underlying problem related to the payment of bonuses, ie an aspect relevant to the petitioner’s position as employee and not as member.337 9.80 In Re Blue Arrow plc,338 the petitioner fell short of demonstrating that her legitimate expectations were relevant to her interests in her capacity as a member: she was the ‘president’339 of a public company. The position was entrenched in the articles of the company but was unrelated to any shareholding qualification. She unsuccessfully resisted an amendment of the articles which would have allowed for the election of another person as president. As much as she had a legitimate expectation that the affairs of the company would be conducted in accordance with 332 R&H Electric Ltd v Haden Bill Electrical Ltd [1995] 2 BCLC 280, ChD, at 294a. 333 [2007] UKPC 26, [2007] 4 All ER 164 at [31]. It was, in turn, followed in Re Woven Rugs Ltd [2010] EWHC 230, ChD, at [95]. 334 At [33]; see also [37], [38]. 335 Re JE Cade & Son Ltd [1992] BCLC 213, ChD, at 229d–229i. See R&H Electric Ltd v Haden Bill Electrical Ltd [1995] 2 BCLC 280, ChD, at 292c. 336 Re Unisoft Group Ltd (No 3) [1994] 1 BCLC 609, ChD, at 626a–626c. 337 O’Neill v Phillips [1999] 1 WLR 1092, HL. However, see Wootliff v Rushton-Turner [2016] EWHC 2802 (Ch) where the s 994 petition encompassed a claim for wrongful dismissal, and was permitted to continue including that part of the claim even if such relief would not benefit the employee in his capacity as a member, following Gamlestaden Fastigheter AB v Baltic Partners Ltd [2007] UKPC 26, [2007] 4 All ER 164, PC; and applying Re J&S Insurance & Financial Consultants Ltd [2014] EWHC 2206 (Ch). 338 [1987] BCLC 585, ChD. 339 Presumably the equivalent of chairman of a board of directors.

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its constitution, so investors in the public company were entitled to assume that the whole of its constitution was contained within the constitution. There is, accordingly, no room for any interests informed by any legitimate expectation relating to some agreement or arrangement between the directors, kept private and not disclosed to those placing the shares.340

Legitimate expectation not confined to quasi-partnerships 9.81 The ‘legitimate expectation’ doctrine finds application not only in the context of the quasi-partnership situation; even in the absence of a quasi-partnership, the interests of members that are relevant for the purposes of section 994 are not necessarily confined to their strict legal rights but may extend to any legitimate expectations they might have.341 The proposition can be summarised as follows: in general, members do not have legitimate expectations beyond the strict legal rights afforded to them by the constitution of a company; legitimate expectations superimposed on a member’s legal rights may arise from agreements or understandings between the members; however, the acquisition of shares in the company is one of a complex set of formal written agreements, and it is then a question of interpreting those agreements to establish whether any superimposed legitimate expectations can arise.342 The wideness of the interests may have unexpected consequences regarding the respondents against whom relief may be sought. In appropriate cases: ‘relief can be sought against a non-member other than the company itself, or against a person not involved in the acts complained of (at least if that person would be affected by the relief sought) and that a person against whom no relief is sought cannot necessarily escape being a respondent, whilst, on other facts, it can be right to strike out a petition, even as against those whose acts are complained of, so long as no relief is sought against such a person’.343 Affected ‘interests’ cannot be confined to a situation in which the share value was seriously diminished or seriously jeopardised.344 There are obviously limitations to the wideness of interpretation, but then, judicial interpretation should not seek to limit the meaning of ‘interests’ arbitrarily.345 Neither should further extensions of the concept be arrived at arbitrarily. 9.82 The judgment of the Hong Kong Court of Appeal in Re Yung Kee Holdings Ltd346 resulted in divergent views on the question of the scope of quasi-partnership. That court stated347 that ‘… the expression of “quasi-partnership” is nothing more than a convenient label. The use of such a label should not be allowed to subvert the underlying question: whether a petitioner can pinpoint matters giving rise to an equitable consideration which makes it unfair for those conducting the affairs 340 341 342 343 344

Re Blue Arrow plc [1987] BCLC 585, ChD, at 590e–590h. Re Elgindata Ltd [1991] BCLC 959, ChD, at 985b. At 985c–985d. Re Little Olympian Each-Ways Ltd [1994] 2 BCLC 420, ChD, at 429f–429g. Re RA Noble & Sons (Clothing) Ltd [1983] BCLC 273, ChD, at 291g–291i. See also Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [10]. The point is not affected by the appeal [2013] EWCA Civ 667, [2014] 1 BCLC 427, CA. 345 Atlasview Ltd v Brightview Ltd [2004] EWHC 1056 (Ch), [2004] 2 BCLC 191, ChD, at [36]. 346 [2014] 2 HKLRD 313 (HKCA). 347 At [107].

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of the company to rely upon their strict legal powers’. In passing it questioned whether the existence of third-party shareholders who were not party to the mutual understanding, negates the equitable consideration to restrain the exercise of legal rights in accordance with the articles of association of the company. In Edwardian Group Ltd (aka Estera Trust (Jersey) Ltd v Singh)348 Fancourt J expressed the obiter view that, disregarding some exceptions, he was ‘very doubtful’ that the relevant equitable restraints could arise where there were shareholders who were not parties to the underlying understanding.349 Dealing with these deliberations in Waldron v Waldron350 HH Judge Eyre QC held that where equitable considerations emanated from the existence of an agreement or understanding, there needed to be a degree of agreement such as it could be said that there would be a breach of good faith in departing from it. The fact that there might be other shareholders not party to such an agreement was not necessarily a bar to equitable considerations arising. The court concluded: ‘42. It follows that in my judgement the Hong Kong Court of Appeal was right to say, at [133], that “the crucial question is whether there are any equitable considerations arising from the dealings between the shareholders which call for restraints over the exercise of strict legal rights on the particular facts of the case”. The existence of third-party rights and of third-party involvement in and membership a company of can be very significant in deciding whether such equitable considerations are present and also in deciding whether constraints which were formerly present have passed away. They may as the Hong Kong Court of Appeal said, at [131], “present real and insurmountable difficulties” to the grant of relief in particular circumstances. They are not, however, conclusive or without more determinative of those questions. Where such constraints are found to exist, then the existence of such third-party rights will again be relevant to the question of the appropriate relief.’

‘UNFAIRLY PREJUDICIAL CONDUCT’ Interpretation and scope 9.83 For relief under section 994, a petitioner must satisfy the court that the company’s affairs have been conducted in a manner which is ‘unfairly prejudicial’ to the interests of some part of the members351 (including the petitioner), or that an actual or proposed act or omission of the company is or would be so prejudicial. Should unfairly prejudicial conduct be established, relief does not follow as a matter of course: the court retains the discretion to grant or to refuse relief.352 The expression ‘unfairly prejudicial’ was introduced into legislation by section 75 of the 1985 Act to ameliorate the requirement of ‘oppressive’ conduct in section 210 of the 1948 Act. Despite certain minor amendments, it continued to be the norm in

348 349 350 351 352

[2018] EWHC 1715 (Ch). At [134]. [2019] EWHC 115 (Ch), [2019] BCC 682. See the discussion at 9.82. Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, CA, at 17c.

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section 459 of the 1985 Act and, subsequently, in section 994 of the 2006 Act.353 The expression was chosen to give effect to the definition of ‘oppression’ in Elder v Elder & Watson354 as being ‘a visible departure from the standards of fair dealing, and a violation of the conditions of fair play on which every shareholder who entrusts his money to a company is entitled to rely’.355 Hoffmann LJ described the phrase ‘unfairly prejudicial’ as having been cast in ‘deliberately imprecise language’.356 The words ‘unfairly’ and ‘prejudicial’ are general words and they should be applied flexibly in order to meet the circumstances of a particular case.357 In the spirit of interpreting section 994 widely or broadly,358 it is inevitable that a broad interpretation should be given to the phrase under discussion. This is particularly so since ‘fairness’, with its inherent wideness of scope, lies at the heart of the relief available under sections 994 and 996.359 The conduct must be both prejudicial (in the sense of causing prejudice or harm) to the relevant members’ interests as well as unfair, as conduct may be unfair without being prejudicial, or prejudicial without being unfair.360 There is barely a limit to the way in which unfair prejudice manifests, as illustrated in Re Derbyshire Aggregates Ltd:361 after some 34 years as quasi-partners, one, without the knowledge of the other, was nominated for and received an MBE. Fury erupted when the undecorated partner became aware of this fact. He attempted to blackmail the recipient of the MBE to expose tax fraud to get the MBE revoked. This was held to be conduct of the affairs of the Company in a way that is unfairly prejudicial to the interests of shareholders as it was used to attempt to procure the resignation of the honoured director and the purchase of his shares.362 The norm, by which conduct for purposes of section 994 is measured, is unfair prejudice and not unlawfulness. Conduct may be strictly lawful, but still be unfairly prejudicial.363 Unlawful conduct does not necessarily result in a cause of action under section 994 unless it is unfairly prejudicial to members. There must be a causal 353 For the legislative development, see the judgment of Hoffmann LJ in Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, CA, at 17d–17f; and, in the same case, the even more detailed exposition by Neill LJ at 28d–30b. 354 1952 SC 49 at 55. 355 Re Saul D Harrison & Sons plc [1995] 1 BCLC 14 at 18h–18i. Compare Re BSB Holdings Ltd (No 2) [1996] 1 BCLC 155, ChD, at 237f. 356 Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, CA, at 17d. 357 Per Neill LJ in Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, CA, at 30f–30i. Although the words ‘unfairly’ and ‘prejudicially’ have been conjoined in the expression, they are separately considered in 9.84–9.85 and 9.86 respectively. 358 See also 9.47. 359 See 9.8 and 9.84–9.85. 360 Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, CA, at 31c; Re a Company (No 005685 of 1988) ex p Schwarcz (No 2) [1989] BCLC 427, ChD, at 437c; Sikorski v Sikorski [2012] EWHC 1613 (Ch) at [55]. Note the typographical error in this passage of the citation of Re Neath Rugby Ltd – it should read [2007] EWHC 2999 (Ch). The reference Hawkes v Cuddy (No 2) [2007] EWHC 2999 (Ch), [2008] BCC 390, ChD, is used throughout this book for the firstinstance decision in this case. 361 [2021] EWHC 2455 (Ch), [2021] 9 WLUK 138. 362 At [239]. 363 Re a Company (No 005685 of 1988), ex p Schwarcz (No 2) [1989] BCLC 427 at 437c–437d, approved by Neill LJ in Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, CA, at 31c, and dealt with more comprehensively by Hoffmann LJ at 18h–19b. See also Re Blackwood Hodge [1997] 2 BCLC 650, ChD, at 673f–673i; Re Legal Cost Negotiators Ltd [1999] 2 BCLC 171, CA, at 197d–197e; Re Southern Counties Fresh Foods Ltd [2008] EWHC 2810 (Ch) at [46].

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link between the conduct complained of and the unfair prejudice suffered by the shareholder.364 Although it has been suggested that it should first be determined whether conduct prejudicial to the interests of members exists and, thereafter, whether such prejudicial conduct is also unfair,365 there is not, and should not be, any fixed formula or set sequence by which disputes of this nature are to be resolved. Any such prescribed methodology does not sit well with the notion of the exercise of a wide discretion which lies at the heart of resolving disputes under section 994.

Fairness 9.84 By choosing ‘fairness’ as the criterion for relief, Parliament intended to ‘free the court from technical considerations of legal right and to confer a wide power to do what appeared just and equitable’.366 Fairness must be considered in a commercial context for the purposes of section 994: conduct acceptable to competing businessmen may not necessarily be considered as fair by family members.367 9.85 Lord Hoffmann’s speech in O’Neill v Phillips,368 which dealt extensively with the issue of fairness, was summarised by Patten J  (sitting as judge of the Court of Appeal with Mummery and Mance LJJ) in Grace v Biagioli.369 The main features are: •

The concept of unfairness must not be considered in a vacuum: an objective test has to be applied.370 Unfairness has to be considered in the context of at least the legal background of the corporate structure under consideration in the form of its constitution and, in particular, the articles and any shareholders’ agreement. These documents are subject to established, equitable principles which may moderate the exercise of strict legal rights when insistence on the enforcement of such rights would be unconscionable.371 An instructive perspective on the various factors to be taken into account when considering unfairness emerges from the New Zealand judgment of Thomas v H W Thomas Ltd,372 referred to in Re Macro (Ipswich) Ltd:373 it reiterated that fairness cannot

364 Re Southern Counties Fresh Foods Ltd [2008] EWHC 2810 (Ch) at [47]; Re BSB Holdings Ltd (No 2) [1996] 1 BCLC 155, ChD; Irvine v Irvine (No 1) [2006] EWHC 406 (Ch), [2007] 1 BCLC 349, ChD, at [256]; Re Blackwood Hodge plc [1997] 2 BCLC 650, ChD, at 673. 365 Re Macro (Ipswich) Ltd [1994] 2 BCLC 354, ChD, at 404a. 366 O’Neill v Phillips [1999] 1 WLR 1092, HL, at 1098D–1098E. 367 O’Neill v Phillips [1999] 1 WLR 1092, HL, at 1098E–1098F. 368 [1999] 1 WLR 1092, HL. 369 [2005] EWCA Civ 1222, [2006] 2 BCLC 70, CA, at [61]; Repeated in Re BC&G Care Homes Ltd [2015] EWHC 1518 (Ch), [2016] BCC 615, ChD, at [108]; Re Via Servis Ltd [2014] EWHC 3069 (Ch) at [72]. 370 Re RA Noble & Sons (Clothing) Ltd [1983] BCLC 273, ChD, at 290g–290i; Re Little Olympian Each-Ways Ltd (No 3) [1995] 1 BCLC 636, ChD; Fisher v Cadman [2005] EWHC 377 (Ch), [2006] 1 BCLC 499, ChD, at [86]; Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [4] (an aspect not requiring consideration on appeal [2013] EWCA Civ 667, [2014] 1 BCLC 427, CA; Re Quantum Survey Management Ltd [2016] EWHC 3084 (Ch) at [76]. 371 See also Rahman v Malik [2008] EWHC 959 (Ch), [2008] 2 BCLC 403, ChD, at [56]; Re Metropolis Motorcycles Ltd [2006] EWHC 364 (Ch), [2007] 1 BCLC 520, ChD, at [54](iv); Re Phoenix Office Supplies Ltd [2002] EWCA Civ 1740, [2003] 1 BCLC 76, CA, at [29]. 372 [1984] 1 NZLR 686 at 694–695. 373 [1994] 2 BCLC 354, ChD, at 404e–404h.

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•

•

• • •

•

be assessed subjectively; the weighing of conflicting interests of different groups, as well as all the interests within the company, may become necessary. The duties of directors, the rights and duties of majority shareholders, the structure of the company, and reasonable expectations all form part of the equation to determine whether there is a ‘visible departure from the standards of fair dealing’. It will ordinarily not be unfair for the affairs of a company to be conducted in accordance with the provisions of its articles or any other relevant and legally enforceable agreement, unless it would be inequitable for those agreements to be enforced in the particular circumstances under consideration. Either the breach of the strict legal rules themselves, or the use of rules in a manner which equity would regard as contrary to good faith, may constitute unfairness.374 The conduct complained of need not be unlawful, but must be inequitable. The petitioner is not required to demonstrate that the controllers of the company had acted in bad faith or in the conscious knowledge that their actions were unfair to the petitioner.375 Equitable rules (and not some indefinite notion of fairness) should inform the investigation whether it would be unjust for parties to insist on their strict legal rights. To be unfair, the conduct complained of need not be such as would have justified the making of a winding-up order on just and equitable grounds, as formerly required under section 210 of the 1948 Act.376 It is important to establish, in every instance, whether the exercise of the power or rights in question would have involved a breach of an agreement or an understanding between the parties which it would be unfair to allow a member to ignore. Such agreements do not have to be contractually binding in order to found the equity. In an unfair prejudice context, there is no room for a so-called ‘no fault divorce’. When trust and confidence between shareholders break down, a shareholder has no right to a unilateral withdrawal. However, the situation is different if that breakdown in relations causes the majority to exclude the petitioner from the management of the company, or otherwise to cause him prejudice in his capacity as a shareholder – that conduct may very well be unfairly prejudicial.

An agreement providing for the dismissal of a so-called ‘bad leaver’ as defined in the agreement, has been applied upon a finding that the director was precisely such a bad leaver, thereby leaving no scope for the court’s intervention to modify the consequences provided for in the contractual agreements the parties made when the company was formed:377 ‘… neither equity nor the jurisdiction under section 994 sweeps away contractual arrangements; at most, the exercise of contractual rights is subjected to equitable restraint if it would be unconscionable, or unfairly prejudicial. If the exercise of 374 O’Neill v Phillips [1999] 1 WLR 1092, HL, at 1098H–1099B. 375 Compare Re RA Noble & Sons (Clothing) Ltd [1983] BCLC 273, ChD, at 290g–290i; McGuinness v Bremner plc [1988] BCLC 673, CSOH, at 678h–679a. 376 Its current equivalent is s 122(1)(g) of the Insolvency Act 1986. See Chapter 11 regarding the requirements for the just and equitable winding up of a company. 377 Re LCM Wealth Management Ltd [2013] EWHC 3957 (Ch) at [7] and see the discussion whether the agreements were subject to overriding equitable considerations at [36]–[56]. See also Re Charterhouse Capital Ltd [2015] EWCA Civ 536, [2015] 2 BCLC 627, CA (Civ).

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the legal right would not be unconscionable, the consequences of its exercise must be permitted to follow.’378 The rejection of a reasonable offer in the course of, or preceding, section 994 proceedings may eliminate any unfairness that might have attached to unfairly prejudicial conduct.379 So may acquiescence to a course of admittedly prejudicial conduct, remove the element of unfairness. In Re KR Hardy Estates Ltd380 the court observed: ‘It is possibly unusual for it to be appropriate in s 994 proceedings to examine whether admitted prejudice is or is not unfair in a relevant sense. It is after all almost a sine qua non that admitted prejudice relative to a specific event or course of conduct is “unfair” without more, but the court’s evaluation of the evidence in order to determine the valuation date will in this case turn to a large extent on when an event which was unfair per se had a relevant impact on Christine’s shareholder interest. This choice of words is significant because it enables a distinction to be made between conduct or a course of conduct which can be treated as “unfairly” prejudicial per se and conduct or a course of conduct which but for the giving of consent or the existence of some kind of estoppel would be considered inherently unfair if occasioning recognisable prejudice. The buyout, for example, would qualify had not Christine at least implicitly consented to it and all of its consequences. Obviously, prejudice which directly or incidentally arises owing to a course of conduct to which a member or class of members of a company has consented is by definition not relevantly unfair and cannot be relied on.’

Prejudice 9.86 The prejudice contemplated in section 994 must be contextualised within the framework of the purpose of the section, namely to give relief to members suffering from unfairly prejudicial conduct which they are unable to resolve internally through the company structures.381 Prejudice of a trivial nature is not intended to invoke the provisions of section 994, or to evoke judicial sympathy to expand the notion of fairness to accommodate members with frivolous complaints.382 An attempt to confine or define the scope of prejudice in this legislative context, taking into account the general principle that the constituent components of section 994 should be widely interpreted, was first ventured in the unreported judgment of Re Bovey Hotel Ventures Ltd.383 Recognising the fact-bound assessment necessary 378 Re LCM Wealth Management Ltd [2013] EWHC 3957 (Ch) at [45]. 379 Wilkinson v West Coast Capital [2005] EWHC 3009 (Ch), [2007] BCC 717, ChD, at [328], [329]. See Re Phoenix Office Supplies Ltd [2002] EWCA Civ 1740, [2003] 1 BCLC 76, CA, at [19](iii)–(vii), for a convenient summary of the applicable principles. See also West v Blanchet [2000] 1 BCLC 795, ChD, at 803d–804d; Music Sales Ltd v Shapiro Bornstein & Co Inc [2005] EWHC 759 (Ch), [2006] 1 BCLC 371, ChD. For the effect of making a reasonable offer on the fairness of the exclusion from management situations, see 9.160–9.162. 380 [2014] EWHC 4001 (Ch), [2016] BCC 367, ChD, at [59]. 381 Compare Chapters 5 and 7. 382 Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [10]. See also Irvine v Irvine (No 1) [2006] EWHC 406 (Ch), [2007] 1 BCLC 349, ChD, at [256]; Re BSB Holdings Ltd (No 2) [1996] 1 BCLC 155, ChD. 383 As quoted in Re R A Noble & Sons (Clothing) Ltd [1983] BCLC 273 at 290h–290i.

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to establish prejudice, the basic yardstick was that petitioners had to show that the value of their shareholdings in a company had been ‘seriously diminished or at least seriously jeopardised’ as a result of conduct on the part of the de facto controllers of the company. In a similar vein, it was held in Re Macro (Ipswich) Ltd384 that conduct which is prejudicial to a company in a financial sense sufficiently constitutes financial prejudice to the interests of the petitioners.385 It is not a prerequisite that the financial prejudice should be quantifiable.386 But, as Nourse J concluded in Re R A Noble & Sons (Clothing) Ltd,387 conduct could amount to unfairly prejudicial conduct in the absence of seriously diminished or jeopardised share values for purposes of winding up, although not for purposes of section 459. That distinction was not upheld in Re Sunrise Radio Ltd,388 where the following explanation was given: ‘… Prejudice will most often be established by reference to conduct having a depressive effect (actual or threatened) on the value of the petitioner’s shareholding, which will in most cases be a minority holding, typically in a private company with restrictions on transfer. Unfairness, in turn, most often connotes some breach of the articles, statute, or general principles of company law. However, the operation of the section is not necessarily limited to such cases. The test is an objective one. There may be mutual understandings between shareholders giving rise to special rights of a quasi-partnership kind. Even without that, the conduct of the company’s directors may, whether by reason of malevolence, crass stupidity, or something in between, fall so far short of the standards to be expected of them as to lead to the conclusion that the petitioning shareholder cannot reasonably be expected to have the minimum of trust and confidence in the integrity or basic competence of the board that any shareholder is entitled ordinarily to expect. This is so irrespective of any impact on the value of his or her shares, and irrespective of whether any specific breach of the articles, statute, or the general principles of company law is involved.’ (emphasis supplied) The conclusion is that the conduct complained of need not have measurable impact on the value of the complaining shareholders’ investment to cause prejudice for purposes of section 994.389 It has now been confirmed that such prejudice is not required to be financial but may be non-financial.390 Such non-financial prejudice arose when a shareholder/director assaulted his co-shareholder/director in an altercation about the former’s remuneration, being an aspect of conduct of the company’s affairs.391 Where the acts complained of have no adverse financial consequence, it may be more difficult 384 [1994] 2 BCLC 354, ChD, at 404d. 385 See also Re Elgindata Ltd [1991] BCLC 959, ChD, at 984d–984f; Re Little Olympian Each-Ways Ltd (No 3) [1995] 1 BCLC 636, ChD; Re Brenfield Squash Racquets Club Ltd [1996] 2 BCLC 184, ChD. The risk that members’ claims may suffer from the application of the ‘no reflective loss’ rule is real in such circumstances, because the loss is primarily that of the company and not of the shareholder. See further Chapter 8. 386 Re Elgindata Ltd [1991] BCLC 959, ChD, at 1003i–1004a. 387 [1983] BCLC 273, ChD, at 291h–292a. 388 [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [4]. 389 Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [10]. The appeal [2013] EWCA Civ 667, [2014] 1 BCLC 427, CA, pertained only to aspects of valuation. 390 Re Coroin Ltd [2012] EWHC 2343 (Ch) at [630], affirmed on appeal [2013] EWCA Civ 781, [2013] 2 BCLC 583, CA. See also McGuinness v Bremner plc [1988] BCLC 673, CSOH, where delay of a meeting with no impact on share value was held to constitute unfairly prejudicial conduct, applied in Re OS3 Distribution Ltd [2017] EWHC 2621 (Ch) at [118]. 391 Re Home & Office Fire Extinguishers Ltd [2012] EWHC 917 (Ch).

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to establish relevant prejudice,392 although not necessarily impossible.393 Moreover, if the prejudice is such that it converts to negligible share values, the offended party may be the loser and punished by an appropriate order as to costs.394

Categorisation of unfairly prejudicial conduct 9.87 Returning to the conjoined concept of ‘unfairly prejudicial’, the occurrence of unfairly prejudicial conduct can essentially be summarised in four categories:395 (a) a breach of the terms on which a shareholder agreed that the affairs of the company should be conducted;396 (b) equitable considerations which arose at the commencement of the relationship (or subsequently), which make it unfair for those conducting the affairs of the company to rely on their strict legal rights;397 (c) a board of directors exceeding the powers vested in them or exercising their powers for illegitimate or ulterior purposes;398 (d) an event which brings to an end the basis on which the parties have entered into association with each other, making it unfair that one shareholder should insist on the continuance of the association.399

Breach of the strict legal rules Introduction 9.88 Common to all companies limited by shares is the existence of a constitution (consisting of at least the articles of association, with or without shareholders’ agreements and special resolutions)400 and the rules imposed by the Companies Act in force from time to time. This collection of rules regulates the relationships between shareholders inter se and between the shareholders and the company. Most, and sometimes all, the understandings and arrangements between corporators will be encapsulated in the express terms of the constitution.401 These rules, with agreement as their basis,402 encompass the ‘strict legal rules’ – strict in the sense that 392 Michel v Michel [2019] EWHC 1378 (Ch) at [77]–[78]; see also Re Macom GmBH (UK) Ltd [2021] EWHC 1661 (Ch) at [47]. 393 Re Coroin Ltd [2012] EWHC 2343 (Ch) at [630]–[631]. 394 Ashdown v Griffin [2018] EWCA Civ 932, [2018] 7 WLUK 697. 395 Per Warren J in Re Southern Counties Fresh Foods Ltd [2008] EWHC 2810 (Ch), at [41], and in Amin v Amin [2009] EWHC 3356 (Ch) at [412]. These categories are not impervious – overlap is unavoidable. 396 See 9.88–9.121. 397 See 9.122–9.166. 398 See 9.167–9.169. 399 See 9.170–9.172. 400 See Chapter 3. Even in those cases where shareholders’ agreements do not qualify for inclusion in the constitution, they remain relevant as contracts between the parties thereto, breach of which may have the same consequences as if it forms part of the constitution. See eg the facts in Birdi v Specsavers Optical Group Ltd [2015] EWHC 2870 (Ch) at 331: “’But a finding of improper motive is not, as I understand the law, the only way in which unfair prejudice can be established: a breach of the terms on which it was agreed that the affairs of the company would be conducted is capable of constituting the relevant unfairness …’. 401 Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, CA. 402 O’Neill v Phillips [1999] 1 WLR 1092, HL, at 1098F–1098G.

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they will be construed and applied as any other contract or legislation, without the tempering influence of equity. In contrast, equitable rules, with fairness as their basis, apply to understandings and undertakings which are established by the legitimate expectations of corporators,403 transcending the strict legal rules. After all, ‘[e]very shareholder is entitled to insist upon the observance of the standards of fair dealings and conditions of fair play, which include those standards and conditions the law prescribes as absolute’.404 Material breach of the strict legal rules by the de facto controllers of a company is likely to constitute unfairly prejudicial conduct detrimentally affecting the interests of other members, thereby establishing grounds for a claim under section 994.405 It is trite law that agreements ought to be abided by,406 and that breach will allow the innocent party to recover any loss suffered as a result. Therefore, ‘[s]ince keeping promises and honouring agreements is probably the most important element of commercial fairness, the starting point in any case under section 459 will be to ask whether the conduct of which the shareholder complains was in accordance with the articles of association’.407 Breach of the strict legal rules is, and should remain, the starting point for any investigation into alleged unfairly prejudicial conduct.408 Such breach is capable of being both unfair and prejudicial and there is, accordingly, no need to consider whether there are equitable considerations which render the exercise of rights as unfair under the constitution or the arrangements governing relations between the shareholders.409 It does not mean that the forensic exercise will not include, if so pleaded, an investigation into the existence of legitimate expectations which may override the strict legal rules. However, the categories which constitute unfairly prejudicial conduct are not closed, and the standards of corporate conduct are not limited to those standards imposed by legislation, existing case law,410 directors’ breach of their fiduciary duty, or the company’s breach of the terms of its articles, or an agreement. It requires emphasis that directors’ duties are towards the company they serve, not the individual shareholders personally. It was put as follows in Re Hut Group Ltd:411 ‘As regards paragraph  (5) of the prayer for relief, the respondents submit that, as the directors did not owe Zedra any fiduciary or statutory duties, there is no basis for an award of compensation to be paid by the directors to Zedra. This is not a sustainable argument. Zedra’s complaint is of conduct by the directors 403 Considered in the next category commencing at 9.122. 404 Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [11]. This point was not subject to the appeal [2013] EWCA Civ 667, [2014] 1 BCLC 427, CA. It means that the qualities of trust and confidence are not the exclusive preserve of the quasi-partner. 405 See Re Arrow Nominees Inc v Blackledge [2000] 2 BCLC 167, CA, at [41]. 406 ‘Pacta sunt servanda’. See, amongst many others, Joujou v Masri [2011] EWCA Civ 746, [2011] 2 CLC 566, CA, at [55]. 407 Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, CA, at 18a. Under the 2006 Act, ‘articles’ referred to in the quotation may form part of the ‘constitution’. See 3.19. 408 Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, CA, at 18b–18h; O’Neill v Phillips [1999] 1 WLR 1092, HL, at 1098H. See also Rahman v Malik [2008] EWHC 959 (Ch), [2008] 2 BCLC 403, ChD, at [57]; Wilkinson v West Coast Capital [2005] EWHC 3009 (Ch), [2007] BCC 717, ChD, at [234]. 409 Re Southern Counties Fresh Foods Ltd [2008] EWHC 2810 (Ch) at [45]; see Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, HL; Re Saul D Harrison [1995] 1 BCLC 14, CA. 410 Re BSB Holdings Ltd (No 2) [1996] 1 BCLC 155, ChD. 411 [2021] EWCA Civ 904 at [66]; and see 2.7.

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which was unfairly prejudicial to its interests as a member. The relevant conduct took the form of alleged breaches by the directors of their statutory duties. This formulation of unfair prejudice is entirely in line with the approach adopted by this court in Re Saul D Harrison & Sons and by the House of Lords in O’Neill v Phillips. It is not dependent on showing a fiduciary or statutory duty owed by directors to shareholders personally. Once unfair prejudice is established, the court has the wide powers to grant relief conferred by section 996, as discussed above, and they plainly include the power to order wrongdoing directors to pay compensation to the petitioner.’ 9.89 Although breach of a fiduciary duty owed by directors to a company may appear to vest a claim in the company to seek redress for the company (or for shareholders to pursue a derivative action in its stead), the issue is much less discrete; it might very well be the personal rights and interests of a member, or members, which were affected by such a breach, thus providing the basis for a personal claim. As such, when a member alleged that directors were in breach of their fiduciary duty by allotting shares for an improper purpose, the claim was held to be a personal, and not a derivative, claim.412 The facts in this instance were that a large country house had been converted into flats, the freehold of which was owned by a management company in which each flat-owner owned one share. The company proposed a new scheme for shares to be allotted in proportion to contributions made to the service charge. The petitioning shareholder unsuccessfully alleged that the directors’ proposed issue of shares was an abuse of their fiduciary powers, as it concealed a real and more sinister motive. The court concluded that the matter was not a derivative claim, despite the fact that the alleged breach of fiduciary duty by the board was, in theory, a breach of duty to the company. The true basis of the action was an infringement of the petitioner’s personal rights as a member/shareholder. Therefore, the abuse of the power, to effect an allotment on the basis of an improper and unlawful exercise of the powers granted to the board by the company’s constitution, constituted a breach of the member’s contractual rights under the constitution.413 Although, in principle, breach of a bargain with the member may result in a personal claim, trivial or technical infringements of the articles were not intended to give rise to unfair prejudice petitions.414 As always, fairness requires balance to be maintained and rigidity of approach avoided: ‘… [w]here, moreover, statute or the constitution lay down absolute standards, not dependent on impropriety or even negligence, the Court should respect those standards, which are there for a purpose, and not be too ready to dismiss anything other than minor, inadvertent departures as “trivial”.’415 9.90 Managerial decisions may either impact on the strict legal rules, or may run contrary to legitimate expectations. Section 994 and its predecessors were not devised to provide a method whereby courts are called on to sit as a super appealboard of directors, reconsidering business decisions taken bona fide and, purportedly, 412 Re a Company (No 005136 of 1986) [1987] BCLC 82, ChD. See also 4.20–4.21 and 9.115–9.118. 413 At 84d–84f. 414 Re Saul D Harrison & Sons plc [1995] BCLC 14, CA, at 18h–18i. See Re Baumler (UK) Ltd [2004] EWHC 1763 (Ch), [2005] 1 BCLC 92, ChD, at [180](iii), read with [181]; Irvine v Irvine (No 1) [2006] EWHC 406 (Ch), [2007] 1 BCLC 349, ChD, at [256]; Re BSB Holdings Ltd (No2) [1996] 1 BCLC 155, ChD. 415 Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [8].

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in the best interests of a company. It is, therefore, rarely sufficient, for the purpose of establishing unfairness, to show that some managerial decision prejudiced a member’s interests. It is one of the risks that investors in a company take: decisions which are clearly in conflict with the strict legal rules may be taken, in the wider interests of the company, despite the potential of harm to the interests of shareholders.416 It will be unfair, but not prejudicial. Although courts are at liberty (taking into account their wide discretion) to find that serious mismanagement of a company’s business constitutes conduct that is unfairly prejudicial to the interests of shareholders, they will ordinarily be reluctant to do so; put differently, managerial decisions do not normally, save in the most unusual of circumstances, amount to unfair prejudice.417

Effects of condoning a breach 9.91 Examination is required into the position of shareholders who tolerated, over a period of time, conduct by the de facto controllers of a company amounting to breach of the strict legal rules. The starting point is that articles of association and agreements between shareholders can be varied by subsequent agreement, arrived at either expressly or by conduct.418 In Fisher v Cadman,419 the petitioner did not object to the extremely lax running of the company over a very substantial period. Mr Philip Sales (sitting as Deputy Judge of the High Court) stated that:420 ‘… in considering whether the conduct of the controllers amounts to conduct unfairly prejudicial to the interests of a member, it is also relevant to take into account any agreement, understanding or clearly established pattern of acquiescence on the part of that member which may have led the controllers to act or continue to act in a particular way, even if their action may have involved a departure from a strict adherence to the terms of the Articles.’ 9.92 Such acquiescence condones the unlawful act. It deprives acquiescing members from subsequently relying on otherwise unfairly prejudicial conduct. That conduct becomes legitimised by the failure of minority shareholders to object thereto and redefine the contractual rules of engagement. The judge placed reliance on the dictum of Lord Reed in Anderson v Hogg421 that the parties: ‘agreed, by their words and conduct, to conduct the affairs of the company on an informal basis which allowed the respondent to exercise powers of management more freely than the articles may have envisaged or permitted. In these circumstances, unfairness has to be assessed against what the members actually agreed rather than against the articles.’422 416 Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, CA, at 31g–31h. 417 Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, CA, at 33g; Re Elgindata Ltd [1991] BCLC 959, ChD, at 993–994; see Re Addbins [2015] EWHC 3161 (Ch) at [68]. 418 Re Southern Counties Fresh Foods Ltd [2008] EWHC 2810 (Ch) at [49]. And see the discussion at 3.11–3.19. 419 [2005] EWHC 377 (Ch), [2006] 1 BCLC 499, ChD. 420 At [90]. 421 2000 SLT 634, CSOH, at 640B–640D. It does not appear that the reversal of the judgment on appeal (2002 SC 190) affected this dictum. 422 Relied on in Fisher v Cadman [2005] EWHC 377 (Ch), [2006] 1 BCLC 499, ChD, at [91]. Cf also para [90] in the latter judgment, relied upon in Re Quantum Survey Management Ltd [2016] EWHC 3084 (Ch) at [77].

284

‘Unfairly prejudicial conduct’ 9.94

9.93 A deviation from the strict legal rules, arrived at in this manner, must be distinguished from the underlying agreements or understandings arising in a quasipartnership company context, breach of which will call into aid equitable rules to achieve redress. A member who has condoned deviation from the strict legal rules will be non-suited if he nevertheless launched section 994 proceedings on the basis of breach of those same rules. However, such a member is fully entitled to demand, on reasonable notice, future performance from the controllers of the company in exact accordance with the strict legal rules:423 ‘… The position is akin to that in which a party to a contract may waive insistence upon a contractual term, but then at a later date wishes to revive reliance upon the term. If the relevant contract has not been amended, and if it is not inequitable to do so, the party may usually give reasonable notice to the other party to the contract to revive the term and his entitlement to rely upon it against that other: see eg Panoutsos v Raymond Hadley Corp of New York [1917] 2 KB 473.’ If, in response to such a demand, compliance with the strict legal rules resumes, a member may institute section 994 proceedings on the basis of a further breach of the strict legal rules amounting to unfairly prejudicial conduct affecting his interests. The point of departure ought always to be an analysis of the underlying documentation comprising the agreement between the parties. In UTB LLC  v Sheffield United Ltd424 the investment and shareholders’ agreement contained a ‘no oral variation’ clause which negatived any other understanding between the parties relating to their rights and obligations.425 This, together with the articles of association determined the relationship between the parties leaving no room for a personal relationship of cooperation and trust and hence quasi partnership features.

Effects of petitioner’s non-compliance with the strict legal rules 9.94 Section 994 petitions may be met by counter-allegations (whether accompanied by a cross-petition or not) attributing unfairly prejudicial conduct to the petitioner. The question is whether fairness will be served if the conduct of the petitioner, unacceptable as it might have been, can be overlooked or forgiven when assessing the conduct of the respondents from whom relief is sought.426 In Parkinson v Eurofinance Group Ltd,427 Pumfrey J considered the issue in the following terms and concluded that a petitioner’s conduct may indeed play a role: ‘Plainly the equitable constraints of which Lord Hoffmann was speaking are constraints affecting the otherwise legally valid exercise of a power under the articles. But what is the position where the petitioner has indicated that he himself intends to act in a way which is not sanctioned by the articles, or is contrary to them, and the exercise of the power complained of is designed to forestall his 423 Fisher v Cadman [2005] EWHC 377 (Ch), [2006] 1 BCLC 499, ChD, at [93]. See also Re Southern Counties Fresh Foods Ltd [2008] EWHC 2810 (Ch) at [49]. 424 [2019] EWHC 2322 (Ch); [2019] 9 WLUK 144. 425 Oral amendments in agreements containing no oral variation clauses simply cannot be given effect to in the absence of an estoppel: Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24, [2019] AC 119, [2018] 5 WLUK 292. 426 See Re RA Noble & Sons (Clothing) Ltd [1983] BCLC 273, ChD; Re Baumler (UK) Ltd [2004] EWHC 1763 (Ch), [2005] 1 BCLC 92, ChD, at [180](v), [181]. 427 [2001] 1 BCLC 720, ChD, at [87].

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ex hypothesi illegal acts? It seems to me that the petitioner’s declared intention can, in a proper case, be relevant to the question whether the prejudice which he maintains he has suffered from the acts of which he complains is itself unfair, and it may also affect relief, even if the treatment of which he complains is both unfair and prejudicial. If his declared intention to act contrary to the articles is the operative cause of his exclusion, I do not see why this cannot weigh in considering the fairness of the manner in which he was excluded. This is implicit in the decision of Nourse J in Re London School of Electronics Ltd (1985) 1 BCC 99, 394.’428 9.95 Nourse J held in Re London School of Electronics429 that, even if the conduct on the respondent’s part was both prejudicial and unfair, the petitioner’s own unfair conduct may nevertheless have affected the relief which the court thought fit to grant, there being ‘no independent or overriding requirement that it should be just and equitable to grant relief or that the petitioner should come to the court with clean hands’.430 It is certainly not a prerequisite for standing that the petitioner should be entirely blameless or, in other words, that he or she has to approach the court with ‘clean hands’. However, depending on the circumstances, the nature and seriousness of the petitioner’s own conduct may result in a refusal of relief, despite establishing all the elements for an otherwise successful section 994 claim.431 This was the case when a petitioner was found to be at fault for the situation which had developed and his fault was many times graver than the relevant conduct of the other shareholders whose conduct was not causative of the state of affairs which had developed.432 It may also have an impact on costs.433 9.96 A section 994 petition is a remedy based on fairness. It involves a balancing of competing interests which can hardly ignore relevant, serious misconduct by a petitioner. It was put as follows in Grace v Biagioli:434 ‘… The use by the majority of the powers and voting rights conferred by the articles cannot be regarded as contrary to good faith where they are invoked to protect the company from conduct which is itself either in breach of a relevant agreement, or otherwise detrimental to the well-being of the company and its assets. The judge was therefore entitled to have regard to Mr Grace’s conduct in relation to the negotiations with Corrpro in determining whether his removal as a director by the respondents was a proportionate and justifiable response to what they had discovered.’

428 Also reported as [1986] Ch 211, [1985] 3 WLR 474, ChD, and [1985] BCLC 273, ChD. 429 [1986] Ch 211 at 222A–222C. 430 In this case, the petitioner diverted the custom of certain students of the company whilst the other directors had set up a different business, taking most of the business with them, to the exclusion of the petitioner. See also Re Tobian Properties Ltd [2012] EWCA Civ 998, [2013] BCC 98, CA, at [41], where Arden LJ observed that ‘Justice is not administered on the basis of tit for tat’; Re Quantum Survey Management Ltd [2016] EWHC 2896 (Ch). 431 Richardson v Blackmore [2005] EWCA Civ 1356, [2006] BCC 276, CA, at [53]; Interactive Technology Corp Ltd v Ferster [2016] EWHC 2896 (Ch) at [318]. 432 Interactive Technology Corp Ltd v Ferster [2016] EWHC 2896 (Ch) at [325]. 433 At [62]. 434 [2005] EWCA Civ 1222, [2006] 2 BCLC 70, CA, at [64]. See also Faulkner v Vollin Holdings Ltd [2021] EWHC 787 (Ch), [2021] 3 WLUK 557 where the importance of fidelity to the agreement or ‘bargain’ (as a critical component of the good faith principle) was emphasised at [399]–[400]. (Appeal pending as at 1 November 2021).

286

‘Unfairly prejudicial conduct’ 9.97

The Court of Appeal set aside a judgment which held that a section 994 claimant was deprived of claiming on the basis of excessive director’s remuneration because he did not insist on being provided with a company’s accounts, from which the excess would have been established. The approach of the court below imposed a requirement for diligence that had no basis in the statutory provisions or in principle or authority.435 Blameworthy conduct by a petitioner, affecting the relief that he may be entitled to, may not only cover past, present and future conduct, but also conduct displayed during the course of a trial.436

Strict legal rules prevailing 9.97 In Re Posgate & Denby (Agencies) Ltd,437 the petitioner was the holder of non-voting shares. The voting shares carried preferential rights as regards dividends and the return of capital.438 The company was compelled to discontinue its Lloyds insurance business, and the directors proposed a series of management buy-outs which gave rise to a conflict of interest as the acquisitions were to be made by entities in which a majority of the company’s directors held interests. The sale of the company’s assets was within the power of the board. The provisions in the company’s articles relating to conflicts of interest were complied with, and shareholder approval was duly obtained. Nevertheless, the petitioner alleged that the management buy-out was unfairly prejudicial to his interests as an equity shareholder, in that the equity shareholders were the only persons ultimately interested in the price at which the company’s business was sold. He further alleged that a majority of the directors had conflicts of interest that made it impossible for them to view the merits of the transaction objectively; and, lastly, that the difficulty in valuing the company’s assets posed a risk of the assets being sold at an undervalue. The petitioner sought an order restraining the sale of the company’s assets unless the agreements to sell them were approved by the equity shareholders. The question was, therefore, whether the petitioner could be said to have had a legitimate expectation that the board would not dispose of the business units without the approval of the holders of a majority of the equity shares. However, importantly, none of the expectations went beyond the terms of the constitution. Each of the contentions was expressly or impliedly contemplated by the articles which formed the basis on which the petitioner took his shares, thereby denying reliance by the petitioner on legitimate expectations.439 The strict legal rules accordingly prevailed. The 2006 Act provides for the removal of directors, as long as certain formalities have been complied with.440 Except for the process provided for in section 169 of the 2006 Act to regulate fair dismissal, there is ordinarily no right or entitlement not to be

435 436 437 438

Re Tobian Properties Ltd [2012] EWCA Civ 998, [2013] BCC 98, CA, at [32]. At [73]; adopted in Amin v Amin [2009] EWHC 3356 (Ch) at [417]. [1987] BCLC 8, ChD. See also Re XYZ Ltd (1986) 2 BCC 99520. Since it will be detrimental to the interests of creditors, capital can be returned (or distributed) to shareholders only if authorised by a company’s articles: Progress Property Co Ltd v Moorgarth Group Ltd [2010] UKSC 55, [2011] 1 WLR 1, SC. 439 Re Posgate & Denby (Agencies) Ltd [1987] BCLC 8, ChD, at 14a–14f. 440 Section 168 of the 2006 Act, and see 7.63–7.66.

287

9.98  Unfair Prejudice: Section 994

removed as such.441 Therefore, where the constitution of a company granted the right to someone to remain the chairman of the board until removed in general meeting, the incumbent was not allowed to contest a proposed amendment to the constitution to permit an alternative way of terminating the incumbent’s term of office.442 The proposed amendment was not a breach of the constitution; it was, therefore, neither unfair nor prejudicial. 9.98 A board of directors was confronted with the problem of introducing new capital. One of the directors (D) was prepared to do so personally, if he could obtain control of the company in the process. However, it became clear that the claimants – who had held some 25 per cent of the shares between them – would not vote in favour of the necessary special resolution required under the 1985 Act to dis-apply the preemption provisions of section 89 of the 1985 Act.443 To circumvent the problem, shares from the stock of unissued shares were issued to D against payment of the purchase price, which provided the required capital for the benefit of the company and gave him the necessary control. The court found that the board’s decision to cede control to D in return for his investment was proper, as being in the interests of the company. The modus operandi which obviated the need for a special resolution did not mean that the board’s powers were exercised for an improper purpose. The board had a legitimate end in view, and it achieved it in a legitimate way. The claimants were accordingly not unfairly prejudiced.444 9.99 Another claim of unfairly prejudicial conduct, arising from pre-emption provisions, was dismissed on the basis of a true construction of the articles.445 The company was a typical family quasi-partnership company.446 A  decline in profitability of its cane sugar-growing business resulted in substantial accumulated losses. The business was discontinued as a result. The company had insufficient income from other sources to service its debt but its land had development potential. A  development company, Classic, made an offer to buy all the issued shares and the board recommended the offer for acceptance. The offer was accepted by all the members, except the appellant, who claimed that she was entitled under the company’s articles to exercise a pre-emption right which required the other shareholders to first sell their shares to her at a fair price, determined in accordance with the articles. On behalf of the other shareholders, the board made an offer to the appellant to purchase her shares which, the board claimed, was in accordance with her pre-emption rights under the articles. She rejected the offer as not being in compliance with the articles. The appellant launched unfair prejudice proceedings. She applied for an injunction to restrain any transfer of shares to Classic until there was proper compliance with the articles’ pre-emption provisions. The appellant relied on a clause allowing a share transfer to a ‘selected’ person who was not a shareholder, if his membership was 441 Re a Company (No 00314 of 1989); Estate Acquisition & Development Ltd [1995] BCC 338, ChD. The articles may legitimately contain a provision weighing certain shares’ voting rights, which, if exercised in the process of attempting to remove a director under the statutory provisions, may cause the rejection of the proposal: Bushell v Faith [1970] AC 1099, HL. 442 Re Blue Arrow plc [1987] BCLC 585, ChD. 443 Compare Pt 17, Ch 3 of the 2006 Act. 444 CAS (Nominees) Ltd v Nottingham Forest FC plc [2002] 1 BCLC 613, ChD. 445 Knox v Deane [2005] UKPC 25, [2005] BCC 884, PC. 446 A family business organised into a company does however not automatically have quasi partnership characteristics. See eg Michel v Michel [2019] EWHC 1378 (Ch), [2019] 5 WLUK 501.

288

‘Unfairly prejudicial conduct’ 9.100

desirable for advancing the interests of the company. It was held that Classic was such a person and acquired pre-emption rights as a result. The rights of the selected person were not subordinate, but alternative, to the rights of the shareholders, and the choice of alternatives was left to the discretion of the directors, who rightfully decided to offer the shares to Classic. As noted above,447 non-compliance with a pre-emption provision ordinarily constitutes a private affair and is not the company’s affairs.448 Where directors were not to be remunerated by salary but only by way of dividend, the size of a director’s shareholding would dictate his reward for his work on the company’s business. The way in which directors were to be remunerated and the company’s distributions policy fall within the conduct of the company’s affairs. Therefore, denying a shareholder’s right of pre-emption when he was still a director, constituted interference in the manner in which the parties had agreed that the company would remunerate its directors. Such conduct accordingly falls within the ambit of section 994(1).449 9.100 In Wilkinson v West Coast Capital,450 a shareholders’ agreement required a 65 per cent majority to approve acquisitions. It also provided that each shareholder was obliged to use all reasonable and proper means to promote the interests of NGS, the holding company of a number of subsidiaries. One of them, ‘New Gifts’, which was controlled by the defendant, purchased a company, ‘Birthdays’. The defendant and New Gifts had two directors in common. The petitioner claimed that the acquisition of Birthdays should have been concluded by NGS. The petitioner contended that the provisions of the shareholders’ agreement meant that, even if the 65 per cent requirement had not been fulfilled in relation to acquisition of Birthdays, the defendant and a co-shareholder, one G, as shareholders of NGS, were obliged to use all proper and reasonable means to bring about that acquisition for NGS. The application was dismissed. Whilst the shareholders were obliged to promote the interests of NGS, they were only obliged to do so in a way that did not conflict with the 65 per cent consent provisions. Further, under the shareholders’ agreement, the shareholders had to exercise their powers subject to contrary instructions given in writing by at least 65 per cent of the members. There was no such contrary instruction in existence relating to a possible acquisition by NGS of Birthdays. There was therefore no breach by the two directors, because there was no agreement that NGS should acquire Birthdays. There was no question that the board of NGS was able to proceed with the acquisition in the face of the provisions of the shareholders’ agreement to which NGS itself was a party. In any event, as acting board members, the two directors could not be criticised if they had voted against NGS acquiring Birthdays in order to respect the provisions of shareholders’ agreement which, as between 100 per cent of the shareholders and NGS itself, were stated to take precedence over the articles. There was no ‘omission’ for the purposes of section 459 (section 994 of the similarly worded 2006 Act) in the board failing to acquire Birthdays for NGS.

447 At 9.47. 448 Re Unisoft Ltd (No 3) [1994] 1 BCLC 609, ChD and Re Coroin Ltd [2013] EWCA Civ 781, [2013] 2 BCLC 583, CA; applied in Graham v Every [2014] EWCA Civ 191, [2015] 1 BCLC 41, CA, at [29]–[31]. 449 Graham v Every [2014] EWCA Civ 191, [2015] 1 BCLC 41, CA, at [40]. 450 [2005] EWHC 3009 (Ch), [2007] BCC 717, ChD.

289

9.101  Unfair Prejudice: Section 994

Examples of breach of the strict legal rules Mismanagement of the company’s business 9.101 It is axiomatic that directors must manage the affairs of a company in the best interests of the company.451 As a general proposition, courts will be reluctant to accept that managerial decisions taken in the ordinary course of business amount to unfairly prejudicial conduct.452 The reasons are that, first, judges are not only ill-equipped to resolve disagreement between members and management, the fundamentals of daily management of companies being said to be outside of their expertise, but there can be no unfairness to the petitioners if those in control of the company’s affairs take a different view from that of shareholders on such issues. Second, when acquiring shares, shareholders take the risk that management may not be of the highest quality. If management neglected the business on occasion or lacked the necessary vigour and purposefulness, their shortcomings are unlikely to amount to unfairly prejudicial conduct, but will be considered as part of the business risk that the shareholder took when signing up to the constitution.453 Short of a breach by a director of his duty of skill and care, there is, prima facie, no unfairness to a shareholder if the quality of the management should turn out to be poor.454 Courts will therefore come to the aid of section 994 petitioners only where ‘constructive’ mismanagement is demonstrated, as opposed to poor, or below par, management. Where there is a mere difference of opinion between controllers of the company and other shareholders about the desirability of particular commercial decisions, the mismanagement relied on for the purposes of a claim under section 994 must be serious.455 Courts will be astute not to ‘second guess’ legitimate management decisions taken on reasonable grounds at the time, even though, as events transpired, they may not have been the best decisions in the interests of the company.456 It does not appear as though this approach to a consideration of business decisions by a board of directors will be influenced by the formulation, in section 172 of the 2006 Act, of the duty to promote the success of a company.457 9.102 Mismanagement was found to be sufficiently serious to warrant the court’s interference in Oak Investment Partners XII, Limited Partnership v Boughtwood,458 although the boot was on the wrong foot. The petitioner persistently failed to adhere to his management role; he ignored board decisions and expended money not 451 Section 172 of the 2006 Act explicitly requires of directors the promotion of the success of the company. 452 Re Sam Weller & Sons Ltd [1990] Ch 682 at 694C–694D; Re Elgindata Ltd [1991] BCLC 959, ChD, at 993i. 453 Re Elgindata Ltd [1991] BCLC 959, ChD, at 1000h–1000i. See also Fisher v Cadman [2005] EWHC 377 (Ch), [2006] 1 BCLC 499, ChD, at [103]–[105], where apparent neglect of assets of the company was held not to constitute grounds for an unfairly prejudicial petition where the assets were already in a poor state by the beginning of the period that was the subject of complaint. 454 Re Elgindata Ltd [1991] BCLC 959, ChD, at 994a–994f. 455 Re Macro (Ipswich) Ltd [1994] 2 BCLC 354, ChD, at 404a. See also Re Elgindata Ltd [1991] BCLC, ChD, at 959. 456 Re Macro (Ipswich) Ltd [1994] 2 BCLC 354, ChD, at 404i–405a, 406f–406g; Fisher v Cadman [2005] EWHC 377 (Ch), [2006] 1 BCLC 499, ChD, at [95]. 457 See the discussion at 2.22–2.26. 458 [2009] EWHC 176 (Ch), [2009] 1 BCLC 453, ChD.

290

‘Unfairly prejudicial conduct’ 9.104

budgeted for.459 The Court of Appeal460 characterised his conduct as ‘underhanded and unconstitutional’461 and, further, ‘wrongly trespassing on others’ turf and doing so in a manner seriously destructive of the group’s well-being. The petitioner-director created a poisoned culture that was damaging to the group’s morale’.462 Simply put, he did not live up to the demands of the strict legal rules to act in the best interests of the company and, instead, seriously mismanaged the company. 9.103 In Re Macro (Ipswich) Ltd,463 a number of acts and omissions were found to constitute mismanagement at a level sufficient to have unfairly prejudiced the company and the interests of shareholders: a failure to have a planned maintenance programme; failure to supervise repairs; failure to inspect properties regularly; a failure to let on protected short hold tenancies; taking of commissions from builders doing work for the companies; the charging of excessive management fees; an excessive secretarial salary; and the mismanagement of litigation.464 Although reluctant to do so, in Re Sam Weller & Sons Ltd (Re a Company (No 823 of 1987)),465 Peter Gibson J did not strike out allegations of mismanagement in the form of a directors’ decision to embark on a process of capital expenditure rather than maintaining a parsimonious dividend policy.466 9.104 In Re Leeds United Holdings plc,467 it could not be said that the board of directors was conducting the company’s affairs in a manner unfairly prejudicial to the petitioner by exercising a choice which of two offers for the company’s shares should be recommended to the shareholders; nor could it be said that the company’s entering into a subscription agreement was unfairly prejudicial to any of the members of the company.468 The diversion of the business of a company to another company by which the de facto controller caused the destruction of the business of the first company clearly constituted mismanagement. Moreover, purchases by the second company from the first went unpaid. These were held to be sufficient to constitute unfairly prejudicial conduct.469 It amounted to a gross deviation from the actual purpose of acting in the best interests of the company. Where the majority shareholders, for reasons of their own, persist in retaining a member of their family – who was demonstrably incompetent – in charge of the management of the company’s business, it may constitute unfairly prejudicial conduct for purposes of section 994.470

459 At [329]. 460 Per Rimer LJ (Rix and Moses LJJ concurring), Boughtwood v Oak Investment Partners XII, Limited Partnership [2010] EWCA Civ 23, [2010] 2 BCLC 459, CA, at [120]–[123]. 461 At [120]. 462 At [122]. 463 [1994] 2 BCLC 354, ChD. 464 At 404a–404b. 465 [1990] Ch 682. 466 At 694B–694C. 467 [1996] 2 BCLC 545, ChD. 468 At 560d–560g. 469 Whillock v Henderson [2009] BCC 314, CSOH. See also Re Stewarts (Brixton) Ltd [1985] BCLC 4, ChD; Re GO DPO EU Compliance Ltd [2021] EWHC 1765 (Ch), [2021] 6 WLUK 443. 470 Re Elgindata Ltd [1991] BCLC 959, ChD, at 994e–994f.

291

9.105  Unfair Prejudice: Section 994

Remuneration and bonuses 9.105 The articles will prescribe the procedures to determine directors’ remuneration and what role members play in that process, if any. Under the Companies (Model Articles) Regulations 2008, the function of determining directors’ remuneration has been delegated to the directors471 with no approval functions left to the members.472 The previous model articles, art 84 of Table A, made provision for approval of directors’ remuneration by ordinary majority of the members. Once the correct procedures have been followed, courts will be reluctant to interfere with the company’s exercise of its discretion.473 9.106 Where procedures are prescribed by the articles to determine remuneration and bonuses, a failure to follow them constitutes a prima facie breach of duty.474 Unauthorised bonus agreements are likely to contravene the directors’ duty to act fairly towards shareholders.475 In Re Sunrise Radio Ltd,476 the mere fact that a substantial bonus was contemplated for a director (although not paid) without the necessary authorisation was considered sufficient to establish unfairly prejudicial conduct.477 The lack of authorisation and the resultant improper bookkeeping justifiably destroyed the shareholder’s trust and confidence in the board of directors.478 Where shareholders knowingly permitted a deviation of the prescribed procedures, none of the shareholders should subsequently be permitted to complain that such conduct by another is unfair on that ground alone.479 9.107 By not complying with prescribed procedures, the de facto controllers of the management and finances of a company are in a position to abuse their powers by either starving minority shareholders of bonuses and/or dividends, or by awarding themselves unjustifiably large bonuses to the detriment of the minority shareholders.

471 Article 19 in respect of private companies limited by shares, and art 23 in respect of public companies. 472 This only applies if the model articles have indeed become the company’s articles: the corporators had and have the freedom to agree on any other control measure incorporated either into the model articles as an amendment or as part of an entirely new set of articles. 473 See Re Halt Garage (1964) Ltd [1982] 3 All ER 1016, ChD, at 1039h–1039i; applied in Progress Property Co Ltd v Moore [2010] UKSC 55, [2011] 2 BCLC 332, SC, at [18]–[19], [31]. 474 Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [173] (not affected by the appeal on issues of valuation [2013] EWCA Civ 667, [2014] 1 BCLC 427, CA); compare Fisher v Cadman [2005] EWHC 377 (Ch), [2006] 1 BCLC 499, ChD, at [98] – applied on the facts in Re J&S Insurance & Financial Consultants Ltd [2014] EWHC 2206 (Ch) at [23]; Rahman v Malik [2008] EWHC 959 (Ch), [2008] 2 BCLC 403, ChD, at [105]–[109]; Croly v Good [2010] EWHC 1 (Ch), [2010] 2 BCLC 569, ChD, at [96], [99]. The failure may be condoned by a general meeting giving the necessary approval ex post facto: Re McCarthy Surfacing Ltd [2009] 1 BCLC 622, ChD, at [80]. 475 Re McCarthy Surfacing Ltd [2008] EWHC 2279 (Ch), [2009] 1 BCLC 622, ChD, at [81]; Mutual Life Co of New York v The Rank Organisation Ltd [1985] BCLC 11, ChD. 476 [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD. 477 Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [173]. See also Fisher v Cadman [2005] EWHC 377 (Ch), [2006] 1 BCLC 499, ChD, at [98]; applied on the facts in Re J&S Insurance & Financial Consultants Ltd [2014] EWHC 2206 (Ch) at [23]; Rahman v Malik [2008] EWHC 959 (Ch), [2008] 2 BCLC 403, ChD, at [105]–[109]. 478 Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [224]. The appeal, [2013] EWCA Civ 667, [2014] 1 BCLC 427, CA, does not cover this point. 479 Croly v Good [2010] EWHC 1 (Ch), [2010] 2 BCLC 569, ChD, at [94].

292

‘Unfairly prejudicial conduct’ 9.108

The extent to which such abuse may go is illustrated in Re McCarthy Surfacing Ltd.480 The salient facts appear from the judgment: ‘[74] One obvious objection to Mr Tom McCarthy’s decision to award himself 45% of the profits is that he took it alone, and in secret, while under a hopeless conflict of interest. No disclosure was made to other members of the board. And even if disclosure had been made it is difficult to see how the other directors could properly have approved Mr McCarthy’s bonus agreement granted that every other director was entering into a similar bonus agreement with the company and was therefore also under a conflict of interest. Mr McCarthy’s own justification for awarding himself 45% of the profits of the Thames Water contract was that it was a reward for having worked for the company at a lower rate of remuneration than he personally thought he was worth. There was no suggestion in the evidence that the company had any legal liability to pay extra remuneration to Mr McCarthy for his past services. In effect he awarded himself a gift from the company. It was just not in his power to do this on his own. Only the company in general meeting could have awarded him remuneration on that basis. [75] A further vice of the bonus agreements, as devised by Mr Tom McCarthy, is that, in my judgment, they were a calculated scheme on his part to ensure that no part of the profits of the Thames Water contract became available for distribution to shareholders. It was not a coincidence that Mr McCarthy’s decisions on the appropriate profit shares of the directors and executives totalled 100%, it was entirely intentional. What Mr McCarthy was seeking to do was to redraw the shareholders’ entitlements to the profits of the company. Subject to the 19% of the profits designated for non-shareholder executives, the effect of the bonus agreements was to allocate the balance of the profits of the contract between Mr McCarthy and his two brothers, to the exclusion of Mr Hequet and Mr Hoare. That was undeniably the effect of what was done, and I have no doubt that Mr McCarthy (acting as the board’s delegate) intended to bring about that result.’ It is glaringly obvious that the prejudice to the McCarthy shareholders was substantial.481 The court concluded on this aspect that ‘… the making of the bonus agreements constituted unfair prejudice, being a device deliberately designed (at least so far as the payments to the McCarthy brothers were concerned) to ensure that none of the profits of a major and potentially lucrative contract would be available to the shareholders of the company’.482 9.108 In Fisher v Cadman,483 the directors breached an unequivocal understanding and arrangement not to receive any remuneration for the limited services they were rendering to the company by awarding themselves remuneration (and contemplating using their majority vote at a general meeting to approve their remuneration), thereby giving rise to equitable constraints on what they were permitted in fairness to do in the exercise of their powers within the company.484

480 [2008] EWHC 2279 (Ch), [2009] 1 BCLC 622 at [73]–[81]. 481 Re McCarthy Surfacing Ltd [2008] EWHC 2279 (Ch), [2009] 1 BCLC 622, ChD, at [77], [79]. The bonus agreements deprived shareholders of 81 per cent of net profits; estimated at £1.4m. 482 Re McCarthy Surfacing Ltd [2008] EWHC 2279 (Ch), [2009] 1 BCLC 622, ChD, at [77]. 483 [2005] EWHC 377 (Ch), [2006] 1 BCLC 499, ChD. 484 At [98], applied on the facts in Re J&S Insurance & Financial Consultants Ltd [2014] EWHC 2206 (Ch) at [23].

293

9.109  Unfair Prejudice: Section 994

It is not necessary for the bonus or remuneration to be excessive in order for it to be characterised as being unfairly prejudicial. However, the size of self-awarded bonuses may be indicative of the bad faith involved if it was not put to the general meeting for approval, where required. Determining whether payments are excessive will, in all likelihood, have to be established by experts valuing the remuneration paid in respect of the actual services rendered to the company, compared to the market485 (obviously taking account of fundamental issues such as turnover and profits generated with comparisons to similar sized companies in the same field of endeavour). Exorbitant amounts may render prima facie proof of excessive payments.486 In Fisher v Cadman,487 it was held that remuneration which was not justifiable on any reasonable basis was sufficient for a finding of excessiveness. The ousting of a member and director, followed by the remaining directors doubling their salaries, was regarded as clear unfairly prejudicial conduct in Allmark v Burnham.488 It has to be contrasted with the situation in Re Saul D Harrison & Sons plc,489 where the directors’ benefits were proportionate to the scale of the company’s operations. 9.109 Petitioners’ allegations in this regard have to be assessed objectively, whilst objective commercial criteria will have to be employed to determine whether the excess, if any, constitutes unfairly prejudicial conduct. Sir Richard Scott V-C put it as follows in Re a Company (No 4415 of 1996):490 ‘If the respondents are unable to justify by objective commercial criteria that the companies’ dividend policy was a reasonable one and that the remuneration the P  family directors were paid by the companies was within the bracket that executives carrying the sort of responsibility and discharging the sort of duties that they were carrying and discharging would expect to receive, the petitioners will, in my opinion, have succeeded in establishing their s 459 case.’ 9.110 In Irvine v Irvine,491 expert evidence established that the appropriate remuneration for the respondent – including a performance bonus over and above a fixed salary to reflect his major responsibility for the profits of the business – would have been 40 per cent of the business’s net profit. Subject to a minimum of £300,000, the balance would be available for distribution as dividends to the respondent, the petitioner, and the trust, according to their respective shareholdings. Such a split produced a 70/30 division of profits between the respondent, on the one hand, and the petitioner and the trust on the other. It followed that the petitioner and the trust had established that the respondent had conducted the affairs of the company in a manner which was unfairly prejudicial to their interests.

485 See Re a Company, ex p Burr [1992] BCLC 724, ChD, at 735f–735g. 486 Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [186], [187]. This point is unaffected by the appeal [2013] EWCA Civ 667, [2014] 1 BCLC 427, CA. 487 [2005] EWHC 377 (Ch), [2006] 1 BCLC 499, ChD, at [98]; applied on the facts in Re J&S Insurance & Financial Consultants Ltd [2014] EWHC 2206 (Ch) at [23]. See also Re a Company (No 002612 of 1984) (1986) 2 BCC 99453 (Ch) at 99482; Re Cumana Ltd [1986] BCLC 430, ChD, at 435d–435e. 488 [2005] EWHC 2717 (Ch), [2006] 2 BCLC 437, ChD, at [96](vi). 489 [1995] 1 BCLC 14, CA, at 25i–26a. 490 [1997] 1 BCLC 479, ChD, at 492g–492h; see also 494a–494c. The test was approved by Blackburne J in Irvine v Irvine [2006] EWHC 406 (Ch), [2007] 1 BCLC 349, ChD, at [267]–[270]; see also Re Tobian Properties Ltd [2012] EWCA Civ 998, [2013] BCC 98, CA, at [36]. 491 [2006] EWHC 406 (Ch), [2007] 1 BCLC 349, ChD.

294

‘Unfairly prejudicial conduct’ 9.111

Depending on the terms of a company’s constitution, determination of directors’ remuneration is a commercial decision for the board of directors, and the court would not generally interfere. In this instance the remuneration paid to some respondents had not been authorised by shareholders or the constitution leading to various degrees of excessive remuneration. It amounted to unfairly prejudicial conduct.492 A father, the controller of the majority shareholding in a typical family company, had caused the company to make loans to himself which did not benefit the company, thereby breaching his duty under the Companies Act 2006, s  172.493 He failed to promote the company’s success for the benefit of the members as a whole. Having made inadequate disclosure as to the extent of his interest in the borrower, he had also breached his duties under section 177.494 His conduct was clearly unfairly prejudicial.495 Failure by a company’s chief executive and principal shareholder to disclose investment opportunities he utilised himself, together with the board failing to investigate those matters properly and further, the improper distribution of profits to him through excessive remuneration, amounted to unfairly prejudicial conduct and concomitant relief was granted.496

Failure to pay reasonable dividends 9.111 Investors risking their money, by buying shares in a company, do so primarily with a view to a return on their investment by receiving dividends coupled, preferably, with capital growth in the share value. The potential for conflict is immediately apparent: if directors allow payment of all surplus funds towards dividends, it will, undoubtedly, starve the company of its own capital for reinvestment and internal growth.497 On the other hand, declaring and paying small, or no, dividends for purposes of applying surplus funds for expansion of the company’s business to enhance share prices will starve the investors of a decent return on their investment. A board of directors is accordingly walking a tightrope when considering the payment of dividends and, if they decide to recommend a dividend, what the amount of the dividend should be. Under the Companies (Model Articles) Regulations 2008498 a company may, by ordinary resolution, declare dividends, and the directors may decide to pay interim dividends. A dividend must not be declared unless the directors have made a recommendation as to its amount, and it cannot exceed the amount recommended by the directors. The decision to declare dividends is the exercise of discretion which must be bona fide and in the best interests of the company. 499 492 493 494 495 496 497

Re AMT Coffee Ltd [2019] EWHC 46 (Ch), [2019] 1 WLUK 274, at [120]–[121], [131], [134]–[135]. See more fully 2.22–2.29 See, for a full discission, 2.40, 2.47–2.51. Re Dinglis Properties Ltd [2019] EWHC 1664 (Ch) [2019] Bus LR 3100. Re Edwardian Group Ltd [2018] EWHC 1715 (Ch), [2018] 7 WLUK 97. Excessive borrowings to fund capital development has the potential of reducing share values if the debt:equity ratio becomes untenable. 498 Article 30 for private companies limited by shares; art 70 for public companies. A different set of articles may be adopted, or the Model Articles may be varied to accommodate other arrangements. 499 In Re AMT Coffee Ltd [2019] EWHC 46 (Ch), [2019] 1 WLUK 274, at [143]–[144] the respondents had made no bona fide decision not to pay dividends under circumstances where the company had sufficient reserves to declare dividends; yet th had paid out large sums by way of ‘bonuses’ to the first two respondents, thereby disposing of much of the profits. Capital was diverted by lending large sums of money to those respondents on loan accounts to pay personal expenditure, of course resulting in less cash available to pay dividends. It follows that the failure to make a decision in good faith on the issue of dividends amounted to conduct unfairly prejudicial to the petitioners.

295

9.112  Unfair Prejudice: Section 994

In private companies, and particularly the quasi-partnership type, the power to decide on declaring dividends or not may be abused by its directors to the prejudice of the minority. That is particularly the case where the member-directors are in any event benefiting from contractual remuneration by the company (over which they have control, should the 2008 Model Articles apply), whilst ordinary members are entirely dependent on the recommendation by the directors for the ultimate payment of dividends as reward for the investment risk they are taking. Despite the fact that a board’s powers are particularly strong when it comes to the declaration of dividends, their powers will be limited by the practicalities of a lack of the combined matters of profit and available cash.500 9.112 A company’s constitution does not normally confer a right on members to have profits distributed to them during the solvent lifetime of a company.501 However, there is no prohibition against a provision in articles, or by shareholders’ agreements among all the shareholders, for the regular payment of dividends on a pre-determined basis and time depending, of course, on the availability of cash to do so. Breach of an agreement to pay dividends on a certain basis or on agreed-by dates is likely to constitute unfairly prejudicial conduct502 on the same basis as any other breach of the terms of the constitution. A  court will view allegations of unfair prejudice on these grounds with circumspection,503 since it similarly involves descending into the arena of adjudging business decisions. That does not mean that directors’ decisions are beyond challenge. The position was summarised as follows in Re McCarthy Surfacing Ltd:504 ‘[70] That is not of course to say that directors’ decisions on dividends are immune from challenge. The court must consider whether the directors did genuinely take a decision on the payment of dividends, and must consider whether the reasons now advanced for not having done so were genuinely the rationale for the decision at the time. In Saul D Harrison Hoffmann LJ said ([1995] 1 BCLC 14 at 18): “… the powers which the shareholders have entrusted to the board are fiduciary powers, which must be exercised for the benefit of the company as a whole. If the board act for some ulterior purpose, they step outside the terms of the bargain between the shareholders and the company.”’ The court then proceeded to quote,505 with apparent approval, from the judgment of Harman J in Re A Company (No 00370 of 1987), ex p Glossop:506

500 See Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [140]–[141]. 501 The constitution may have a provision to the contrary, or a shareholders’ agreement may impose such an obligation on the directors. An expectation of entitlement to a dividend did not survive an agreement regarding the application of cash reserves for development of the company: Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [142]. The appeal [2013] EWCA Civ 667, [2014] 1 BCLC 427, CA, did not relate to this point. 502 See Sikorski v Sikorski [2012] EWHC 1613 (Ch); Croly v Good [2010] EWHC 1 (Ch), [2010] 2 BCLC 569, ChD, at [97]; Grace v Biagioli [2005] EWCA Civ 1222, [2006] 2 BCLC 70, CA, at [71]–[72]. 503 Re Sam Weller & Sons Ltd [1990] Ch 682 at 693C–693E. 504 [2008] EWHC 2279 (Ch), [2009] 1 BCLC 622, ChD, at [70]. And see Re CF Booth Ltd [2017] EWHC 457 (Ch) at [79] and [87]–[95] where a no dividend policy was found to constitute unfairly prejudicial conduct and a breach of duties owed by the directors. 505 At [70]. 506 [1988] 1 WLR 1068, at 1076G–1077C.

296

‘Unfairly prejudicial conduct’ 9.113

‘It is, in my judgment, vital to remember that actions of boards of directors cannot simply be justified by invoking the incantation “a decision taken bona fide in the interests of the company”. The decision of the Privy Council in Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821507 clearly establishes that a decision can be attacked in the courts and upset notwithstanding (a) that directors were not influenced by any “corrupt” motive, by which I mean any motive of personal gain as by obtaining increased remuneration or retaining office, and (b) that directors honestly believed that their decision was in the best interests of the company as they saw its interests. Lord Wilberforce’s observations, delivering the advice of the board at p831E, acquits the directors of corrupt motive; at p832 he asserts the primacy of the board’s judgment; but he goes on, at p835, to assert that there remains a test, applicable to all exercises of power given for fiduciary purposes, that the power was not to be exercised for any “bye-motives”. If it were to be proved that directors resolved to exercise their powers to recommend dividends to a general meeting, and thereby prevent the company in general meeting declaring any dividend greater than recommended, with intent to keep moneys in the company so as to build a larger company in the future and without regard to the right of members to have profits distributed so far as was commercially possible, I am of opinion that the directors’ decision would be open to challenge. This is an application, in a sense, of the principle affirmed in so many local government cases and usually called “the Wednesbury principle” (see Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223). If it were proved that the board of directors had habitually so exercised its powers that could justify the making of an order for winding up on the just and equitable ground.’508 9.113 A failure to declare dividends over a long period is not per se indicative of unfair prejudice to the interests of members,509 but it may well be so in circumstances where a consistent failure to consider whether or not to declare dividends was held to be a breach of duty.510 On the one hand, unfair prejudice will be difficult to establish if the build-up of surplus cash was pre-planned for certain strategic purposes, like bona fide provision for protection in leaner financial times, or to acquire an asset.511 On the other hand, the build-up of large cash reserves for no apparent purpose without recommending any, or recommending inadequate, dividends constitutes a good point of departure for a finding that the failure indeed constitutes unfairly prejudicial conduct.512 The same approach is evident in Re Metropolis Motorcycles Ltd:513 the arrangement between two corporators (H  and W) was that H  would not involve himself in the management of the company, while W would do so on a salaried basis. His remuneration would form part of the expenses when calculating net profit before 507 508 509 510 511

For a discussion of this case, see 2.16–2.19. See for a discussion of the Wednesbury principle, 2.26. Re McCarthy Surfacing Ltd [2008] EWHC 2279 (Ch), [2009] 1 BCLC 622, ChD, at [69]. At [84]. See also Sikorski v Sikorski [2012] EWHC 1613 (Ch). As was the case in Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, and Amin v Amin [2009] EWHC 3356 (Ch) at [567]. 512 See Richards v Lundy [2000] 1 BCLC 376, ChD, at 395g; Re Sam Weller & Sons Ltd [1990] Ch 682; Quinlan v Essex Hinge Co Ltd [1996] 2 BCLC 417, ChD, at 427d; Re a Company (No 00370 of 1987), ex p Glossop [1988] 1 WLR 1068, ChD, at 1075E–1075F (not followed in Re Sam Weller supra in this note); Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, CA, at 18d–18g. 513 [2006] EWHC 364 (Ch), [2007] 1 BCLC 520, ChD, at [70]–[75].

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profit-sharing. As such, H had a legitimate expectation to earn a return on the capital he invested in the form of dividends. However, accrued profits were almost depleted after two bad financial years. Although the contention was that non-payment of dividends was prejudicial to his interests, such prejudice was not significantly unfair on the basis of the evidence presented: H was required to establish that the losses which had been incurred during that period should not have been incurred; otherwise, he could not complain that he did not receive any return on his investment.514 9.114 A decision to ease payment of dividends in a cash-rich company, coinciding with the institution of unfair prejudice proceedings by a minority shareholder, may very well result in a finding of unfairly prejudicial conduct.515 However, it should be noted that, if the sole ground for an unfair prejudice petition is a credit standing to the loan account of the director arising from the declaration of dividends but not paid over, it is not appropriate to follow the petition route; it should rather be pursued in an action for the recovery of the credit standing to his account.516 Where dividends have not been declared in circumstances warranting an inference of unfairly prejudicial conduct, a court may consider granting relief on the basis of an award of (or a sum equivalent to) interest in respect of the value of shares, taking into consideration that the petitioner had been deprived of any income whatsoever.517 The exercise may become a very complicated one, because one would, in fairness, have to take into account the value which has accrued to the shares as a result of the increased cash reserves, which should reflect well on the company’s balance sheet with concomitant benefit to the financial interests of a member. Directors acted in an indisputable unfairly prejudicial manner under the following circumstances: when a third shareholder was accepted, the allotment of shares were split into two categories: 9,500 A shares allotted to the incumbents and 500 B shares to the newcomer. The creation of a policy was provided for in a special resolution, but never formulated, which would provide for dividend payments to B class shares only after dividends were declared and paid to the A class shareholders. The directors never got around to formulate the policy and continued to declare and pay dividends only to themselves as holders of the A shares. This amounted to unfair prejudice as the resolution did not sanction the blanket non-payment of dividends on the B shares.518

Allotment of shares and rights issues 9.115 Directors are duty bound to exercise the powers of a company to allot shares or to grant rights to subscribe for, or to convert any security into, shares in the company, in accordance with sections 550 and 551 of the 2006 Act and do so as fiduciaries.519 Shareholders’ ultimate percentage-holding will determine not only 514 See also, as an example of the absence of unfair prejudice by the non-payment of dividends, Shah v Shah [2010] EWHC 313 (Ch) at [132], affirmed by the Court of Appeal ([2010] EWCA Civ 1408). 515 Amin v Amin [2009] EWHC 3356 (Ch) at [576]–[577]. 516 At [578]. 517 Allmark v Burnham [2005] EWHC 2717 (Ch), [2006] 2 BCLC 437, ChD, at [138], [139]. See further, regarding the issue of interest awarded in buy-out situations, 10.41–10.43. 518 Routledge v Skerritt [2019] EWHC 573 (Ch), [2019] BCC 812. 519 Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [79]. See also Re a Company (No 005136 of 1986) [1987] BCLC 82, ChD, at 84d–84f; Dalby v Bodilly [2004] EWHC 3078 (Ch), [2005] BCC 627, ChD. It is arguable that these fiduciary duties are owed to the shareholders directly and not to the company as such. As to which, see 2.19 and 4.20– 4.21; Cf Sharp v Blank [2015] EWHC 3220 (Ch) at [9]–[11].

298

‘Unfairly prejudicial conduct’ 9.117

their voting powers at general meetings (unless it is weighted in favour of other shareholders), but also their pro rata entitlement to dividends once declared and, in the final instance, their share in a winding-up dividend.520 9.116 The essence of an allotment of new shares by a rights issue is that shares must first be offered to existing ordinary shareholders pro rata to their holdings on the same terms, before any allotment is made to third parties to ensure, as far as is possible, that the percentage voting rights remain in the same proportion. If an allotment has been made bona fide and in the interests of the company, a breach of directors’ duties is hardly arguable.521 Conversely, a failure to act in that manner invalidates the allotment.522 It is not a question of a mere technical breach; the breach is substantial, because the statutory provisions embody ordinary and basic notions of fairness as between shareholders, inter se, whilst governing those with the power to allot shares. Matters will be made worse where the allotment was made for an improper purpose and an improper motive.523 Unauthorised new allotments of shares or the issuing of new shares under a rights offer – well-knowing that a member does not have the financial ability to take up his portion of the new issue and that the member will of necessity suffer a dilution in his shareholding – is a recipe for unfair prejudice and for relief sought under section 994. In Re a Company (No 005134 of 1986), ex p Harries,524 Peter Gibson J commented that he could not conceive of a ‘more blatant case of unfairly prejudicial conduct to a member than the unilateral and secret exercise by a director of the power of allotment so as to increase his own shareholding from 60% to 96% and to reduce the other member’s holding thereby from 40% to 4%’.525 The director’s own interests were pursued at the cost of the best interests of the company. 9.117 In Re a Company (No  007623 of 1984),526 Hoffmann J, having rejected allegations of unfairly prejudicial conduct where capital was raised by a new share issue, said that:527 ‘[i]f the majority know that the petitioner does not have the money to take up his rights and the offer is made at par when the shares are plainly worth a great deal more than par as part of a majority holding (but very little as a minority holding), it seems to me arguable that carrying through the transaction in that form could, viewed objectively, constitute unfairly prejudicial conduct.’

520 Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [90]. 521 This is well illustrated in Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, where two allotments were in issue as allegedly having constituted unfairly prejudicial conduct. In the first instance, there was clear evidence of a sound economic rationale for the rights issue – see [55], [71], [75]. The second instance, which did not pass muster, is discussed in more detail at 9.117. 522 Re a Company (No 005134 of 1986), ex p Harries [1989] BCLC 383, ChD, which was decided on the basis of s 17 of the 1980 Act. The analogous provisions are found in ss 561(1), 568 and 569 of the 2006 Act. 523 At 396b–396c. 524 At 395e–395f. 525 See the similar facts and conclusions drawn in Dalby v Bodilly [2004] EWHC 3078 (Ch), [2005] BCC 627, ChD, at [18]. 526 [1986] BCLC 362, ChD. 527 At 367b–367c. See also CAS (Nominees) Ltd v Nottingham Forest FC plc [2002] 1 BCLC 613, ChD.

299

9.117  Unfair Prejudice: Section 994

In Re Sunrise Radio Ltd,528 HH Judge Purle QC (sitting as a Judge of the High Court) confirmed and developed the proposition in a number of ways: (a) a dilution of the proportion of shares held is not per se unfair; (b) there are a number of surrounding factors to be taken into account; and (c) a rights issue must be priced at a level that is fair to all,529 because the determination of an issue price is as much part of the directors’ fiduciary duty as the power to make an allotment.530 The reasons for these statements of principle were explained as follows:531 ‘… They [the directors] should not unthinkingly issue shares at par. In a simple case where the majority are acting in unison, full value may be required. In other cases, a discount for the assumption of increased risk, or to make the offer attractive to those interested in subscribing, may be appropriate. Quite where the price will fall within the permissible range will depend on the particular circumstances of any given case. What is clear to my mind, however, is that the fiduciary nature of the power requires a board to consider these matters fairly, in the interests of all groups of shareholders and having regard to the foreseeable range of responses. The impact of that duty may be more acute if the board members, or those in a position to control or influence them, stand to benefit appreciably from the exercise of the power in a particular way. Any failure to give proper consideration to the price in the light of the factors I have mentioned may, and ordinarily will, amount to a breach of fiduciary duty.’ All relevant circumstances ought to be taken into account in coming to a commercial judgment; and, for that purpose, appropriate consultation with current shareholders should precede the decision to issue or allot.532 Although not an absolute rule, a failure to make such inquiries of shareholders as are reasonable in the circumstances may incline the court towards holding that there was a failure to take all relevant matters into account.533 An expert valuer may have to be consulted to assist in determining an appropriate price.534 If the minority shareholders are unable or unwilling to subscribe, but the majority shareholders are so willing, the duty of the directors will ordinarily be to get the best price they can from the shareholders willing to subscribe. It is inevitable that other shareholders will, in those circumstances, suffer a dilution in the proportion of shares held by them.535 In Sunrise Radio, the failure to take all relevant considerations into account was held to be a breach of fiduciary duty, and therefore unfair to the petitioner. Prejudice was established, as the directors had denied the company the opportunity to fix the rights issue or to negotiate a more suitable price following proper consideration. The 2007 share issue was accordingly found to be unfairly prejudicial to the petitioner.536

528 [2010] 1 BCLC 367, ChD. The appeal ([2013] EWCA Civ 667, [2014] 1 BCLC 427, CA) only related to aspects regarding the valuation of the shares. 529 At [76]. 530 At [79], [95]. 531 At [95]. 532 At [96]. This applies to the quasi-partnership or small private company at best. It is not suggested that it is applicable to public or quoted companies. 533 At [96], [113]. 534 At [96]. 535 At [96]. 536 At [113], [135].

300

‘Unfairly prejudicial conduct’ 9.119

9.118 In Re Regional Airports Ltd,537 a rights issue proved to be problematical because of the failure of the directors to properly take the interests of the minority shareholders into account. The issued shares in the company were held as to 50 per cent by W and as to 10 per cent each by five other shareholders. The shareholders were all directors; W was the sole executive director. The shareholders’ agreement and agreement pertaining to W’s expenses and remuneration were never finalised. Two of the petitioners were removed as directors in April 1995. In 1997, the board proposed a rights issue at £3 per share to raise some £400,000 and, at the same time, proposed to permit W to take up his rights by setting off sums totalling over £200,000 said to be due to him from the company by way of remuneration and expenses. To that extent, the rights issue would not have raised any new capital for the company, although W contended that the motivation for the rights issue was to steer the company through a cash-flow crisis and to avoid the company’s insolvency by not including the debt owed to him in the accounts. Before proposing the rights issue, W did not discuss with any of the shareholders what the likelihood of their participation in the rights issue may have been.538 The reason was quite clear in retrospect: W sought to enrich himself by retrospective remuneration which was largely unjustified.539 W was on a frolic of his own to ensure increased control of the company and to effectively oust the other shareholders. Minority shareholders had the right and the expectation that the affairs of the company would be conducted within the ambit and scope of the applicable Companies Act and the company’s constitution; or, put differently, they were entitled to expect that the powers of the board would not be exercised for an ulterior purpose, namely the enhancement of W’s position as shareholder.540 The decision regarding the rights issue was accordingly unfair to the petitioners and potentially prejudicial to their interests.541

Contravention of the Companies Act in force Seriousness of transgression 9.119 Occasional disregard of, or non-compliance with, provisions of the applicable Companies Act only becomes relevant if it unfairly prejudices the interests of a member. Trivial breaches are not likely to trigger relief under section 994. Regarded as less serious in Re a Company (No 00789 of 1987), ex p Shooter542 was the failure of directors to declare their interests as required by section 317 of the 1985 Act543 (which was held not to have constituted prejudice to the shareholders),544 as well as their failure to file accounts and to prepare and file annual returns (which could conceivably have been unfairly prejudicial to members under different circumstances).545 The more serious a transgression, the greater the likelihood of it constituting unfairly prejudicial conduct. The conduct of a company providing financial assistance for the 537 [1999] 2 BCLC 30, ChD. 538 At 61i–62a. 539 At 68h–68i; 72a–72b; 72h–72i. 540 At 80h–80i. 541 At 80i–81a. 542 [1990] BCLC 384, ChD. 543 Section 182 of the 2006 Act. 544 Re BSB Holdings Ltd (No 2) [1996] 1 BCLC 155, ChD. 545 Re a Company (No 00789 of 1987), ex p Shooter [1990] BCLC 384, ChD, at 392f–392g.

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acquisition of shares546 was per se considered as unfairly prejudicial conduct.547 This was particularly so because the financial assistance did not benefit the company, but only the aberrant shareholder/director. The failure to seek the approval of shareholders for the alienation of a substantial asset of the company, as required by section 320 of the 1985 Act,548 was not considered as being serious enough to warrant an inference of unfair prejudice.549 However, any failure to comply with the section was ‘vulnerable to the characterisation of unfairness, and that unfairness would be prejudicial, even in the absence of any adverse financial impact, if the complaining shareholder reasonably concluded that the board could not be trusted or relied upon to conduct the affairs of the company in accordance with the requirements of proper corporate governance’.550 A director of a company which owned and ran a public house business breached his fiduciary duty, resulting in his removal as a director: he had acquired an interest in another pub nearby without the necessary disclosures to his co-directors. His conduct was clearly a conflict of interest. He had failed to meet the disclosure requirements of both the Companies Act 2006, s 175 and regulation 85 of Table A.551 Convening meetings 9.120 Meetings of shareholders are important building blocks in regulating the affairs of a company.552 The statutory requirements in this regard are designed to protect shareholders.553 A failure to call a meeting when required to do so deprives shareholders, in principle, of the benefits otherwise associated with meetings, and could be considered as conduct unfairly prejudicial to shareholders.554 Such a failure frustrates a member’s reasonable efforts to obtain information about the affairs of the accounts and the company.555 The same applies to giving short notice of meetings556

546 Prohibited by s 151(1) of the 1985 Act. But see the analogous provision in ss 678, 679 of the 2006 Act, which no longer necessarily prohibits private companies from providing financial assistance for the purchase of their own shares. 547 Re Hailey Group [1993] BCLC 459, ChD, at 465d–465f. See also Fowler v Gruber [2010] 1 BCLC 563, CSOH, at [130]–[134]. The prohibition against making loans to directors without shareholders’ approval is now regulated by s 197 of the 2006 Act (previously s 330 of the 1985 Act). 548 Compare s 190 of the 2006 Act (note that subsection (6)(b) was amended with effect from 1 October 2013). 549 Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [259]. This is unaffected by the appeal [2013] EWCA Civ 667, [2014] 1 BCLC 427, CA. 550 At [258]. 551 Allnutt v Nags Head Reading Ltd [2019] EWHC 2810 (Ch), [2020] BCC 70. 552 See the discussion in Chapters 3 and 7. 553 Re Woven Rugs Ltd [2010] EWHC 230 (Ch) at [160]. 554 Re a Company (No 00789 of 1987), ex p Shooter [1990] BCLC 384, ChD. It should be noted that the judgment dealt with s 459(1) before its amendment in 1989 aligning the position with the current one, namely that relief is available if all the members are affected. 555 Fisher v Cadman [2005] EWHC 377 (Ch), [2006] 1 BCLC 499, ChD. See also Rahman v Malik [2008] EWHC 959 (Ch), [2008] 2 BCLC 403, ChD. 556 See Re a Company (No 00789 of 1987), ex p Shooter [1990] BCLC 384, ChD, where short notice resulted in the invalidity of a purported increase in the share capital of the company; see particularly 388e–389e.

302

‘Unfairly prejudicial conduct’ 9.121

or a delay in holding meetings.557 The spectre of an inference of unfair prejudice may be overcome by providing the information typically provided at an annual general meeting by means of any other method of communication. It does not, however, resolve the problem of depriving members of the opportunity to debate and the right to vote on critical matters.558 Circumstances may arise where a failure to call a meeting may not be causally connected to unfair prejudice suffered. In Irvine v Irvine,559 the company had never held any shareholder meetings to receive its annual accounts and directors’ and auditors’ reports, or to approve the payment of any dividends. The minority shareholder, who was also a director, was remiss by not insisting on holding such meetings. Despite the continuing failure by the controlling shareholder and director to call meetings after a demand for compliance was made (which would have had the effect of reverting to compliance with the strict legal rules), the court did not consider that the failure caused the minority member any material prejudice. Not only was it doubtful whether the minority member would have attended meetings had they been called, but it would have been an exercise in futility since the majority would have passed the resolutions in any event.560 Due observance of the prescribed statutory requirements would at best have alerted the minority earlier to the true financial position of the company, but would not have resulted in any different or lesser prejudice from that which the petitioners complained about.561 9.121 Starkly contrasted with Irvine is the position in Re a Company (No 00789 of 1987), ex p Shooter,562 which dealt with serial failures of statutory duties in the following manner:563 ‘This present case is of repeated failure, year over year over year, to hold annual general meetings or to lay accounts before members, so that members were wholly deprived of any opportunity to consider the affairs of the company, to vote on the election or re-election of directors, or in any other way to know what was going on. As it seems to me, that conduct, not the absence of filing but the conduct in depriving members of their right to know and consider the state of the company and its directorships, and to ask questions of its directors, is conduct which, inevitably, must be prejudicial to the interests of members.’

557 See McGuinness v Bremner plc [1988] BCLC 673, CSOH, where it was held that any reasonable bystander would conclude that it was prejudicial to the petitioner’s interests to delay a meeting, even though it could not have seriously jeopardised the value of the petitioner’s shares. 558 Fisher v Cadman [2005] EWHC 377 (Ch), [2006] 1 BCLC 499, ChD. 559 [2006] EWHC 406 (Ch), [2007] 1 BCLC 349, ChD. 560 This appears to be, with respect, a somewhat defeatist approach. There is either a purpose in calling a general meeting or not. A predictable outcome should not be a reason to condone the failure to call general meetings. 561 Irvine v Irvine [2006] EWHC 406 (Ch), [2007] 1 BCLC 349, ChD, at [344]–[347]. 562 [1990] BCLC 384, ChD. 563 At 393c–d; see also 393h–393i, where the conclusion is drawn that the serious irregularities amounted to unfairly prejudicial conduct, but that no relief could follow because it affected all members. In view of the amendment to s 459(1) effected on 4 February 1991 no longer requiring that everybody should be affected, the outcome was likely to have been different. It retains persuasive force for petitions brought in terms of s 994.

303

9.122  Unfair Prejudice: Section 994

Equitable considerations overriding the strict legal rules Distinguishing features 9.122 For equitable considerations to be taken into account in resolving shareholders’ disputes, ‘something more’564 is required than merely having reference to the rights and obligations encompassed in the company’s constitution, shareholders’ agreements falling outside the constitution, and in the rules imposed by the Companies Acts in existence from time to time (the strict legal rules with which the first category concerned itself). Strong indicators establishing the ‘something more’ required for the application of equitable considerations are a combination of the following:565 (a) an association formed or continued on the basis of a personal relationship, involving mutual confidence and trust566 – typically so where a pre-existing partnership (where good faith is a natural ingredient of the relationship) has been converted into a limited company; (b) a legitimate expectation based on an understanding or arrangement that all or some of the shareholders shall participate in the conduct of the company’s business; and (c) a restriction on the transfer of members’ interests in the company – so that, if the trust and confidence amongst the corporators are lost, or one member is removed from management, he cannot simply take out his stake and go elsewhere. The list of factors is not exhaustive. A  further important typical element is the provision of capital by all or some of the corporators.567 The fact that someone has made no, or no substantial, financial contribution to a company does not necessarily constitute a basis for finding that he had had no legitimate expectation to participate in the affairs of the company.568 Conclusions drawn in this regard will inevitably be strongly fact-based.569

564 As used in Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, CA, at 20d. That which is not ‘something more’ is lucidly explained in Re Coroin Ltd [2012] EWHC 2343 (Ch) at [636] affirmed on appeal [2013] EWCA Civ 781, [2013] 2 BCLC 583, CA; cf Re OS3 Distribution Ltd [2017] EWHC 2621 (Ch). 565 Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, HL, at 379F–379G. See also Re Phoenix Office Supplies Ltd [2002] EWCA Civ 1740, [2003] 1 BCLC 76, CA, per Auld LJ at [24]; Strahan v Wilcock [2006] EWCA Civ 13, [2006] 2 BCLC 555, CA. 566 See eg Jesner v Jarrad Properties Ltd [1993] BCLC 1032, CSOH. A pre-existing close personal relationship does not necessarily lead to the conclusion that equity is engaged and a quasipartnership company has been created: Cf Michel v Michel [2019] EWHC 1378 (Ch), [2019] 5 WLUK 501 where the relationship between family members involved in the running of a company was indeed not of the quasi-partnership kind and therefore did not give rise to any equitable constraints preventing the removal of a director from office. The petitioner’s removal was in accordance with the company’s constitution and did not amount to unfairly prejudicial conduct. 567 Per Nourse J in Re Bird Precision Bellows Ltd [1984] Ch 419 at 430C–430D. 568 Richards v Lundy [2000] 1 BCLC 376, ChD. See also Quinlan v Essex Hinge Co Ltd [1996] 2 BCLC 417, ChD. 569 Oak Investment Partners XII, Limited Partnership v Boughtwood [2010] EWCA Civ 23, [2010] 2 BCLC 459, CA, at [118]. See the peculiar considerations taken into account in Strahan v Wilcock [2006] EWCA Civ 13, [2006] 2 BCLC 555, CSOH, at [23], [25].

304

‘Unfairly prejudicial conduct’ 9.124

With reference to these three considerations, HHJ  David Cooke commented as follows in re Foundry Miniatures Ltd:570 ‘The three matters mentioned are thus indicators of cases where the courts may impose equitable considerations on the exercise of shareholders rights, but not a set of tests that must be satisfied. They need not all be present in every case, though often they will be. It is a matter for the court’s overall assessment in any case whether conduct of a company’s affairs which may or may not be in accordance with its constitution, the Companies Acts or other general law is to be regarded as in breach of equitable obligations owed by the shareholders to each other as part of the overall arrangements under which they conduct business through a limited company.’ 9.123 The strict legal rules do not always fully reflect the understanding on which the shareholders became associated with one another.571 There are, or may be, understandings and expectations which exist, but which are not reflected in the strict legal rules. The stark choice is between ignoring those understandings and expectations (thereby failing those who relied on them when joining a company) or giving effect to them, and thereby transcending the limits set by the strict legal rules. Fairness being the key to section 994, this rather more apparent than real quandary engages the rules of equity, manifested in the notions of ‘legitimate expectations’ and ‘quasi-partnership’ companies, to give effect to those understandings and expectations. The latter two concepts are connected, in that the superimposition of legitimate expectations finds expression in the corporate quasi-partnership where members frequently have expectations of co-managing the company and sharing in profits arising from the ‘understandings on which the company was formed and which it may be unfair for the other members to ignore’.572 Jonathan Parker J put the position as follows in Re Astec (BSR) plc:573 ‘… [I]n order to give rise to an equitable constraint based on “legitimate expectation” what is required is a personal relationship or personal dealings of some kind between the party seeking to exercise the legal right and the party seeking to restrain such exercise, such as will affect the conscience of the former.’574 9.124 There is no universal definition specifying the type of company which falls into the quasi-partnership category,575 but a combination of the factors listed above, which satisfies the ‘something more’, simultaneously typifies a company as being a quasi-partnership company. All the members of a company must share the legitimate expectations for it to apply. Realistically, the fewer members there are, the greater the chances of such a relationship forming. This relationship must be distinguished from what may be termed a ‘commercial relationship’ or a pure investor relationship which comprises the involvement of an investor who acquires shares purely for purposes of earning a dividend and capital appreciation, with no expectation of managerial

570 [2017] EWHC 889 (Ch), [2017] 4 WLUK 400, at [59]. 571 Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, CA, at 19a–19b. 572 Re Posgate & Denby (Agencies) Ltd [1987] BCLC 8, ChD, at 14b–14c. 573 [1998] 2 BCLC 556, ChD, at 588d–588e. 574 Passage approved in O’Neill v Phillips [1999] 1 WLR 1092, HL, at 1101D–1101E. 575 See Croly v Good [2010] EWHC 1 (Ch), [2010] 2 BCLC 569, ChD, at [9].

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participation with concomitant remuneration.576 The restriction on the transferability of shares alone will not transform a commercial investor into a quasi-partner.

Legitimate expectations 9.125 Company law has developed from the law of partnership, treated by equity as a contract of good faith. One of the roles of equity is to restrain the exercise of legal rights in relationships which it considers to be contrary to good faith.577 It has two consequences:578 first, there will be instances where equitable considerations make it unfair for those conducting the affairs of a company to rely on the strict legal rules if, in doing so, the rules are used in a manner which equity would regard as contrary to good faith.579 Secondly, the concept of unfairness in unfair prejudice provisions will run parallel to the ‘just and equitable’ provision. This approach takes into consideration the human relationships within company structures. Although the expression ‘legitimate expectation’ in the context of unfair prejudice petitions was a later formulation,580 its source is in the well-known passage in Ebrahimi v Westbourne Galleries Ltd, where it was put as follows:581 ‘The words [just and equitable] are a recognition of the fact that a limited company is more than a mere judicial entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act 1948 and by the articles of association by which the shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The “just and equitable” provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights or to exercise them in a particular way.’ 9.126 Hoffmann LJ, in Re Saul D Harrison & Sons plc, developed the thesis of the central role that personal relationships play, underpinning the concept of legitimate expectations, as follows:582 576 This will mostly be the case where investors invest in quoted companies. A seat on the board of directors may be negotiated to protect substantial investors, but that does not create a relationship in equity. It remains strictly business. 577 O’Neill v Phillips [1999] 1 WLR 1092, HL, at 1098H. 578 At 1098H–1099H. 579 See also Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, HL, at 379E. 580 Per Hoffmann J in Re Posgate & Denby (Agencies) Ltd [1987] BCLC 8, ChD; per Hoffmann LJ in Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, CA. See also O’Neill v Phillips [1999] 1 WLR 1092, HL, at 1102C–1102E, where Lord Hoffmann explains the genesis of the concept. 581 [1973] AC 360 at 379B–379D. See, for its context in the development of the argument by Hoffmann LJ, Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, CA, at 19c–19e; and, as Lord Hoffmann, in O’Neill v Phillips [1999] 1 WLR 1092, HL, at 1099C–1099E. 582 [1995] 1 BCLC 14, CA, at 19f–20b. Compare Wilkinson v West Coast Capital [2005] EWHC 3009 (Ch), [2007] BCC 717, ChD, at [237].

306

‘Unfairly prejudicial conduct’ 9.127

‘Thus the personal relationship between a shareholder and those who control the company may entitle him to say that it would in certain circumstances be unfair for them to exercise a power conferred by the articles upon the board or the company in general meeting. I have in the past ventured to borrow from public law the term “legitimate expectation” to describe the correlative “right” in the shareholder to which such a relationship may give rise. It often arises out of a fundamental understanding between the shareholders which formed the basis of their association but was not put into contractual form, such as an assumption that each of the parties who has ventured his capital will also participate in the management of the company and receive the return on his investment in the form of salary rather than dividend. These relationships need not always take the form of implied agreements with the shareholder concerned; they could enure for the benefit of a third party such as a joint venturer’s widow. But in Re Westbourne Galleries Lord Wilberforce went on to say: “It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. Certainly the fact that the company is a small one, or a private company, is not enough. There are very many of these where the association is a purely commercial one, of which it can safely be said that the basis of association is adequately and exhaustively laid down in the articles. The superimposition of equitable considerations requires something more …” Thus, in the absence of “something more”, there is no basis for a legitimate expectation that the board and the company in general meeting will not exercise whatever powers they are given by the articles of association.’ 9.127 Subsequently, now as Lord Hoffmann, the learned judge expressed regret for having introduced the expression ‘legitimate expectation’, explaining that:583 ‘It was probably a mistake to use this term, as it usually is when one introduces a new label to describe a concept which is already sufficiently defined in other terms. In saying that it was “correlative” to the equitable restraint, I meant that it could exist only when equitable principles of the kind I  have been describing would make it unfair for a party to exercise rights under the articles. It is a consequence, not a cause, of the equitable restraint. The concept of a legitimate expectation should not be allowed to lead a life of its own, capable of giving rise to equitable restraints in circumstances to which the traditional equitable principles have no application.’ However, it is suggested that the notion of ‘legitimate expectations’ in the company law context is so deeply ingrained that it cannot be excised without creating confusion, especially in the absence of another suitable expression. It deserves continuing application. The parallel between ‘just and equitable’ and ‘unfairness’ does not mean that conduct will not be unfair unless it would have justified an order to wind up a company, as was the case under section 210 of the 1948 Act.584 It should also be noted that the parallel is ‘not in the conduct which the court will treat as justifying a particular remedy 583 O’Neill v Phillips [1999] 1 WLR 1092, HL, at 1102E–1102F. 584 At 1099H–1100B. See further the discussion at 11.2 and 12.9 dealing with the inter-relationship between s 994 and winding up in the current legislative context.

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but in the principles upon which it decides that the conduct is unjust, inequitable or unfair’.585 9.128 In Croly v Good,586 the view was expressed that the meaning of the relationship of mutual trust and confidence is that those qualities are required in order for the relationship to work as intended. It is not necessary for the parties to expressly articulate any feelings of trust and confidence; nor does it matter if each of the parties to the relationship may have had reservations about the extent to which they trusted or had confidence in the other:587 ‘They [the shareholders] made a relationship which required such qualities, most obviously because the broad arrangement for equality of division of profits could only operate successfully if neither of them abused his position to achieve a personal advantage, and implied that they should cooperate with each other if it became necessary to deal with the situation in which the company was not generating the funds necessary to make the payments they anticipated. In the event, of course, neither of them appears to have raised the matter at all and so there was no opportunity to enter into such cooperation, but in my view, that does not affect the fact that they would have been required to do so.’ The legitimate expectation to which the court has regard must relate to the conduct of the company’s affairs; the most obvious and common example being an expectation of being allowed to participate in the management of the affairs of the company.588 Accordingly, the expectation that shareholders would not sell their shares without the consent of the other shareholders does not relate to the company’s affairs and, therefore, is not conduct which falls within the scope of unfair prejudice petitions.589 9.129 Legitimate expectations may stretch no further than an expectation of compliance with the company’s strict legal rules, but usually the term is used in the context of the equitable rules superimposed on the strict legal rules. In Re Blue Arrow plc,590 there was no basis for finding that the petitioner had a legitimate expectation that the company’s articles would not be altered so as to enable the termination of her office as president of the company in ways other than those already provided for in the articles. Vinelott J concluded:591 ‘No doubt there are cases where a legitimate expectation may be inferred from arrangements outside the ambit of the formal constitution of the company, but it must be borne in mind that this is a public company, a listed company, and a large one, and that the constitution was adopted at the time when the company was first floated on the Unlisted Securities Market. Outside investors were entitled to assume that the whole of the constitution was contained in the articles, read, of course, together with the Companies Acts. There is in these circumstances no room for any legitimate expectation founded on some agreement or arrangement made between the directors and kept up their sleeves and not disclosed to those placing the shares with the public through the Unlisted Securities Market.’ 585 At 1100C–1100E. 586 [2010] EWHC 1 (Ch), [2010] 2 BCLC 569, ChD. 587 At [91]. 588 See Re a Company (No 00477 of 1986) [1986] BCLC 376, ChD; Tay Bok Choon v Tahanson Sdn Bhd [1987] 1 WLR 413, PC. 589 Re Leeds United Holdings plc [1996] 2 BCLC 545, ChD. 590 [1987] BCLC 585, ChD. 591 At 590g–590i.

308

‘Unfairly prejudicial conduct’ 9.131

9.130 Similarly, the appellant in O’Neill v Phillips ultimately failed to convince the House of Lords that his legitimate expectations went beyond the scope of the company’s strict legal rules.592 The real question was whether, in fairness and in equity, the petitioner had a right to certain shares, allegedly promised to him by the majority shareholder during a protracted negotiation process. The judge at first instance593 ruled that the respondent never agreed or promised to give the shares to the appellant. The House of Lords was unable to hold that the respondent was behaving unfairly by withdrawing from the negotiations. Should he be bound by the appellant’s unjustified expectations, it would restrain the exercise of legal rights and would be imposing an obligation on the respondent to which he had never agreed.594 Due to the personal character underpinning quasi-partnership companies, rights arising from a legitimate expectation are not transmissible to an executor or heirs.595

Formation of corporations with quasi-partnership qualities The concept of quasi-partnership 9.131 Legitimate expectations596 and the concept of quasi-partnership companies are two sides of the same coin. The importance of determining whether a company is a quasi-partnership company or not arises from the fact that, if it is not such a company, unfairly prejudicial conduct by the de facto controllers of the company has to be found solely in an abuse of fiduciary powers and duties by the directors of the company, or in conduct of the affairs of the company which breaches the strict legal rules comprised by its constitution and the applicable Companies Act.597 It is predominantly in the context of a quasi-partnership company that reasonable expectations may operate to the benefit of the members: reasonable expectations are based on mutual understanding, breach of which may constitute actionable unfairly prejudicial conduct. A further reason for identifying a company as a quasipartnership is that it has a material impact on the valuation of shares in the event of a buy-out: in the quasi-partnership situation, shares will ordinarily be valued on the non-discounted basis; whereas, in the purely commercial relationship, they will normally be valued on a discounted basis to reflect the lesser value of a minority shareholding.598 Despite its somewhat confusing merger of partnership and company qualities, the use of the term ‘quasi-partnership companies’599 has become so ingrained that it is unwise to eradicate or limit its use. The expression is not perfect: it does not capture all the underlying dynamics of situations where equitable principles are superimposed on the strict legal rules.600 Equity operates by stepping in to prevent a person relying 592 593 594 595

O’Neill v Phillips [1999] 1 WLR 1092, HL, at 1103D–1103F. Cited as Re a Company (No 00709 of 1992) [1997] 2 BCLC 739, ChD. O’Neill v Phillips [1999] 1 WLR 1092, HL, at 1103G–1103H. Murray’s Judicial Factor v Thomas Murray & Sons (Ice Merchants) Ltd [1993] BCLC 1437, CSOH, at 1449f. On the face of it, it was a particularly inappropriate point to take under the circumstances. 596 See 9.125–9.130. 597 Re EAP Securities Ltd [2010] EWHC 2421 (Ch). 598 For a full discussion, see 10.19–10.32. 599 The expression ‘in substance partnerships’, used from time to time, appears to have fallen into disuse. 600 Fisher v Cadman [2005] EWHC 377 (Ch), [2006] 1 BCLC 499, ChD, at [84].

309

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on, or exercising, strict legal rights in a manner where it would be contrary to good faith or against conscience to do so,601 and can barely be artificially limited by the use of only one expression. In Fisher v Cadman,602 it was stated that the term ‘quasipartnership’ was only intended as a ‘useful shorthand label’ which should not in itself govern the answer to the question, namely, whether the circumstances surrounding the conduct of the affairs of a particular company are such as to give rise to equitable constraints on the behaviour of other members, going beyond the strict legal rules. 9.132 As always, rigid rules cannot apply to the situation: on the one hand, a purely commercial relationship can arise on company formation despite the participants being family members, friends or partners (although the default position would be that those kinds of participant would possess the typical qualities of mutual trust and confidence which underlie a quasi-partnership company). On the other hand, the apparent absence of those qualities does not mean that members in a purely commercial relationship are, for purposes of section 994, necessarily only confined to their strict legal rights. Legitimate expectations may even in those circumstances transcend the strict legal rights.603 It does not particularly matter precisely when the company became a quasi-partnership, provided that it did so before the time of the conduct complained of.604

Quasi-partnership companies since formation 9.133 Many companies commence their corporate life with the corporators legitimately expecting that they, who are risking their time and money in the venture, would exert control over the business by taking part in management as directors and receiving remuneration in that capacity.605 It is usually only when this relationship has broken down, and ends by the removal of one of the directors from office, that the issue is investigated ex post facto: if the company indeed was a quasi-partnership, the removal from office (without a reasonable offer of compensation or to purchase his shares) might constitute unfairly prejudicial conduct.606 Legitimate expectations may also be entertained regarding a profit share larger than the pro rata number of shares held, and receiving weighted voting rights.607 The factors to be taken into account when addressing the question of the existence of a quasi-partnership cannot be circumscribed; they will be fact-based. There are some pointers which are of assistance: usually, where an existing partnership (where equity in any event ascribes the qualities of mutual trust and confidence) becomes incorporated, with the partners becoming the shareholders and directors, and the business of the partnership 601 Re Guidezone Ltd [2000] 2 BCLC 321, ChD, at [174], [175]; Rahman v Malik [2008] EWHC 959 (Ch), [2008] 2 BCLC 403, ChD, at [56]; Quantum Survey Management Ltd [2016] EWHC 3084 (Ch) at [70]. 602 [2005] EWHC 377 (Ch), [2006] 1 BCLC 499, ChD, at [84]. 603 See Re Elgindata Ltd [1991] BCLC 959, ChD, at 985b–895d. 604 Croly v Good [2010] EWHC 1 (Ch), [2010] 2 BCLC 569, ChD, at [88]. 605 See eg Re London School of Electronics Ltd [1986] Ch 211; relied upon in Re J&S Insurance & Financial Consultants Ltd [2014] EWHC 2206 (Ch) at [18]; Re a Company (No 00477 of 1986) [1986] BCLC 376, ChD. 606 For the effect of making a reasonable offer on the fairness of the exclusion from management, see 9.160–9.162. 607 See Re a Company (No 00709 of 1992) (O’Neill v Phillips) [1997] 2 BCLC 739, the Court of Appeal judgment starting at 759. The facts will determine these propositions. In the further appeal from that case, O’Neill v Philips [1999] 1 WLR 1092, HL, the petitioner was unable to persuade the House of Lords of his entitlement to a larger shareholding.

310

‘Unfairly prejudicial conduct’ 9.135

becoming the business of the company,608 the original relationship of mutual trust and confidence effortlessly, and probably unconsciously, transfers into a relationship of mutual trust and confidence on incorporation. This is all the more so where partners resolved, during the subsistence of a partnership and in anticipation of incorporation, not to enter into a shareholders’ agreement providing the partners with the freedom to sell their shares, on incorporation, to third parties.609 To have the qualities of a quasipartnership company, it is not required (to the extent possible) for a company to be conducted as a partnership.610 A  purely commercial relationship may be converted into a quasi-partnership relationship whenever the relationship between the shareholders develops into one of mutual trust and confidence.611 Similarly, the qualities of quasi-partnership may be lost if the relationship becomes more formalised as a purely commercial relationship.612 This may happen unobtrusively through a change in the conduct of the parties or, expressly, by a shareholder repudiating an existing arrangement, or by one or more of the shareholders selling out to an investor who has no managerial aspirations. 9.134 Where the acquisition of shares in a company is one of the results of a complex set of formal written agreements, it is a question of construction of those agreements whether any such superimposed legitimate expectations can arise.613 In R & H Electric Ltd v Haden Bill Electrical Ltd,614 mutual trust was evidenced by the fact that the parties who had drafted and negotiated numerous agreements never signed them before embarking on their business venture. This stands in contrast to the position of the petitioner who had entered into massively detailed, professionally drafted agreements which were held to be so comprehensive as to exclude any notion of legitimate expectations going beyond the intricate contractual terms embodied thereby.615 However, the mere existence of complex written agreements does not necessarily exclude the possibility of the existence of some other arrangements or understandings between the parties, be it express or implied.616 It is apparent that there is no rule of thumb, but as a general rule the more the shareholders regulate their relationship by means of express agreement, the less scope there is for a finding that legitimate expectations can be entertained. All agreements relevant to the formation of the company will have to be analysed to arrive at the correct conclusions. 9.135 In Re a Company (No  005685 of 1988), ex p Schwarcz (No  2),617 the relationship between the parties derived from a merger between two groups of 608 See Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, HL; Re Bird Precision Bellows Ltd [1984] Ch 419, affirmed by the Court of Appeal ([1986] Ch 658); Richards v Lundy [2000] 1 BCLC 376, ChD. 609 Richardson v Blackmore [2005] EWCA Civ 1356, [2006] BCC 276, CA. 610 Croly v Good [2010] EWHC 1 (Ch), [2010] 2 BCLC 569, ChD, at [9]. 611 Compare Strahan v Wilcock [2006] EWCA Civ 13, [2006] 2 BCLC 555, CA, at [19]. See also the discussion at 9.137. 612 Shah v Shah [2010] EWHC 313 (Ch) at [103], confirmed on appeal ([2010] EWCA Civ 1408). See also the discussion at 9.142. 613 See Re Elgindata Ltd [1991] BCLC 959, ChD, at 985b–985d. 614 [1995] 2 BCLC 280, ChD, at 294i–295d. 615 Re a Company (No 005685 of 1988), ex p Schwarcz (No 2) [1989] BCLC 427, ChD, at 439e–439f, 440i–441c. See also Wootliff v Rushton-Turner [2017] EWHC 3129 (Ch), [2017] 11 WLUK 401. 616 Re a Company (No 002015 of 1996) [1997] 2 BCLC 1, ChD, at 18e–18f. 617 [1989] BCLC 427, ChD, considered in Brownlow v GH Marshall Ltd [2000] 2 BCLC 655, ChD, at [47].

311

9.136  Unfair Prejudice: Section 994

companies and the formation of the subject company as a vehicle for the flotation of the company’s shares. It was not conducive to antecedent understandings between the shareholders and, in fact, there were none. The petitioners had entered into service agreements for short fixed terms and, thereafter, until terminated on three months’ notice. The arrangements were contained in no less than 115 documents, drafted with the aid of appropriate professionals. The petitioners held 5.5 per cent of the shares and the majority (80 per cent) were held by a venture capital company. The court found that, under those circumstances, there was no room for the implication of any equitable considerations to be superimposed on the purely commercial (as opposed to personal) relationships set up by the formal documents. 9.136 The existence of service agreements between a company and its directors or managers does not, without more, stand in the way of a finding that the underlying relationship is one of mutual trust and confidence typical of a quasi-partnership company. Brownlow v GH  Marshall Ltd618 reiterated the principle that equitable considerations in a quasi-partnership context might disentitle the majority from removing a minority shareholder director from office if they do not make a reasonable offer for the purchase of the excluded member’s shares.619 The existence of service agreements did not change the position, as separate service agreements between the company and individual directors were not intended to affect the rights or expectations of those directors that also held shares, in their capacity as shareholders:620 ‘No agreement was reached between the shareholders, amongst themselves, as to what would happen to the shares of a person dismissed from employment under these agreements. In the absence of such agreement or some contrary understanding, it does not seem to me that the terms of the service agreements override the equitable considerations that had already arisen from the personal relationships within this company that I have described. Nor do the agreements detract from the expectations that might reasonably have been derived from the manner in which actual and potential departures by shareholders from management had previously been discussed and handled.’

Initial commercial relationship converted into quasi-partnership 9.137 Somewhat more intricate is the situation where a company begins life as a purely commercial undertaking, but changes to one displaying the characteristics of mutual trust and confidence amongst its members typical of the quasi-partnership company. In Strahan v Wilcock,621 there was no partnership preceding the establishment of the company. The appellant (W) had formed a company, with himself as sole shareholder. A few years later, S joined the company as an employee and soon thereafter took over the management of the company, advancing rapidly to become the managing director. S declined an opportunity to buy the company because the price was too high. Under a further option agreement, S used his bonuses to acquire five per cent of the shares in the company. S was subsequently dismissed as employee. He also 618 [2000] 2 BCLC 655, ChD. 619 At [45]. 620 At [46]. For a more comprehensive discussion of the effect of a reasonable offer on the unfairness of any prejudice suffered, see 9.160–9.162. 621 [2006] EWCA Civ 13, [2006] 2 BCLC 555, CA.

312

‘Unfairly prejudicial conduct’ 9.139

resigned as a director. S requested W to purchase his shares at their full value on a non-discounted basis, ie on the basis that his involvement was on a quasi-partnership basis. In determining the issue, it was important to ask whether, if the company was formed at the time that S  had become a member, the company would have been formed on the basis of a personal relationship involving mutual confidence.622 Arden LJ summarised the position623 by referring to the ease of inferring the existence of a quasi-partnership company if it had evolved from a partnership. It was usually not problematical to deduce the formation of a quasi-partnership when a company was formed by a group of persons well known to each other, with a view to those persons working together in order to exploit some business concept which they shared. Much more difficult are instances such as the case under consideration, but, as her Ladyship made clear, a relationship of quasi-partnership may be acquired after the formation of the company. In the context of the matter at hand, the terms of the option agreements, with their express terms and conditions, did not mean that the parties adopted the position of arm’s length vendor and purchaser under a commercial contract. The lenient terms of the option agreement resulted in an inference of a closer personal relationship having developed and, hence, the matter could be dealt with as if the relationship was that of a quasi-partnership.624 9.138 In another case of conversion from a commercial set-up to a quasipartnership situation,625 the petitioner had established a legitimate expectation of participation in management as a director beyond the scope of his service agreement. He had joined the company some 30 years after its formation. The basis on which he acquired his interest in the company and contributed his capital was that he would participate, for all practical purposes, as a partner in the affairs of the company, and share in the profits. Accordingly, he had a legitimate expectation of participation in the management of the company as a director, beyond the scope of his service agreement. In addition, the articles of the company contained a restriction on the transfer of shares. It did not matter that he was the junior ‘partner’ and the other member the senior ‘partner’: the company which had started life as a commercial venture was transformed into a quasi-partnership company. 9.139 In Croly v Good,626 a number of factors contributed to the finding of a personal relationship of mutual trust and confidence, although the company started out as a purely commercial one. There was no express agreement to conduct matters as a quasi-partnership. Mere participation in a management role was inconclusive: an employee may be granted a management role without thereby elevating the business relationship to a personal one. Performing management functions ought to have the character of someone who was essentially an owner (or part-owner) of the business.627 The fact that, in relation to the company’s dealings with the franchisor (which were at the very heart and foundation of the company’s business), the petitioner was held out and considered to be a ‘principal’ in the business was a factor counting strongly in favour of an inference of a personal relationship. The petitioner’s income was largely derived from dividends which could only have been paid from profits, making 622 623 624 625 626 627

At [21]. At [19]. At [23]–[26]. Quinlan v Essex Hinge Co Ltd [1996] 2 BCLC 417, ChD. [2010] EWHC 1 (Ch), [2010] 2 BCLC 569, ChD. At [89], [91].

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him vitally interested in the overall performance of the company.628 To complete the picture, neither of the parties heeded the provisions of the company’s constitution, so that governance was quite informal.629 Under these circumstances, a quasipartnership had come into existence.

Continuation of quasi-partnership despite newcomer joining company 9.140 A new shareholder who joined an existing company already functioning as a quasi-partnership did not, on the facts, disturb that relationship so that, after his introduction as shareholder, the relationship continued as such.630 Where children or spouses become shareholders in an existing family business, it will only happen if the directors decide not to exercise their power of refusing to transfer shares to them, so that acceptance as a shareholder in these circumstances is an indicator that mutual trust and confidence will continue between all the members, old and new. 9.141 In Fisher v Cadman,631 the petitioner became a member of the company through inheritance from her parents. She never contributed capital and there was no agreement that she would have had a role in the management of the company. Before she became a member, the company was undoubtedly a quasi-partnership company. However, a decisive factor maintaining the company’s quasi-partnership character was the existence of a common understanding amongst all the shareholders that the articles of association did not represent the complete and exhaustive regulating force between the shareholders:632 ‘But the company had started life as a clear quasi-partnership involving James, Edith, Cedric and Rodney Cadman, and it was effectively continued on the same basis after first James’s then Edith’s deaths, as a small family company in which the family relationship would be important alongside the relationship defined in the articles of association. Its affairs were dealt with on a very informal basis throughout, indicating a common understanding on all sides that the articles of association did not represent the complete and exhaustive statement of how the relationship between the members and the members and management should be conducted. Further, Cedric Cadman, in his letters to Mrs Fisher of 15 November 2000 and 24 November 2000, made express appeal to their common family ties in trying to sort out the problems which had arisen within the company. In addition, CDL’s articles of association contained restrictions upon the ability of any member to dispose of their shares.’ The fact that the sons acquired their shares as a gift from their father did not prevent them from claiming relief for unfairly prejudicial conduct, as would be typical in a quasi-partnership company context, despite the father having conducted the business for a long time before the sons became shareholders.633 Having established the company, the father could not thereafter disregard the legal entity which was brought into being and the shares which were created therein. His dictatorial conduct, amounting to oppressive conduct under section 210 of the 1948 Act, could not be 628 629 630 631 632 633

At [90]. At [92]. Rahman v Malik [2008] EWHC 959 (Ch), [2008] 2 BCLC 403, ChD, at [78], [119]. [2005] EWHC 377 (Ch), [2006] 1 BCLC 499, ChD. At [89]. Re Harmer Ltd [1959] 1 WLR 62, CA (Jenkins, Romer and Willmer LJJ).

314

‘Unfairly prejudicial conduct’ 9.144

tolerated. The fact that the petitioners knew that their father would retain control by virtue of his predominant voting power was irrelevant. They were entitled to legitimately expect that he would exercise his control in a lawful and regular manner.

Original quasi-partnership converted into a commercial relationship 9.142 In Re a Company (No  005134 of 1987), ex p Harries,634 R  had set up a company, with himself and his wife as the shareholders. A few years later, he entered into a joint venture with H whereby H was appointed a director of the company and allotted 40 per cent of the issued share capital in return for supplying the company with suitable premises free of charge. A  quasi-partnership came into existence. H supervised the production side of the business, receiving a weekly remuneration in addition to directors’ fees, until the company moved to a new factory to accommodate its expanding business. H’s premises were no longer required. He ceased to play any part in the business and lost his entitlement to remuneration. He had become a mere investor with a 40 per cent stake in the company. The quasi-partnership had ceased. When, subsequently, R  unlawfully caused a severe dilution to H’s shareholding, thereby justifying an inference of unfairly prejudicial conduct, H, quite correctly, did not rely on a quasi-partnership. His shares were ordered to be bought out on a discounted basis (ie as if no quasi-partnership existed).635 9.143 In the Scottish case of Fowler v Gruber,636 the introduction of new institutional/corporate shareholders, in a situation where the existing shareholders undoubtedly stood in a relationship of trust and confidence, changed the character of the relationship amongst the new body of shareholders to one of a purely commercial nature. There was no suggestion that the terms of the founders’ agreement had been explained to, or agreed by, any of the new shareholders. Such an explanation or agreement may perhaps have bound the new shareholders to the existing arrangement, retaining the character of the company. However, it is difficult to envisage personal relationships of mutual trust and confidence existing or coming into operation where the new entrant is a corporation, particularly a complete outsider with its directors or shareholders having no ties with the current company. Similarly, the existence of a relationship of mutual trust and confidence did not survive several reconstructions of a company and its shareholders, particularly when the original individual corporators became directors of different companies originating from the original company.637

Legitimate expectations in public company context 9.144 It is almost axiomatic that there is no room for the concept of ‘legitimate expectations’ in the context of public quoted companies.638 There are a number of factors informing this view: the sheer number of shareholders in public and quoted

634 [1989] BCLC 383, ChD. 635 See Re McCarthy Surfacing Ltd [2008] EWHC 2279 (Ch), [2009] 1 BCLC 622, ChD, where the shareholders themselves destroyed the personal relationships; Third v North East Ice & Cold Storage Co Ltd [1998] BCC 242, CSOH. 636 [2010] 1 BCLC 563, CSOH, at [136]–[137]. 637 Re Leeds United Holdings plc [1996] 2 BCLC 545, ChD. 638 Re Astec (BSR) plc [1998] 2 BCLC 556, ChD, at 588d–589b; CAS (Nominees) Ltd v Nottingham Forest FC plc [2002] 1 BCLC 613, ChD, at [37].

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companies is sometimes staggering,639 resulting in a correspondingly unlikely prospect of all the shareholders forging personal relationships; the purpose of holding shares in a public company is ordinarily only for investment; there is likely to be no common expectation beyond management being undertaken in accordance with the company’s constitution and the relevant Companies Act;640 and expectations (as opposed to aspirations) to become involved in management would appear to be irrational. No doubt shareholders in a quoted company relied on a company’s constitution only – and not on any legitimate expectation of equitable rules superimposed on the constitution – when declining to accept a cash offer, and when taking up shares under a rights issue.641 9.145 In Re Leeds United Holdings plc,642 Rattee J left the door slightly open for the assertion that there may be rare instances in which a legitimate expectation may arise in a public company context. However, the matter was put beyond doubt by Jonathan Parker J in Re Astec (BSR) plc,643 by holding that the concept of ‘legitimate expectation’ can have no place in the context of public quoted companies: in order to give rise to an equitable constraint based on legitimate expectation, a personal relationship or personal dealings of some kind is required to exist between the party seeking to exercise the legal right and the party seeking to restrain such exercise, such as will affect the conscience of the former.644 In the absence of a personal relationship or personal dealings of that kind, a shareholder can reasonably and legitimately expect no more than that the board of the company will act in accordance with its fiduciary duties and that the affairs of the company will be conducted in accordance with its articles of association and the applicable Companies Act. Such expectations merely affirm the existence of the shareholders’ legal (or strict) rights. They do not constrain the exercise of those rights.645 Jonathan Parker J continued:646 ‘so far as corporate governance is concerned, members of the public buying shares in a listed company may well expect that all relevant rules and codes of best practice will be complied with in relation to the company. But that expectation cannot, in my judgment, give rise to an equitable constraint on the exercise of legal rights conferred by the company’s constitution (of which the Listing Rules, the City Code and the Cadbury Code form no part) so as to found a petition under s 459. It is in essence little more than an expectation that the company’s affairs will not be conducted in a manner which is unfairly prejudicial to the interests of the members generally, or of some part of its members, an expectation which one would expect to be present in virtually every case.’

Understandings or arrangements 9.146 Unexpressed understandings, arrangements, or promises between prospective corporators will usually have come into existence by the time of 639 As an example, there were more than 2 million shareholders of Halifax Bank of Scotland before its acquisition by Lloyds TSB in January 2009. 640 Re Blue Arrow plc [1987] BCLC 585, ChD. 641 Re Tottenham Hotspur plc [1994] 1 BCLC 655, ChD, at 659f–660a. 642 [1996] 2 BCLC 545, ChD, at 559b–559c. 643 [1998] 2 BCLC 556, ChD, at 589a. 644 Compare Irvine v Irvine [2006] EWHC 406 (Ch), [2007] 1 BCLC 349, ChD, at [256]. 645 Re Astec (BSR) plc [1998] 2 BCLC 556, ChD, at 588f–588g. 646 At 590a–590b.

316

‘Unfairly prejudicial conduct’ 9.147

incorporation, ie when the expressly agreed terms of engagement as reflected in the constitution will already have been established.647 Such unexpressed understandings, arrangements, or promises, may be binding as a matter of justice and equity, although they would not be enforceable at law,648 having no contractual force. It is not required for the corporators to have been aware of the existence of those arrangements or understandings. Nobody may have consciously given thought that all the corporators would be entitled to rights of management and the right not to be excluded from management. These understandings are usually only reconstructed ex post facto. It is not only those understandings, arrangements or promises arrived at when forming the corporation which will be maintained. They may also arise in the course of the conduct of the business of the company, expressly or by conduct, and would be as enforceable as those that came into existence prior to incorporation.649 9.147 In Fisher v Cadman,650 Philip Sales (sitting as Deputy Judge of the High Court) appears to have held651 that a pattern of acquiescence to the manner in which the controllers of a company manages the company in defiance of the constitution of the company will, and should, be categorised as an understanding or agreement to which equitable considerations will apply: ‘As to the first of the possibilities referred to in [88], above (breach of the articles of association), it is my view that, in considering whether the conduct of the controllers amounts to conduct unfairly prejudicial to the interests of a member, it is also relevant to take into account any agreement, understanding or clearly established pattern of acquiescence on the part of that member which may have led the controllers to act or continue to act in a particular way, even if their action may have involved a departure from a strict adherence to the terms of the articles. In such a case, in the light of their common understanding as to what conduct will be regarded as acceptable between themselves despite the terms of the articles of association, it would not be correct to characterise the action of the controllers as unfair within the context of the whole relationship between them and the member. In my view, this is a corollary of the approach to the test of unfairness adopted in the authorities to which I have referred above, whereby the agreement between the members as set out in the articles of association may be subject to equitable considerations and obligations arising out of the particular circumstances of their relationship overall. There is no good reason why such equitable considerations should not qualify, as well as add to, the expectations about how the controllers of the company ought to behave to be derived from a simple reading of the articles of association.’ The ordinary rules of equity will not hold the majority to an understanding which is not enforceable at law, unless, and until, the minority has acted in reliance on it. Unless there are special circumstances, it will only be at that point, and not before, that equity will intervene by providing a remedy to the minority which is not available at law.652

647 648 649 650 651 652

O’Neill v Phillips [1999] 1 WLR 1092, HL, at 1101F–1101G. At 1101G. At 1101E–1101G. [2005] EWHC 377 (Ch), [2006] 1 BCLC 499, ChD. At [90]. Re Guidezone Ltd [2000] 2 BCLC 321, ChD, at [175].

317

9.148  Unfair Prejudice: Section 994

Limitation on the transfer of shares 9.148 The third typical component justifying the invocation of the application of equitable rules is that the unfairly prejudiced minority member is unable to freely dispose of his shares. Shareholders who wish to leave, or who are forced to leave as and when they are excluded from the management of the company, are at the mercy of the directors,653 who may refuse the transfer of shares at their discretion on receipt of a transfer notice. The application of equitable principles opens the door for a member, whose interests have been unfairly prejudiced by the de facto controllers of the company, to overcome this impediment either by obtaining an order for the buyout of his shares,654 or by obtaining an order for the winding up of the company.655 Public companies in general, but quoted companies in particular, do not prohibit the unfettered trading of their shares, subject to the rules of the stock exchange on which their shares are trading.656 From the company’s point of view, it does not matter who the shareholders of the company are, unless, of course, the control of the company is affected by an accumulation of its shares beyond prescribed limits. Sellers of quoted shares may continue to dispose of their shares as long as there are purchasers in the market. It is, accordingly, unlikely that a buy-out of shares will be part of any relief available to shareholders who suffer unfair prejudice at the hands of controllers of public and quoted companies.

Exclusion from management General 9.149 One of the most prevalent occurrences657 of unfairly prejudicial conduct is the exclusion from management of members who have harboured a legitimate expectation of becoming, and remaining, involved in the management of a company.658 Such exclusion will engage the equitable considerations referred to in Ebrahimi v Westbourne Galleries Ltd.659 In Re Guidezone Ltd,660 Jonathan Parker J  expressed the view that Ebrahimi v Westbourne is typical of those cases of quasi-partnership companies where exclusion of the minority from participation in the management of the company (contrary to the agreement or understanding on which the company was 653 Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, HL, at 380G, 381C–381F, 386E–387A. 654 For which, see 10.15–10.43 and 11.30. 655 See Chapter 11. 656 A prohibition may follow upon a failure by shareholders to divulge certain information. See more fully Chapter 3 ‘Limitation on shareholders’ rights’ at 3.14. 657 See the somewhat outdated data referred to in Jones v Jones; Re Incasep [2003] BCC 226, CA, evidencing the trend. 658 See, for typical examples, Re a Company (No 00477 of 1986) [1986] BCLC 376, ChD; Arrow Trading and Investments v Edwardian Group Ltd [2004] EWHC 1319 (Ch), [2005] 1 BCLC 696, ChD; Re Ghyll Beck Driving Range Ltd [1993] BCLC 1126, ChD; Richardson v Blackmore [2005] EWCA Civ 1356, [2006] BCC 276, CA; Croly v Good [2010] EWHC 1 (Ch), [2010] 2 BCLC 569, ChD, at [93]; Re Woven Rugs Ltd [2010] EWHC 230 (Ch) at [84]; Re Regional Airports Ltd [1999] 2 BCLC 30, ChD; I Fit Global Ltd [2013] EWHC 2090 (Ch), [2014] 2 BCLC 116, ChD. 659 [1973] AC 360, HL. See also Baker v Potter [2004] EWHC 1422 (Ch), [2005] BCC 855, ChD at [89]–[91]; Shah v Shah [2010] EWHC 313 (Ch) at [106], affirmed by the Court of Appeal ([2010] EWCA Civ 1408). 660 [2000] 2 BCLC 321, ChD, at [175].

318

‘Unfairly prejudicial conduct’ 9.151

formed) provides a clear example of conduct by the majority which equity regards as contrary to good faith. 9.150 The mere fact of a shareholding, even between only two shareholders, does not per se entitle any one of them to become involved in management, nor does it make it inequitable if one of the shareholders does not permit the other’s participation in management. There must be something more; an understanding or agreement of some sort which establishes an entitlement to manage. The most apparent manner in which management functions for all shareholders will be deduced (bar some evidence to the contrary) is where a partnership incorporates its business, resulting in the partners becoming shareholders and directors. Determination of the issue may manifest in a multitude of other fact-related scenarios. The ‘something extra’ in Tay Bok Choon v Tahansan Sdn Bhd661 was located in the good fortune of the shareholders to have obtained the co-operation and support of the petitioner as financier and businessman, despite the fact that no specific undertakings had been given assuring him a place on the board. An obligation to allow him a seat on the board was inferred from the conduct of the parties which had wittingly allowed the petitioner to participate in management and to be a director. That position would endure until, by withdrawal of his support or for some other good reason, a change in management and control became necessary.662 9.151 David Donaldson QC, sitting as a Deputy High Court Judge in Re Flex Associates Ltd,663 put the proposition somewhat differently:664 ‘Traditionally, the jurisdiction under section 459 has been exercised in cases of exclusion from management where the company has been regarded as a “quasi partnership”, a concept imported from the case-law on winding up on the “just and equitable” ground. Since the decision of the House of Lords in O’Neill v Phillips [1999] 1 WLR 1092 it appears to me, however, that the relevant question can be stated and addressed more directly without an unnecessary excursus through consideration of that concept. In short, the court is required to consider whether the exclusion would breach or run counter to an understanding between the members as to the management of the company’s affairs, whether or not that understanding amounts to a legally binding or formal agreement.’ This does not appear to be an accurate analysis of O’Neill v Phillips. It is inconceivable that such understandings running counter to the constitution in larger companies and particularly quoted companies may exist; in fact, many companies, irrespective of size, attract investors interested only in a return on their capital. The kind of understandings and agreements regarding the participation in management are precisely those that define the quasi-partnership company, and exclusion, with its particular consequences, should only arise in that context. An executive director of a company not having quasi-partnership qualities, who is excluded from management, will in all likelihood have remedies in terms of his service contract, and not under section 994. However, in Wootliff v Rushton-Turner665 a section 994 petition 661 662 663 664

[1987] 1 WLR 413, PC. At 417H–418A. [2009] EWHC 3690 (Ch). At [29]. In this case, one of four members fell out with the others, lost the argument, and walked out. It was not unfairly prejudicial when the remaining members did not accept a withdrawal of the resignation from the unrepentant member. See further [30], [68] and [69]. 665 [2016] EWHC 2802 (Ch).

319

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encompassing a claim for wrongful dismissal was permitted to continue including that claim even if such relief would not benefit the claimant/employee in his capacity as a member. 9.152 Companies Acts form as much a part of the matrix of rules to which a company and its members are bound as the company’s constitution does. Save, possibly, in the event of specially entrenched provisions in company constitutions (which may in any event be amended),666 directors may, as a matter of company law, be removed from office.667 The expectation of involvement in management or the entitlement to a seat on the board of directors can hardly survive the legitimate removal of a director in accordance with the 2006 Act and termination of his services under a service contract if he was an executive director. In R&H Electric Ltd v Haden Bill Electrical Ltd,668 the company was planned, formed and set up in business on the basis of mutual trust. It carried the qualities of a corporate quasi-partnership. The petitioner (P) had a legitimate expectation of participation in the management of the company, at least for so long as another company under his control (R&H) remained a significant loan creditor of the company, and so long as P was closely associated with R&H. That, of course, could not prevent his removal. It did, however, render his removal unfair and invoked the equitable rules ensuring an appropriate remedy under the circumstances. Exclusion is, per se, not the key to a remedy under sections 994 and 996. Any form of exclusion is likely to be prejudicial, but it is only relevant in relation to relief where there is scope for a finding that the exclusion was unfair669 by, for instance, not offering to buy out the member’s shares at a price arrived at in accordance with the articles. Exclusion was not established in Re Coroin Ltd:670 The claimant alleged that he was unfairly prejudiced by exclusion from participation in management. His right to participate in the management of the company arose by virtue of his appointment as director by the holders of a class of shares (which class comprised of himself). Most board meetings were attended by the claimant or his alternate. The claimant was in no respect prevented from exercising his right as director. The complaint, feeble as it was, that he was in a permanent minority on the board, was rejected in the following terms:671 ‘But there is clearly nothing in the articles or the shareholders agreement which entitles directors to more than the votes at board meetings conferred on them by the shareholders agreement. Nor do the articles or the shareholders agreement prohibit particular groups of shareholders from cooperating with each other unless they have done so in a way which triggers the pre-emption provisions or which constitutes in some way a breach of the obligations of good faith to which I shall later return. The fact that the directors appointed by the Barclay interests and Mr Quinlan may take a position different to that of Mr McKillen does not involve any exclusion of Mr Quinlan or any unfairness unless the position which they take is taken in breach of their duties as directors.’ 666 Re Blue Arrow plc [1987] BCLC 585, ChD. See also 3.13. 667 By virtue of ss 168, 169 of the 2006 Act. See Re Estate Acquisition & Development Ltd [1995] BCC 338 (Ch) at 349h–350b; and 7.63–7.66. 668 [1995] 2 BCLC 280, ChD. 669 Kelly v Hussain [2008] EWHC 1117 (Ch) at [16]. 670 [2012] EWHC 2343 (Ch); affirmed on appeal [2013] EWCA Civ 781, [2013] 2 BCLC 583, CA. 671 At [637].

320

‘Unfairly prejudicial conduct’ 9.153

Exclusion found to be unfair 9.153 In Ebrahimi v Westbourne Galleries Ltd,672 a partnership was converted into a private company. Under the articles of association, the company, in general meeting, had an express power to remove a director by ordinary resolution.673 It was intended that the shareholders would continue to participate in the management of the company as directors674 as an expression of the existence of the good faith by which the partnership had been conducted. The company maintained a policy of not paying dividends. Two of the three directors (a father and son) used their combined majority shareholding in general meeting to remove the petitioner as director. It was made clear to him that he was no longer regarded as a ‘partner’, but only as an employee. The appellant was left high and dry: he had lost his right to share in the profits by means of directors’ remuneration, only retaining the chance of receiving dividends as a minority shareholder, for which he was left at the mercy of the remaining directors and for which there was a precedent of no dividend declarations. He was, furthermore, unable to dispose of his interest in the company without the remaining directors’ consent. Although removed as a director in accordance with the articles and thus entirely lawfully, the conduct of the majority was held to be unjust and inequitable. Lord Wilberforce explained the application of the ‘just and equitable’ provision to expulsion cases in the following terms:675 ‘My Lords, this is an expulsion case, and I must briefly justify the application in such cases of the just and equitable clause.676 The question is, as always, whether it is equitable to allow one (or two) to make use of his legal rights to the prejudice of his associate(s). The law of companies recognises the right, in many ways, to remove a director from the board. Section 184 of the Companies Act 1948 confers this right upon the company in general meeting whatever the articles may say. Some articles may prescribe other methods: for example, a governing director may have the power to remove (compare In re Wondoflex Textiles Pty Ltd [1951] VLR 458) and quite apart from removal powers, there are normally provisions for retirement of directors by rotation so that their re-election can be opposed and defeated by a majority, or even by a casting vote. In all these ways a particular director-member may find himself no longer a director, through removal, or non-re-election: this situation he must normally accept, unless he undertakes the burden of proving fraud or mala fides. The just and equitable provision nevertheless comes to his assistance if he can point to, and prove, some special underlying obligation of his fellow member(s) in good faith, or confidence, that so long as the business continues he shall be entitled to management participation, an obligation so basic that, if broken, the conclusion must be that the association must be dissolved, 672 [1973] AC 360, HL. 673 It was permissible not only by virtue of the articles of the company, but also because of the provisions of s 184 of the 1948 Act. The corresponding section is s 168 of the 2006 Act, which allows for the removal of a director by ordinary resolution at a meeting of shareholders. See further 7.63–7.66. 674 Unless otherwise agreed, partners in a partnership as a matter of course share the management of the partnership: Partnership Act 1890, ss 5 and 24(5). 675 Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, HL, at 380B–380F. 676 ‘Just and equitable’ here refers to the standard for determining whether a company should be wound up. The jurisdictional basis under s 210 of the 1948 Act was that a court had to be of the opinion that the facts would justify a winding-up order on the just and equitable ground. For the current position, see 11.2.

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9.154  Unfair Prejudice: Section 994

and the principles on which he may do so are those worked out by the courts in partnership cases where there has been exclusion from management (see Const v Harris (1824) Tur & Rus 496, 525) even where under the partnership agreement there is a power of expulsion (see Blisset v. Daniel (1853) 10 Hare 493; Lindley on Partnership, 13th ed (1971), pp. 331, 595).’ Lord Wilberforce emphasised that the just and equitable provision was not confined to cases where the exclusion had been made in bad faith. It did not matter that the majority genuinely considered that the interests of the company were better served without the director whom they had excluded.677 9.154 Where a petitioner had established a legitimate expectation of participation in management as a director beyond the scope of his service agreement, the association between him and the other shareholders involved mutual confidence and an understanding that the petitioner would participate in the conduct of the business over and above the specific areas defined by the service agreement.678 Since the articles of the company contained a restriction on the transfer of members’ interest in the company, the petitioner had established all the elements of a quasi-partnership, despite the fact that he was a junior partner to a dominant senior partner; his rights, therefore, were not restricted to his rights under the strict legal rules of the company, but extended to equitable relief. 9.155 The removal or dismissal of directors guilty of bribery, fraud or dishonesty in relation to company property is justifiable on various grounds.679 It is difficult to comprehend circumstances which would not result in the justifiable exclusion of members guilty of such conduct. In such circumstances, exclusion would not be unfair or contrary to the requirements of good faith. Not only is it likely to constitute breach of a service contract, but such conduct brings the company into disrepute with potentially serious consequences on share values and the concomitant interests of shareholders. In another matter, an erstwhile chief executive of a company failed to persuade the court that his dismissal, which arose from conduct entailing forgery, deception, bribery and the misuse of money which he knew did not belong to the company, was unfairly prejudicial to his interests. The fact that there might have been other remedies available against the director did not distract from the fact that the question was one of the alleged unfairness of his dismissal. His exclusion was held to be entirely justified.680 The same fate befell a director whose conduct could, at best, be described as dishonest. He embarked on negotiations with competitors for the purchase of a related business in an underhand and secretive manner, which placed him in a position of conflict with his duties as a director towards the company. The conduct was obviously detrimental to the interests of the company and, indirectly, the members.681 677 At 381F–381H. 678 Quinlan v Essex Hinge Co Ltd [1996] 2 BCLC 417, ChD. 679 Re a Company (No 005685 of 1988), ex p Schwarcz (No 2) [1989] BCLC 427, ChD, at 441d–441i. An alternative argument was roundly dismissed in no uncertain terms: ‘In my judgment the court will not listen to such a plea from a man guilty of such disgraceful conduct any more than it would listen to a complaint from one highwayman against another (see Everet v Williams (1725) Lindley on Partnership (15th edn) 149n)’. 680 Mears v R Mears & Co (Holdings) Ltd [2002] 2 BCLC 1, ChD, at [34]. See also Re Stewarts (Brixton) Ltd [1985] BCLC 4, ChD. 681 Grace v Biagioli [2005] EWCA Civ 1222, [2006] 2 BCLC 70, CA, at [65]–[70]. See also Badyal v Badyal [2018] EWHC 68 (Ch); [2018] 1 WLUK 263, at [154], [200].

322

‘Unfairly prejudicial conduct’ 9.158

Exclusion found to be fair 9.156 The appellant in O’Neill v Phillips682 failed to establish a superimposing, equitable basis for relief under an unfair prejudice petition. He was a 25 per cent shareholder and, for a period, the managing director of the company. The respondent held 75 per cent of the shares, but allowed the appellant to take 50 per cent of the profits. Negotiations to formally increase the appellant’s shareholding to 50 per cent failed. After an argument between the parties, the respondent’s largesse came to an end. From that time forth, the appellant was only entitled to his salary and dividends based on his 25 per cent shareholding. He elected to leave the company, alleging that he was effectively excluded from the management by the respondent. The House of Lords (per Lord Hoffmann) found that there could never have been a legitimate expectation in respect of the promised 50 per cent shareholding, simply because there was never an agreement to that effect.683 There was no circumstance invoking equitable rules in favour of the appellant. Accordingly, the exclusion was not unfairly prejudicial to the interests of the appellant. The same applied to the expectation he harboured regarding profit-sharing. 9.157 If the expectation of management participation extended no further than receipt of remuneration (other than dividends), and if the shareholder was a director for only a very short period of time, his exclusion is unlikely to constitute unfairly prejudicial treatment, as was the case in Re a Company (No  005134 of 1986), ex p Harries.684 Similarly, no legitimate expectation of continued participation in the management of a public company could subsist where, although the petitioner’s position was entrenched in the articles, they were capable of amendment to reverse the position. Being a public and quoted company, outside investors were entitled to assume that the constitution, in its entirety, was contained in the articles and the relevant Companies Act. Under those circumstances, there was no room for any legitimate expectation founded on some agreement or arrangement made between the directors and kept secret from market participants.685 The co-incidental exclusion from management did not constitute unfairly prejudicial conduct. 9.158 Exclusion may be justified and may deprive an excluded member from any relief, if his own conduct amounts to breach of the constitution or the Companies Act in force at the time.686 The petitioner in RA  Noble & Sons (Clothing) Ltd687 escaped censure: Nourse J held that there was no requirement that it should be just and equitable to grant relief, or that the petitioner should come to court with the proverbial ‘clean hands’.688 The Court of Appeal considered a similar situation in Grace v Biagioli689 and concluded that: 682 683 684 685 686

[1999] 1 WLR 1092, HL. At 1103D–1103E. [1989] BCLC 383, ChD, at 397f–397g. Re Blue Arrow plc [1987] BCLC 585, ChD, at 590e–590g. Re London School of Electronics Ltd [1986] Ch 211 at 222A–222C; see also Shah v Shah [2010] EWHC 313 (Ch) at [115], affirmed by the Court of Appeal ([2010] EWCA Civ 1408). 687 [1983] BCLC 273, ChD. 688 At 291h–292b. See also the judgment of the same judge, Nourse J, in Re London School of Electronics Ltd [1986] Ch 211 at 222A–222C. See further Re Baumler (UK) Ltd [2004] EWHC 1763 (Ch), [2005] 1 BCLC 92, ChD, at [180], [180](v); and 9.95. 689 [2005] EWCA Civ 1222, [2006] 2 BCLC 70, CA. This judgment and Re London School of Electronics were again confirmed as reflecting the prevailing position: Re BC&G Care Homes Ltd [2015] EWHC 1518 (Ch), [2016] BCC 615, ChD, at [109].

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‘[t]he use by the majority of the powers and voting rights conferred by the articles cannot be regarded as contrary to good faith where they are invoked to protect the company from conduct which is itself either in breach of a relevant agreement, or otherwise detrimental to the well-being of the company and its assets.’690 9.159 Exclusion was found to be fair under the circumstances in Re a Company (No 004377 of 1986).691 The company had been set up as a quasi-partnership. When the relationship between the members later broke down, one of the members was excluded from management. That, however, did not, without more, constitute unfairly prejudicial conduct. A  finding to that effect was dependent on whether it would have been reasonable for the petitioner (rather than the other members) to leave the company, as well as whether the offer for his shares was fair. The articles, which provided a mechanism for untangling interests on a breakdown in the relationship between the members, were duly complied with. The claimant was obliged to leave the company, as he did not have any legitimate expectation that the articles would not have been relied on by the remaining shareholder. Accordingly, there was no basis for finding unfair prejudice. The fate of the petitioner in Woolwich v Milne692 was entirely understandable: he persisted in treating staff in a wholly inappropriate manner, despite his fellow directors having warned him on more than one occasion that such conduct risked damaging the company’s business. His dismissal and consequential exclusion was held to be fair.

Reasonable offer making unfair exclusion fair 9.160 Unfairness does not arise from the fact of exclusion alone, but from exclusion without a reasonable offer by the majority693 to purchase the shares of the petitioner on a non-discounted basis.694 In Richards v Lundy695 it was held that a combination of factors required that the petitioner should not be left high and dry once excluded from management: an agreement that there should be no dividend, and that his shares in the company should be regarded as his pension, gave rise to a legitimate expectation that, when he left the company, the value represented by his 10 per cent shareholding should have been released to him in some form. It was therefore unfair to dismiss the petitioner but then leave him locked into the company as a minority shareholder.696 If the respondent to an exclusion matter had plainly made a reasonable offer, unfairness disappears697 and he will be entitled to have the petition struck out.698 690 691 692 693 694 695 696 697 698

At [64]. [1987] 1 WLR 102, ChD. [2003] EWHC 414 (Ch). O’Neill v Phillips [1999] 1 WLR 1092, HL, at 1107B–1107C. Cf Parkinson v Eurofinance Group Ltd [2001] 1 BCLC 720, ChD; Allmark v Burnham [2005] EWHC 2717 (Ch), [2006] 2 BCLC 437, ChD; Amin v Amin [2009] EWHC 3356 (Ch) at [421]–[423]. Strahan v Wilcock [2006] EWCA Civ 13, [2006] 2 BCLC 555, CA, at [29]–[30]. See Rahman v Malik [2008] EWHC 959 (Ch), [2008] 2 BCLC 403, ChD, at [58]. [2000] 1 BCLC 376, ChD. At 395e–395g. Re a Company (No 006834 of 1988), ex p Kremer [1989] BCLC 365, ChD. Unfair prejudice petitions were not intended to enable the court to preside over a ‘protracted and expensive contest of virtue between the shareholders and to award the company to the winner’ (at 368b). O’Neill v Phillips [1999] 1 WLR 1092, HL, at 1107B–1107C.

324

‘Unfairly prejudicial conduct’ 9.161

For an offer to be fair, it should have the following qualities:699 (a)

the shares should be valued without a discount being made for the fact that the holding is a minority one, ie a value representing an equivalent proportion of the total issued share capital; (b) if the share value cannot be agreed, it should be determined by an appropriate expert, acting as an expert and not as an arbiter. The objective should be economy and expedition, even if it carries the possibility of a rough edge for one side or the other (both parties bearing the same risk in any event) compared with a more elaborate procedure; (c) both parties should have equal right of access to information about the company, as it ultimately has a bearing on the value of the shares; (d) the offer should cover the costs of the petitioner, but the respondent should be allowed a reasonable opportunity to make an offer before being obliged to pay costs; (e) the respondent should have a reasonable time to make an offer before his conduct could be considered as being unfair. These guidelines have the situation in mind of the majority offering to buy out the minority, and may not be suitable in instances where shareholders hold their shares 50/50:700 ‘… there is a clear potential for injustice if one of them is able to seize de facto control of the company and effectively force the other either to accept his offer to buy or be forever excluded from the participation that he bargained for and cut out from any remedy in respect of what would be a continuing breach of the quasipartnership arrangement originally made.’ A letter setting out a modus vivendi regarding the making of an offer was held wanting, as it was not an offer capable of forming a binding contract on acceptance.701 An offer stating that it was ‘subject to affordability’ destroyed the equivalence postulated in O’Neill v Phillips since, at the end of the process, the defendants would have had no obligation to buy. The purpose of an offer is to impose on the other party acceptance of the offer, thereby creating a solution by contract rather than by court proceedings.702 A petitioner was held not to have acted unreasonably by refusing offers made to him. The offers did not make provision for certain matters peculiar to the facts of that case, namely the under-declaration of profits and unpaid dividends.703 9.161 In CVC/Opportunity Equity Partners Ltd v Demarco Almeida,704 the Privy Council was concerned with the reasonableness of an offer made to a minority shareholder in the Cayman Islands where no remedy similar to the unfair prejudice 699 At 1107D–1108B. See also the comments by Hoffmann J in Re a Company (No 004377 of 1986) [1987] 1 WLR 102, ChD. See further Re Flex Associates Ltd [2009] EWHC 3690 (Ch) at [72]– [74]. 700 See Harborne Road Nominees Ltd v Karvaski [2011] EWHC 2214 (Ch), [2012] 2 BCLC 420, ChD, at [27]. 701 Croly v Good [2010] EWHC 1 (Ch), [2010] 2 BCLC 569, ChD, at [114]–[116]. 702 Re Flex Associates Ltd [2009] EWHC 3690 (Ch) at [74]. 703 Rahman v Malik [2008] EWHC 959 (Ch), [2008] 2 BCLC 403, ChD, at [125]–[127]. See also Harborne Road Nominees Ltd v Karvaski [2011] EWHC 2214 (Ch), [2012] 2 BCLC 420, ChD. 704 [2002] 2 BCLC 108, PC. See the discussion and application on the facts in Re Annacott Holdings Ltd [2013] EWCA Civ 119, [2013] 2 BCLC 46, CA, at [11]–[14].

325

9.162  Unfair Prejudice: Section 994

remedy of English company law existed. If a minority shareholder was excluded from management without a fair offer for the purchase of his shares by the majority, his only relief was an application for winding up the company. The minority shareholder was entitled to reject an offer which was tantamount to the liquidation value of his shares. It would give the purchaser a windfall and was therefore considered as unfair. The amount which the minority shareholder would obtain on a winding up represented the least that the shares could be worth to him, but did not represent their fair value as between the parties. He had, accordingly, not acted unreasonably by rejecting the offer. 9.162 Where a company’s articles provided for a fair and independent valuation of a member’s shares, a member, seeking to sell his shares on the breakdown of relations with other members, should not be entitled (in the absence of allegations of bad faith or impropriety) to complain of unfair prejudicial conduct until those provisions have been implemented.705 When it is clear that the appropriate solution to a breakdown was for the petitioner to sell his shares to the respondent or the company, and if a mechanism for determining a fair price was in place, presentation of an unfair prejudice petition will ordinarily constitute an abuse of the process of the court.706 When the breakdown occurs between two members and both of them made competing offers, a qualitative evaluation has to be undertaken to determine whose offer is the most reasonable under the circumstances.707 A party could be acting reasonably by rejecting an offer if, on reasonable grounds, it appeared that there was no realistic prospect or reasonable likelihood that the other party would be able to pay the purchase price.708 It follows that it is incumbent on the majority, when excluding a member, to offer reasonable compensation for his shares. It is also incumbent on the excluded member to carefully consider accepting such an offer, before being faced with a finding that the apparent unfair exclusion had indeed been made good by an adequate offer.

Failure to consult petitioner 9.163 Closely related to the issue of exclusion from management is the issue of the failure to consult a member in a quasi-partnership situation on matters material to his interests in the company. The theoretical basis for this proposition is embedded in the same principle which governs entitlement to participation in management of the company, namely legitimate expectations springing from the relationship of mutual trust and confidence resulting in a common understanding which justifies the superimposition of equitable principles in its analysis.709 In short, consultation by the de facto controllers of the company on material matters affecting another shareholder (whether a director or not) is applicable to the shareholders in a quasi-partnership situation. The position was explained as follows in Fisher v Cadman:710 705 Re a Company (No 004377 of 1986) [1987] 1 WLR 102, ChD, at 110F–110H. See also John Reid & Sons (Strucsteel) Ltd [2003] EWHC 2329 (Ch), [2003] 2 BCLC 319, ChD, at [44]. 706 Re a Company (No 006834 of 1988), ex p Kremer [1989] BCLC 365, ChD; Re a Company (No 007623 of 1986) [1986] BCLC 362, ChD. 707 Brownlow v GH Marshall Ltd [2000] 2 BCLC 655, ChD. 708 McGuinness v Bremner plc [1988] BCLC 673, CSOH. 709 See Re Regional Airports Ltd [1999] 2 BCLC 30, ChD, at 80e–80g, 81a–81d; Re Cumana Ltd [1986] BCLC 430, CA. 710 [2005] EWHC 377 (Ch), [2006] 1 BCLC 499 at [95].

326

‘Unfairly prejudicial conduct’ 9.165

‘… [A] failure on the part of a controller to provide information about the affairs of a company to which the member is entitled in circumstances where that can be said on objective grounds so to disable the member from knowing what is going on in the company or what action to take to protect his interests in relation to the company [as to undermine in a serious and unfair way the basis of the continuing relationship between them in the company]711 (such that the member could with justification say that the controller is using his legal powers to maintain the association in circumstances to which the member did not agree …).’ 9.164 Should an expectation to be provided with information be established, an entitlement to a reasonable flow of information concerning the company and any of its trading subsidiaries arises, as well as the right to be consulted on broad strategic issues.712 For these purposes, the member does not have to be a director.713 If the entitlement to information vests in a director and is withheld, he may in any event justifiably contend that he is being excluded from management. As a general proposition, a member who is entitled to participate in management will be entitled, as of right, to be consulted on any material matter concerning the conduct of the affairs of the company. A  non-director entitled to information has to be consulted on material matters such as policy decisions affecting the scope and nature of the business. It may be difficult to draw a line between general dayto-day management and policy decisions,714 but perhaps the de facto controllers should err on the side of caution and rather provide possibly relevant information than withhold  it. Such consultation may take place in formal board meetings (if the aberrant members of course care to invite the other members to those meetings)715 or, simply, in an informal setting.716 Consultation is a dialogue, not negotiation with a view to arriving at an agreement. It is, at best, an opportunity for the exchange of ideas or, at worst, an opportunity for the minority shareholder to make representations in relation to the affairs of the company. The duty to inform may also arise from contractual arrangements, breach of which may constitute unfairly prejudicial conduct.717 9.165 A  petitioner, who sought information from the company for purposes of valuing his shares for sale to a third party, was held to have had no entitlement thereto after the right to sell and transfer had expired. The information sought did not relate to the affairs of the company, although it affected the interests of the member. The refusal of the information was, accordingly, not an unfair manner of conducting the company’s affairs.718

711 The phrase in square brackets appears in the official transcript and in the electronic version of the BCLC reports, but not in the latter’s printed version. 712 See Re Regional Airports Ltd [1999] 2 BCLC 30, ChD, at 80a–80b; Whillock v Henderson [2009] BCC 314, CSOH, at [14]. 713 Re a Company (No 002612 of 1984) (1986) 2 BCC 99453 (Ch) at 99482; affirmed by the Court of Appeal (1986) 2 BCC 99495. 714 See Re Elgindata Ltd [1991] BCLC 959, ChD, at 986f, 989h. 715 Compare RA Noble & Sons (Clothing) Ltd [1983] BCLC 273, ChD, at 289h. 716 See Allmark v Burnham [2005] EWHC 2717 (Ch), [2006] 2 BCLC 437, ChD. 717 Hawkes v Cuddy (No 2) [2007] EWHC 2999 (Ch), [2008] BCC 390 (Ch) at [275], [281]; on appeal, Re Neath Rugby Ltd (No 2) [2009] EWCA Civ 291, [2009] 2 BCLC 427, CA, at [69], [77]–[78]. 718 Mears v R Mears & Co (Holdings) Ltd [2002] 2 BCLC 1, ChD, at [42]–[44], [51].

327

9.166  Unfair Prejudice: Section 994

The specific matters on which to consult defy definition. Frivolous matters will fall outside the scope of the duty under discussion. In Re Metropolis Motorcycles Ltd,719 issues such as a failure to consult on senior management salary increases, the changes of accounting policies, and the appointment of auditors were regarded as matters sufficiently within the range of affairs on which a member could legitimately expect to be consulted. To this short list can be added inputs regarding the distribution of the company’s commercial profit.720 The test to determine the relevancy of information pertaining to the company’s affairs is, of course, not complete unless those failures can be demonstrated to be prejudicial and unfair to the interests of the minority member. 9.166 In Re Phoenix Office Supplies Ltd,721 the petitioner was an employee and director of a computer company. There were two other directors, each holding one third of the shares. A  discussion regarding arrangements in the event of any one of them leaving the company was never formalised. The petitioner gave notice of termination of his employment and made known his intention to resign as a director and member of the company. He was, however, not prepared to do so until an agreement regarding the purchase and transfer of his shares had been reached. The other two directors offered to purchase his shareholding on the basis that the purchase price should be substantially discounted to reflect his minority holding. Pending agreement on the sale and transfer of his shares, they treated the petitioner as already having resigned his directorship and refused him access to the company’s records and accounts. The petitioner resorted to an unfair prejudice petition. The Court of Appeal held that section 459 did not provide relief for a member of a quasipartnership company who voluntarily severed his connection with the company for personal reasons, and who was seeking to force the other members to purchase his shareholding at its full, undiscounted value when he had no contractual right to do so.722 Although the respondents conceded the wrong-doing within a quasi-partnership context, by excluding the petitioner from management and for treating him as having resigned his directorship, the petitioner could not show that he had been unfairly prejudiced thereby. The information to which the petitioner was entitled as a director was not sought in order to discharge his duties as such, but merely for his own benefit to achieve the highest price possible for his shares.

Powers exceeded or exercised for an illegitimate or ulterior purpose 9.167 Illegality may amount to unfair prejudice for purposes of section 994.723 The principle operates on two levels: on the one hand, a shareholder who is not a 719 [2006] EWHC 364 (Ch), [2007] 1 BCLC 520, ChD, at [76]. 720 Re a Company (No 002612 of 1984) (1986) 2 BCC 99453 (Ch) at 99482. 721 [2002] EWCA Civ 1740, [2003] 1 BCLC 76, CA. And see Hawkes v Cuddy [2007] EWHC 2999 (Ch), [2008] BCC 390, ChD at [246], relied on by Birss J in Eaton v Caulfield [2013] EWHC 2214 (Ch), [2015] 1 BCLC 634, ChD, at [24]. 722 Cf Michel v Michel [2019] EWHC 1378 (Ch), [2019] 5 WLUK 501 where the relationship between family members involved in the running of a company was indeed not of the quasi-partnership kind and therefore did not give rise to any equitable constraints preventing the removal of a director from office. The petitioner’s removal was in accordance with the company’s constitution and did not amount to unfairly prejudicial conduct. 723 Hawkes v Cuddy (No 2) [2007] EWHC 2999 (Ch), [2008] BCC 390 (Ch) at [238], confirmed on appeal (Re Neath Rugby Ltd (No 2) [2009] EWCA Civ 291, [2009] 2 BCLC 427, CA).

328

‘Unfairly prejudicial conduct’ 9.169

participant in the unlawful conduct may rely on such conduct for founding a petition under section 994. On the other hand, a member who has acted in an unlawful manner, and is brave enough to petition, might be refused relief on the basis of the principle that a person cannot rely on his own illegal conduct in order to found relief.724 This category largely overlaps with the discussion regarding the allotment of shares and rights issues,725 and diversion of assets of the company for personal gain. The diversion of a company’s assets or business to another company in which the de facto controller has an interest is done with ulterior motives, namely self-interest and enrichment. It is particularly so when the company’s business is destroyed by such an action.726 9.168 At a minimum, a petitioner’s prior knowledge of illegality in an unfair prejudice petition will always be a relevant consideration when unfair prejudice is under consideration, according to Bermuda Cablevision Ltd v Colica Trust Co Ltd.727 Bermuda Cablevision was operated illegally, as it was – in defiance of legislation – controlled by non-Bermudans. Despite the on-going illegality brought about by the continued involvement of non-Bermudans, the Privy Council did not dismiss the appeal. It held that, if the petitioner’s prior knowledge of the illegality should serve to preclude him from raising a complaint, the unlawful carrying on of the business would be aided and abetted. In rare cases, this position may be outweighed by sufficiently cogent countervailing factors, one of which is that shareholders are locked into a position where a company is continuing to carry on business unlawfully. Relief was accordingly granted under the circumstances.728 When a shareholder and employee of a company claimed that his dismissal was unlawful and impinged on his rights, the court rejected his claim since he had made himself guilty of paying bribes.729 The disdain with which the court considered the petitioner’s own conduct is apparent from the court’s refusal to entertain his request for an amendment ‘from a man guilty of such disgraceful conduct any more than it would listen to a complaint from one highwayman against another’.730 9.169 In Re Regional Airports Ltd,731 the de facto controller abused his position by creating a rights issue for an ulterior purpose, namely the enhancement of his position as shareholder.732 In the same vein was a director’s unilateral and secret exercise of his power of allotment so as to increase his own shareholding from 60 per cent to 96 per cent, thereby reducing the other member’s holding from 40 to 4 per cent.733 The allotment was for an improper purpose and with an improper motive.734

724 Hawkes v Cuddy (No 2) [2007] EWHC 2999 (Ch), [2008] BCC 390 (Ch) at [238]. 725 See 9.115–9.118. 726 Whillock v Henderson [2009] BCC 314, CSOH. 727 [1998] AC 198, PC, at 212E–212F. See the discussion of this judgment in Hawkes v Cuddy (No 2) [2007] EWHC 2999 (Ch), [2008] BCC 390 (Ch) at [237]. 728 Bermuda Cablevision Ltd v Colica Trust Co Ltd [1998] AC 198, PC, at 209B–209D, 210D–210G, 211E–211F, 212D–212G. 729 Re a Company (No 005685 of 1988), ex p Schwarcz (No 2) [1989] BCLC 427, ChD. 730 At 441g–441h. 731 [1999] 2 BCLC 30, ChD. 732 At 80h–80i. 733 Re a Company (No 005134 of 1986), ex p Harries [1989] BCLC 383, ChD. See the very similar facts and conclusions in Dalby v Bodilly [2004] EWHC 3078 (Ch), [2005] BCC 627, ChD, at [18]. 734 Re a Company (No 005134 of 1986), ex p Harries [1989] BCLC 383, ChD, at 396b–396c.

329

9.170  Unfair Prejudice: Section 994

Theft from the company, in whatever guise or form, is certainly an example of the illegitimate exercise of powers. However, unless shareholders are able to demonstrate that they have suffered losses which are not reflective of the losses suffered by the company, a derivative action and not a personal action under section 994 appears to be the appropriate remedy.735

An event putting an end to the association 9.170 Unfairness for purposes of section 994 may also arise when an event puts an end to the basis on which the parties entered into association with each other, making it unfair that one shareholder should insist on the continuation of the association.736 Lord Hoffmann explained: ‘The analogy of contractual frustration suggests itself. The unfairness may arise not from what the parties have positively agreed but from a majority using its legal powers to maintain the association in circumstances to which the minority can reasonably say it did not agree: non haec in foedera veni.737 It is well recognised that in such a case there would be power to wind up the company on the just and equitable ground (see Virdi v Abbey Leisure Ltd [1990]  BCLC  342) and it seems to me that, in the absence of a winding up, it could equally be said to come within s 459. But this form of unfairness is also based upon established equitable principles and it does not arise in this case.’ 9.171 It appears to be settled that not all the detailed rules about contractual frustration should be applied to section 994 petitions. Having drawn attention to the fact that Lord Hoffmann gave only one example of a case to illustrate what he meant in this regard,738 Lewison J continued as follows in Hawkes v Cuddy (No 2):739 ‘If all the rules of contractual frustration had been in play, it could hardly be doubted that the frustration was self-induced, because the company had voluntarily sold the nightclub. So in referring to Abbey Leisure as the only example of what he had in mind, Lord Hoffmann cannot, in my judgment, have intended to confine his remarks to a case in which the full rigour of contractual frustration was satisfied. This conclusion is also consistent with Lord Hoffmann’s statement that in many cases it is not profitable to enquire into the causes of a breakdown of trust and confidence. If the approach in a quasi-frustration case is radically different because self-induced frustration cannot be relied on, Lord Hoffmann would surely have said so.’ 735 For a discussion on reflective loss, see Chapter 8. 736 O’Neill v Phillips [1999] 1 WLR 1092, HL, at 1101H–1102B. See also Re Metropolis Motorcycles Ltd [2006] EWHC 364 (Ch), [2007] 1 BCLC 520, ChD, at [90]. And, for an example, see the facts in Fisher v Cadman [2005] EWHC 377 (Ch), [2006] 1 BCLC 499, ChD, at [41]–[50], [61]–[63], [97], [108]. Regard should further be had to Re Guidezone Ltd [2000] 2 BCLC 321, ChD, at [176], where Jonathan Parker J emphasised that the unfairness will arise from the conduct of the majority in insisting on the continuance of the association in the changed circumstances, and not in the changed circumstances themselves. Hence, there was nothing unfair in shareholders insisting on the continuation of the association (at [190]). 737 Loosely translated as ‘it was not this that I promised to do’. See Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696, HL, at 729. 738 Virdi v Abbey Leisure Ltd; Re Abbey Leisure Ltd [1990] BCLC 342, CA. 739 [2007] EWHC 2999 (Ch), [2008] BCC 390, ChD, at [233], confirmed on appeal (Re Neath Rugby Ltd (No 2) [2009] EWCA Civ 291, [2009] 2 BCLC 427, CA).

330

Deadlock inapplicable to section 994 9.174

9.172 In Re Leeds United Holdings plc,740 it could not be said that the board of directors was conducting the company’s affairs in a manner unfairly prejudicial to the petitioner by exercising a choice which of two offers for the company’s shares should be recommended to the shareholders; nor could it be said that the company’s entering into a subscription agreement was unfairly prejudicial to any of the members of the company.741

DEADLOCK INAPPLICABLE TO SECTION 994 9.173 Should a court in winding-up proceedings be faced with a proven situation of deadlock, the result would inevitably be an order for winding up as a matter of course. Deadlock implies the absence of unfairly prejudicial conduct. In the latter instance, some blameworthy conduct is usually attributable to one of the parties. Whilst deadlock alone may justify a winding-up order on the ‘just and equitable’ ground, it does not, without more, constitute unfairly prejudicial conduct on the part of a respondent for the purposes of a petition under section 994.742 The jurisdictions are ‘parallel’ and not ‘the same as’.743 It follows that, in many cases, the conduct of the respondent may give rise both to the jurisdiction under section 994 and to that under section 122(1)(g); but that there may be cases which satisfy the requirements of one jurisdiction but not the other. This approach is consistent with the judgment of Arden LJ (with whom Rix and Brown LJJ concurred) in Jones v Jones; Re Incasep.744 Moreover, the approach ‘is consistent with the differences in the statutory wording: Parliament would not have used such different wording in section 994 of the Companies Act 2006 and in section 122(1)(g) of the Insolvency Act if the jurisdictions were intended to be coterminous’.745 9.174 The court does not have the jurisdiction to make an order on an unfair prejudice petition merely on the grounds that there has been a breakdown in the relationship between members in a company formed as a quasi-partnership.746 However, a breach of duty by a member may not be causative of ‘prejudice or loss’ to the company, but may lead to such a loss of confidence on the part of another, innocent, participant and breakdown in relations that the innocent participant is entitled to relief under unfair prejudice provisions. In effect, the unfairness lies in compelling the innocent participant to remain a member of what was once a company formed with the characteristics which made it capable of being given the label of ‘quasi-partnership’.747 740 741 742 743 744

[1996] 2 BCLC 545, ChD. At 560d–560g. Re Neath Rugby Ltd (No 2) [2009] EWCA Civ 291, [2009] 2 BCLC 427, CA, at [101]–[103]. At [104]. [2002] EWCA Civ 961, [2003] BCC 226, CA, at [44]; see also Re R A Noble & Sons (Clothing) Ltd [1983] BCLC 273, ChD. 745 Re Neath Rugby Ltd (No 2) [2009] EWCA Civ 291, [2009] 2 BCLC 427, CA, at [105]. 746 The court’s discretion entails the refusal of relief provided for in s 996(1). Unless an order for winding up is specifically sought, it appears that a court will not be able to make such an order in s 994 proceedings: Antoniades v Wong [1995] BCC 682 at 694D; confirmed on appeal ([1997] 2 BCLC 419, CA). 747 Re Baumler (UK) Ltd [2004] EWHC 1763 (Ch), [2005] 1 BCLC 92, ChD, at [180], [181]. See also Grace v Biagioli [2005] EWCA Civ 1222, [2006] 2 BCLC 70, CA, at [61(6)], [77]; Re Jayflex Construction Ltd [2003] EWHC 2008 (Ch), [2004] 2 BCLC 145, ChD, at [55].

331

9.175  Unfair Prejudice: Section 994

It follows that, in instances where the qualities associated with quasi-partnership companies are not present (such as mutual trust and confidence), it does not avail a shareholder to unilaterally claim a loss in confidence in management (save probably in instances of exclusion from management itself). If conduct by the controllers of the company is lawful and proper, it does not become unlawful and improper just because the aggrieved member so contends.748 9.175 Relief sought under unfair prejudicial provisions is available where deadlock was established by the circumstance of the parties agreeing that a winding up was inevitable and that the business was terminated, but where the unfair prejudicial conduct comprised of negotiations to amend an agreement in respect of the management of the company.749 The purpose of a winding up is to bring an end to the existence of the company and to return to the members their proportionate shares in cash, after payment of all creditors. When deadlock is present, any one shareholder may venture an application for the winding up of the company, but will run a material risk in launching section 994 petitions because of the apparent absence of unfairly prejudicial conduct either way. A third and logical option, which should actually rank first in a consideration of which route to follow, is to implement the pre-emption provisions of the constitution to obtain a buy-out, without the necessity of any court intervention. An applicant/ petitioner may well find that his application for winding up or petition on the basis of unfair prejudicial conduct will be struck out as being an abuse of the process of court.750 A factor to be taken into account is whether the refusal to accept the buyout process was reasonable or not.751 The courts will guard against a situation of a buy-out order being made simply because the parties found it difficult to co-exist, although no basis is laid for unfair prejudice.752

PROCEDURE 9.176 The procedure for the bringing of proceedings under section 994 is discussed in Chapter 13, whilst interim relief is dealt with in Chapter 14.

748 Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [32]; affirmed on appeal [2013] EWCA Civ 667, [2014] 1 BCLC 427, CA, (which only dealt with aspects regarding valuation). 749 Re Phoneer Ltd [2002] 2 BCLC 241, ChD. 750 Re a Company (No 006834 of 1988), ex p Kremer [1989] BCLC 365, ChD. 751 Virdi v Abbey Leisure Ltd; Re Abbey Leisure Ltd [1990] BCLC 342, CA. 752 Grace v Biagioli [2005] EWCA Civ 1222, [2006] 2 BCLC 70, CA, at [77].

332

Chapter 10

Setting Right Unfair Prejudice: Section 996 remedies

Contents Introduction 10.1 Wide discretion

10.3

Prayers and orders for relief Prayers Orders

10.9 10.9 10.10

The remedies provided by section 996 Section 996(2)(e): buy-out Section 996(2)(a): future conduct Section 996(2)(b): injunctive relief Section 996(2)(c): derivative action authorised Section 996(2)(d): alteration of articles

10.15 10.15 10.44 10.45 10.46 10.47

Implementation of court’s order

10.48

INTRODUCTION 10.1 Where a breach of a right has been demonstrated under section 994, there should be a concomitant remedy. Winding up as remedy is considered in Chapter 11. In this chapter the range of remedies afforded by section 996(1) of the Companies Act 2006 (‘the 2006 Act’) is addressed. The subsection provides for discretion to a court to ‘make such order as it thinks fit for giving relief in respect of the matters complained of’, ie matters complained of under the unfair prejudice provisions of section 994 of the 2006 Act.1 Subsection (2) provides as follows: ‘(2) Without prejudice to the generality of subsection (1), the court’s order may– (a) regulate the conduct of the company’s affairs in the future; (b) require the company – (i) to refrain from doing or continuing an act complained of, or (ii) to do an act that the petitioner has complained it has omitted to do; (c) authorise civil proceedings to be brought in the name and on behalf of the company by such person or persons and on such terms as the court may direct;

1 See Chapter 9.

333

10.2  Setting Right Unfair Prejudice: Section 996 remedies

(d) require the company not to make any, or any specified, alterations in its articles without the leave of the court; (e) provide for the purchase of the shares of any members of the company by other members or by the company itself and, in the case of a purchase by the company itself, the reduction of the company’s capital accordingly.’ 10.2 Successfully establishing all the elements of a section 994 petition is no guarantee that orders will be made under section 996:2 petitioners must still persuade the court that it is appropriate to make an order for the relief which they seek.3 The relief must be proportionate to the degree of unfair prejudice established: it may be disproportionate to order a buy-out of one shareholder’s shareholding where the unfair prejudice is relatively modest.4 An excellent case on the merits may still fail if it appears that the shares involved are valueless and the aim of realising value is thwarted as a result.5 In similar vein, a petitioner should not profit from unfairly prejudicial conduct beyond what was within the ambit of the original project.6 Presentation of a section 994 petition, in order to exert pressure on the alleged perpetrators of unfairly prejudicial conduct purely to achieve a collateral purpose, is an abuse of the process and will result in the refusal of relief.7 Unreasonable rejection by the claimant of a reasonable offer could lead to a dismissal of the petition.8 If the issues giving rise to the petition have been put right and cured and cannot recur, there is no basis for the court granting relief.9 Misconduct on the part of a petitioner may affect the relief to which he or she should otherwise have been entitled to: it may be wrong to apply a discount for misconduct where the company had suffered no financial loss.10 In the case of misconduct in the course of proceedings, where a party is dishonest or is making use of forged materials, this is likely to result in censure in the form of dismissal of a claim.11 In determining the appropriate order under section 996, the court considers matters as they stood at the time of the hearing.12 If, at the time of the hearing, an administrative 2

Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [10]. Affirmed on appeal ([2013] EWCA Civ 667, [2014] 1 BCLC 427, CA) on limited issues of valuation. 3 Antoniades v Wong [1997] 2 BCLC 419, CA, at 426a–426d. 4 Phoenix Office Supplies Ltd v Larvin [2002] EWCA Civ 1740, [2003] BCC 11, CA, at [51], per Jonathan Parker LJ. 5 Cf Ashdown v Griffin [2018] EWCA Civ 1793, [2018] 7 WLUK 697. 6 Re TPD Investments Ltd [2017] EWHC 657 (Ch) at [146]–[147]. 7 See for a discussion of collateral purpose, Re Maud [2015] EWHC 1626 (Ch) at [27]; see further specific instances such as Re Bellador Silk Ltd [1965] 1 All ER 667 (Ch) (an attempt to obtain the repayment of a loan); Re Astec (BSR) plc [1998] 2 BCLC 556, ChD (an attempt to elicit a takeover bid); Jaber v Science and Information Technology Ltd [1992] BCLC 764, ChD, at 784f–784g (parallel proceedings pending); Re a Company (No 00836 of 1995) [1996] 2 BCLC 192, ChD, at 205i (pursuing the matter for personal reasons). 8 See eg West v Blanchet [2000] 1 BCLC 795, ChD, at 803d–804d; Music Sales Ltd v Shapiro Bornstein & Co Inc [2005] EWHC 759 (Ch), [2006] 1 BCLC 371, ChD. 9 Re Legal Costs Negotiators Ltd [1999] 2 BCLC 171, CA, at 196d–196g. 10 Re Home & Office Fire Extinguishers Ltd [2012] EWHC 917 (Ch). See further Amin v Amin [2009] EWHC 3356 (Ch); Sethi v Patel [2010] EWHC 1830 (Ch), [2011] 1 BCLC 277, ChD, at [31]–[32]; Re a Company (No 005685 of 1988), ex p Schwarcz (No 2) [1989] BCLC 427, ChD, at 451i; Richardson v Blackmore [2005] EWCA Civ 1356, [2006] BCC 276, CA. 11 Rubin v Parsons [2016] EWHC 237 (Ch) at [150]–[154]; cf Arrow Nominees Inc v Blackledge [2000] 2 BCLC 167, CA at [56], [73]–[74]. 12 Grace v Biagioli [2005] EWCA Civ 1222, [2006] 2 BCLC 70, CA, at [73]; Re Hailey Group Ltd [1993] BCLC 459, ChD.

334

Wide discretion 10.3

receiver has been appointed over the assets of the company, it may have the effect that it is no longer possible for the affairs of the company to be conducted in a manner which is unfairly prejudicial to the interests of the petitioner and will obviate the necessity for an order under section 996. An order may still be appropriate, however, where the unfairly prejudicial conduct has prevented the sale of the petitioner’s shares before the onset of insolvency, or if the substantive relief sought is for the purchase of the petitioner’s shares by reference to their value at a time when the company was solvent.13 It would be inappropriate to only set right unfairly prejudicial conduct that occurred in the past, and not also, where circumstances so dictate, to make orders such as would enable the company, for the future, to be properly managed and for its affairs to be placed under the conduct of somebody in whom shareholders generally could have confidence.14

WIDE DISCRETION 10.3 It leaves of no doubt that the discretion afforded by section 996(1) is and should be wide, yet exercised judicially and on rational principles relevant to the facts and circumstances of the case at hand.15 In Re Bird Precision Bellows Ltd,16 Oliver LJ, dealing with section 461 of the Companies Act 1985,17 described the court’s discretion as ‘very wide’: ‘It seems to me that the whole framework of the section, and of such of the authorities as we have seen, which seem to me to support this, is to confer on the court a very wide discretion to do what is considered fair and equitable in all the circumstances of the cases, in order to put right and cure for the future the unfair prejudice which the petitioner has suffered at the hands of the other shareholders of the company and I  find myself quite unable to accept that that discretion in some way stops short when it comes to the terms of the order for purchase in the manner in which the price is to be assessed.’ More recently, Vos J (as he then was), having referred to the applicable authorities, put the position as follows:18 ‘125 In my judgment, these authorities all speak with one voice. They show that ss 994–996 provide a wide and flexible remedy where the affairs of a company have been conducted in a manner that is unfairly prejudicial to the interests of some or all of its members. A s 994 petition is appropriate where, for whatever reasons, the trust and confidence of the parties to a quasi-partnership has broken down. Relief can be granted to remedy wrongs done to the company, and in such 13 Re Hailey Group Ltd [1993] BCLC 459, ChD, at 473d–473e. 14 See Re Hailey Group Ltd [1993] BCLC 459, ChD, at 472g–472i. 15 See, for a summary of the authorities establishing this proposition, the endorsement in Eaton v Caulfield (No 2) [2013] EWHC 2214 (Ch), [2015] 1 BCLC 634, ChD, at [24] of the principles set out in Hawkes v Cuddy [2007] EWHC 2999 (Ch), [2008] BCC 390, ChD, at [243]–[246]; Cf Re Watercor Ltd [2017] EWHC 1814 (Ch) at [14]. 16 [1986] Ch 658, CA, at 669D–669E. See also Re Icamera Ltd [2021] EWHC 1762 (Ch), [2021] 6 WLUK 400, at [30]–[32]. 17 The predecessor of s 996 of the 2006 Act, similarly worded. 18 Apex Global Management Ltd v FI Call Ltd [2013] EWHC 1652 (Ch) [2014] BCC 286, ChD, at [125].

335

10.4  Setting Right Unfair Prejudice: Section 996 remedies

a situation the alleged wrongdoers must be made parties to the petition. Nonmembers of a company who are alleged to have been responsible for such conduct can be joined as respondents, and, in an appropriate case, such non-members can be made primarily or secondarily liable to buy the petitioners’ shares. Artificial limitations should not be introduced to reduce the effective nature of the remedy introduced by ss 994–996.’ In a subsequent related judgment19 Hildyard J reiterated the breadth of the remedies available. They include requiring reimbursement to the company of sums due to or held on trust for it, or some other form of equitable compensation; or adjusting the proportion of distributions upon a winding-up order pursuant to section 996. 10.4 Hoffmann J interpreted the same subsection as giving the court the ‘widest possible discretion’,20 whilst it was described as ‘extremely wide’ in Re a Company (No  00789 of 1987), ex p Shooter.21 There are certain principles inhibiting an unbridled exercise of the discretion. First and foremost, like all discretions, it must be exercised judicially and on rational principles.22 Second, and obviously so, the discretion is limited to address the injustice suffered by a petitioner at the hands of the majority by giving relief ‘in respect of the matters complained of’.23 Third, the court cannot close its eyes to relevant facts. It is bound to take into account all relevant facts and circumstances, namely ‘the reality and practicalities of the overall situation’:24 ‘[73] … Although s 461(1) speaks in terms of relief being granted “in respect of the matters complained of”, the court has to look at all the relevant circumstances in deciding what kind of order it is fair to make. It is not limited merely to reversing or putting right the immediate conduct which has justified the making of the order. … The prospective nature of the jurisdiction is reflected in the fact that the court must assess the appropriateness of any particular remedy as at the date of the hearing and not at the date of presentation of the petition; and may even take into account conduct which has occurred between those two dates. The court is entitled to look at the reality and practicalities of the overall situation, past, present and future. [74] It was, therefore, incumbent on the judge to consider the whole range of possible remedies and to choose the one which on his assessment of the existing state of relations between the parties was most likely both to remedy the unfair prejudice already suffered and to deal fairly with the situation which had occurred. The principal criticism of his judgment on this issue is that it concentrated on the precise nature of the prejudice already suffered (ie  the non-payment of the dividend), but failed to look at matters in the round. In particular, no adequate regard was paid to the fact that the respondents had in effect helped themselves 19 20 21 22 23 24

Apex Global Management Ltd v FI Call Ltd [2015] EWHC 3269 (Ch) at [49]–[51]. Re a Company [1986] BCLC 68, ChD, at 70h; see also Antoniades v Wong [1997] 2 BCLC 419, CA, at 426b. [1990] BCLC 384, ChD, at 394g–394i. See also Oak Investment Partners XII Ltd Partnership v Boughtwood [2009] EWHC 176 (Ch), [2009] 1 BCLC 453, ChD; partially affirmed on appeal [2010] EWCA Civ 23, [2010] 2 BCLC 459, CA. Hawkes v Cuddy (No 2) [2007] EWHC 2999 (Ch), [2008] BCC 390, ChD, at [243]. Re Legal Costs Negotiators Ltd [1999] 2 BCLC 171, CA; Hawkes v Cuddy (No 2) [2007] EWHC 2999 (Ch), [2008] BCC 390, ChD, at [244]. Grace v Biagioli [2005] EWCA Civ 1222, [2006] 2 BCLC 70, CA, at [73], [74].

336

Wide discretion 10.6

to the dividend to which Mr Grace was undoubtedly entitled, nor to what is said to be the overwhelming likelihood that similar acts of prejudice will be suffered in the future.’ 10.5 Inherent in all these possible remedies is that the court’s order should be fair. The width of the discretion means that it has to be carefully controlled to prevent it from becoming a means of oppression in itself.25 A proper application of this wide discretion should result in a remedy proportionate to the unfair prejudice found.26 The exercise of jurisdiction under section 996 is not a punishment for bad behaviour.27 A contemplated buy-out order may not ensue where the unfair prejudice is relatively modest28 and a less drastic measure can be devised.29 Fairness extends to all possible facets underpinning the order to be made and includes (to single out a few): the date chosen for the valuation of shares;30 a respondent’s financial position;31 the interests of others, particularly creditors;32 an order for the purchase of the minority’s shares at an intermediate figure involving a smaller discount, the possibility existing that there may be cases in which neither a pro rata valuation nor a minority shareholding valuation is fair;33 and the appointment of a valuer.34 Where no appropriate remedy is apparent, the court is entitled to refuse to make an order where it is unable to devise relief which would constitute an appropriate remedy, or where some other course of action seems preferable.35 10.6 The wideness of the section 996 discretion may go as far as to include third parties in orders made in terms thereof.36 Joinder of a third party will be a necessity if such third party’s rights are affected by an order. The test was put as follows in F & C Alternative Investments (Holdings) Ltd v Barthelemy and another (No 2):37 ‘What is the relevant test of attribution of responsibility beyond the narrow class of case where an agency relationship exists? In my judgment, the test is whether the defendant in a section 994 claim is so connected to the unfairly prejudicial conduct in question that it would be just, in the context of the statutory regime contained in sections 994 to 996, to grant a remedy against that defendant in relation to that conduct. The standard of justice to be applied reflects the requirements of fair commercial dealing inherent in the statutory regime. This is to state the test at a high level of abstraction. In practice, everything will depend upon the facts of a particular case and the court’s assessment whether what was done involved 25 26 27 28 29 30 31

32 33 34 35 36 37

Re a Company (No 005685 of 1988), ex p Schwarcz (No 2) [1989] BCLC 427, ChD. Hawkes v Cuddy (No 2) [2007] EWHC 2999 (Ch), [2008] BCC 390 at [246]. At [246]. At [246]; see also Re Regional Airports Ltd [1999] 2 BCLC 30, ChD, at 82f–83c. Hawkes v Cuddy (No 2) [2007] EWHC 2999 (Ch), [2008] BCC 390, ChD, at [290]. Re Cumana Ltd [1986] BCLC 430, CA. Re Cumana Ltd [1986] BCLC 430, CA, at 444a; Allmark v Burnham [2005] EWHC 2717 (Ch), [2006] 2 BCLC 437, ChD; Re Phoenix Office Supplies Ltd [2002] EWHC 591 (Ch), [2002] 2 BCLC 556, ChD, at [121], [122] – an aspect which was rendered academic by the Court of Appeal’s upholding of the appeal on the basis that the petitioner was not entitled to insist on the full undiscounted value of his shareholding ([2002] EWCA Civ 1740, [2003] 1 BCLC 76, CA). Re Neath Rugby Ltd (No 2) [2009] EWCA Civ 291, [2009] 2 BCLC 427, CA, at [84]. Richards v Lundy [2000] 1 BCLC 376, ChD, at 398d–398f. Bilkus v King [2003] EWHC 2516 (Ch). Antoniades v Wong [1997] 2 BCLC 419, CA. Re Little Olympian Each-Ways Ltd (No 3) [1995] 1 BCLC 636, ChD. [2012] 3 WLR 10, ChD, at [1096]; applied in Re TPD Investments Ltd [2017] EWHC 657 (Ch) at [148]; see also [159]–[161].

337

10.7  Setting Right Unfair Prejudice: Section 996 remedies

unfairness in which the relevant defendant was sufficiently implicated to warrant relief being granted against him.’ Instead of granting permission under section 996(2)(c) to proceed with a derivative action, relief of a derivative nature was granted against the directors of a defendant company where a member of the company (who also happened to be a creditor) brought unfair prejudice proceedings against it.38 In Lowe v Fahey,39 where the unfairly prejudicial conduct involved the diversion of company funds, it was held that a petitioner was entitled to seek an order for payment to the company itself; not only against members, former members, or directors allegedly involved in the unlawful diversion, but also against third parties who had knowingly received or improperly assisted in the wrongful diversion. However, the fact that a claimant could always commence by an unfair prejudice petition rather than a derivative action must not be seen as a licence to claimants in proceedings where the only substantive relief being sought is a claim on behalf of the company against such a third party. In conflict with their fiduciary duties owed to a company, two of the directors of a company had acquired a property in the name of another company controlled by them.40 In an unfair prejudice petition against the aberrant directors, the court ordered another company to retransfer the property which was unlawfully diverted to it. 10.7 In Re Chime Corp Ltd,41 it was held that relief in unfair prejudice proceedings, in the form of permission to proceed with a derivative action against the company, should only be granted when it is clear at the pleading stage that a determination of the amount of the director’s liability to the company could conveniently be dealt with in the hearing of the petition. It is also required that the order to be made corresponds with the order which the company would have been entitled to, had the allegation in question been successfully prosecuted in an action by the company or a derivative action in the name of the company. The shortcut is permitted because it would be both wasteful and inefficient if a separate derivative claim was required. 10.8 In Clark v Cutland,42 the petitioner and C  were equal shareholders and the only directors of a company. Without authority to do so, C took cash from the company and paid it into his personal pension fund. The payments were without legal effect and not merely voidable. C clearly acted in breach of his fiduciary duty to the company. The company was entitled to trace the payments made to the pension fund. The petitioner commenced a derivative action on behalf of the company against the trustees of the pension fund to recover the misappropriated moneys, and simultaneously brought unfair prejudice proceedings against C. The two proceedings were later consolidated. There was no particular reasoning regarding the propriety or otherwise of unfair prejudice proceedings, yet the order was made as if in unfair prejudice proceedings,43 permitting the tracing of the payments by the company to a

38 39 40

41 42 43

Gamlestaden Fastigheter AB v Baltic Partners Ltd [2007] UKPC 26, [2007] 4 All ER 164, PC. See also the discussion at 9.31. [1996] 1 BCLC 262, ChD. Bhullar v Bhullar [2003] EWCA Civ 424, [2003] 2 BCLC 241, CA (Schiemann, Brooke and Jonathan Parker LJJ). See also for its application FHR European Ventures LLP v Mankarious [2013] EWCA Civ 17, [2014] Ch 1, CA, at [47], [86]; Pennyfeathers Ltd v Pennyfeathers Property Co Ltd [2013] EWHC 3530 (Ch) at [59]–[63]. (2004) 7 HKCFA 546. [2003] EWCA Civ 810, [2004] 1 WLR 783, CA. Compare Anderson v Hogg 2002 SC 190, CSOH. Ie in current circumstances, by applying s 996(2)(c).

338

Prayers and orders for relief 10.10

third party.44 The petitioner was put to the problem of recovering his costs incurred in the petition from the company.45

PRAYERS AND ORDERS FOR RELIEF Prayers 10.9 Despite the wide discretion afforded to courts under section 996, it does not relieve a petitioner from explicitly stating the relief sought so as to leave the court in no doubt as to what the petitioner wants it to do. However, the prayer is not required to be as detailed as the court would require on the drawing up of the order.46 This approach does not deprive the court of its power to grant relief which a petitioner has neither sought, nor agreed to.47 The suggestion in Bhullar v Bhullar,48 that a court will not award relief which shareholders do not seek and do not agree to, was found to lie ‘uneasily with the proposition that the court has a discretion as to what relief should be granted’.49 The correct position appears to be that ‘[t]he all-but-universal inclusion in the prayer of petitions of “that such other order may be made as the court thinks fit” itself means that the discretion of the court as to the relief to be granted is unfettered by the petition’.50

Orders 10.10 It is self-evident that there cannot be a closed number of orders, or prescribed content of such orders, due to the infinite variety of sets of facts.51 It is nevertheless instructive to explore the possibilities offered by reported orders varying between uncomplicated buy-outs at the one end of the spectrum and, at the other end, very detailed and lengthy orders going so far as overruling and amending the company’s articles.52 An order will attempt to achieve a clean break and not to be prescriptive by making undertakings and cross-undertakings orders of court.53 Even in solvent circumstances, and in accordance with the ‘clean break’ principle, it will be advisable that an order should provide for the outgoing shareholder’s loan account to be repaid.54

44

Clarke v Cutland [2003] EWCA Civ 810, [2004] 1 WLR 783, CA, at [8], endorsed the approach adopted by the court of first instance. 45 At [35]. 46 Re Antigen Laboratories [1951] 1 All ER 110 (Note) (Ch). 47 Re Neath Rugby Ltd (No 2) [2009] EWCA Civ 291, [2009] 2 BCLC 427, CA, at [88]–[91], although it was a point rendered academic by the consent order: see [85]. 48 Bhullar v Bhullar (unreported 2002 WL 1654842, 10 May 2002), ChD, at [289], a point not affected on appeal ([2003] EWCA Civ 424, [2003] 2 BCLC 241, CA). 49 Re Neath Rugby Ltd (No 2) [2009] EWCA Civ 291, [2009] 2 BCLC 427, CA, at [88]. 50 Re Neath Rugby Ltd (No 2) [2009] EWCA Civ 291, [2009] 2 BCLC 427, CA, at [90]; Fulham Football Club (1987) Ltd v Richards [2011] EWCA Civ 855, [2012] Ch 333, CA, at [46]–[48]. 51 Cf Re BC&G Care Homes Ltd [2015] EWHC 1518 (Ch), [2016] BCC 615, ChD, at [143]. 52 For an example of which, see Re Neath Rugby Ltd (No 2) [2009] EWCA Civ 291, [2009] 2 BCLC 427, CA, at 470d–472b. A similar comprehensive order ensued in a South African judgment: McMillan NO v Pott 2011(1) SA 511 (WCC). 53 Re Elgindata Ltd [1991] BCLC 959, ChD, at 1005f–1005i. 54 Re Haden Bill Electrical Ltd [1995] 2 BCLC 280, ChD.

339

10.11  Setting Right Unfair Prejudice: Section 996 remedies

Within the realm of possible orders in buy-out situations are: a sale on receipt of sealed bids; a successive options formula; or entrusting the sale of the company to a third party.55 Orders for interim payments are permissible.56 10.11 Where a director had diverted cash assets of the company for his credit into a pension fund, typical proprietary orders were made as follows: an order declaring that the company was entitled to a charge over the assets of the aberrant director’s pension entitlement to secure the diverted sum together with interest thereon; an order that, pursuant to such charge, that sum is thereby set off against the sum of £100,000 owed by the company to the trustees of the director’s pension fund, with interest thereon; an order that the balance of the moneys secured by the charge shall stand charged on the cash reserves of the pension fund until payment was made in full; and orders regarding payment of the amount due.57 Where shareholders funded a company on becoming members thereof by making loans, and the company failed as a result of unfairly prejudicial conduct on the part of one of them, the latter was ordered – jointly and severally with the company – to repay the loan which the company was unable to do because of its financial situation.58 In addition, orders were made for the wrongdoer to indemnify the petitioner in respect of the company’s liability under guarantees to the bank, and for him to take all lawful and reasonable steps within his power to procure the petitioner’s prompt release from liability under guarantees. In the same vein, a court ordered the transfer of shares of the defendant shareholder to the petitioner, conditional on the payment by the petitioner of moneys advanced by the defendant to the company, which were not otherwise recoverable by the defendant from the company.59 The remedy of an injunction may also be appropriate to prevent unfairly prejudicial conduct, such as ordering the company to refrain from holding an extraordinary general meeting and to refrain from passing a resolution for the petitioner’s removal as director.60 10.12 Where an offer was reasonably rejected by the petitioner, for the very reason that it did not mention or take into account matters such as the under-declaration of profits or unpaid dividends, an order was made that his uncle should purchase his shares at 50 per cent of the value of the company. He was also entitled to receive his full share of the dividends of the company from 1999 on the basis of the accounts, plus an increase of 15 per cent to take account of the fact that the profits were systematically under-declared.61

55 56 57 58

59 60 61

Re Cumana Ltd [1986] BCLC 430, CA, at 444g–445b. Re Stratos Club Ltd [2021] EWHC 1008 (Ch), [2021] 2 WLUK 461. However, it may be subject to conditions: Ferguson v Mclennan Salmon Co Ltd [1990] BCC 702. Clark v Cutland [2003] EWCA Civ 810, [2004] 1 WLR 783, CA, at [34]. See also Hedgehog Golf Company Limited [2010] EWHC 390 (Ch) at [81]–[87]. Re Woven Rugs Ltd [2010] EWHC 230 (Ch) at [177]; Allmark v Burnham [2005] EWHC 2717 (Ch), [2006] 2 BCLC 437, ChD, at [106]–[108]; see also Re a Company (No 00789 of 1987), ex p Shooter (No 2) [1991] BCLC 267, ChD; Re Ghyll Beck Driving Range Ltd [1993] BCLC 1126, ChD, at 1137i–1138a. Re a Company (No 00789 of 1987), ex p Shooter (No 2) [1991] BCLC 267, ChD, at 287f–287g. Re Whyte Petitioner (1984) BCC 99044, CSOH. Rahman v Malik [2008] EWHC 959 (Ch), [2008] 2 BCLC 403, ChD, at [118], [119].

340

Prayers and orders for relief 10.13

A corollary of an order providing for the purchase of the shares of any member by the company itself (and, obviously, not by another shareholder) will require an order reducing the company’s capital accordingly.62 Where an administrative receiver had been appointed, it was held that a buy-out order was inappropriate. To do so would have imposed a fine on the purchasers, because there was no longer anything of value for them to purchase.63 An order for the buy-out of shares, which had become worthless by the time the order was made, was considered not to be a penalty on the purchaser, but rather a form of damages.64 The appointment of a receiver was deemed appropriate where a majority shareholder had unfairly blocked the sale of a minority shareholding to a third party to sell the shares upon non-compliance by the majority shareholder to buy the minority’s share.65 It was also deemed appropriate to appoint receivers to effect payment of a substantial judgment debt by way of equitable execution over certain assets belonging to the first and second respondents.66

Escape clauses 10.13 The notion of ‘escape clauses’ arises in circumstances where it is uncertain whether the party who was ordered to purchase the shares of another will be in a financial position to actually perform in full. The order allows for an alternative solution if, despite the purchaser’s best endeavours, it is subsequently established that it is unable to raise the money to complete the purchase at the price fixed.67 There is not much enthusiasm for this kind of order. It has been described as ‘wrong on principle’.68 The court is deciding the amount of compensation which the wrongdoing member should pay to the member whose interests were unfairly prejudiced by his conduct: ‘The fact that a wrongdoer is impecunious is no reason why judgment should not be given against him for the amount of compensation due to his victim. What Mr Lewis should do to get money out of Mr Bolton, claiming, as he still does, that he is impecunious, is a matter for him to decide, not the court’.69 It also appears to be an impractical solution:70

62 63

64 65 66 67 68 69 70

Section 996(2)(e) of the 2006 Act. It will be effected by utilising the mechanisms provided for by ss 998 and 999. Re Hailey Group Ltd [1993] BCLC 459, ChD; contrast Re Via Servis Ltd [2014] EWHC 3069 (Ch) at [78]–[79] where the court was not convinced that the refusal in Hailey to make a share purchase order in circumstances of insolvency was appropriate and continued to make precisely such an order in similar circumstances – at [83]. Re Woven Rugs Ltd [2010] EWHC 230 (Ch) at [175]; compare Atlasview Ltd v Brightview Ltd [2004] EWHC 1056 (Ch), [2004] 2 BCLC 191, ChD, at [4]. This may have tax implications – see Chapter 15 on the taxation of damages. Otello Corp ASA v Moore Frères and Co LLC [2020] EWHC 3261 (Ch), [2020] 11 WLUK 469, at [314]–[321]. VB Football Assets v Blackpool Football Club (Properties) Ltd (formerly Segesta Ltd) [2019] EWHC 530 (Ch), [2019] BCC 896. Re Cumana Ltd [1986] BCLC 430, CA, at 436i–437a. Re Cumana Ltd [1986] BCLC 430, CA, per Lawton LJ at 437a. At 436i–437a; see also Sethi v Patel [2010] EWHC 1830 (Ch), [2011] 1 BCLC 277, ChD, at [36]; Re Regional Airports Ltd [1999] 2 BCLC 30, ChD, at 82f–83c; Re Ghyll Beck Driving Range Ltd [1993] BCLC 1126, ChD, at 1134b–1134e. Re Cumana Ltd [1986] BCLC 430, CA, at 444i–445b.

341

10.14  Setting Right Unfair Prejudice: Section 996 remedies

‘Nor do I  think that the judge erred in not including an “escape clause” in the purchase order. I  confess that for some time during the argument I  found this submission attractive, but, in the end, I  am satisfied that the difficulties in formulating and implementing an appropriate escape clause are such as to make this proposal impracticable and unsatisfactory. In order to give Mr Lewis reasonable protection, an escape clause which effectively reduced the price which Mr Bolton had to pay if he could show that after a fixed period and through no fault of his own he was unable to sell the shares, would need to provide for matters such as Mr Bolton making substantial interim payments, limiting the remuneration which he could draw from Cumana and, perhaps, confining Mr Bolton’s business activities in some respects. Not surprisingly, counsel for Mr Bolton did not seek an escape clause along these lines.’ In Re Regional Airports Ltd,71 the problem was overcome by granting leave to the parties to return to court for further or ancillary relief in the event of a default occurring.

Demerger 10.14 A demerger was suggested as appropriate relief in Hawkes v Cuddy (No 2).72 It amounted to a redistribution of assets among the companies involved, disentangling the warring directors and permitting joint control over the assets. The court concluded that, although such an order is probably theoretically possible under an unfair prejudice petition, it is one that should rarely be made. In general, a court should not compel a company to distribute its assets in specie to its members.73 The court should also not be put in a position: where it has to make commercial judgments; where it runs the risk of being reliant on commercial or political negotiations; or where it has to make contingent or alternative orders subject to the outcome of commercial or political negotiations.74

THE REMEDIES PROVIDED BY SECTION 996 Section 996(2)(e): buy-out75 10.15 Since it is the most prevalent form of relief, buy-outs are dealt with first, with the remedies contained in other subparagraphs of section 996(2) to follow at 10.44–10.47. As a general rule, a buy-out will usually only be ordered on the exclusion of a member from the management of a quasi-partnership type company as a result of unfairly prejudicial conduct towards it by the de facto controllers of the company.76 The existence of a prior reasonable offer will cancel out unfairly prejudicial conduct77 and will, as a consequence, not require an order under section 996. It may constitute an abuse of 71 [1999] 2 BCLC 30, ChD, at 83c. 72 [2007] EWHC 2999 (Ch), [2008] BCC 390 (Ch) at [248]. 73 At [250]. 74 At [249], relying on Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672. 75 For the various tax implications of the sale or acquisition of shares, see Chapter 15. 76 See 9.149–9.162. 77 See the discussions at 9.160–9.162.

342

The remedies provided by section 996 10.17

the process of court to pursue the petition if, after the commencement of section 994 proceedings, the respondent had made a reasonable offer to purchase the petitioner’s shares, or sold his shares in the company. It will inevitably lead to a dismissal of the petition. Such a situation was not resolved on a striking-out application (where the matter is adjudicated on the basis of the allegations made, not the evidence), because many factors determining the reasonableness of the offer would only come to light at the hearing78 (where the court will be in a position to evaluate the evidence). 10.16 In Grace v Biagioli,79 the Court of Appeal considered that the judge in the court of first instance took too narrow an approach in finding that the petitioner’s conduct justified the rejection of a buy-out order, even if that order would otherwise have been an appropriate remedy for conduct amounting to unfair prejudice on the part of the respondents.80 The general principle enunciated in O’Neill v Phillips81 was: ‘… not directed to the case where fault amounting to unfair prejudice was found to exist on the part of the respondents. He was concerned only to exclude the possibility of a buy-out order being made simply because the parties found it difficult to co-exist, although nothing amounting to unfair prejudice could be made out.’82 In addition, the fact that the petitioner was not an active manager in the business was not a reason for refusing to make a buy-out order.83 Issues of buying out shares are likely to arise only in the context of non-quoted and (usually) quasi-partnership companies. In the case of quoted companies, shareholders are not locked in by any prohibition, or qualification, or procedure for the sale of their shares (unless so limited by a group of shareholders who elected to arrange their affairs amongst themselves). The shares trade on the open market and their value is reflected in the traded price from time to time throughout the day and, usually, on the basis of closing prices if values have to be determined retrospectively. Moreover, expulsion constituting unfairly prejudicial conduct is hard to envisage happening in a quoted or public company context, where the attributes of quasi-partnership are patently absent.84

‘Clean break’ principle 10.17 The purpose of a buy-out order is to ensure a clean break between the warring factions,85 so as to enable the company to proceed with business without being affected by the disputes between its membership and management; or, as it was put in O’Neill v Phillips:86 ‘The objective should be economy and expedition, even if this carries the possibility of a rough edge for one side or the other (and both parties in this respect take the same risk) compared with a more elaborate procedure’. To achieve a clean break, a judge’s ‘imaginative solution to the difficult problem 78 Apcar v Aftab [2003] BCC 510, ChD. 79 [2005] EWCA Civ 1222, [2006] 2 BCLC 70, CA. 80 At [85]. 81 [1999] 1 WLR 1092, HL. 82 At [77]. 83 At [84]. 84 For the nature of quasi-partnership companies, see 9.131–9.145. 85 Bilkus v King [2003] EWHC 2516 (Ch) at [25], [29]; Grace v Biagioli [2005] EWCA Civ 1222, [2006] 2 BCLC 70, CA, at [75]; Re Elgindata Ltd [1991] BCLC 959, ChD, at 1005i. 86 [1999] 1 WLR 1092, HL, per Lord Hoffmann at 1107G.

343

10.18  Setting Right Unfair Prejudice: Section 996 remedies

of remedy facing him was well within the broad scope of the statutory discretion afforded to him …’87

Majority ordered to sell to minority 10.18 The usual order made, when buy-outs are involved, provides for the wrongdoing majority to buy out the prejudiced minority. It is highly exceptional if the converse is ordered.88 In 1989, Hoffmann J could not conceive of a situation in which it could occur:89 ‘I think it must be very unusual for the court to order a majority shareholder actively concerned in the management of the company to sell his shares to a minority shareholder when he is willing and able to buy out the minority shareholder at a fair price. I am not going to exercise my imagination to suggest circumstances in which this might happen, but I am quite sure this is not such a case.’ However, a few instances of such orders have surfaced over time. In Re Brenfield Squash Racquets Club Ltd,90 FMR held the majority holding in the company. Three directors of the company were also directors of FMR. The directors had failed to draw a proper distinction between the affairs of the company and the affairs of FMR: not only had they caused the company to grant FMR’s bank security over the company’s assets without there being any possible benefit to the company, but they also entered into other arrangements that could have had the effect of transferring to FMR assets that rightfully belonged to the company. It was held that the affairs of the company had been conducted in a manner that was unfairly prejudicial to the interests of the petitioners. The court ordered FMR, despite being a majority shareholder, to sell its shares to the petitioners. A  similar order ensued in Oak Investment Partners XII  Ltd Partnership v Boughtwood,91 where the majority shareholder committed gross breaches of duty.

Bases of valuations 10.19 Any attempt to define rigid rules or guidelines regarding the method of valuation of shares upon an order to buy out, should be exercised with caution under circumstances where, as is the case under section 996, the court is given a wide discretion to make appropriate orders. The discretion is not limited to orders putting right the injustices of the past or to avoid such injustices in the future, but extends to the assessment of the price payable when a buy-out is ordered92 to ensure a just and equitable resolution of the dispute between all the parties.93 In instances 87 88 89 90 91

92 93

Thomas v Dawson [2015] EWCA Civ 706, [2015] BCC 603, CA, at [37]. In that case an option to acquire the respondent’s share at a specified price was given effect to. Re a Company (No 00836 of 1995) [1996] 2 BCLC 192, ChD, at 205f. Re a Company (No 006834 of 1988) [1989] BCLC 365, ChD, at 367g–367f. [1996] 2 BCLC 184, ChD. [2009] EWHC 176 (Ch), [2009] 1 BCLC 453, ChD. The appeal against the buy-out order was dismissed: [2010] EWCA Civ 23, [2010] 2 BCLC 459, CA. See also, for a similar order, Re Jermyn Street Turkish Baths Ltd [1970] 1 WLR 1194, ChD, but reversed on appeal ([1971] WLR 1042, CA). Re Bird Precision Bellows Ltd [1986] Ch 658, CA, at 669D–669F. At 672F–672H.

344

The remedies provided by section 996 10.20

where a company’s majority shareholder had issued a compulsory transfer notice in relation to shares held by its former directors, and the articles of association provide for the determination of fair value, it was held that the correct procedure for determining the fair value of those shares was that contained in the articles of association, notwithstanding that the articles defined fair value by reference to a separate agreement.94 Any purported principled stance on the subject will always have to yield to the particular facts of a case. The absence of absolute or rigid rules is evident from Richards v Lundy95 where different possible scenarios were mooted: on the extreme side, the possibility that exclusion from the company without an offer to purchase the shares might be fair; in other cases, an offer to purchase the shares at the market price for a minority holding, ie usually at a very substantial discount, may be fair;96 and, lastly, there may be cases where neither a pro rata valuation nor a minority shareholding valuation is fair, and fairness is found in some middle ground involving a smaller discount than usual. 10.20 It is not wrong to depart from a point of view that all shares in a private company have the same value. But the adoption of assumptions may prove perilous. It was argued in Cosmetic Warriors Ltd v Gerrie97 that in construing the articles in that matter ‘English law starts with a presumption in favour of a construction which puts a value on the shareholding which it would have in the real world, ie a value which takes into account its status as a minority shareholding, over a construction which puts an artificial value on it based solely on the value of the company as a whole’. The proposition was roundly rejected98 in the following terms:99 ‘… I do not think it is right to start with any presumption one way or the other. Particularly in the case of a private company with few members, where the relationship between the key shareholders may well be one of quasi-partnership, it is far from obvious that valuation of the shares to be transferred as a block, rather than on a pro rata basis, would accord with business common sense. The parties may well have intended that the valuation should reflect the value of the selling member’s proportional stake in the business as a whole, regardless of the size of his shareholding. The circumstances in which a member may wish, or be compelled, to transfer some or all of his shares are likely to vary enormously, and whatever basis of valuation is prescribed the result may (depending on the precise circumstances in which the question arises) appear to prejudice one side or the other. In the end, there is in my judgment no substitute for looking at the language which the parties have actually used, in accordance with the principles of construction which are common ground, in order to ascertain what they objectively intended. As the cases show, the issue is one which frequently arises and is often difficult to answer, but the guidance which the authorities can give is limited because ultimately everything turns on the wording of the articles in question.’ 94 95 96 97 98 99

Lord v Maven Wealth Group Ltd [2021] EWHC 2544 (Comm), [2021] 9 WLUK 273. [2000] 1 BCLC 376, ChD, at 398d–398f, per Nicholas Strauss QC (sitting as a Deputy Judge of the High Court). With reference to Re Bird Precision Bellows Ltd [1984] Ch 419 at 430 (affirmed on appeal [1986] Ch 658, CA). [2017] EWCA Civ 324 at [38]. At [42]. At [43].

345

10.21  Setting Right Unfair Prejudice: Section 996 remedies

A  common sense approach is commendable. It found application in a different yet practical formulation, namely the principle of reality:100 when undertaking a complicated valuation it would behove the valuer to step back at the end and assess the complexities against reality before coming to a final conclusion. A minority shareholding may be worth significantly less pro rata than the net value of the company as a whole due to its unattractiveness for investors in an open market. The size of a shareholding affects the measure of control that a shareholder may exert and hence the shares’ value. On a receding scale: a shareholder with a holding of 90% or more can force the purchase of the remaining minorities;101 holders of 75% or more shares can pass special resolutions;102 more than a 50% holding can pass ordinary resolutions;103 a holder of 25% or more can block special resolutions; whilst holdings of 10% or more can block a sale.104 As a matter of logic, a majority shareholding will be worth more per share than a minority shareholding. However, a minute shareholding of 2%, where there are two other shareholders holding 49% each, creates a powerful position of control in its choice which of the shareholders to support to attain an ordinary majority and this should be reflected in its value. Different classes of shares may attract different valuations. In essence, there are three bases on which a minority holding of shares in an unlisted company can be valued: the undiscounted or non-discounted basis; the discounted basis; and the break-up or liquidation value.105 10.21 The grounds for distinguishing between the undiscounted and the discounted basis, have largely become moot by virtue of the analysis of the position in Re Blue Index Ltd106 and Re Addbins Ltd.107 In Blue Index the court considered that it was faced with a conflict of authority:108 on the one hand those judgments holding that the general principle is that, apart from quasi-partnership cases, a minority shareholding is to be valued ‘as it is’ with a discount;109 and on the other that the discount is appropriate only in special circumstances and that the general rule was one of ‘no discount’ regardless of whether it was a quasi-partnership case.110 The court held:111 ‘It may be objected, as it was argued unsuccessfully before the Court of Appeal in Re Bird Precision Bellows [1986] Ch 658, that this ignores the reality that the shareholding to be purchased is a minority shareholding. But that argument was 100 Chilukuri v RP Explorer Master Fund [2013] EWCA Civ 1307 at [59]; and met with approval in Gallium Funds Solutions Group Ltd [2021] EWHC 765 (Ch). 101 Section 979 of the 2006 Act. For a discussion, see 7.54–7.55. 102 Section 283 of the 2006 Act; and see 3.15. 103 Section 282 of the 2006 Act. 104 See 7.56–7.62. 105 CVC/Opportunity Equity Partners Ltd v Demarco Almeida [2010] EWCA Civ 23, [2002] 2 BCLC 108, PC, at [37]. 106 [2014] EWHC 2680 (Ch). 107 [2015] EWHC 3161 (Ch). 108 At [35], [36]. 109 As propounded in Irvine v Irvine (No 2) [2006] EWHC 583 (Ch), [2007] 1 BCLC 445, ChD; Fowler v Gruber [2010] 1 BCLC 563, CSOH; Strahan v Wilcock [2006] EWCA Civ 13, [2006] 2 BCLC 555, CA and CVC/Opportunity Equity Partners Ltd v Demarco Almeida [2002] UKPC 16, [2002] 2 BCLC 108, PC, at [41]. 110 As contended for in O’Neill v Phillips [1999] 1 WLR 1092, HL, particularly at 1107D–E; and on the correct understanding of Re Bird Precision Bellows Ltd [1986] Ch 658, CA. 111 At [26].

346

The remedies provided by section 996 10.22

rejected. And it is in my view a fallacious one, since the whole purpose of the unfair prejudice remedy is to grant the oppressed minority a remedy which it would not otherwise have. It would substantially defeat the purpose of the new remedy if the oppressing majority were routinely rewarded by the application of a discount for a minority shareholding.’ This position in law was adopted in Addbins,112 however, adding the qualification that it comprises a general, not an absolute rule. Fairness, and no adherence to fixed rules should prevail:113 ‘“Fair value” is the general principle to be applied when the court exercises its wide discretion to put right and cure unfair prejudice. There is a presumption that shares will be purchased on a non-discounted basis in the context of quasipartnerships. Whilst in principle the presumption is rebuttable, that would be unusual. However, in Re Edwardian Group Ltd [2018] EWHC 1715 (Ch), [2019] 1 BCLC 171) Mr Justice Fancourt drew attention to the cases “not speak[ing] with one voice” on this point in non-quasi-partnership cases. His analysis concluded that there are no fixed rules precisely because the basis of valuation depends upon what is fair in all the circumstances. As he observed, the remedy is to be proportionate to the unfair prejudice suffered.’ This qualification should properly be accounted for when considering the next two sections.

The undiscounted basis 10.22

As explained in 10.21, the general rule is one of ‘no discount’.

The undiscounted basis involves the determination of a rateable proportion of the total value of a company as a going concern, without any discount for the fact that the holding in question is a minority holding. It was generally regarded that this approach would typically be applicable in quasi-partnership company set-ups: a minority shareholding valuation should be treated on the discounted basis ‘… unless there is some good reason to attribute to it a pro rata share of the overall value of the company. Short of a quasi-partnership or some other exceptional circumstance, there is no reason to accord to it a quality which it lacks’.114 There is a long line of cases where this basic point of departure was applied.115 However, the application of a discount to a minority interest will now be the exception. 112 At [89]. In a subsequent hearing it was determined that the shares had no financial value and no compensation could follow: Ashdown v Griffin [2018] EWCA Civ 1793, [2018] 7 WLUK 697. 113 Re Gallium Funds Solutions Group Ltd [2021] EWHC 765 (Ch) at [71]. See also [72]–[74] for a general discussion of valuation under s 996. See further the comprehensive analyses provided in Re Edwardian Group Ltd [2018] EWHC 1715 (Ch), [2019] 1 BCLC 171, at [637]–[653]. 114 Per Blackburne J in Irvine v Irvine (No 2) [2006] EWHC 583 (Ch), [2007] 1 BCLC 445, ChD, at [11]. This approach was not followed in Re Blue Index [2014] EWHC 2680 (Ch) and Re Addbins Ltd [2015] EWHC 3161 (Ch), discussed above at 10.21. 115 Re Annacott Holdings Ltd [2011] EWHC 3180 (Ch) at [21]; Croly v Good [2010] EWHC 1 (Ch), [2010] 2 BCLC 569, ChD, at [102]; Strahan v Wilcock [2006] EWCA Civ 13, [2006] 2 BCLC 555, CA, at [17]; Bilkus v King [2003] EWHC 2516 (Ch) at [33]; Richards v Lundy [2000] 1 BCLC 376, ChD; Brownlow v G H Marshall Ltd [2000] 2 BCLC 655, ChD, at [75]; Re London School of Electronics Ltd [1986] Ch 211 at 225D; Quinlan v Essex Hinge Co Ltd [1996] 2 BCLC 417, ChD; Re Haden Bill Electrical Ltd [1995] 2 BCLC 280, ChD; Re a Company (No 00709 of 1992) (O’Neill v Phillips) [1997] 2 BCLC 739, CA.

347

10.23  Setting Right Unfair Prejudice: Section 996 remedies

In Re Bird Precision Bellows Ltd,116 Nourse J (at first instance) held that there is a general rule in a case where the company is, at the material time, a quasi-partnership and the purchase order is made in respect of the shares of a quasi-partner.117 He provided the following exposition:118 ‘I would expect that in a majority of cases where purchase orders are made under section [996] in relation to quasi-partnerships the vendor is unwilling in the sense that the sale has been forced upon him. Usually he will be a minority shareholder whose interests have been unfairly prejudiced by the manner in which the affairs of the company have been conducted by the majority. On the assumption that the unfair prejudice has made it no longer tolerable for him to retain his interest in the company, a sale of his shares will invariably be his only practical way out short of a winding up. In that kind of case it seems to me that it would not merely not be fair, but most unfair, that he should be bought out on the fictional basis applicable to a free election to sell his shares in accordance with the company’s articles of association, or indeed on any other basis which involved a discounted price.119 In my judgment the correct course would be to fix the price pro rata according to the value of the shares as a whole and without any discount, as being the only fair method of compensating an unwilling vendor of the equivalent of a partnership share. Equally, if the order provided, as it did in In re Jermyn Street Turkish Baths Ltd [1970] 1 WLR 1194, for the purchase of the shares of the delinquent majority, it would not merely not be fair, but most unfair, that they should receive a price which involved an element of premium.’ 10.23 Despite acceptance of the basic premise that the undiscounted basis is usually appropriate in a quasi-partnership context,120 the court in Re Sunrise Radio Ltd drew attention to the fact that Nourse J did not say anything about an investor paying an undiscounted price on becoming a shareholder or providing risk capital on the same terms as all the other shareholders (including the majority).121 Hence, previous examples from the decided cases should not be applied ‘mechanistically’, but a consistency of approach should be sought, a feat very much achieved by the judgments discussed in 10.21. However, it should be noted that it was debated in Otello Corp ASA v Moore Frères and Co LLC122 that a certain dichotomy was detected between the approach to determining fair value in Strahan, Irvine, and Booth, on the one hand, and Re Blue Index and Re Addbins, on the other. No firm conclusion was drawn, because the court 116 [1984] Ch 419; confirmed on appeal: [1986] Ch 658, CA. This judgment is the cornerstone for the reasoning in Re Blue Index [2014] EWHC 2680 (Ch); see further 10.21. 117 At 431F. 118 At 430D–430F. 119 In Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [298], it was said of this phrase that it ‘reflects the unreality of treating the aggrieved minority as a willing seller, a point that, though expressed in the context of quasi-partnerships, has potential application outside that context in an appropriate case’. 120 Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [290]. The line of reasoning at [289]–[308] differs from, but nevertheless supports the reasoning in Re Blue Index at [37]. In Re CF Booth Ltd [2017] EWHC 457 (Ch) (decided on 14 March 2017) the court applied discount to a minority shareholder, having considered Re Sunrise Radio but with no reference to either Re Blue Index (decided on 29 July 2014) or Addbins (decided on 3 November 2015) which presumably were not cited – see Re CF Booth at [138]–[154]. 121 At [299]. 122 [2020] EWHC 3261 (Ch), [2020] 11 WLUK 46, at [253].

348

The remedies provided by section 996 10.24

was satisfied with the approach adopted in Edwardian Group (at [642] and [648])123 which allowed it at [254] to conclude ‘That is not necessarily a binary choice between applying a minority discount to the valuation and not applying a minority discount to the valuation. Any basis of valuation selected must be fair in all the circumstances’. The debate illustrates that there is no single right or wrong approach, but an approach suitable to the facts of a particular case. We are fortified in holding this view by the judgment by the Court of Appeal in Re Sprintroom Ltd124 where it was held that the judge was perfectly entitled to follow Re Blue Index. 10.24 The Privy Council rejected the proposition that the value of the petitioner’s shares should reflect the remedy available to him if no offer had been made:125 ‘44.  … Its attraction lies in the popular notion that the value of an asset depends on what a willing purchaser would be prepared to pay for it, and that it has no value if no one is willing to buy it. In cases such as the present the respondents are normally unwilling purchasers. They do not want to buy the petitioner’s shares and would not make him an offer at all were it not for their concern to have the proceedings aborted. 45.  Where the court has power to order the respondents to purchase the petitioner’s shares, the flaw in the proposition that the value of his shares is measured by the remedy is readily apparent. The price at which the respondents ought to offer to buy the petitioner’s shares in order to have the proceedings struck out if he refuses to accept it and the price which the court will order them to pay if the petition is successful cannot be measured in terms of each other without producing a circularity. The concept of a fair price assumes that the shares have an objective value by which the fairness of the offer can be assessed.’ The proposition is equally unsound when winding up is the only available remedy:126 ‘… In the first place, it assumes that the fair value of the shares is to be measured by their value to the petitioner and that their value to the respondents is to be ignored. The amount which the petitioner would obtain in respect of his shares on a winding up represents the least that they can be worth to him, but it does not represent their fair value as between the parties. In the second place, the fairness of the offer should be judged by reference to what will happen if it is accepted, not if it is refused.’ 123 [648] reads: ‘What I have to determine is a basis for a fair price for JS (or the Company) to pay HS and Estera for their shares, in circumstances where a share purchase is appropriate and necessary to relieve HS/Estera against unfair prejudicial conduct that they have suffered as shareholders. That question is not, in my judgment, a simple choice between a pro rata share of the Company’s overall value and the market value of the shares. Those are, as it were, the two extremes of price that could be ordered to be paid, but between them there are various possibilities for specifying a basis of valuation that results in a fair price as between these minority shareholders and the Respondents against whom relief is granted. I do not read Arden LJ’s obiter dictum as implying that market value is the only alternative in cases where a non-discounted valuation is inappropriate.’ 124 [2019] EWCA Civ 932, [2019] BCC 1031 stating at [92] that ‘the normal order in cases such as the present is for purchase without discount.’ 125 CVC/Opportunity Equity Partners Ltd v Demarco Almeida [2002] UKPC 16, [2002] 2 BCLC 108, PC, at [44], [45]; compare Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [304]; affirmed on appeal ([2013] EWCA Civ 667, [2014] 1 BCLC 427, CA). 126 CVC/Opportunity Equity Partners Ltd v Demarco Almeida [2002] UKPC 16, [2002] 2 BCLC 108, PC, at [46]; see also Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [304]; affirmed on appeal ([2013] EWCA Civ 667, [2014] 1 BCLC 427, CA).

349

10.25  Setting Right Unfair Prejudice: Section 996 remedies

The Privy Council concluded by finding that the company’s offer to purchase the shareholder’s shares, at a valuation based on the company’s break-up or liquidation value, fell short of a fair offer,127 on the basis that:128 ‘In the case of a quasi-partnership company the corporate structure represents the legal medium by which a business is carried on as a joint venture. The petitioner’s interest in the joint venture cannot be determined by a sale of his shareholding to his co-venturers unless the price reflects his share in the underlying business. The subject-matter of the notional sale which forms the basis of valuation is, therefore, not the petitioner’s minority holding but the entire share capital of the company.’ 10.25 The precariousness of adherence to ostensible firm rules is illustrated by the views expressed in passing by the Court of Appeal in Strahan v Wilcock129 to the effect that it was difficult to conceive of circumstances in which a non-discounted basis of valuation would have been appropriate where a quasi-partnership relationship did not exist. Just such a circumstance arose in Re Sunrise Radio Ltd,130 where HH Judge Purle QC ordered the application of an undiscounted valuation in the absence of the existence of a quasi-partnership. 10.26 Outside the typical quasi-partnership situations, the observations in CVC/ Opportunity Equity Partners are also apposite to other situations, since it may be necessary to avoid unjust enrichment to either vendor or purchaser:131 ‘… the value of the shares in the hands of the respondents to a petition may be a very material factor, for the respondents may be unjustly enriched by the acquisition of shares at a discount where the acquisition has been triggered by their wrongful conduct, especially if there is reason to suspect or believe that their conduct, or some material part of it, may have been influenced by a desire to buy out or worsen the position (for example, by dilution) of the minority. Unjust enrichment is not limited to cases of quasi-partnerships. Moreover, the courts in England do not labour under any difficulty in making the most suitable order to suit the facts of the particular case before it. The court must do what is fair.’ Under the particular circumstances prevalent in Re Sunrise Radio,132 the petitioner was held to be entitled to the undiscounted method of valuation of her shares, primarily because she could not reasonably have been considered as someone who had elected to remain an investor.133

The discounted basis 10.27 A  valuation on the discounted basis would ordinarily occur where the shareholder was merely an investor. The stark reality for investors, other than minority shareholders in quasi-partnership companies who were subject to unfairly prejudicial 127 CVC/Opportunity Equity Partners Ltd v Demarco Almeida [2002] UKPC 16, [2002] 2 BCLC 108, PC, at [49]. 128 At [48]. 129 [2006] EWCA Civ 13, [2006] 2 BCLC 555, CA, at [17] (Mummery, Arden and Richards LJJ). 130 [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD. 131 Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [305]; see also [283]. Affirmed on appeal ([2013] EWCA Civ 667, [2014] 1 BCLC 427, CA) on limited issues of valuation. 132 Summarised at [308]. 133 See [306].

350

The remedies provided by section 996 10.29

conduct and lost managerial positions as a result, is that the prejudice suffered by them is not sufficiently unfair to entitle them to demand compensation on the undiscounted basis, which would place a very onerous burden on the other shareholders.134 However, any possible view of a uniform approach to the applicability of valuations on the discounted basis is turned on its head by the possible exception thereto which immediately presents itself: what is the solution if the exclusion of a member within a quasi-partnership context was justified and that member ought to have severed the relationship with the company voluntarily, or if a buy-out had to be ordered on the basis that neither of the parties admitted to fault on their side? Nourse J held that, under those circumstances, the fair basis of valuation was that no discount should have been provided for, unless the respondents have established that the petitioners acted in such a way as to deserve their exclusion from the company.135 The weight of subsequent higher authority appears to adopt the position that a member who has not been dismissed or excluded cannot demand that his shares be purchased simply because he has lost trust and confidence in the other shareholders.136 10.28 In Re Phoenix Office Supplies Ltd,137 the Court of Appeal held that the predecessor of section 996 did not provide a member of a quasi-partnership company, who wished voluntarily to sever his connection with the company for personal reasons, with the means of forcing the other members to purchase his shareholding at its full undiscounted value when he has had no contractual right to do so. By the company’s articles, the directors had an absolute discretion to refuse the registration of a share and there was no provision for put options or the right of pre-emption. Therefore, without some equitable entitlement (established through section 994 or winding up), the value of the shares was what the holder could get for them,138 ie on the discounted basis.139 10.29 Turning to the position of an investor, the rule is, pure and simple, that no general rules apply:140 ‘Next, I must consider the example from the second category of cases in which, broadly speaking, shares in a small private company are acquired. It is not of direct relevance for present purposes, but I mention it briefly in order finally to refute the suggestion that there is any rule of universal application to questions of this kind. In the case of the shareholder who acquires shares from another at a price which is discounted because they represent a minority it is to my mind selfevident that there cannot be any universal or even a general rule that he should be bought out under section [996] on a more favourable basis, even in a case where his predecessor has been a quasi-partner in a quasi-partnership. He might himself have acquired the shares purely for investment and played no part in the 134 135 136 137 138 139

Re Metropolis Motorcycles Ltd [2006] EWHC 364 (Ch), [2007] 1 BCLC 520, ChD, at [89], [90]. Re Bird Precision Bellows Ltd [1984] Ch 419, at 431B; 431F–431G; 435H. O’Neill v Phillips [1999] 1 WLR 1092, HL, at 1104C–1105B. [2002] EWCA Civ 1740, [2003] 1 BCLC 76, CA. At [33]–[34]. Recognising that there is no formula or fixed basis on which discounts are to be calculated, as a rule of thumb: a 75% shareholding may be valued at 75% of the company’s value as a whole; a 20% discount will apply to a 55% shareholding; a 49% shareholding may be valued at approximately 20% of the company as whole, ie a discount of about 60%; and a 25% shareholding may be valued at approximately 5% of the company as a whole, with a resultant discount of approximately 80%. 140 Re Bird Precision Bellows Ltd [1984] Ch 419, at 431D–431F; and see Cosmetic Warriors Ltd v Gerrie [2017] EWCA Civ 324 at [42]–[43].

351

10.30  Setting Right Unfair Prejudice: Section 996 remedies

affairs of the company. In that event it might well be fair – I do not know – that he should be bought out on the same basis as he himself had bought, even though his interests had been unfairly prejudiced in the meantime. A fortiori, there could be no universal or even a general rule in a case where the company had never been a quasi-partnership in the first place. In summary, there is in my judgment no rule of universal application.’ In Re Sunrise Radio Ltd141 it was held that, where there is no quasi-partnership relationship, there cannot be a rule of universal application excluding an undiscounted valuation in such a case either.142 As noted above, some subsequent authorities indicate that an undiscounted valuation will be the starting presumption.143 10.30 Preference shareholders can expect to be treated as investors and hence should ordinarily not be able to hold out for anything better than a discounted valuation.144 In many instances, ordinary shareholders who were investors only should be treated in the same manner.145 But it must be emphasised that the position is flexible and such a presumption should not be rigidly applied. Shares in a company, which had lost its quasi-partnership character, were valued on the discounted basis and not on a full pro rata basis, to prevent the petitioner from receiving a benefit he was not entitled to.146 This was particularly the case where the investor was responsible for converting the quasi-partnership character of the relationship into a pure transactional, business-like relationship.147 It illustrates the flexibility inherent in such determinations, which are always fact-specific. The company was valued on an earnings basis, using earnings before interest, tax, depreciation and amortisation; and then a discount of 40 per cent was applied to reflect the fact that the petitioner had held a minority shareholding.148

Break-up or liquidation value 10.31 The third valuation type is the break-up or liquidation value, ie a rateable proportion of the net assets of the company at its break-up or liquidation. That implies a value after deduction of the costs of winding up, which will obviously diminish the value of the shares compared to a valuation on a ‘going concern’ basis.149 It would be somewhat cynical to employ this method if the purchaser intended to continue to carry on the business of the company as a going concern. He would be unjustifiably 141 [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [297]. 142 See further the discussion at 10.21. 143 See 10.21. 144 Oak Investment Partners XII, Limited Partnership v Boughtwood [2010] EWCA Civ 23, [2010] 2 BCLC 459, CA; Re Planet Organic Ltd [2000] 1 BCLC 366, ChD (discount 30%). 145 Re a Company (No 005134 of 1986), ex p Harries [1989] BCLC 383, ChD; Re London School of Electronics [1986] Ch 211 at 224G–224H; Re McCarthy Surfacing Ltd [2008] EWHC 2279 (Ch), [2009] 1 BCLC 622, ChD, at [92]; Re Elgindata Ltd [1991] BCLC 959, ChD, at 1007g–1007i; Irvine v Irvine (No 2) [2006] EWHC 583 (Ch), [2007] 1 BCLC 445, ChD. 146 Fowler v Gruber [2010] 1 BCLC 563, CSOH, at [186]. 147 Re McCarthy Surfacing Ltd [2008] EWHC 2279 (Ch), [2009] 1 BCLC 622, ChD, at [99]. Allowance was nevertheless made for some compensation accruing to the petitioners by virtue of the loss of opportunity to have had dividends declared (see [101]); Re a Company (No 005134 of 1986), ex p Harries [1989] BCLC 383, ChD, at 399a–399c, disavowed Nourse J’s ‘general rule’ as stated in London School of Electronics referred to in n 145. However, it is submitted that Nourse J’s general rule appears to be the preferred point of departure. 148 Fowler v Gruber [2010] 1 BCLC 563, CSOH, at [187]–[188]. 149 See Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [303].

352

The remedies provided by section 996 10.32

enriched in the process:150 the vendor would have received the notionally calculated diminished share value whilst, in reality, the company would have continued operations without the notional burden of winding-up costs. An application to strike out a petition on the basis that the petitioner acted unreasonably by not accepting a valuation undertaken in terms provided for in the company’s articles, but instead persisting with a winding-up petition, was dismissed on the ground that there was the risk that an accountant, in carrying out such a valuation, might have valued the petitioner’s shares at a discount because he was a minority shareholder and there was nothing unreasonable for him in refusing to accept this risk. In a winding up, the liquidator would be in a better position than a valuer to determine the value and to ensure that the price paid was similar to that paid to another shareholder for a similar stake.151 In circumstances where the articles expressly provided for the valuation of shares on the basis of a liquidation preference, the court could not ignore those provisions when the actual valuation was undertaken. Allowing for discretion to direct that the liquidation preference should not be applied, it was not exercised in the shareholder’s favour since it was the wrongdoer and should not have benefited from it.152 10.32 The facts in CVC/Opportunity Equity Partners Ltd v Demarco Almeida153 justified an approach to a valuation that ignored a break-up and ignored any discount that might otherwise have applied for marketability. Moreover, if the value of the seller’s shares was discounted for lack of marketability, the purchaser’s shares would have had to be discounted as well, which would have resulted in the ‘absurd’ situation of 100 per cent of the shares being worth less than the net value of the company as a whole.154 The starting point is the value of the company as a whole, so that the value of the shares in this instance was one half of the value of the company as a whole. In a situation where a valuation of a company’s business (and not of the company itself or a single share) disclosed that the company was indeed balance sheet insolvent but commercially solvent, an appeal against an order for buy-out placing a value of £55,000 on the shares, was dismissed.155 The valuation did not purport to value either the company or the petitioner’s share but left it for the judge to decide how to identify a fair price to be paid, taking such assistance from the expert valuation as he thought fit.156 The valuation evidence was submitted for the assistance of the court but did not fetter its broad discretion157 and the remedy arrived at by the judge would achieve a clean break if the petitioner exercised the option.158 150 CVC/Opportunity Equity Partners Ltd v Demarco Almeida [2002] UKPC 16, [2002] 2 BCLC 108, PC, at [38]. The liquidation costs which would reduce the net asset value will, of course, not have to be incurred on this scenario. 151 Virdi v Abbey Leisure Ltd; Re Abbey Leisure Ltd [1990] BCLC 342, CA. 152 Oak Investment Partners XII, Limited Partnership v Boughtwood [2010] EWCA Civ 23, [2010] 2 BCLC 459, CA, at [129]–[131]. 153 [2002] UKPC 16, [2002] 2 BCLC 108, PC. 154 Re Annacott Holdings Ltd [2012] EWHC 1662 (Ch). On appeal [2013] EWCA Civ 119, [2013] 2 BCLC 46, CA, at [25]–[26]) it was held that the court ought to have ordered that there should be a deduction for the costs of selling the properties to reflect the fact that ‘C’ could never have realised any value from the properties without paying those costs. 155 Thomas v Dawson [2015] EWCA Civ 706, [2015] BCC 603, CA. 156 At [26]. 157 At [25]. 158 At [36].

353

10.33  Setting Right Unfair Prejudice: Section 996 remedies

The valuation process 10.33 Three scenarios present themselves: (a) provisions in a company’s constitution may prescribe a fixed formula for determining share values for buy-out purposes which, by its application, removes any potential dispute other than those which may arise in applying the formula; (b) a third party, usually an accountant, is appointed to determine the share value on a basis where there is agreement that his valuation will be final; or (c) where, absent agreement as to finality of the determination, the valuation is contested or the necessary consensus cannot be arrived at by the shareholders, with resultant disputes which will have to be resolved by a court or in arbitration, often aided by forensic accountants as expert witnesses. At the best of times, the valuation of shares in a private company as a going concern being sold on the open market may present a difficult task,159 largely because a position in the abstract must be postulated.160 Much will depend on the nature of the business, its assets and the valuation method applied. A  common sense approach is nevertheless commendable by applying the principle of reality.161 The particular context in buy-out situations is that: ‘… when arriving at a “fair value” in the absence of a market it is necessary to assume that the notional sale is taking place between the actual participants in the transaction, since the whole purpose of the valuation is to be fair as between the parties. There is no market to provide an objective external criterion. The actual parties must be taken to participate in the sale as willing participants.’162 In most instances, each of the warring parties and/or the company would have – by the nature of things – appointed accountants, either to make a bid for the purchase of shares, or to consider the reasonableness of an offer. Assuming that the terms on which an accountant is prepared to undertake a valuation are reasonable and consistent with the rights and obligations of the shareholders under the articles, the implication of a term requiring them to co-operate in the valuation process, by accepting the appointment on those terms, was an obvious and necessary means of giving effect to the contract.163 If that valuation system breaks down, the court has the power to undertake the valuation where the available machinery was not mandatory.164 10.34 If the need arises in the course of section 994 proceedings, to have a valuation undertaken, it should be undertaken by an independent valuer.165 This may, in some instances, be the company’s external accountant, despite any misgivings the minority may have that the accountant may be biased in favour of the company and the majority shareholders who are likely to remain as clients once the minority 159 Re Planet Organic Ltd [2000] 1 BCLC 366, ChD, at 372b. Shares in a football club cannot be properly valued by the application of customary valuation techniques: see Re a Company (No 00789 of 1987), ex p Shooter (No 2) [1990] BCLC 384, ChD. 160 This is not a novel proposition: courts are frequently required to make assessments of damages on the same basis, with or without the assistance of experts. 161 Chilukuri v RP Explorer Master Fund [2013] EWCA Civ 1307 at [59]. 162 Parkinson v Eurofinance Group Ltd [2001] 1 BCLC 720, ChD, at [98]; see also Re Natural Duvet & Pillow Co Ltd v Ng [2011] EWHC 1834 (Ch) (affirmed by the Court of Appeal [2012] EWCA Civ 333). 163 Cream Holdings Ltd v Davenport [2011] EWCA Civ 1287, [2012] 1 BCLC 365, CA. 164 Cream Holdings Ltd v Davenport [2011] EWCA Civ 1287, [2012] 1 BCLC 365, CA. 165 Bilkus v King [2003] EWHC 2516 (Ch) at [18].

354

The remedies provided by section 996 10.35

shareholder has been bought out.166 A  joint appointment is preferable.167 It may very well be that the court will be satisfied with the valuation of only one valuer. If the parties cannot agree on the identity of a valuer, or accept the appointment by a professional body as determined by the chairman of such a body, a system of nominations may be devised whereby the respective parties make nominations, each with a veto in respect of the other’s list, and for the court to make an appointment from the remaining names on the lists.168 The appointment of a single expert was revoked and substituted with another when it appeared that the costs of the first appointee would be disproportionate to the value of the shares.169 A new valuer can be appointed by the court if an appointed one fails to perform his duties.170 It will be inappropriate for a court, faced with two conflicting expert valuations prepared by competent valuers, to strike out a section 994 petition.171 Fair value is a matter for determination at the trial, when the conflicts can be resolved by crossexamination. Experts must follow instructions carefully in making recalculations: an expert instructed by the court as part of a settlement to value company shares using all of the records and documents in the company’s control, including handwritten takings, had breached the terms of his mandate by failing to consider the contents of the handwritten takings. His valuation was therefore set aside.172 But the terms of reference have to be interpreted to determine the ambit and scope of a mandate given to an expert valuer.173 The principles applicable to challenging expert valuations are beyond the scope of this book but are based on the construction of the contract under which the expert was appointed to act. It is by construing the contract for the valuer’s appointment that the matters that were referred for his determination, the meaning and effect of any special instructions and the extent to which his decisions on questions of law or mixed fact and law were intended to bind the parties can be established. If the expert valuer departed from those instructions his valuation will be liable to be set aside.174 10.35 There are numerous valuation methods available (depending on the circumstances). It is a specialist field falling outside the ambit of this book. At best we can offer some guidance regarding such methods that have found their way into law reports. They include:175

166 North Holdings Ltd v Southern Tropics Ltd [1999] 2 BCLC 625, CA, at 639h. Minority shareholders may, rightly or wrongly, fear that the accountant will favour the majority (who will remain in control) and with whom the accountant will continue to do business. 167 Re Flex Associates Ltd [2009] EWHC 3690 (Ch) at [90]. 168 See eg Bilkus v King [2003] EWHC 2516 (Ch) at [19]–[22]. 169 Kranidiotes v Paschali [2001] EWCA Civ 357, [2003] BCC 353, CA. 170 Re Minrealm Ltd [2012] EWHC 343 (Ch). 171 Guinness Peat Group plc v British Land Co plc [1999] 2 BCLC 243, CA. 172 See Begum v Hossain [2015] EWCA Civ 717. 173 Premier Telecommunications Group Ltd v Webb [2014] EWCA Civ 994, [2016] BCC 439, CA. 174 See eg Veba Oil Supply and Trading GmbH v Petrotrade Inc [2001] EWCA Civ 1832, [2002] 1 Lloyd’s Rep 295. 175 Other acceptable methods are based on multiples of post-tax profits using an applicable price/ earnings ratio; dividend yield; and the so-called enterprise valuation based on either earnings before interest and tax, or earnings before interest, tax, depreciation and amortisation. For the earnings basis, see Re Natural Duvet & Pillow Co Ltd v Ng [2011] EWHC 1834 (Ch).

355

10.36  Setting Right Unfair Prejudice: Section 996 remedies

(a) a ‘going concern’ basis;176 (b) the adding of net assets to goodwill, represented by one year’s purchase of its gross profit (ie sales less cost of sales) and, in the case of the subsidiary, three times its retained profits after certain adjustments;177 (c) net asset value178 or the gross dividend yield valuation;179 (d) activities-based discounted cash-flow calculations.180 A valuation based on an estimated future income stream was generally preferable to one based on net realisable assets, but uncertainties in the income position of a business may mean that an assets value is preferable.181 The frequency of reported matters, regarding disputes between shareholders of football clubs, justifies consideration of the peculiar valuations applicable thereto.182 A court should avoid a two-stage valuation process.183 Where an order for the purchase of a minority shareholder’s shares provided for a determination of the market value of the company’s share capital, in arriving at that value, the company’s net borrowings as at the valuation date had to be taken into account.184 Whether that is appropriate in a particular case is a commercial matter and depends on the particular facts.185

Adjustments to valuation ordered by court 10.36 Courts are not mindless recipients of opinions provided to them by valuers. The valuation has to fit into the factual matrix of the matter at hand and must be fair to all concerned. Valuations may have to take heed of directions given by the court for the very purpose of achieving fairness. Numerous situations accordingly arise where the courts give such directions. They include: • • • •

adjustments for overpayment of rent by the company;186 claims adjusting loan accounts;187 assuming the recoverability of loan accounts in full;188 an acceptance that misappropriated funds already form part of the aberrant shareholder’s loan account,189 or, where it is not yet so reflected, that regard should be had to excess remuneration drawn by the wrongdoer shareholder;190

176 Parkinson v Eurofinance Group Ltd [2001] 1 BCLC 720, ChD, at [99], [100], but see for a contrasting approach Dawson v Bell [2016] EWCA Civ 96, [2016] 2 BCLC 59, CA, at [109]. 177 Richards v Lundy [2000] 1 BCLC 376, ChD, at 398h–398i. 178 See Shah v Shah [2011] EWHC 1902 (Ch) for the valuation of a property-owning company. Surplus assets which are not required as working capital are to be added to the value arrived at on an earnings basis: Re Scitec Group Ltd [2012] EWHC 661 (Ch). 179 Re Macro (Ipswich) Ltd [1994] 2 BCLC 354, ChD, at 409e; 409g–410b. 180 Re Regional Airports Ltd [1999] 2 BCLC 30, ChD. 181 Platt v Platt [1999] 2 BCLC 745, ChD, not affected on partial reversal on appeal ([2001] 1 BCLC 698, CA). 182 Re a Company (No 00789 of 1987), ex p Shooter (No 2) [1991] BCLC 267, ChD, at 282g–283f. 183 Bilkus v King [2003] EWHC 2516 (Ch). 184 Wann v Birkinshaw [2017] EWCA Civ 84 at [41], [44]. 185 At [41]. 186 Sethi v Patel [2010] EWHC 1830 (Ch), [2011] 1 BCLC 277, ChD, at [48]. 187 At [56], [70]. 188 Croly v Good [2010] EWHC 1 (Ch), [2010] 2 BCLC 569, ChD, at [118]. 189 At [120]. 190 Irvine v Irvine (No 1) [2006] EWHC 406 (Ch), [2007] 1 BCLC 349, ChD, at [356]–[358].

356

The remedies provided by section 996 10.37

• • • • •

adjustments to set right costs paid by the company on behalf of a shareholder in the course of section 994 proceedings which it should not have done;191 adjustments necessary to reflect the difference in interest paid on loans;192 the proportions in which the control premium should be split;193 an adjustment to the value of the company to take account of a financial loss suffered;194 and, lastly, as an example of the fact-specific problem at hand, attention should be drawn to the great variety of adjustments proposed in Re Sunrise Radio Ltd195 and the findings on appeal which required a re-assessment of the amount due.196

Date of determination 10.37 As one of the important components in arriving at a fair order for the buy-out of shares, it follows that the wide discretion given to courts includes the determination of the actual or presumed date on which the shares are to be bought, with the customary qualification that the discretion must be exercised judicially and on rational principles.197 Therefore, what may appear as a general rule will always be dependent on the facts of the particular case to ensure that the order is fair.198 In Re London School of Electronics Ltd,199 Nourse J  postulated, as a basic point of departure, that a going concern should be valued at the date on which it was ordered to be purchased.200 The date on which the actual valuation takes place201 would be more appropriate than the date of the presentation of the petition or the occurrence of the unfair prejudice.202 Nourse J  added: ‘But whatever the general rule might be it seems very probable that the overriding requirement that the valuation should be fair on the facts of the particular case would, by exceptions, reduce it to no rule at all’.203 Nourse J  proceeded to list instances where other dates were found to have been justified:204

191 192 193 194 195 196 197

Re Elgindata Ltd [1991] BCLC 959, ChD, at 1008b–1008d. Re Ghyll Beck Driving Range Ltd [1993] BCLC 1126, ChD, at 1138a. Re Macro (Ipswich) Ltd [1994] 2 BCLC 354, ChD, at 410e–410f. Richards v Lundy [2000] 1 BCLC 376, ChD, at 400g. [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [199]–[206], [309]. [2013] EWCA Civ 667, [2014] 1 BCLC 427, CA. Profinance Trust SA v Gladstone [2001] EWCA Civ 1031, [2002] 1 WLR 1024, CA, at [19]. See further Re Edwardian Group Ltd [2018] EWHC 1715 (Ch), [2018] 7 WLUK 97, at [632]. 198 Re London School of Electronics Ltd [1986] Ch 211 at 224A–224B; Profinance Trust SA v Gladstone [2001] EWCA Civ 1031, [2002] 1 WLR 1024, CA, at [33]. 199 [1986] Ch 211 at 224A–224C. 200 Also favoured under the prevailing circumstances in Re a Company (No 005134 of 1986), ex p Harries [1989] BCLC 383, ChD; Re Elgindata Ltd [1991] BCLC 959, ChD, at 1006g–1007a; Re Ghyll Beck Driving Range Ltd [1993] BCLC 1126, ChD, at 1134b–1134f; Croly v Good [2010] EWHC 1 (Ch), [2010] 2 BCLC 569, ChD, at [105]; Richards v Lundy [2000] 1 BCLC 376, ChD, at 398g; Bilkus v King [2003] EWHC 2516 (Ch) at [29]–[33]. 201 The most up-to-date valuation date was preferred in Re Regional Airports Ltd [1999] 2 BCLC 30, ChD, at 83g–83i. 202 Compare Re Annacott Holdings Ltd [2011] EWHC 3180 (Ch). 203 Re London School of Electronics Ltd [1986] Ch 211 at 224A–224B. 204 At 224C–224G.

357

10.38  Setting Right Unfair Prejudice: Section 996 remedies

(a)

shares were ordered to be purchased at the value which they would have had at the date of the petition if there had been no oppression;205 (b) assets, undertaking and goodwill of the company had to be valued on an inquiry as at the date of the master’s certificate;206 (c) the shares of a petitioner, who had unreasonably rejected previous fair offers to purchase them, ought to have been valued at the date of the valuation and not at the date when he had been excluded from participation in the affairs of the company, although the applicable date may even be the date of exclusion of the petitioner;207 (d) albeit in the form of a consent order, a valuation was made as at the date of the consent order which provided that the shares should be purchased at such price as the court should thereafter determine.208 Ultimately, on the facts in London School of Electronics, the date of presentation of the petition was determined as the appropriate date for the valuation.209 10.38 The law is conveniently summarised by the Court of Appeal (Schiemann and Robert Walker LJJ, and Lloyd J) in Profinance Trust SA v Gladstone.210 The court accepted that the basic point of departure was the date on which it was ordered that the shares should be purchased,211 and continued:212 ‘61.  The general trend of authority over the last 15 years appears to us to support that as the starting point, while recognising that there are many cases in which fairness (to one side or the other) requires the court to take another date. It would be wrong to try to enumerate all those cases but some of them can be illustrated by the authorities already referred to. (i) Where a company has been deprived of its business, an early valuation date (and compensating adjustments) may be required in fairness to the claimant: see Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324.213 (ii) Where a company has been reconstructed or its business has changed significantly, so that it has a new economic identity, an early valuation date may be required in fairness to one or both parties: see In re OC (Transport) Services Ltd [1984] BCLC 251, and to a lesser degree In re London School of Electronics Ltd [1986] Ch 211. But an improper alteration in the issued share capital, unaccompanied by any change in the business, will not necessarily have that outcome: see In re DR Chemicals Ltd (1988) 5 BCC 39. 205 Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324, HL; see also Re a Company (No 001612 of 1984) (1985) 2 BCC 99453 at 99492–99493, confirmed on appeal in Re Cumana Ltd [1986] BCLC 430, CA. 206 Re Jermyn Street Turkish Baths Ltd [1970] 1 WLR 1194, ChD (not affected by successful appeal on another point – [1971] 1 WLR 1042, CA). 207 Re a Company (No 002567 of 1982) [1983] 1 WLR 927, ChD, at 937D–938B; followed in Re OC (Transport) Services Ltd [1984] BCLC 251, ChD, at 258d. 208 Re Bird Precision Bellows Ltd [1984] Ch 419, approved on appeal ([1986] Ch 658, CA). 209 Re London School of Electronics [1986] Ch 211 at 224H. 210 [2001] EWCA Civ 1031, [2002] 1 WLR 1024, CA. See for its application eg Re CF Booth Ltd [2017] EWHC 457 (Ch) at [119]–[123]; Re Addbins Ltd [2015] EWHC 3161 (Ch). 211 At [60]. See also Re KR Hardy Estates Ltd [2014] EWHC 4001 (Ch), [2016] BCC 367 at [88], [93]. 212 At [61]; see also Re Phoenix Contracts (Leicester) Ltd [2010] EWHC 2375 (Ch) at [149]. 213 And see for a recent application Re Addbins Ltd [2015] EWHC 3161 (Ch) at [82], although on the facts it was held in a subsequent hearing that the shares had no financial value and no compensation could follow: Ashdown v Griffin [2018] EWCA Civ 1793, [2018] 7 WLUK 697.

358

The remedies provided by section 996 10.39

(iii) Where a minority shareholder has a petition on foot and there is a general fall in the market, the court may in fairness to the claimant have the shares valued at an early date, especially if it strongly disapproves of the majority shareholder’s prejudicial conduct: see In re Cumana Ltd [1986] BCLC 430. (iv) But a claimant is not entitled to what the deputy judge called a one-way bet, and the court will not direct an early valuation date simply to give the claimant the most advantageous exit from the company, especially where severe prejudice has not been made out: see In re Elgindata Ltd [1991] BCLC 959. (v) All these points may be heavily influenced by the parties’ conduct in making and accepting or rejecting offers either before or during the course of the proceedings: see In re a Company (No 00709 of 1992) [1999] 1 WLR 1092.’ 10.39 In Re Abbington Hotel Ltd,214 both parties made themselves guilty of reciprocal unfairly prejudicial conduct. It resulted in the parties obtaining a first valuation on 31 July 2007. The order, made on 18 March 2011, determined 31 July 2007 as the appropriate valuation date.215 In Croly v Good,216 an expulsion case, the petitioner sought to use the date of expulsion as the date of the valuation. Since that date, the company’s financial position had deteriorated markedly to such an extent that it had entered insolvency; yet, the other shareholder managed to resurrect another company out of the ashes of the first, and apparently prospered. A number of unsatisfactory aspects surrounding the insolvency217 (suspiciously overlapping a period during which the petitioner was faced with a strongly contested petition for a buy-out order) caused HHJ David Cooke (sitting as a judge of the High Court) to conclude that it gave rise to a ‘very substantial risk that a valuation of Mr Croly’s shares at a date after his expulsion would be seriously unfair to him’.218 Accordingly, the most appropriate valuation date was the date of expulsion.219 A valuation date as at the date of judgment was ordered in Re Sunrise Radio Ltd,220 where it was clear that any earlier date would have caused unjust enrichment to either the vendor or the purchaser.221 The date of valuation was pushed back even further than the date of the petition or the date of expulsion where the harmful conduct arose from the allotment of new shares preceding the date of exclusion. The petitioner’s shares were therefore valued as at the date of the resolution for increasing the company’s capital, since the value of the shares, at that date, would not have been affected by the company’s altered status brought about by the allotment of the newly authorised shares.222

214 215 216 217 218 219

[2011] EWHC 635 (Ch), [2012] 1 BCLC 410, ChD. At [138]–[141]. [2010] EWHC 1 (Ch), [2010] 2 BCLC 569, ChD. See, for a detailed account, [106]–[112]. At [113]. At [117]. See also Re Phoenix Contracts (Leicester) Ltd [2010] EWHC 2375 (Ch) at [150], [154]; Re Foundry Miniatures Ltd [2017] EWHC 889 (Ch); Re Via Servis Ltd [2014] EWHC 3069 (Ch) at [84]–[85]; Cf Re Cabot Global Ltd [2016] EWHC 2287 (Ch). 220 [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [288]. 221 At [283], [287]. 222 Re OC (Transport) Services Ltd [1984] BCLC 251, ChD.

359

10.40  Setting Right Unfair Prejudice: Section 996 remedies

10.40 Another pragmatic approach was adopted in Quinlan v Essex Hinge Co Ltd223 (an expulsion matter). In June 1992, the petitioner was summarily dismissed by the company and thereafter excluded from any participation in its management. In July 1993, the petitioner presented his unfair prejudice petition. After a hearing in May 1996, judgment was given on 17  July 1996. The company had continued to prosper after the petitioner’s departure. The company’s year-end was 31 March. Although, at the date of the hearing, its accounts for the year ending 31 March 1996 must have been close to completion (if not already completed), the most convenient date for valuation was considered to be 31 March 1996.224

Interest 10.41 Can interest be added to a purchase price determined by order of a court in buy-out situations? The answer is provided in Profinance Trust SA v Gladstone,225 where it was held that the onus rests on a petitioner not only to justify a prayer for the payment of interest, but also to substantiate the required rate of interest:226 ‘31.  In our judgment the deputy judge was right in his view that an order for the equivalent of interest is not beyond the powers of the court under section 461(1) of the Companies Act 1985. The court has repeatedly emphasised the width of the discretion conferred by that subsection, which is not limited to the particular powers enumerated in subsection (2). The House of Lords has (in relation to the court’s closely comparable powers under section 210 of the Companies Act 1948) approved the making of adjustments in the valuation process which mean that the court is actually valuing shares, not as they are, but as they would have been if events had followed a different course; and that practice is regularly followed by the court in orders under section 461(1). In these circumstances a denial of the court’s power to award the equivalent of interest would come close to straining at a gnat. 32.  It is however a power which should be exercised with great caution, Miss Newman has rightly drawn attention to the need for lawyers to be able to advise their clients as to the likely range of outcomes of section 459 proceedings, in order to encourage compromise in an area in which litigation can be cripplingly expensive. If a petitioner seeking an order for the purchase of his shares contends (either as his only claim or in the alternative) that they should be valued at a relatively early date but then augmented by the equivalent of interest, he must put forward that claim clearly and persuade the court by evidence that it is the only way, or the best way, to a fair result. It should not be a lastminute afterthought (as it may have been, to some extent, in In re Bird Precision Bellows Ltd [1984] Ch 419 and Elliott v Planet Organic Ltd [2000] BCC 610). Unless a petitioner is asking for no more than simple interest at a normal rate he should also put before the court evidence on which the court can decide what amount (if any) to allow …’

223 [1996] 2 BCLC 417, ChD. 224 At 428a. 225 [2001] EWCA Civ 1031, [2002] 1 WLR 1024, CA. 226 At [31], [32]. See also Bilkus v King [2003] EWHC 2516 (Ch).

360

The remedies provided by section 996 10.43

Re BC&G Care Homes Ltd227 reiterated that the granting of interest is a jurisdiction to be exercised with great caution. The exercise of the discretion is very fact-dependent. In this matter the parties considered that an earlier valuation date was appropriate. The shareholder had not received any return on his investment by way of dividend and had lost employment and the salary that went with it. Since expulsion he had received nothing from the company. These facts warranted an award akin to quasiinterest. On the strength of Profinance Trust, interest was granted in Re Southern Counties Fresh Foods Ltd228 at a rate of 2.5% per annum (simple interest).229 Following from the point of departure that the date of the order was the determinative date for the valuation of the shares, a petitioner sought to have the order for buy-out made effective on the date of his resignation, some three years previously. The interval was attributable to a choice on his part. If he had chosen the date of the order as the applicable date, account could have been taken of the extent to which the remaining shareholder benefited from the company in the petitioner’s absence. Because of the choice he had made, the petitioner was not entitled to interest.230 10.42 In Re Annacott Holdings Ltd,231 the petitioner ought to have disposed of his investment in the company at an earlier stage, but, instead, it suited him to hold onto his investment at the time. Nevertheless, it was considered appropriate to determine the date for valuation as the date immediately prior to the date on which the other shareholder transferred company property to himself, ie at a stage where the company still possessed all its assets. Under these circumstances, HHJ Hodge QC considered it fair that the petitioner should be awarded the equivalent of interest on the amount applicable to the value of his shares, calculated from the date prior to the alienation of the company’s assets.232 In subsequent proceedings,233 the applicable interest rate was determined on an investment/lending basis as opposed to a borrowing basis. The appropriate analogy was the rate which an investor would receive on a substantial long-term investment with no access to the funds. There was no evidence of such a rate but, based on the court’s knowledge and experience, and bearing in mind that base rates were artificially low at the time of the hearing, the appropriate rate was determined to be ‘base + 2 per cent’ through October 2008, and ‘base + 3 per cent’ thereafter. 10.43 In Re Bird Precision Bellows Ltd,234 Nourse J held that petitioners were not entitled, in the absence of agreement, to interest on the purchase price for any period before the purchase price had been determined by order of court. The Court of Appeal confirmed the freedom of determining interest payable from a certain date.235 Where the order determined a buy-out to occur sometime in the future, no interest could run on the purchase price: the vendor remained the owner of the shares whereas the

227 228 229 230 231 232 233

[2015] EWHC 1518 (Ch), [2016] BCC 615 at [143]. [2010] EWHC 3334 (Ch) at [92]–[96]. At [99]. Sethi v Patel [2010] EWHC 1830 (Ch), [2011] 1 BCLC 277, ChD, at [37]–[42]. [2011] EWHC 3180 (Ch). At [14], [21]. Re Annacott Holdings Ltd [2012] EWHC 1662 (Ch). An appeal succeeded partially on a point irrelevant to this issue – [2013] EWCA Civ 119, [2013] 2 BCLC 46, CA. 234 [1984] Ch 419 at 437c–437d. 235 [1986] Ch 658, CA, at 677C–677E; 679D–679F.

361

10.44  Setting Right Unfair Prejudice: Section 996 remedies

purchase price was not due yet, so there was no capital sum on which interest could run.236 To the extent that section 994 proceedings are not aimed at the recovery of a debt or damages (which is not the case in buy-out situations), it appears that a petitioner cannot benefit from the senior court’s power to award interest on debts and damages, as provided for in section 35A of the Senior Courts Act 1981.237

Section 996(2)(a): future conduct 10.44 The purpose of the very wide discretion bestowed on a court to do what it considers fair and equitable is ‘in order to put right and cure for the future the unfair prejudice which the petitioner has suffered at the hands of the other shareholders of the company’.238 The court may, therefore, make orders regulating the conduct of the company’s affairs in the future.239 So, for instance, inordinate delay in convening an extraordinary general meeting justified an unfair prejudice petition, with relief granted by ordering the company to convene the meeting.240 Relief will be granted in respect of any proposed act or omission of the company which affects the affairs of a member in an unfairly prejudicial way.241 In Re Astec (BSR) plc,242 a shareholder’s threat to use his voting power to cause the company to cease paying future dividends (which might or might not have amounted to unfairly prejudicial conduct) came to nought, as he eventually voted in favour of a final dividend.243 On the date of presentation of the petition, there was no act or omission by the company in relation to future dividends which could or would have been unfairly prejudicial to the petitioners. ‘Something more’ was required:244 ‘In my judgment, even assuming that the petitioner’s alleged concerns as to the future are legitimate concerns, the mere existence of those concerns does not provide any basis for an allegation of future unfair prejudice for the purpose of s 459. To found a case under s 459 there must be some proposed act or omission by or on behalf of the company which can arguably be so characterised …’

Section 996(2)(b): injunctive relief 10.45 By section 996(2)(b) of the 2006 Act, a court may order a company to either refrain from carrying out or continuing with an act complained of, or to perform the act it is alleged to have omitted doing. It is thus a mechanism to prevent unfair 236 Re Planet Organic Ltd [2000] 1 BCLC 366, ChD, at 374h–375a. Compare Harrison v Thompson [1993] BCLC 784, CA. 237 Re a Company (No 005134 of 1986) (1989) 5 BCC 39; Re Birds Precision Bellows Ltd [1984] Ch 419; approved at [1986] Ch 658 (CA), at 677 and 679. 238 Re Bird Precision Bellows Ltd [1986] Ch 658, CA, at 669D–669E. 239 Section 996(2)(a) of the 2006 Act. 240 McGuinness v Bremner plc [1988] BCLC 673, ChD, at 675i–676a; see also Re HR Harmer Ltd [1959] 1 WLR 62, CA. 241 See Bermuda Cablevision Ltd v Colica Trust Co Ltd [1998] AC 198, PC, at 212A–212C, although it deals with similar provisions in the comparable Bermudan legislation. 242 [1998] 2 BCLC 556, ChD. 243 At 571a–571c. 244 At 578c.

362

The remedies provided by section 996 10.46

prejudice. Injunctions were granted to order a company to refrain from holding an EGM, as well as passing a resolution regarding the petitioner’s removal as director.245 An injunction was also granted to prevent a company from taking any steps to implement or enforce an amendment to its articles of association.246 It appears to be inevitable that the ordinary principles for granting temporary and final injunctions will apply to found any petition on this ground.247 It flies against company law principles that a company may apply its funds in opposing section 994 proceedings. An injunction is accordingly appropriate to prevent a company from doing so without a tender to repay money so expended.248 A judge had erred in granting interim injunctions placing one member, who had been the driving force in the business and was seeking the winding-up of the companies and partnerships, in control of all of them pending trial.249 An interim injunction was granted preventing property developers from refinancing a development without first paying back a loan from a petitioning company, where there was a seriously arguable case that the developers were conducting business which was unfairly prejudicial to the petitioner where flats had been taken off the market without being sold.250 In UTB LLC v Sheffield United Ltd251 a dispute arose between equal shareholders. The defendant proposed that pending the hearing it and the claimant each make an interest-free loan to the company in order to preserve it as a going concern and so maintain the value of the shares in dispute until trial. When the claimant refused, the defendant applied for an interim order requiring the claimant to grant the company an interest-free loan pending the hearing. The claimant opposed the application: it conceded that the court had power pursuant to CPR r 25.1(1)(c) to grant an interim order for the preservation of relevant property, it did not include shares, being intangible property. The court held that intangible property such as shares could also come within CPR r 25.1(1)(c). In any event the court had retained its broad equitable power to grant appropriate interim relief pending trial. Relief was refused as the balance of convenience favoured the claimant.

Section 996(2)(c): derivative action authorised 10.46 The position pertaining to authorisation of civil proceedings to be brought in the name and on behalf of the company by such person or persons, and on such terms, as the court may direct as permitted by section 996(2)(c) of the 2006 Act, was considered by Lewison J in Iesini v Westrip Holdings Ltd252 in the following terms:253 245 Re Whyte Petitioner (1984) 1 BCC 99044, CSOH. 246 Constable v Executive Connections Ltd [2005] 2 BCLC 638, ChD. 247 For interim injunctions, see American Cyanamid Co v Ethicon Ltd [1975] AC 396, HL, at 407G–409D; for mandatory injunctions, see Morris v Redland Bricks Ltd [1970] AC 652, HL, at 665F–666G. A mandatory injunction was granted in Royal Bank of Scotland Plc v Hicks [2010] EWHC 2568 (Ch), requiring the restoration of the composition of a board of directors. 248 Gott v Hauge [2020] EWHC 1152 (Ch), [2020] 5 WLUK 112, at [16]. 249 Loveridge v Loveridge [2020] EWCA Civ 1104, [2020] 8 WLUK 179. 250 Homes of England Ltd v Horsham Holdings Ltd [2019] EWHC 2429 (Ch), [2019] 7 WLUK 578. 251 [2018] EWHC 1663 (Ch), [2018] 1 WLR 5195. 252 [2009] EWHC 2526 (Ch), [2011] 1 BCLC 498, ChD. 253 See further discussions of this case in Chapter 6.

363

10.47  Setting Right Unfair Prejudice: Section 996 remedies

[82] Accordingly, it seems to me that where the petitioner’s complaint is that the company has failed to assert a good claim against a third party, the court’s powers under s 996 would include the making of an order requiring the company to assert that claim, if necessary by taking or defending proceedings. Since the company’s claim would be a claim against a third party, once the court had decided that a failure to assert that claim had unfairly prejudiced the petitioner, the directors would not need to be parties to the subsequent claim against the third party. In addition, the width of the court’s jurisdiction under s 996 enables the joinder of third parties to the petition itself, at least where relief is claimed against them: Re Little Olympian Each-Ways Ltd [1994] 2  BCLC  420; Lowe v Fahey [1996] 1 BCLC 262.’ In practice, this relief is rarely sought or granted. The main reasons for this are probably that, unlike in the case of a derivative claim brought under ss  260–264 of the 2006 Act,254 there is no provision for a shareholder proceeding by petition to obtain an early order for an indemnity from the company for the costs of the petition proceedings; and that the proceeds of the petition will go to the company rather than the petitioning shareholder. However, a few cases under predecessor provisions have considered the availability and suitability of such relief.255

Section 996(2)(d): alteration of articles 10.47 This subsection provides for an order requiring a company not to make any, or any specified, alterations in its articles without the leave of the court.

IMPLEMENTATION OF COURT’S ORDER 10.48 It follows that any order amending the constitution, or giving leave to do so, will have to be registered as part of the constitution.256

254 See Chapter 6 and 12.5–12.8. 255 See eg Gamlestaden Fastigheter AB v Baltic Partners Ltd [2007] UKPC 26, [2007] 4 All ER 164, PC. See Re Chime Corp Ltd (2004) 7 HKCFAR 546 at 10.7; Lowe v Fahey [1996] 1 BCLC 262, ChD, at 10.6; and Clark v Cutland [2003] EWCA Civ 810, [2004] 1 WLR 783, CA, at 10.8. 256 Sections 998 and 999 of the 2006 Act.

364

Chapter 11

Just and Equitable Winding Up as Remedy Contents Relationship with sections 994 and 996 of the Companies Act 2006 11.1 Nature and scope of the ‘just and equitable’ basis for winding up 11.5 Standing 11.10 General 11.10 Contributories 11.14 Tangible interest 11.24 Resolving disputes about standing 11.27 Availability of alternative remedies: section 125(2) 11.28 Application of section 122(1)(g) illustrated 11.33 Deadlock 11.35 Breakdown of personal relationships: loss of confidence 11.38 Exclusion from management 11.42 Disappearance of substratum 11.44 Poor management 11.48 Circumstances preventing relief under section 122(1)(g) Other bases for contributories’ petitions

11.49 11.50

RELATIONSHIP WITH SECTIONS 994 AND 996 OF THE COMPANIES ACT 2006 11.1 By section 122(1)(g) of the Insolvency Act 1986 (‘the Insolvency Act’), a court may wind up a company if it is of the opinion that it is just and equitable to do so. With fairness as common denominator, the jurisdictional prerequisite of ‘just and equitable’ in section 122(1)(g) is, on the face of it, closely related to the ‘unfairly prejudicial conduct’ required for relief sought by members under sections 994 and 996 of the Companies Act 2006 (‘the 2006 Act’). Although not expressly so stated, relief under section 996 may result in a winding-up order because of the wideness of the jurisdiction of that section, allowing courts to grant orders for appropriate relief in respect of the matters complained of. The common ground is that provisions under the Insolvency Act and the 2006 Act respectively aim to resolve disputes between members of companies whose relationships of trust and confidence (whenever required to be present) have broken down, yet are prevented by the company’s constitution from realising the value of their investment in the company by the sale of their shares.1 1

Fulham Football Club (1987) Ltd v Richards [2012] Ch 333, CA, at [57].

365

11.2  Just and Equitable Winding Up as Remedy

The major distinguishing feature is that the relief for unfairly prejudicial conduct – section 994 read with section 996 – is premised on blameworthy conduct on the part of, usually, the de facto controllers of the company, whereas just and equitable winding up is premised on a set of circumstances, not necessarily involving fault, which makes it impossible to continue a corporate business relationship. In Fulham Football Club (1987) Ltd v Richards,2 Patten LJ explained the link between these provisions with reference to their origin: the unfairly prejudicial conduct jurisdiction developed as an alternative to winding up on the just and equitable ground originally legislated for under section 210 of the Companies Act 1948.3 Section 210 of the Companies Act 1948 evolved into section 122(1)(g) of the Insolvency Act. Provisions for unfairly prejudicial conduct remained within the ensuing Companies Acts, generally providing for more flexible relief than was available under section 210.4 11.2 Determining the dividing line between the respective jurisdictions was somewhat troublesome. In Re Guidezone Ltd,5 Jonathan Parker J  held that the jurisdiction to make a winding-up order on the just and equitable ground under section 122(1)(g) of the Insolvency Act was not wider than the jurisdiction to grant relief under section 459 of the Companies Act 1985 (‘the 1985 Act’). Accordingly, if the conduct by the majority was not unfair for the purposes of section 459, it could not found a case for a winding-up order on the just and equitable ground. That approach has since been definitively refuted in Re Neath Rugby Ltd (No 2):6 facts which were sufficient to justify a winding up on the just and equitable ground were not necessarily sufficient to give the court jurisdiction to make an order under sections 994 and 996 of the 2006 Act. The two jurisdictions are parallel, but not coterminous. A  winding up can be ordered on the just and equitable ground in the absence of allegations of unfair prejudicial conduct.7 It was not only a view supported by the vast majority of case law, but, importantly, ‘Parliament would not have used such different wording in section 994 of the Companies Act 2006 and in section 122(1)(g) of the Insolvency Act if the jurisdictions were intended to be coterminous’.8 Patten LJ dealt with the common features as follows:9 ‘Although Lord Hoffmann described these provisions as parallel jurisdictions, he was keen ([1999] 2 BCLC 1 at 9, [1999] 1 WLR 1092 at 1099)10 to emphasise the limits of their common features:

2 3 4 5 6

7 8 9 10

[2011] EWCA Civ 855, [2012] Ch 333, CA, at [60]. A predecessor of s 994 of the 2006 Act. See also 9.3. [2000] 2 BCLC 321, ChD. [2009] EWCA Civ 291, [2009] 2 BCLC 427, CA; Shah v Shah [2010] EWHC 313 (Ch). See also the criticism of the Guidezone approach in the court below: Hawkes v Cuddy (No 2) [2007] EWHC 2999 (Ch), [2008] BCC 390, ChD, per Lewison J at [229]–[231]; and in Re Southern Counties Fresh Foods Ltd [2008] EWHC 2810 (Ch), per Warren J at [48]. See also Apex Global Management Ltd v FI Call Ltd [2015] EWHC 3269 (Ch), at [55]. Re Neath Rugby Ltd (No 2) [2009] EWCA Civ 291, [2009] 2 BCLC 427, CA, at [104], [105]; Apex Global Management Ltd v FI Call Ltd [2015] EWHC 3269 (Ch), at [55]; Re Paramount Powders (UK) Ltd [2019] EWCA Civ 1644, [2020] BCC 152, at [47]. Re Neath Rugby Ltd (No 2) [2009] EWCA Civ 291, [2009] 2 BCLC 427, CA, at [105]. Fulham Football Club (1987) Ltd v Richards [2011] EWCA Civ 855, [2012] Ch 333, CA, at [60]; see also Re R A Noble & Sons (Clothing) Ltd [1983] BCLC 273, ChD. The reference is to O’Neill v Phillips.

366

Relationship with sections 994 and 996 of the Companies Act 2006 11.3

“I should make it clear that the parallel I have drawn between the notion of ‘just and equitable’ as explained by Lord Wilberforce in In re Westbourne Galleries Ltd and the notion of fairness in s 459 [of the 1985 Act] does not mean that conduct will not be unfair unless it would have justified an order to wind up the company. There was such a requirement in s 210 of the Companies Act 1948 but it was not repeated in s 459. As Mummery J observed in Re a company (No 00314 of 1989), ex p Estate Acquisition and Development Ltd [1991] BCLC 154, [1990] BCC 221, page 161 of the former report the grant of one remedy will not necessarily require proof of conduct which would have justified a different remedy: ‘Under sections 459 to 46111 the court is not … faced with a death sentence decision dependent on establishing just and equitable grounds for such a decision. The court is more in the position of a medical practitioner presented with a patient who is alleged to be suffering from one or more ailments which can be treated by an appropriate remedy applied during the course of the continuing life of the company.’ The parallel is not in the conduct which the court will treat as justifying a particular remedy but in the principles upon which it decides that the conduct is unjust, inequitable or unfair.”’ 11.3 Winding-up petitions should not be regarded as the primary remedy to resolve shareholders’ disputes. It is a last resort and an exceptional remedy.12 Therefore, as a rule of thumb, where possible and appropriate, an unfair prejudice petition should be brought in the first instance, because of the much wider jurisdiction a court will have under section 996 of the 2006 Act to grant appropriate relief to resolve disputes, before resorting to winding up.13 The same flexibility does not exist if the sole ground of resolving shareholder disputes is winding up on the just and equitable basis: it is a distinct risk for a member to approach the court solely on the basis of section 122(1) (g) of the Insolvency Act because, if the winding up petition is struck out, leave to amend the petition to pursue relief in terms of sections 994 and 996 of the 2006 Act may not follow automatically.14 A member who asserts that his interests have been unfairly prejudiced will therefore have to consider carefully the risk of limiting his relief to an application for winding up under section 122(1)(g) only. Situations may, of course, arise which do not warrant relief under section 994 of the 2006 Act at all, but rather only under section 122(1)(g) of the Insolvency Act.15 In Antoniades v Wong16 an appeal against a refusal of relief under an unfair prejudice petition failed. In the court below, Ferris J (whose views were accordingly upheld) had held that, despite the fact that unfairly prejudicial conduct was established, a buy-out order was inappropriate and a winding-up order appropriate. The reasons 11 12

13 14 15 16

Of the 1985 Act. The corresponding sections are ss 994 and 996 of the 2006 Act. Fulham Football Club (1987) Ltd v Richards [2011] EWCA Civ 855, [2012] Ch 333, CA, at [56]; Re a Company (No 004415 of 1996) [1997] 1 BCLC 479, ChD; Hawkes v Cuddy (No 2) [2007] EWHC 2999 (Ch), [2008] BCC 390, ChD, at [247]; CPR Practice Direction 49B, para 1. The Court of Appeal rejected criticism of a trial judge’s statement to this effect in Re Paramount Powders (UK) Ltd [2019] EWCA Civ 1644, [2020] BCC 152, at [29]–[30]. Re a Company (No 001363 of 1988), ex p S-P [1989] BCLC 579, ChD, at 596a. Such leave was, in fact, given on occasion: Re Woven Rugs Ltd [2010] EWHC 230 (Ch) at [2]. Re R A Noble & Sons (Clothing) Ltd [1983] BCLC 273, ChD; Jesner v Jarrad Properties Ltd [1993] BCLC 1032, CSOH. [1997] 2 BCLC 419, CA.

367

11.4  Just and Equitable Winding Up as Remedy

were: the formula for ascertaining the value of the shares would not yield a fair price; the proposed order was not practical since the company’s solvency was in doubt; and, in addition, the company had been dormant for quite some time. It is permissible to resolve issues regarding the underlying dispute first by arbitration, but only the court can make an order for winding up.17 11.4 CPR Practice Direction 49B draws attention to the undesirability of asking, as a matter of course, for a winding-up order as an alternative to an order under section 994 proceedings. Caution should therefore be exercised to include a prayer for winding up only if it is the preferred relief, or considered to be the only relief to which a petitioner is entitled.18 However, unless it is clear that a winding up cannot be ordered on trial, an alternative prayer for such relief under section 994 proceedings should not be struck out.19 In the past, publicity given to an application to wind up a company, in the form of its presentation, may have had devastating effects on the functioning of a company pending finalisation of the proceedings. This was so because of the consequences inherent in section 127(1) of the Insolvency Act: any disposition of the company’s property, and any transfer of shares, or alteration in the status of the company’s members, made after the commencement of a winding-up petition is void, unless the court otherwise orders. Section 127(1) applies to every case where a petition to wind up is presented, even if sought as alternative relief under section 996 of the 2006 Act. This provision might lead to a freezing of a company’s bank account on the presentation of a petition under section 994, even though there was no alternative claim expressly praying for a winding up, because of the possibility that the court in its discretion could allow an amendment resulting in a winding up. If an order for winding up was granted, it would be deemed to have commenced at the date of the presentation of the petition.20 However, these stumbling blocks may be overcome by a petitioner consenting to the debtor company continuing to operate without the strictures placed on it by section 127(1).21 It has become standard practice for a petitioner, when making his petition, to give such consent expressly.22

NATURE AND SCOPE OF THE ‘JUST AND EQUITABLE’ BASIS FOR WINDING UP 11.5 By section 122(1)(g) of the Insolvency Act, a company may be wound up if the court is of the opinion that it is just and equitable that it should be wound up. Put slightly differently, the question is whether it is fair to wind up the company.23 Fairness, in the company law context, developed from the rules of equity applied in 17 18 19

Fulham Football Club (1987) Ltd v Richards [2011] EWCA Civ 855, [2012] Ch 333, CA. Virdi v Abbey Leisure Ltd; Re Abbey Leisure Ltd [1990] BCLC 342, CA. Re Central Coating Ltd [2004] EWHC 3472 (Ch); Re Copeland and Craddock Ltd [1997] BCC 294, CA. 20 See Re a Company (No 001363 of 1988), ex p S-P [1989] BCLC 579, ChD, at 587a–587b. 21 Re Central Coating Ltd [2004] EWHC 3472 (Ch). 22 Re Copeland v Craddock Ltd [1997] BCC 294, CA, at 299h–300a. It is an understandable pragmatic approach, and one settled in practice. However, it is questionable on what basis legislation can be overruled by consent of an individual shareholder. 23 The necessity for winding-up to be fair to all interested parties was emphasised by the Court of Appeal in Re Paramount Powders Ltd [2019] EWCA Civ 1644, [2020] BCC 152.

368

Nature and scope of the ‘just and equitable’ basis for winding up 11.6

relationships between partners and was transplanted into company law, at least insofar as the relationship between members of so-called ‘quasi-partnership companies’24 goes, ie those companies where the relationship between the corporators is built on mutual trust and confidence. The default position is that there is no obligation on corporators to co-operate with each other once they have become members of a company, save insofar as they are bound to co-operate as a result of a company’s constitution, a shareholders’ agreement,25 or in terms of the applicable Companies Act (the so-called ‘strict legal rules’).26 The strict legal rules ought to be abided by and enforced as in any commercial relationship regulated by agreement. Superimposed on these strict legal rules are the rules of equity, which cater for the special personal relationships between shareholders which come about as a result of agreements or understandings not expressly provided for in the strict legal rules. By allowing equity to regulate relationships, fairness between shareholders can be achieved, which will not be possible by the mere mechanical application of the strict legal rules.27 11.6 The starting point of any discussion on the just and equitable ground for winding up is inevitably Ebrahimi v Westbourne Galleries Ltd,28 not only because of the seminal exposition of the law by Lord Wilberforce,29 but also because of the facts, which are instructive and often replicated in practice. A partnership which had traded for many years converted to a company. The company took over the business. The original partners (E and N) became the shareholders and were the first directors. N’s son, G, became a director. The articles of association provided that the general meeting had the express power to remove a director by ordinary resolution. N and G held the majority shares and concomitant voting power. Profits were distributed as directors’ remuneration. No dividends were ever paid. After disagreement between E on the one hand and N and G on the other, E was removed as director in accordance with the articles. E petitioned under section 210 of the Companies Act 1948 for an order that N and G should purchase his shares in the company or sell their shares to him on such terms as the court should think fit, alternatively for an order for winding up on the just and equitable basis. Having taken into consideration the considerable body of authority in favour of the use of the just and equitable provision,30 Lord Wilberforce continued:31 ‘My Lords, in my opinion these authorities represent a sound and rational development of the law which should be endorsed. The foundation of it all lies in the words “just and equitable” and, if there is any respect in which some of the cases may be open to criticism, it is that the courts may sometimes have been too timorous in giving them full force. The words are a recognition of the fact that 24

The use of this term has often been criticised, but remains the best generic term for those companies where there are close business, family or friendship ties giving rise to a relationship of mutual trust and confidence. 25 A shareholders’ agreement may or may not be part of a company’s constitution: see 3.18. 26 See more particularly 9.73, 9.88–9.90 and 11.8. 27 See 9.74–9.77 and 9.122 onwards. 28 [1973] AC 360, HL. The essential underlying principles have been consistently applied ever since, and recently echoed by the Court of Appeal in Re Paramount Powders (UK) Ltd [2019] EWCA Civ 1644, [2020] BCC 152, at [36]–[37]. 29 For a comprehensive discussion, see 9.74, 9.125 and 9.153. 30 At 378B–378C. 31 At 379B–379D.

369

11.7  Just and Equitable Winding Up as Remedy

a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The “just and equitable” provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.’ 11.7 There is no fixed definition of the circumstances under which those considerations may arise. The superimposition of equitable considerations requires something more. Although not a closed list, one or more or all of the following was held to suffice:32 ‘(i) an association formed or continued on the basis of a personal relationship, involving mutual confidence – this element will often be found where a preexisting partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be “sleeping” members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members’ interest in the company – so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.’ In the instant matter, winding up was the only feasible solution. First, N’s conduct by ignoring E’s status as director, by regarding him simply as an employee, amounted to a repudiation of the relationship of mutual trust and confidence.33 Second, E, through ceasing to be a director, lost his right to share in the profits, retaining only the chance of receiving dividends as a minority shareholder,34 a slim chance indeed, taking into account the dividend history of the company. Third, he was unable to dispose of his shares without the consent of N and G.35 11.8 In O’Neill v Phillips,36 Lord Hoffmann developed the theme. He drew attention to what can be called the formal side of affairs, where the terms of association are covered by a company’s constitution (or, perhaps more correctly, the ‘strict legal rules’).37 Had this been the only basis of regulating the relationship between members, a member would not be able to complain unless there had been a breach of the terms on which he agreed that the affairs of the company should be conducted.38 He considered a second point in these terms:39 32 At 379F–379G. 33 At 381C–381D. 34 At 381D–381E. 35 At 381E–381F. 36 [1999] WLR 1092, HL. 37 See also 11.5. 38 [1999] WLR 1092, HL at 1098G, 1098H. 39 [1999] WLR 1092, HL at 1098G.

370

Nature and scope of the ‘just and equitable’ basis for winding up 11.9

‘secondly, company law has developed seamlessly from the law of partnership, which was treated by equity, like the Roman societas, as a contract of good faith. One of the traditional roles of equity, as a separate jurisdiction, was to restrain the exercise of strict legal rights in certain relationships in which it considered that this would be contrary to good faith. These principles have, with appropriate modification, been carried over into company law.’ He continued to explain that ‘… there will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers’.40 The conclusion is that unfairness may lie not only in the breach of express rules, but also in following the rules in a manner which equity would regard as contrary to good faith. That approach runs ‘parallel’ to the ‘just and equitable’ exposition given by Lord Wilberforce in Ebrahimi.41 Harman J took the view that, in its practical application, it means that ‘… it would be possible for a court to conclude that the directors have so conducted the business of a company as to cause harm to its members in a particular way, which was such that members who did not desire to stay in that company should be entitled to be released, if necessary by a winding up’.42 In Re JE Cade & Son Ltd,43 Warner J drew attention to the principle that there is no ‘third tier of rights and obligations’ which the court may introduce as fair in accordance with its own view of fairness, over and above ‘those rights, expectations and obligations springing from rights and obligations which flow from the agreements or understandings between shareholders’ which in themselves are superimpositions on the written arrangements between members. The strict legal rules are in existence; equitable rules are superimposed on top of them; and there is no room for yet another layer of rules on top of that. The relevant ‘agreements or understandings’ are not arrived at by the directors acting in that capacity as agents on behalf of some of the members, with other members of the company; it must be an understanding between all the members and not between some of the members and the directors where there are other members who are not directors.44 Therefore, despite the strict legal rules, just and equitable rules will come to the aid of an expelled director if he can establish some underlying obligation of his fellow members to allow him to participate in managing the company by applying the equitable principles developed by the courts in partnership cases.45 11.9 As a general rule, a shareholder seeking a winding-up order on the just and equitable ground must be able to establish that the company is solvent and that there will be a surplus remaining for distribution to shareholders (in the form of a winding-

40 41 42

43 44 45

[1999] WLR 1092, HL at 1099A. [1999] WLR 1092, HL at 1099B. See also Fisher v Cadman [2005] EWHC 377 (Ch), [2006] 1 BCLC 499, ChD, at [85], [88]. Re a Company (No 00370 of 1987), ex p Glossop [1988] 1 WLR 1068, ChD, at 1075C. It was not followed by Peter Gibson J in Re Sam Weller & Sons Ltd [1990] Ch 682. The subsequent amendment to s 459(1), and its substitution by s 994 of the 2006 Act, put the matter beyond doubt: if all the members’ interests are affected by unfairly prejudicial conduct, relief may also be claimed under s 994 of the 2006 Act. [1992] BCLC 213, ChD, at 227b–227d. Re Benfield Greig Group plc [2000] 2 BCLC 488, ChD (overruled, but not on this point, in Nugent v Benfield Greig Group plc [2001] EWCA Civ 397, [2002] 1 BCLC 65, CA). Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, HL, at 380E–380F.

371

11.10  Just and Equitable Winding Up as Remedy

up dividend) after the payment of the company’s debts and the costs and expenses of the liquidation – a so-called tangible interest must be demonstrated.46 Winding up on the just and equitable ground will not be ordered if the court is of the view that suitable alternative remedies are available and that the petitioners are acting unreasonably in seeking to have the company wound up instead of pursuing those other remedies.47 Winding up on the just and equitable ground is not limited to quasi-partnerships. On occasion, it may be invoked whenever justice and equity so require.48

STANDING General 11.10 Any member of a company is entitled to petition for the winding up of a company on the just and equitable ground, on condition of course that other jurisdictional requirements are met. However, this apparently uncomplicated point of departure is not stated that simply in the Insolvency Act, due to the preferred choice of the expression ‘contributory’ and the absence of the expression ‘shareholder’. The operative part of section 124(1) of the Insolvency Act for purposes of the scope of this book currently reads49: ‘Subject to the provisions of this section, an application to the court for the winding up of a company shall be by petition presented either by the company, or the directors, or by any creditor or creditors (including any contingent or prospective creditor or creditors), contributory or contributories … or by all or any of those parties, together or separately.’ Shareholders or members are not mentioned by name as prospective petitioners. Contributories are, in fact, members of a company, whether they have to contribute anything (which they would have had to do if their shares were not fully paid up) or not (in the event of them holding fully paid-up shares).50 The notion of a contributory arose from the situation of shares not being fully paid up; in such an instance, the member remains liable to contribute his unpaid portion of the share price to the company in liquidation. Their interest is clear: a winding up with concomitant concursus creditorum51 will prevent the company from incurring further liabilities which the contributory may be called to meet.52 The majority of contributories are not required to make any contribution at all: members who are fully paid up shareholders are merely deemed to be contributories.53 Following the Insolvency 46 See Re Rica Gold Washing Co Ltd [1879] 11 ChD 36, as well as the discussions at 11.10–11.13 regarding standing and 11.24–11.26 regarding tangible interest. 47 Section 125(2) of the Insolvency Act. See further, 11.28–11.32. 48 Re Ringtower Holdings (1989) 5 BCC 82, ChD. 49 The latest amendment to the sub-section on 31 December 2020 did not affect these material parts of the section. 50 This is well-established but was expressly stated by the Registrar in Hamilton v Brown [2016] EWHC 191 (Ch), [2017] BCC 457, at [48]. 51 Effectively a freezing of creditors’ rights as at the date of the winding up. 52 Re Chesterfield Catering Co Ltd [1977] Ch 373, [1976] 3 All ER 294, ChD. 53 Re National Savings Bank Association (1865–1866) LR 1 Ch App 547; Re Anglesea Colliery Co (1865–1866) LR 1 Ch App 555; Re Phoenix Oil and Transport Co Ltd [1958] Ch 560.

372

Standing 11.12

Act’s nomenclature is unavoidable: references to ‘contributories’ must be understood in the light hereof. 11.11 Importantly, a member is one registered in the company’s register of members or the central register, whether alive or dead and, if incorporated, whether subsisting, in insolvency procedure or dissolved.54 The Court of Appeal in BW Estates did not, and was not required to consider, other provisions of the Insolvency Act 1986 which a single judge court had to do in Re C&MB Holdings Ltd:55 there it was held that the definition of ‘member’ within section 74 of the Insolvency Act 1986 includes a ‘member’ in the wider sense intended in section 250. ‘It follows that the meaning of “contributory” within section 79 IA also includes such a “member”. This is so notwithstanding that the name of the qualifying transferee or of the person to whom shares are transmitted by law is not entered into a company’s register of members. It is also notwithstanding that a member has to have their name registered in the register of members (section 112(2) CA).’56 By section 250 of the Insolvency Act 1986 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, is to be regarded as a member of the company, and references to a member or members are to be read accordingly. Therefore, the trustees in bankruptcy of a former director/shareholder had standing to present a petition for the winding-up of the company despite the fact that the company shares, which had vested in them upon their appointment, had not been registered in their name for the six-month period set out in section 124(2)(b) of the Insolvency Act 1986. Persons in the trustees’ position should be regarded as ‘members’ (withstanding to present a petition) from the date when they acquired the shares, as opposed to the date when the shares were registered in their name.57 11.12 Contributories are permitted to petition for winding up of a company on all the available grounds mentioned in section 122 of the Insolvency Act, other than on the basis that the company is unable to pay its debts.58 The reason is that a contributory who is a member with fully paid shares will not be able to overcome the jurisdictional bar of demonstrating a tangible interest in an insolvent company, there obviously being no prospect of a dividend payable to shareholders under those circumstances.59

54 55 56

Re BW Estates Ltd [2017] EWCA Civ 1201, [2018] Ch 511, at [71]. See also 1.6 and 9.19. [2016] EWHC 191 (Ch), [2017] 1 BCLC 269, ChD. At [46]. See further the exposition at [47]–[50] which culminates in the conclusion at [51] that ‘because the Petitioners are to be regarded as “a member” of the Company and therefore as registered within the Company’s register of members for the period from 10 June 2014 until 25 March 2015 (inclusive) and section 124(2)(b) IA is to be read accordingly, they fulfilled its requirements during the period from vesting of the Shares until registration and afterwards.’ 57 Re C&MB Holdings Ltd [2016] EWHC 191 (Ch), [2017] 1 BCLC 269, Ch, at [44]–[51]; Hamilton v Brown [2016] EWHC 191 (Ch), [2017] BCC 457. 58 Section 122(1)(f). The other grounds are: if a company has chosen by special resolution to apply for winding up (s 122(1)(a)); in the case of a public company which had not been issued with a certificate under s 761 of the 2006 Act and more than a year has expired since it was so registered (s 122(1)(b)); it is an ‘old’ public company (s 122(1)(c)); or where a company has not commenced with business within a year (s 122(1)(d)). 59 See 11.24–11.26.

373

11.13  Just and Equitable Winding Up as Remedy

Standing will be established if the petitioner is a contributory at the time of presentation of the petition.60 A member at that point in time can no longer extricate himself from the winding up in any manner, precisely because he will become a contributory on the strength of sections 8861 and 12762 of the Insolvency Act. There is no room for a member to abuse the winding-up process by formulating a section 122(1)(g) cause of action in any capacity other than as a contributory.63 11.13 Standing, for the purposes of winding up on the just and equitable basis, differs materially from standing for the purposes of relief under section 994 of the 2006 Act.64 The right of a contributory to petition for the winding up of a company cannot be excluded or limited by the articles of association of the company65 or, by a parity of reasoning, by any constituent component of a constitution under the 2006 Act. If a contributory’s standing is disputed, the court will consider all the circumstances, including the likelihood of damage to the company if the petition is not dismissed, in determining whether to require the petitioner to seek the determination of the dispute outside the petition.66

Contributories Meaning of ‘contributory’67 11.14 A  contributory means any person liable to contribute to the assets of a company in the event of its winding up.68 For the purposes of all proceedings for determining, and all proceedings prior to the final determination of, the persons who are to be deemed contributories, ‘contributory’ includes any person alleged to be a contributory.69 It does not include a person so liable by virtue of a declaration by the court under section 213 of the Insolvency Act 1986 (imputed responsibility for company’s fraudulent trading) or section 214 of the Insolvency Act (wrongful

60 61 62 63 64 65 66 67 68 69

Re HL Bolton Engineering Co Ltd [1956] Ch 577 at 581; see also Re National Bank of Wales [1897] 1 Ch 298, CA. The section stipulates that any transfer of shares, not being a transfer made to or with the sanction of the liquidator, and any alteration in the status of the company’s members, made after the commencement of a voluntary winding up, is void. By sub-s (1), in a winding up by the court, any disposition of the company’s property, and any transfer of shares, or alteration in the status of the company’s members, made after the commencement of the winding up is, unless the court otherwise orders, void. Re J E Cade & Son Ltd [1992] BCLC 213, ChD. For which, see 9.19–9.39. Also have regard to the discussion in Re Paramount Powders (UK) Ltd [2019] EWCA Civ 1644, [2020] BCC 152. Re Peveril Gold Mines Ltd [1898] 1 Ch 122, CA. Alipour v Ary [1997] 1 WLR 534, CA, at 546C–546D. See also Re JN 2 Ltd [1978] 1 WLR 183, ChD; Re Highgrove Homes Ltd [2013] BLR 45, ChD, at [36]. See, for a recent deliberation on the conundrum caused by the use of the expression ‘contributory’, Burnden Group Holdings Ltd v Hunt [2018] EWHC 463 (Ch), [2018] BCC 404. Section 79 of the Insolvency Act and see the summary of this provision and s 74 in Re C&MB Holdings Ltd [2016] EWHC 191 (Ch), [2017] 1 BCLC 269, ChD, at [44]. Section 79(1) of the Insolvency Act.

374

Standing 11.16

trading)70 or a person who is a contributory only by virtue of section 76 of the Insolvency Act 1986.71 The liability to contribute befalls every present and past member who, when a company is wound up, is liable 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.72 The first and most obvious member targeted by this provision is the member whose shares are not fully paid up. Such a member will not be precluded from petitioning73 but he must, however, fully pay calls on his shares before the petition can be heard.74 In the case of a company limited by shares, no contribution is required from any member exceeding the amount (if any) unpaid on the shares in respect of which he is liable as a present or past member.75 11.15 Provision is further made for a number of practical situations: if a contributory dies either before or after he has been placed on the list of contributories, his personal representatives are liable, in the due course of administration, to contribute to the assets of the company in discharge of his liability and are contributories accordingly.76 Contributories include persons who were members within a period of one year prior to the winding up of the company, if the contributory’s shares were purchased or redeemed by the company out of its capital within the preceding year.77 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, is to be regarded as a member of the company, and references to a ‘member’ or ‘members’ are to be read accordingly.78 11.16 Legislation is not the only source for identifying contributories: in Re a Company (No 003160 of 1986),79 Hoffmann J explained that the rights and liabilities of contributories originated in rules of equity as well as in the common law. He concluded that, if a person had entered into an agreement with a company that he would take shares and the company would register him as a member, equity regarded him as a contributory, even though he had not in fact been registered as a member.80 70 71

Section 79(2) of the Insolvency Act. Section 79(3) of the Insolvency Act. Section 76 deals with the liability of past directors and shareholders. 72 Section 74(1) of the Insolvency Act. This is subject to a number of qualifications listed in sub-s (2). For the purposes of s 74(2)(f) of the Insolvency Act, a member includes a past member who has held fully paid shares. He cannot compete on a par with creditors if the company owes him anything in his capacity as member, such as dividends – see Re Consolidated Gold Fields of New Zealand Ltd [1953] Ch 689. 73 Re Diamond Fuel Co (1879) 13 ChD 400. 74 Re Crystal Reef Gold Mining Co [1892] 1 Ch 408. 75 Section 74(2)(d) of the Insolvency Act. 76 Section 81(1) of the Insolvency Act; Re Bayswater Trading Co Ltd [1970] 1 WLR 343, ChD. 77 Section 76 of the Insolvency Act, read with ss 713–720 of the 2006 Act. 78 Section 250 of the Insolvency Act. This section applies to ‘any provision in this Group of Parts’. The winding-up provisions form part of the ‘Group of Parts’ to which s 250 then applies. See further the discussion above at 11.11. 79 [1986] BCLC 391, ChD. 80 Re a Company (No 003160 of 1986) [1986] BCLC 391, ChD. This is in stark contrast to the position of standing for the purposes of s 994 of the 2006 Act: a member must be reflected as such in the members’ register of the company. See 9.19–9.39.

375

11.17  Just and Equitable Winding Up as Remedy

In Re Wheal Emily Mining Co, Cox’s Case81 a promoter had agreed to take shares but fraudulently registered the shares in the names of nominees. He was held to be a contributory in respect of those shares, although they had never been registered in his name. In Re JN 2 Ltd82 the petitioner alleged that the company had made an offer to allot shares to her, which offer she had accepted by conduct. Brightman J, in interlocutory proceedings, held that, assuming that she could substantiate this allegation, she qualified as a contributory.83 In Alipour v Ary84 the court permitted the petitioner, a provisional liquidator, who accepted that his claim to become a registered shareholder could not be maintained, to proceed to have the disputed allegation, that he was an original allottee, determined. But the principle remains that ordinarily the discretion to wind up will not be exercised where the petition debt is disputed on bona fide or substantial grounds.85

Inclusions and exclusions by section 124(2) of the Insolvency Act 11.17 Save in certain exceptional circumstances,86 by section 124(2) of the Insolvency Act a contributory is not entitled to present a winding-up petition unless either: (a) (b)

the number of members is reduced below two; or the shares in respect of which he is a contributory, or some of them, either were originally allotted to him, or have been held by him, and registered in his name, for at least six months during the 18 months before the commencement of the winding up, or have devolved on him through the death of a former holder.87

Section 124(2)(a) 11.18 Under section 1(3A) of the 1985 Act, a private company limited by shares could be formed by one person and could have only one member.88 A member who knowingly remained the single member of a company, other than in a private company limited by shares, and which carried on business for longer than six months, incurred personal liability for the debts of the company.89 There is no corresponding section in the 2006 Act: by sections 38 and 123 of the 2006 Act, the existence of single member companies is continued with.90 Section 124(2)(a) of the Insolvency Act therefore becomes largely superfluous. There is, accordingly, no longer a need to have resort to winding up if membership falls below two. Where the number of members had always been one only, section 124(2)(a) of the Insolvency Act did not apply.91 81 46 ER 834, ChD. 82 [1978] 1 WLR 183, ChD. 83 See also Re a Company (No 003160 of 1986) [1986] BCLC 391, ChD. 84 [1997] 1 WLR 534, CA. 85 Re Highgrove Homes Ltd [2013] BLR 45, ChD, at [36]. 86 Listed in s 124(3)–(4) of the Insolvency Act. These provisions cover the position of contributories under s 76 and the position when the Secretary of State presents a petition. 87 Section 124(2) of the Insolvency Act. See further the discussion at 11.11. 88 Companies (Single Member Private Limited Companies) Regulations 1992, SI 1992/1699, reg 2(1). 89 Section 24 of the 1985 Act. 90 If there are two members entered in a register and one has become legally incapacitated by eg death, it does not mean that the remaining living member is a single member: Re BW Estates Ltd [2017] EWCA Civ 1201 at [71]. 91 Re Pimlico Capital Ltd [2002] EWHC 878 (Ch), [2002] 2 BCLC 544, ChD.

376

Standing 11.21

Section 124(2)(b) 11.19 There are three scenarios postulated by section 124(2)(b): first, allottees; second, those holding shares and who were registered as members for at least six months during the 18 months preceding the commencement of the winding up; and, third, the situation where shares have devolved on the shareholder through the death of a former holder. Allottees 11.20 It is not necessary for allottees to have been entered onto the register of members for any period whatsoever or, indeed, at all, to qualify as contributories with the required standing.92 The reason is self-evident: section 558 of the 2006 Act reads, since 30 June 2016: ‘For the purposes of the Companies Acts shares in a company are taken to be allotted when a person acquires the unconditional right to be included in the company’s register of members (or, as the case may be, to have the person’s name and other particulars delivered to the registrar under Chapter  2A of Part 8 and registered by the registrar) in respect of the shares.’ Both these scenarios presuppose an agreement or irrevocable enforceable understanding to become a member of a company.93 In Re Quickdome Ltd94 it was held that the petitioner had no standing to petition for winding up. She had to show that the share to which she laid claim was originally allotted to her, taking into account that an allotment involves a transaction between a company and an intended shareholder. The petitioner did not suggest that her claim to the share emerged from any transaction with the company, and so the claim failed.95 An allottee is accordingly not necessarily a member96 for purposes of standing. Without such an entry, an allottee may have standing to apply for the just and equitable winding up of a company on condition that proof can be provided of the underlying transaction which entitles the petitioner to benefit from an allotment. Shareholding for six months 11.21 Persons holding shares at the time of presentation of the petition, and who have been registered as a member for at least six months during the 18 months preceding the commencement of the winding up, have the necessary standing to apply for the just and equitable winding up of a company. In calculating the sixmonth period, one must ignore any period during which such contributory was entitled to be registered as a member (even under an order of court) but was in fact not so registered.97 No specific technical meaning attaches to the word ‘held’ in the 92 93

Re JN 2 Ltd [1978] 1 WLR 183, ChD. Re Florence Land & Public Works Co (1885) 29 ChD 421; Re JN 2 Ltd [1978] 1 WLR 183, ChD, at 186C. 94 [1988] BCLC 370, ChD. 95 See also Atlasview Ltd v Brightview Ltd [2004] EWHC 1056 (Ch), [2004] 2 BCLC 191, ChD; Re a Company (No 003160 of 1986) [1986] BCLC 391, ChD. 96 See ‘membership’ at 9.19–9.39. 97 Re Gattopardo Ltd [1969] 1 WLR 619, CA.

377

11.22  Just and Equitable Winding Up as Remedy

context of holding shares.98 It means no more than that the shareholder must have been registered as such for the minimum prescribed period.99 Although a trustee of a member in bankruptcy represents the bankrupt member in the winding up and is a contributory by virtue of section 82(2) of the Insolvency Act, the trustee cannot present a petition unless he has been registered as member in his capacity as trustee for the minimum prescribed period.100 He cannot benefit from any prior period of registration of the bankrupt. On the other hand, a bankrupt member may not, despite his registration as member for the minimum period, present a petition, in view of its limited legal capacity.101 11.22 Nominees find themselves in an analogous position: a beneficial owner will not be reflected as a member in a company’s register but his nominee will be so reflected, with the result that the beneficial owner will not have standing to bring a winding-up petition. Only the nominee will have that right, unless a court can be persuaded to follow the authority of Atlasview v Brightview102 in relation to unfair prejudice petitions where an unfair prejudice claim was permitted to be instituted by the beneficial holder of shares.103 The beneficial owner’s solution is either to convince his nominee to do so (if the nominee had been registered for the prescribed minimum period), or he will have to replace the nominee as registered member and wait for the minimum period of six months to expire. The provision that the six-month period could have occurred during the previous 18 months is somewhat puzzling. A  member who, by the time of presentation of a petition, has disposed of his shares, although he may have held shares for more than six out of the previous 18 months, will not have the requisite standing for two reasons: he must have been a member at the time of presentation of the petition (which he no longer is); and he will be unable to demonstrate a tangible interest.104 There does not appear to be any rule of construction which results in a conclusion that the six-month period should have been accumulated in one period only: it is suggested that the six-month period may comprise the aggregate of different periods of holding one or more shares in the company, as long as the petitioner was holding some shares on the date of presentation of the petition. Shares devolving through death 11.23 The personal representative of a deceased shareholder is a contributory.105 It is not required that such a person was registered as the holder of the shares which had devolved upon him. It was therefore held that such a petitioner was entitled to have the company wound up.106 98 See Bermuda Cablevision Ltd v Colica Trust Co Ltd [1998] AC 198, PC, at 213C–213D. 99 Re Wala Wynaad Indian Gold Mining Company (1882) 21 ChD 849. 100 Re HL Bolton Engineering Co Ltd [1956] Ch 577; Cumming’s Trustee v Glenrinnes Farms Ltd [1993] BCC 829, CSOH. 101 Re Wolverhampton Steel & Iron Co [1977] 1 WLR 860, CA; Re K/9 Meat Supplies (Guildford) Ltd [1966] 1 WLR 1112 (Ch). 102 [2004] EWHC 1056 (Ch), [2004] 2 BCLC 191, ChD. 103 See the discussion at 9.34. 104 See and compare Re a Company (No 00330 of 1991), ex p Holden [1991] BCLC 597, ChD, at 601g–601h. 105 Section 81 of the Insolvency Act. 106 Re Bayswater Trading Co Ltd [1970] 1 WLR 343, ChD.

378

Standing 11.25

Tangible interest 11.24 It is inherent in the winding-up process, originating on whatever grounds, that the costs of winding up and the claims of creditors are satisfied first. Only if a surplus remains, and it is in accordance with the terms of the articles for them to do so, will shareholders receive a dividend pro rata to their shareholding. A dividend is accordingly only attainable if the company is solvent (after deduction of costs) when it is wound up: in an insolvent winding up, there should be nothing left for distribution to shareholders. This very practical reality underpins the principle that a member (as member, and not in another capacity) does not have any reason to cause the winding up of a company unable to pay its debts.107 His only interest lies in a dividend on winding up. If no dividend is expected, he has no interest. In Re Rica Gold Washing Co,108 Sir George Jessel MR put the position crisply as follows: ‘Now I will say a word or two on the law as regards the position of a petitioner holding fully paid up shares. He is not liable to contribute anything towards the assets of the company, and if he has any interest at all, it must be that after full payment of all the debts and liabilities of the company there will remain a surplus divisible among the shareholders of sufficient value to authorise him to present a petition.’109 A petitioner, who is a fully paid-up member, is obliged to place sufficient information before a court to justify an inference of the existence of a tangible interest, by demonstrating that there is likely to be a material surplus available on winding up. Buckley J confirmed this principle in Re Othery Construction Ltd110 when he stated that it remains a rule that ‘… where a fully paid up shareholder petitions for compulsory winding up he must show on the face of his petition a prima facie probability that there will be assets available for distribution amongst the shareholders’. 11.25 A tangible interest may arise in a different guise. If a surplus of assets available for distribution amongst shareholders cannot be demonstrated, it may be sufficient to show that the affairs of the company nevertheless require an investigation which is likely to produce such a surplus.111 Re Chesterfield Catering Co Ltd112 recognised a potential non-monetary tangible interest in the sense of avoiding or minimising some disadvantage, and not merely by establishing some private advantage which the petitioner might derive from the winding up and which was unconnected with his membership of the company.113 This will manifest in the disadvantage of not being able to show a surplus because the company was not forthcoming in supplying the 107 It must be noted that no similar requirement exists for a petitioner in respect of an unfair prejudice petition: Re Martin Coulter Enterprises Ltd [1988] BCLC 12, ChD at 17a–17b. 108 (1879) 11 ChD 36 at 42–43; see also CVC/Opportunity Equity Partners Ltd v Demarco Almeida [2002] UKPC 16, [2002] 2 BCLC 108, PC, at [13]; Re Martin-Coulter Enterprises Ltd [1988] BCLC 12, ChD, at 17b–17c; Re SA Hawken Ltd [1950] 2 All ER 408, ChD. 109 See also In re Chesterfield Catering Co Ltd [1977] Ch 373; Re Bellador Silk Ltd [1965] 1 All ER 667, ChD; Re Expanded Plugs Ltd [1966] 1 WLR 514, ChD; Re a Company (No 002470 of 1988), Ex p Nicholas [1991] BCLC 480, ChD; Apex Global Management Ltd v FI Call Ltd [2015] EWHC 3269 (Ch) at [56]; Ashdown v Griffin [2018] EWCA Civ 1793, [2018] 7 WLUK 697. 110 [1966] 1 WLR 69, ChD, at 72F. 111 Re Othery Construction Ltd [1966] 1 WLR 69, ChD, at 75G–75H. 112 [1977] Ch 373. 113 At 379H; 380C–380E.

379

11.26  Just and Equitable Winding Up as Remedy

information.114 An inability to demonstrate a surplus will accordingly be excused under those circumstances.115 A petitioner’s duties in this regard are much alleviated if he is able to allege that the company is in default of providing proper access to financial information, due to the existence of conflict between the shareholders and those in control of the company whose management of the company requires investigation.116 Absence of a tangible interest, in its traditional meaning, will therefore not result in the striking out of the petition in the following situations: where the company’s financial position is not known because the company has not produced accounts;117 where there is a dispute about the actual assets or liabilities;118 where an investigation is required;119 or where the petitioner is prevented by the company from establishing the current position.120 The latter exception only applies to striking out applications and not where the petition has reached the trial stage: by that time, the petitioner should have obtained the necessary information through disclosure of documents and by examination of witnesses.121 A further discrete development is that a member may establish a tangible interest by demonstrating that the company would have a surplus if the wrongdoing directors accounted for the profits they had made or the losses the company had sustained as a result of their wrongdoings.122 Contributories holding partly paid shares have a clear tangible interest in the form of a financial interest, because a winding up will prevent the company from incurring further liabilities which the contributory may be called to meet.123 11.26 This principle of demonstrating a tangible interest also finds application to instances where a shareholder opposes an application for winding up, such as may be brought by the Secretary of State under section 124A of the Insolvency Act. Such a shareholder will only have standing if he can show that the company is solvent.124 The fact that a petitioner for winding up on the just and equitable ground held only 62 of a company’s more than seven million issued shares did not mean that the interest was intangible and that he did not have standing. Provided that the petitioner could show that he was likely to recover an appreciable dividend on winding up of the company, compared with the size of his shareholding, the minuscule size of that holding was not of itself a bar to the presentation of a petition.125

114 Charit-Email Technology Partnership LLP v Vermillion International Investments Ltd [2009] EWHC 388 (Ch); followed in Secretary of State for Business, Innovation and Skills v World Future Ltd [2013] EWHC 723 (Ch). 115 Re Newman and Howard Ltd [1962] Ch 257; Re Argentum Reductions (UK) Ltd [1975] 1 WLR 186, ChD; Re Wessex Computer Stations Ltd [1992] BCLC 366, ChD. 116 Re a Company (No 007936 of 1994) [1995] BCC 705, ChD. 117 Re Newman and Howard Ltd [1962] Ch 257. 118 Re Martin Coulter Enterprises Ltd [1988] BCLC 12, ChD. It is suggested that the dispute should be bona fide for this principle to operate. 119 Re Wessex Computer Stations Ltd [1992] BCLC 366, ChD; Re Pimlico Capital Ltd [2002] EWHC 878 (Ch), [2002] 2 BCLC 544, ChD. 120 Re a Company (No 007936 of 1994) [1995] BCC 705, ChD. 121 Re Commercial and Industrial Insulations Ltd [1986] BCLC 191, ChD. 122 See Re Annacott Holdings Ltd [2012] EWCA Civ 998, [2013] 2 BCLC 567, CA, at [11]–[13]. 123 Re Chesterfield Catering Co Ltd [1977] Ch 373. 124 Re Rodencroft Ltd [2004] 1 WLR 1566, ChD; Secretary of State for Business, Innovation and Skills v World Future Ltd [2013] EWHC 723 (Ch). 125 Bryanston Finance Ltd v De Vries (No 2) [1976] Ch 63, CA, at 75A–75C.

380

Availability of alternative remedies: section 125(2) 11.28

It is an abuse of process to pursue a winding-up petition for any purpose other than to protect the petitioner’s right as a contributory.126 Snowden J stated: ‘Pulling these threads together, on the basis of these authorities, I consider that it is clear that “motive” in the sense used by Buckley LJ in the Bryanston case [1976] Ch 63, by Harman J in In re A Company (No 1573 of 1983) [1983] BCLC 492 and by Lord Wilson JSC in the Ebbvale case, namely subjective reasons such as malice or personal animosity – that cause a petitioner to embrace a purpose, aim or objective in presenting and pursuing a petition, do not make a petition that is not otherwise an abuse of process into an abuse of process.’127

Resolving disputes about standing 11.27 In the past, courts were inclined to dismiss a winding-up petition outright where the standing of the petitioner was in dispute.128 The approach changed substantially as a result of the judgment in Alipour v Ary:129 on a contributory’s petition, the court should consider all the circumstances, including the likelihood of damage to the company if the petition was not dismissed, in determining whether to require the petitioner to seek the determination of the dispute outside the petition. Procedural changes, and the fact that a contributory’s petition based on the just and equitable ground need no longer be advertised, reduce the risk of prejudice to the company.130 This notwithstanding, it remains a matter of the court’s discretion on the facts of the case. In this instance, the petitioner was a provisional liquidator and the company dormant, with minimal potential detriment to it should the matter proceed on the point of determining the standing of the petitioner. This pragmatic approach is commendable, and consistent with a similar approach which has developed in section 994 petitions.131 In circumstances where the petitioner combined a petition for a winding up with a petition for relief on the basis of unfair prejudicial conduct, the court did not order separate proceedings to establish the petitioner’s status, even though the objection arose from other shareholders claiming that the petitioner’s shares were held in a nominee capacity for them.132

AVAILABILITY OF ALTERNATIVE REMEDIES: SECTION 125(2) 11.28 As already pointed out,133 winding up should be regarded as relief of last resort. Winding-up petitions which are, on their face, in order may nevertheless be 126 Re Bellador Silk Ltd [1965] 1 All ER 667, ChD. 127 Re Maud [2016] EWHC 2175 (Ch) at [93]; cf Apex Global Management Ltd v FI Call Ltd [2015] EWHC 3269 (Ch) at [54]: ‘… the court will consider, not only alternative remedies, but also whether the petitioner has some improper or collateral purpose in seeking liquidation, or is behaving unreasonably …’. 128 Re Bambi Restaurants Ltd [1965] 1 WLR 750, ChD; Re JN 2 Ltd [1978] 1 WLR 183, ChD. 129 [1997] 1 WLR 534, CA. 130 At 545F–546C. 131 Re Starlight Developers Ltd [2007] BCC 929 (Ch). See the discussion at 9.28. 132 Re Garage Door Associates Ltd [1984] 1 WLR 35, ChD, at 38F–40A. 133 See 11.3.

381

11.29  Just and Equitable Winding Up as Remedy

dismissed if there are reasonable alternative remedies available which have not been pursued by the petitioner. Such will be the case for instance where the petitioner for winding up had a right to demand repayment to her of her interest in a director’s loan account.134 By section 125(2) of the Insolvency Act: ‘(2)  If the petition is presented by members of the company as contributories on the ground that it is just and equitable that the company should be wound up, the court, if it is of opinion – (a) that the petitioners are entitled to relief either by winding up the company or by some other means, and (b) that in the absence of any other remedy it would be just and equitable that the company should be wound up, shall make a winding-up order; but this does not apply if the court is also of the opinion both that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.’ The mechanism for implementing section 125(2) is the following: a court hearing a winding-up petition will first establish whether grounds for winding up exist, ignoring for a moment the possible existence of alternative forms of relief. If the court concludes that, in the absence of any other remedy, it would be just and equitable for the company to be wound up, it is obliged to make a winding-up order unless it is of the opinion that the petitioner is acting unreasonably.135 Where, however, it is ‘plain and obvious’ that the petition will fail because of the existence of a suitable alternative remedy, a petition for winding up will be struck out.136 Where a windingup petition is pursued for a collateral purpose it will also be struck out.137 11.29 At the striking-out phase, a court will be careful not to find against the petitioner where an alternative remedy is potentially available:138 ‘But does it follow that one should hold that either generally or in a particular kind of case a person in S’s position, someone who claims that his equitable rights, as it were, as a quasi-partner have been infringed, should refrain from presenting a winding-up petition? Counsel for S  (Mr Dutton) points out, rightly, that the decision of the House of Lords in the Westbourne Galleries139 case still stands. It has not been negatived by legislation. It still means that that remedy is available to a person who is aggrieved in the way in which S  is aggrieved. True, at the hearing of the petition the judge may, on the full facts when they are found, hold that it would be unreasonable to grant him the remedy of a winding up and that he should pursue his remedy under s 459, but it is a very strong thing to say, on an application to strike out, that it is plain and obvious that a petitioner is behaving unreasonably in seeking a winding-up order.’ 134 Maresca v Brookfield Development and Construction [2013] EWHC 3151 (Ch). 135 Re a Company (No 002567 of 1982) [1983] 1 WLR 927, ChD, at 932F; Vujnovich v Vujnovich [1990] BCLC 227, PC, at 232f–232h. 136 Fuller v Cyracuse Ltd [2001] 1 BCLC 187, ChD, and especially the authorities referred to at 191a–191e; Charles Forte Investments Ltd v Amanda [1964] Ch 240, CA. 137 Re J E Cade & Son Ltd [1991] BCC 360, ChD. 138 Re a Company (No 001363 of 1988), ex p S-P [1989] BCLC 579, ChD, per Warner J at 586g–586i; see also Re Central Coating Ltd [2004] EWHC 3472 (Ch). 139 Ebrahimi v Westbourne Galleries [1973] AC 360, HL.

382

Availability of alternative remedies: section 125(2) 11.30

If, in the course of a winding-up petition under section 122(1)(g) of the Insolvency Act, alternative remedies which are available under section 996 of the 2006 Act have been established, it will satisfy the requirement of the presence of an alternative suitable remedy provided for in section 125(2) and ought to result in a dismissal of the windingup petition.140 If there is an unreasonable failure to pursue an alternative remedy, dismissal of the winding-up petition is unavoidable. The court is left with no discretion. However, if an alternative remedy had already been unsuccessfully pursued, it will not be unreasonable for the petitioner to seek a winding-up order. The unavailability of relief under section 994 has, in itself, no bearing on the winding-up petition, so that a petition for winding up will survive the striking out of the section 994 petition.141 A petition for winding up under section 122(1)(g) should accordingly fail if there are less drastic routes available to the petitioner to resolve disputes, such as: the exhaustion of internal remedies;142 relief under section 261 or 996 of the 2006 Act; or the circumstance of a rejection of a reasonable offer to buy out the petitioner’s shares.143 Yet, it is not unreasonable for a quasi-partner to launch a winding-up application based on unfair prejudicial conduct where each only held one share and a beneficial interest under a sale agreement for the balance of the company’s 6,500 shares. An offer was made to buy out the petitioner’s one share, but the offer did not take into account the petitioner’s beneficial interest in half of the remaining shares. It was accordingly not unreasonable to reject the offer and pursue a petition for a winding-up order.144 It is however necessary for a respondent to establish that an alternative remedy is available in practice and not just in theory if that alternative remedy is to be a potential bar to a winding-up petition. If, for example, a buyout order would not be capable of being enforced due to the inability of a respondent to an unfair prejudice petition to fund it, then a petitioner who establishes that a clean break is what should be ordered will not have an alternative remedy to a winding-up.145 11.30 A  potential practical difficulty arises if a winding-up petition has already been presented when an offer to buy out the shares of the petitioner is made: by virtue of section 127 of the Insolvency Act, any transfer of shares after the presentation of the petition will be void if a winding-up order ensues.146 Practically, acceptance of a buy-out offer is likely to cause the abandonment of the winding-up petition, since the petitioner will no longer have standing. If a reasonable offer is made after presentation of the winding-up petition but rejected by the petitioner, the court will be entitled to dismiss the petition because of an abuse of the process. However, the 140 Re Copeland and Craddock Ltd [1997] BCC 294, CA; Re a Company (No 004415 of 1996) [1997] 1 BCLC 479, ChD. 141 Virdi v Abbey Leisure Ltd; Re Abbey Leisure Ltd [1990] BCLC 342, CA. 142 See Chapter 7. 143 Re a Company (No 002567 of 1982) [1983] 1 WLR 927, ChD; Virdi v Abbey Leisure Ltd; Re Abbey Leisure Ltd [1990] BCLC 342, CA; Re J E Cade & Son Ltd [1992] BCLC 213, ChD; Fuller v Cyracuse Ltd [2001] 1 BCLC 187, ChD. 144 Re a Company (No 001363 of 1988), ex p S-P [1989] BCLC 579, ChD, at 586e–586f. 145 As was the case in the Australian case of Asia Pacific Joint Mining Pty Ltd v Allways Resources Holdings Pty Ltd [2018] QCA 48. 146 It should be noted that from 26 June 2020 the section was amended by the addition of sub-section (3): “This section has no effect in respect of anything done during a moratorium under Part A1, or during a period mentioned in section 5(4)(a) following the end of a moratorium, where the winding-up order was made on a petition presented before the moratorium begins, unless the petition was presented under section 367 of the Financial Services and Markets Act 2000 on the ground mentioned in section 367(3)(b) of that Act.’

383

11.31  Just and Equitable Winding Up as Remedy

court has no right in a winding-up petition to order a buy-out. That can only be achieved via a petition under section 994 of the 2006 Act. 11.31 The specific terms of pre-emption provisions in a company’s articles were found not to constitute an adequate alternative remedy, and it was therefore not unreasonable for the petitioner to have by-passed those provisions.147 The petitioner was of the view that, as a minority shareholder, there was a strong probability that an accountant nominated to determine the fair value of his shares would apply some discount to the proportionate value of the company’s net assets to which he would be entitled on a winding up. Sir George Waller dealt with the argument as follows:148 ‘The learned judge, very rightly, decided to treat as true for the purpose of this application the suggestion that there was an understanding at the time of the formation of the company that the company would not involve itself in other businesses without the consent of Mr Virdi. Accordingly Mr Virdi has a prima facie right to a winding-up order. But if the court is of opinion that there is some other remedy available to the petitioner and the petitioner is acting unreasonably in seeking to have the company wound up, the court is not obliged to make a winding-up order. In this case there was in the Articles a provision (27(3)) that “every member who desires to transfer any share or shares” shall give notice in writing and if it cannot be agreed the price shall be decided by an accountant certifying “the fair value thereof as between a willing seller and a willing buyer”. Before the learned judge there appeared to be some question as to the effect of such a valuation, as to whether or not such a valuation would be more or less than in a winding-up. Before us it appeared that the assets of the company consisted of cash save that there were two claims, one for fees from Mr Virdi and another of substance, to be settled. The effect of the assets being largely cash would reduce the costs of liquidation and the value of each of the petitioner’s shares would be the same as the value of the other shareholders’ shares. On the other hand it was not seriously disputed that in a valuation under clause 27(3) the shares might well be subject to a discount as being a minority holding. In other words in a winding up Mr Virdi would get the same for his 40% as Mr Abbas for his 40%, whereas on an accountant’s valuation he would take the risk of the valuation of his shares being appreciably less than the valuation of Mr Abbas’ shares. While there may be doubts as to whether there was an understanding that there would be no new project, once it is assumed for the purpose of this case that this was the agreement, I am of opinion that it cannot be said that Mr Virdi was acting unreasonably.’ 11.32 Taking into account the wideness of the discretion afforded to a court in section 994 petitions, it is likely that courts will be reluctant to employ the blunt instrument of winding up if other adequate remedies are available. A case in point is Re a Company (No 003028 of 1987),149 where a petition for winding up was dismissed because a pending action would be determinative of the dispute between the parties: if the action was successful, the petitioner would have been able to petition for winding up as a creditor; if the action was unsuccessful, it would mean that the petitioner’s dismissal was not wrongful but would have been attributable to his own unreasonable behaviour. However, it is for the respondent to show that an alternative remedy is or would be available. It is not appropriate for the court to engage in an exercise of imagining every alternative remedy and considering whether it would be available.150 147 Virdi v Abbey Leisure Ltd; Re Abbey Leisure Ltd [1990] BCLC 342, CA. 148 At 351a–351f. 149 [1988] BCLC 282, ChD. 150 Chu v Lau [2020] UKPC 24, [2020] 1 WLR 4656, at [52].

384

Application of section 122(1)(g) illustrated 11.34

APPLICATION OF SECTION 122(1)(G) ILLUSTRATED 11.33 In assessing whether it is just and equitable to wind up a company, fairness will require a consideration of all the relevant facts and circumstances, even circumstances that do not affect the petitioner in his capacity as member.151 Mere allegations of the existence of a quasi-partnership company are not sufficient. Facts in substantiation of the allegations must be provided.152 An order winding up a company on the just and equitable basis will not be granted merely at the whim of a member who wishes to realise his investment, or simply because of a breakdown in trust and confidence between the parties. So-called ‘no-fault divorce’ will not be granted.153 On the analogy of partnership law, if the partnership is able to continue, dissolution of the partnership would not be ordered. A petitioner’s unjustified unilateral termination of a relationship of trust and confidence will not entitle him to a winding up, and his being locked into the company by not being able to dispose of his shares will not constitute unfairly prejudicial conduct of the company’s affairs. It is accordingly not a condition precedent to making an order under section 122(1)(g) of the Insolvency Act that those opposing the order must have acted unjustly or inequitably.154 11.34 In Apex Global Management Ltd v FI Call Ltd155 the court restated ‘just and equitable grounds’ as follows: ‘The leading case as to what will constitute “just and equitable grounds” is still Ebrahimi v Westbourne Galleries Ltd. Lord Wilberforce was careful to reject any exhaustive definition or categorisation of the circumstances that would fulfil the criteria. The court will necessarily wish to have regard to all of the circumstances of the case. However, examples of cases where the courts have considered it appropriate to make such an order include: (1) the exclusion of a petitioner from the management of the company where it was understood or agreed that he would not be so excluded (Re Ebrahimi v Westbourne Galleries Ltd, supra); (2) deadlock in the management of the company, where the directors and/or shareholders refuse to cooperate with one another (Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426); and (3) where the company’s objects or trading purposes can no longer be achieved (Re Perfectair Holdings Ltd [1990] BCLC 423).’ Despite the caveat about categorisation in the passage above, it is deemed helpful to present the following broad categories of historic application of the just and equitable winding-up provision.

151 It virtually goes without saying; but see, in any event, Re Davis and Collett Ltd [1935] Ch 693 at 701; Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, HL, at 375A–375B. 152 Re a Company (No 007936 of 1994) [1995] BCC 705, ChD. 153 O’Neill v Phillips [1999] WLR 1092, HL, at 1104G. 154 Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, HL, per Lord Cross at 383F. See also the discussion of deadlock at 9.173–9.175. 155 [2015] EWHC 3269 (Ch) at [57].

385

11.35  Just and Equitable Winding Up as Remedy

Deadlock156 11.35 Deadlock, without more, does not satisfy the requirements of section 994 of the 2006 Act, but remains a ground for winding up.157 This is because a situation of deadlock can be arrived at without the blameworthy unfair prejudicial conduct adversely affecting the interests of a member, which is required under section 994 petitions. Deadlock typically arises in a situation where the voting power amongst shareholders is divided equally along opposing lines, and, very often, with the selfsame dividing line also present amongst the directors. No decision can be arrived at, either on the directors’ or on general meeting level, because no majority can be achieved,158 even if the members may wish to resolve matters in general meeting. This situation does not require that any of the parties necessarily conduct themselves in a manner prejudicial to the affairs of the company or the shareholders on the other side of the divide.159 The result is paralysis in the conduct of the business of the company, and the most appropriate solution is the winding up of the company. A corollary of, or a further practical test for, the existence of deadlock is whether the company can effectively be managed if one of the sides is excluded from the management of the company.160 The question of whether there is deadlock is assessed as at the date of trial and not limited to the position as at the date of the petition.161 11.36 Re Yenidje Tobacco Co Ltd162 has long been regarded as the leading case on the point. Two tobacco manufacturers, R and W, amalgamated their businesses in a company in which they were equal shareholders in respect of the vote-bearing shares. They were the only directors. The articles of association did not provide for a casting vote. They provided for a quorum of one for meetings of the directors, whilst disputes between directors had to be resolved by arbitration. A  dispute regarding an employee resulted in a protracted arbitration between R and W. To the question ‘… is it likely, is it reasonable, is it common sense, to suppose those two partners163 can work together in the manner in which they ought to work in the conduct of the partnership business?’,164 Lord Cozens-Hardy MR gave the following answer:165 ‘The matter does not stop there. It is proved that these two directors are not on speaking terms, that the so-called meetings of the board of directors have been almost a farce or comedy, the directors will not speak to each other on the board, and some third person has to convey communications between them which ought to go directly from one to the other … Certainly, having regard to the fact that the only two directors will not speak to each other, and no business which deserves the name of business in the affairs of the company can be carried on, I think the company should not be allowed to continue.’ 156 See also, in s 994 context, at 9.173–9.175. 157 Re Neath Rugby Ltd (No 2) [2009] EWCA Civ 291, [2009] 2 BCLC 427, CA, per Stanley Burnton LJ at [110]; Chu v Lau [2020] UKPC 24, [2020] 1 WLR 4656, per Lord Briggs at [17]. 158 See eg the peculiar circumstances in Alvona Developments Ltd v The Manhattan Loft Corporation (AC) Ltd [2005] EWHC 1567 (Ch), [2006] BCC 119, ChD. 159 Compare Shah v Shah [2005] EWHC 2237 (Ch). 160 Vujnovich v Vujnovich [1990] BCLC 227, PC, at 230e–230f. 161 This has been the case for some time in English law, as explained in Chu v Lau [2020] UKPC 24, [2020] 1 WLR 4656, at [14]. 162 [1916] 2 Ch 426, CA. 163 The expression ‘partners’ is obviously used in a loose sense, appropriate only to indicate the relationship of trust and confidence reflected in quasi-partnership companies. 164 At 431. 165 At 431.

386

Application of section 122(1)(g) illustrated 11.38

The court did not see its way open to allow the continuation of this relationship. It was accordingly just and equitable that the company should be wound up.166 11.37 In Ebrahimi v Westbourne Galleries Ltd167 the House of Lords, per Lord Cross, questioned the basis of Yenidje as being a case of deadlock in the following terms:168 ‘It is sometimes said that the order in that case [Yenidje] was made on the ground of “deadlock.” That is not so. As Mr Frank Russell KC, who was counsel for the appellant, pointed out, although Mr Rothman and Mr Weinberg were not on speaking terms they communicated through third parties, the company’s business was flourishing and the articles contained a provision for arbitration to which resort could be had in the event of their failing to agree on any point. The reason why the petitioner succeeded was that the court thought it right to make the order which it would have made had Mr Rothman and Mr Weinberg been carrying on business under articles of partnership which contained no provision for dissolution at the instance of either of them. People do not become partners unless they have confidence in one another and it is of the essence of the relationship that mutual confidence is maintained. If neither has any longer confidence in the other so that they cannot work together in the way originally contemplated then the relationship should be ended—unless, indeed, the party who wishes to end it has been solely responsible for the situation which has arisen. The relationship between Mr Rothman and Mr Weinberg was not, of course, in form that of partners; they were equal shareholders in a limited company. But the court considered that it would be unduly fettered by matters of form if it did not deal with the situation as it would have dealt with it had the parties been partners in form as well as in substance.’ Deadlock as a basis for a just and equitable winding up is alive and well, within the parameters of appropriate facts,169 even if, as described by Lord Cross, it is as a form or example of a breakdown in the relationship of mutual trust and confidence. There is not much merit in applying categorisation absolutely – if the facts do not fit ‘deadlock’ but do fit the category of ‘breakdown of personal relationships’, it remains just and equitable to order winding up of the company.

Breakdown of personal relationships: loss of confidence 11.38 Loss of confidence between members is a ground for winding up on the just and equitable basis,170 but does not, as such,171 constitute unfair prejudicial conduct for the purposes of invoking the relief claimable under sections 994 and 996 of the 166 At 432. 167 [1973] AC 360, HL. 168 At 383G–384B. 169 See eg Re Brand & Harding Ltd (Co No 554589), [2014] EWHC 247 (Ch) where relations between sibling shareholders had been marked by accusations and counter-accusations of misconduct descending into bitter acrimony; they could not seem to pull themselves out of the mess into which the company’s affairs had fallen or agree on any matters relating to its future governance. The only way forward was for the company to be wound up and the business sold. 170 However, it does not follow that whenever a loss of mutual trust and confidence is shown a winding-up on the just and equitable ground will necessarily be ordered: Re Paramount Powders (UK) Ltd [2019] EWCA Civ 1644, [2020] BCC 152, and see 11.42. 171 If exclusion from management follows on loss of confidence, the exclusion is likely to be addressed under s 994 as unfairly prejudicial conduct.

387

11.39  Just and Equitable Winding Up as Remedy

2006 Act. However, it is only a ground for winding up in the case of quasi-partnership companies.172 Re Yenidje Tobacco Co Ltd,173 as interpreted by Ebrahimi v Westbourne Galleries Ltd,174 illustrates the breakdown of personal relationships which inevitably leads to dissolution of the partnership, in the partnership context, and winding up in the context of quasi-partnership companies. This situation can be arrived at without any of the parties necessarily conducting themselves in a manner prejudicial to the affairs of the company or other shareholders.175 If paralysis in the conduct of the business of the company is the result, winding up of the company should follow. 11.39 Loch v John Blackwood Ltd176 was a matter where the defendant was, to all intents and purposes, a quasi-partnership company. The de facto controllers of the company failed, in a number of respects, to report to the minority shareholders. No relief could be obtained by calling a general meeting because the minority would be outvoted. The principle enunciated by the court on matters of this kind was put as follows:177 ‘It is undoubtedly true that at the foundation of applications for winding up on the “just and equitable” rule, there must lie a justifiable lack of confidence in the conduct and management of the company’s affairs. But this lack of confidence must be grounded on conduct of the directors, not in regard to their private life or affairs, but in regard to the company’s business. Furthermore the lack of confidence must spring not from dissatisfaction on being outvoted on the business affairs or on what is called the domestic policy of the company. On the other hand, wherever the lack of confidence is rested on a lack of probity in the conduct of the company’s affairs, then the former is justified by the latter and it is under the statute just and equitable that the company be wound up.’ 11.40 Pure and unadulterated dishonesty, such as misappropriation of company funds, is sufficient to justify a breakdown of personal trust and confidence and the resultant winding up of the company on the just and equitable basis.178 In the same vein falls conduct by the de facto controller of deliberately obstructing the reasonable inquiries of a major financial investor by a process of belligerence, abuse and obstruction, coupled with falsification of the company’s accounts.179 An order that a company, in which a contributory had invested, be compulsorily wound up was entirely proper where attempts by the contributory to investigate what had been done with his investment were unsuccessful, the director’s stewardship of the company necessitated a thorough investigation, and a voluntary liquidation would be prejudicial to the rights of the contributory.180 11.41 In Re a Company (No 00370 of 1987), ex p Glossop181 a winding up was considered to be the appropriate remedy in circumstances where the directors 172 Chu v Lau [2020] UKPC 24, [2020] 1 WLR 4656, per Lord Briggs at [14]–[17]. 173 [1916] 2 Ch 426, CA. 174 [1973] AC 360, HL, at 383H–384B. 175 See Shah v Shah [2005] EWHC 2237 (Ch). 176 [1924] AC 783, HL. See also Jesner v Jarrad Properties Ltd [1993] BCLC 1032, CSOH; Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [302]. The appeal on issues of valuation leaves this point unaffected: [2013] EWCA Civ 667, [2014] 1 BCLC 427, CA. 177 Loch v John Blackwood Ltd [1924] AC 783, HL, at 788. See the underlying factual allegations in Re Zinotty Properties Ltd [1984] 1 WLR 1249, ChD. 178 Re Worldhams Park Golf Course Ltd [1998] 1 BCLC 554, ChD. 179 Re Internet Investment Corp Ltd [2009] EWHC 2744 (Ch), [2010] 1 BCLC 458, ChD. 180 Re Internet Investment Corp Ltd [2009] EWHC 2744 (Ch), [2010] 1 BCLC 458, ChD. 181 [1988] 1 WLR 1068, ChD, at 1076e–1076f. See further the discussion at 9.111–9.114.

388

Application of section 122(1)(g) illustrated 11.43

failed, over an extended period, to declare dividends commensurate with the healthy profits generated by the company, which failure had caused a loss of confidence in them.182 Some conduct relating to the conduct of the company’s business by its controllers must have caused the lack of confidence.183 The situation may arise if disputes which ought to have been resolved internally, in accordance with the rule in Foss v Harbottle, were not dealt with in that manner;184 where a company has acted, or is about to act, ultra vires;185 or where there is a need to investigate the affairs of the company, it being no business of a fully paid-up member to petition the court as an amicus curiae or as a friend of the creditors of the company.186 11.42 A  breakdown of mutual trust and confidence will not without more necessarily lead to the making of a winding-up order on the just and equitable ground, even in the case of a quasi-partnership company. In Re Paramount Powders (UK) Ltd187 the Court of Appeal rejected the petitioner’s contention that in such a case a winding-up order would invariably be granted. Whilst it will frequently be fair that a winding-up order is made in such circumstances, it will depend on what equity would regard as fair in the particular case. Where the petitioner’s own misconduct was the sole cause of the breakdown in trust and confidence she will not be entitled to have the company wound up as a consequence.188

Exclusion from management189 11.43 One of the most prevalent occurrences of winding up on the just and equitable basis is where there is an exclusion from management of one of the members in a quasi-partnership company.190 That will be the case when a legitimate expectation to take part in the management of a company has been thwarted by other

182 The provisions of s 459 of the 1985 Act were not considered to be an appropriate alternative remedy, due to the court’s erroneous view that the said section did not relate to all the members of the company. It was not followed by Peter Gibson J in Re Sam Weller & Sons Ltd [1990] Ch 682. The subsequent amendment to s 459(1), and its substitution by s 994 of the 2006 Act, put the matter beyond doubt: if all the members’ interests are affected by unfairly prejudicial conduct, relief may also be claimed under s 994 of the 2006 Act. 183 See RA Noble & Sons (Clothing) Ltd [1983] BCLC 273, ChD, where the petitioner’s conduct was much less blameworthy than that of the de facto controllers of the company; Loch v John Blackwood Ltd [1924] AC 783. 184 See Chapter 5. 185 Re Pioneers of Mashonaland Syndicate [1893] 1 Ch 731. 186 Re Othery Construction Ltd [1966] 1 WLR 69, ChD. 187 [2019] EWCA Civ 1644, [2020] BCC 152. 188 Re Paramount Powders (UK) Ltd at [34]–[39]. However, the fact that the petitioner’s own conduct was a partial cause of the breakdown will not necessarily bar a remedy: Chu v Lau [2020] UKPC 24, [2020] 1 WLR 4656, at [19] and [64], see also Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 and Il v Yesilkaya [2021] EWHC 1695 (Ch) at [55]. 189 See also the discussion at 9.149–9.162, which focuses on the s 994 end of matters. 190 See, for typical examples, Re a Company (No 00477 of 1986) [1986] BCLC 376, ChD; Arrow Trading and Investments Est 1920 v Edwardian Group Ltd [2004] EWHC 1319 (Ch), [2005] 1 BCLC 696, ChD; Re Ghyll Beck Driving Range Ltd [1993] BCLC 1126, ChD; Richardson v Blackmore [2005] EWCA Civ 1356, [2006] BCC 276, CA; Croly v Good [2010] EWHC 1 (Ch), [2010] 2 BCLC 569, ChD, at [93]; Re Woven Rugs Ltd [2010] EWHC 230 (Ch) at [84]; Re Regional Airports Ltd [1999] 2 BCLC 30, ChD.

389

11.44  Just and Equitable Winding Up as Remedy

members.191 It will engage the equitable considerations referred to in Ebrahimi v Westbourne Galleries Ltd.192 In such a situation, the default position is winding up of the company unless, on the facts, alternative relief presents itself in the form of section 996 of the 2006 Act, or an appropriate and suitable offer has been made to buy the petitioner’s shares. 11.44 In Re A & BC Chewing Gum Ltd193 a robust approach was adopted when it was held that an entitlement to management participation was such a fundamental obligation that, if broken, the association had to be dissolved.194 If, of course, the existence of a quasi-partnership company cannot be found on the facts, a winding-up petition on this basis will be refused.195 Section 125(2) of the Insolvency Act196 plays a particularly important role in relation to a petition for winding up based on exclusion, because of the availability of alternative remedies by virtue of section 996 of the 2006 Act – particularly buy-out. No injustice calling for a court’s intervention exists when a reasonable offer is on the table.197 When there is no alternative, or where alternative remedies had already been rejected by a court, a winding up should follow.198

Disappearance of substratum 11.45 The ‘substratum’ of a company is its reason for existence – the purpose for which it was brought into life. To determine what that purpose is, a great many factors can, and should, be taken into account. Since the disappearance of the object clause in memoranda of association (which would have trumped the articles of association),199 it is suggested that no particular weight should any longer be given to the objects, as currently formulated in a company’s constitution, for the purposes of determining the reason for its existence. Because of its inherent wide scope and the fact that it no longer determines the company’s capacity,200 older authorities, emphasising this aspect201 as an important one for determining the substratum of the company, should be treated with the necessary caution. Currently, they represent a rather narrow view on the issue. 191 Re Davis and Collett Ltd [1935] Ch 693; Re Lundie Brothers Ltd [1965] 1 WLR 1051, ChD, on the facts, although overruled by Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, HL; Tay Bok Choon v Tahansan Sdn Bhd [1987] 1 WLR 413, PC; Shah v Shah [2010] EWHC 313 (Ch). 192 See for their application, amongst many, Baker v Potter [2004] EWHC 1422, [2005] BCC 855, ChD, at [89], [90]; Shah v Shah [2010] EWHC 313 (Ch) at [106]. 193 [1975] 1 WLR 579, ChD. 194 See also Re Davis and Collett Ltd [1935] Ch 693; Re Lundie Bros [1965] 1 WLR 1051, ChD; Tay Bok Choon v Tahansan Sdn Bhd [1987] 1 WLR 413, PC. 195 Re Fildes Bros [1970] 1 WLR 592, ChD. 196 See 11.28. 197 O’Neill v Phillips [1999] 1 WLR 1092, HL, at 1107A–1108C; CVC/Opportunity Equity Partners Ltd v Demarco Almeida [2002] UKPC 16, [2002] 2 BCLC 108, PC, at [53]–[55]; Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [304]. The appeal on issues of valuation leaves this point unaffected: [2013] EWCA Civ 667, [2014] 1 BCLC 427, CA. 198 Vujnovich v Vujnovich [1990] BCLC 227, PC. 199 See 3.5. 200 Section 39 of the 2006 Act. 201 Re German Date Coffee Co Ltd (1882) 20 ChD 169; Re Amalgamated Syndicate [1897] 2 Ch 600; Anglo-Overseas Agencies Ltd v Green [1961] 1 QB 1 at 8; see Re Neath Rugby Ltd (No 2) [2009] EWCA Civ 291, [2009] 2 BCLC 427, CA, at [104].

390

Application of section 122(1)(g) illustrated 11.47

Other relevant factors, by which the substratum can be established, are the articles of association,202 the name of the company as such,203 and a prospectus – not as aid in interpreting the memorandum of association, but as confirmation of the court’s views on the matter.204 Under the 2006 Act, the ‘success of the company’ as referred to in section 172 may also be relevant.205 11.46 It would be rare if any one singular document is determinative in establishing the substratum of a company. The constitution, with all its constituent documents,206 must be considered as a whole. At least in the case of quasi-partnership companies, the court may go beyond the company’s constitution to determine the members’ general intention and mutual understanding.207 It is likely, but not certain, that extraneous evidence regarding the objects of a company may not assist in determining those very objects, if all the shareholders have not had access thereto at the time of subscribing for their shares.208 Moreover, the intention of a board of directors, at a given moment, to discontinue a certain business had no effect on the determination of the question whether the substratum had gone.209 The substratum will be considered to have disappeared, and will therefore constitute grounds for a finding of a just and equitable winding up, when that which the company was established to do can no longer be undertaken. A  good example is where the company had been in existence for six years, had never made any profit, and its business, which had commenced with a considerable staff in extensive premises, ended up being carried on in small premises, attended by a single clerk, with all the paid-up capital except £337 having been exhausted.210 The position would also be untenable if the company has ceased to carry on business and the carrying on of the business has become impossible, such as where: its business had been carried on at a constant loss; all its capital had been expended; its property had been sold at a ruinous sacrifice, with the exception of some patents which were nearly worthless; and it had nothing left but these patents and a sum of money far from sufficient for payment of its debts.211 It is nothing less than fair that winding up should ensue, because the purpose for which shareholders had contributed to the capital of the company has disappeared. 11.47 It is an exercise in futility to keep afloat a company which has run out of capital and to which the members are not prepared to make any further financial contribution. Since the very reason for its existence has disappeared, it will be just and equitable to wind it up.212 Even if the company finding itself in this position is busy dealing with matters incidental to its intended winding up, a petition may still be brought to wind up the company where its only remaining function was to gather 202 Re Capital Fire Insurance Association (1882) 21 ChD 209. 203 Re Crown Bank (1890) 44 ChD 634; Cotman v Broughman [1918] AC 514, HL. 204 Re German Date Coffee Co Ltd (1882) 20 ChD 169 at 184–185. 205 See 2.22–2.29. 206 See 3.8–3.28. 207 Virdi v Abbey Leisure Ltd; Re Abbey Leisure Ltd [1990] BCLC 342, CA. 208 Egyptian Salt and Soda Co Ltd v Port Said Salt Association Ltd [1931] AC 677, PC. 209 Re Kitson & Co Ltd [1946] 1 All ER 435, CA. 210 Re Bristol Joint Stock Bank (1890) 44 ChD 703 at 712. 211 Re Diamond Fuel Co (1879–1880) 13 ChD 400, CA, at 408. Although, in the circumstances, the company may well be insolvent, meaning that relief under s 122(1)(g) would probably not be available today, as the petitioner is likely to be unable to show the required tangible interest. 212 Re Bristol Joint Stock Bank (1890) 44 ChD 703; Re Diamond Fuel Co (1879–1880) 13 LR ChD 400.

391

11.48  Just and Equitable Winding Up as Remedy

its assets and pay its creditors.213 The same will certainly apply to a company formed to pursue a specific opportunity which has proved to be worthless. The impossibility of carrying on business must exist at the date of the petition.214 In Marsden v Tower Taxi Technology LLP,215 it was still possible to continue with the business of the company, since negotiations were still underway to acquire the rights in and to certain software at the time that the petition was presented. The petition was accordingly prematurely brought and was struck out.216 However, there is no formula dictating that a finding of loss of substratum shall necessarily eventuate in a winding up – the court’s obligation remains to form an opinion that, in all the circumstances, it is just and equitable to make the order.217 If a proper commercial purpose remains, a winding-up order on the basis of the disappearance of the substratum ought not to be made.218 11.48 Corporators’ optimism sometimes gets the better of them when they start a venture (sometimes prematurely) to secure their place in the market. A consequence is that the opportunity sought to be exploited cannot be acquired for the company, as was the case in Re Baku Consolidated Goldfields Ltd,219 where the company was formed with the purpose of acquiring certain oilfields in Russia. Before they could be acquired, they were confiscated and for many years the company had been engaged in an endeavour to substantiate a claim against the Russian Government. It did not possess any other assets or carry on any other business. In the circumstances, the entire substratum was gone and it was just and equitable to wind up the company.220 If, in reality, the substratum has disappeared, winding up will usually be ordered, despite the opposition by a majority of members.221

Poor management 11.49 Within a quasi-partnership context, misconduct by the directors is likely to amount to conduct unfairly prejudicial to the interests of other members of the company, warranting remedies under section 996. It is hard to construct a situation outside a quasi-partnership company where poor management may lead to any remedy, it being a business risk that investors take when investing in a company. Breach of any of their duties to the company should attract the dismissal of the directors by the company in general meeting; steps by the company to recover any loss or damage caused by the directors to the company as a result of their misconduct; or, if the company is unwilling to do so, a derivative action by shareholders against the aberrant directors. Any application for winding up will most likely be met by the

213 Re Perfectair Holdings Ltd [1990] BCLC 423, ChD. 214 Re German Date Coffee Co Ltd (1882) 20 ChD 169. See also Re Varieties Ltd [1893] 2 Ch 235. 215 [2005] EWCA Civ 1503. 216 Compare Re Eastern Telegraph Co Ltd [1947] 2 All ER 104, ChD. 217 Re a Company (No 5758 of 2003) [2003] EWHC 2790 (Ch) at [12]. 218 Re Kitson & Co Ltd [1946] 1 All ER 435, CA; Taldua Rubber Co [1946] 2 All ER 763, ChD. 219 [1944] 1 All ER 24, ChD. 220 See also In re Haven Gold Mining Co (1881–82) 20 ChD 151, CA, where rights to mine in New Zealand could not be secured. 221 Re Haven Gold Mining Co (1881–82) 20 ChD 151, CA; Re Baku Consolidated Oilfields Ltd [1944] 1 All ER 24, ChD.

392

Circumstances preventing relief under section 122(1)(g) 11.50

section 125(2) defence, namely the availability of alternative remedies, such as those just mentioned. In interlocutory proceedings, Dillon J suggested222 that, if the directors of a company subject to the City Code on Takeovers and Mergers223 flouted that Code, and minority shareholders suffered loss as a result of the withdrawal of the Stock Exchange listing for the company’s shares, it might be just and equitable for the company to be wound up. Whether, in any case, a winding-up order should be made would depend on a full investigation of the facts of the particular case. This might be an instance where shareholders’ loss will not be reflective of the company’s loss, and that a claim for damages may lie against the directors personally.224

CIRCUMSTANCES PREVENTING RELIEF UNDER SECTION 122(1)(G) 11.50 Having dealt with the categories of acknowledged circumstances in which just and equitable winding up should be granted, a number of circumstances remain where, however wide the courts’ jurisdiction, orders will not be granted. People, so Lord Cross said in Ebrahimi,225 do not become partners unless they have confidence in each other. If that confidence vanishes, the relationship should be terminated, unless the party who wishes to end it has been solely responsible for the situation which has arisen. He must have come to court with the proverbial clean hands. This approach was put in the right context when the Privy Council explained that ‘It is quite clear that Lord Cross was considering the position in which the petitioner’s misconduct (and thus the relative uncleanliness of his hands) was causative of the breakdown in confidence on which the petition was based’.226 A petitioner’s indisputable causative conduct leading to a breakdown in relations did not stand in the way of a winding-up order where the other shareholder consented thereto and where, in any event, a prior unfair prejudice petition was unsuccessful.227 A  mere desire to realise a shareholder’s investment is not sufficient for an order winding up the company.228 Unreasonableness in not pursuing alternative remedies, if they are available,229 may result in the dismissal of the petition. A fully paid-up member will, for lack of showing a tangible interest in the form of a dividend, not be able to petition on the basis that the company is unable to pay its debts.230

222 223 224 225 226

227 228 229 230

Re St Piran Ltd [1981] 1 WLR 1300, ChD, at 1307F–1307H. See, for a discussion of this Code, 4.29–4.34. See, for a discussion of the limited scope for claiming reflective loss, Chapter 8. Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, HL, at 383H–384A, 387G–387H. Vujnovich v Vujnovich [1990] BCLC 227, PC, at 231h–232a. See also the application of this principle in Re Paramount Powders (UK) Ltd [2019] EWCA Civ 1644, [2020] BCC 152 and Haz International v Cuddusi Can Il, [2021] EWHC 1695 (Ch), [2021] 7 WLUK 126 (ICC Judge Prentis) at [52]–[55]. Re Phoneer Ltd [2002] 2 BCLC 241, ChD. Re Anglo-Continental Produce Co Ltd [1939] 1 All ER 99, ChD. Section 125(2) of the Insolvency Act. Section 122(1)(f) of the Insolvency Act.

393

11.51  Just and Equitable Winding Up as Remedy

OTHER BASES FOR CONTRIBUTORIES’ PETITIONS 11.51 A contributory may petition for the winding up of a company on the basis of a special resolution.231 Since the will of the membership has been expressed by a special resolution, it will not be required of a contributory to establish a tangible interest. The company will be wound up irrespective of its financial position. A contributory may petition for a company’s winding up if the company is a public company which was registered as such on its original incorporation, and has not been issued with a trading certificate under section 761 of the 2006 Act and more than a year has expired since it was so registered.232 The section 761 certification is to the effect that the registrar is satisfied, on application made in accordance with section 762233 of the 2006 Act, that the nominal value of the company’s allotted share capital is not less than the authorised minimum.234 A  trading certificate has effect from the date on which it is issued and is conclusive evidence that the company is entitled to do business and exercise any borrowing powers.235 This statutory provision overlaps to an extent with one of the recognised sub-categories under the just and equitable winding-up provision,236 namely the disappearance of the substratum of the company.237 Clearly, members who have invested in a company which has not successfully achieved the required share capital should be given the opportunity of extracting themselves from the venture to recoup so much of their investment as may be available at that stage, or to prevent further financial exposure if they are not fully paid-up members. 11.52 Closely connected to the disappearance of the substratum notion is the entitlement to petition for winding up if the company does not commence its business within a year from its incorporation, or suspends its business for an entire year.238 Contributories have a clear interest in recouping their investment or preventing further harm where a company has suffered such a long period of inactivity. Where the majority of members oppose the winding up, if a winding-up order is to be made, the court must be persuaded that there is no intention to commence or re-commence business.239 A contributory may petition for winding up if the company is an old public company,240 something which is not likely to occur often. An ‘old public company’ is a company limited by shares, or a company limited by guarantee and having a share capital, in respect of which a number of conditions are met.241

231 For discussion of special resolutions, see 3.15. 232 Section 122(1)(b) of the Insolvency Act. 233 Note the slight amendment to s 762 with effect from 30 June 2016. However, it does not have any impact on the point advanced here. 234 Section 761(2) of the 2006 Act. 235 Section 761(4) of the 2006 Act. 236 Section 122(1)(g) of the Insolvency Act. 237 See 11.45–11.48. 238 Section 122(1)(d) of the Insolvency Act. 239 Re Middlesborough Assembly Rooms Co (1880) 14 ChD 104. 240 Section 122(1)(c) of the Insolvency Act. 241 See Companies Act 2006 (Consequential Amendments, Transitional Provisions and Savings) Order 2009, SI 2009/1941, Sch 3.

394

Chapter 12

Inter-relationship of Remedies

Contents Inter-relationship between personal remedies

12.1

Section 996 and internal remedies

12.3

Section 996 and derivative claims

12.5

Section 996 and winding up

12.9

Section 996 and damages claims

12.10

INTER-RELATIONSHIP BETWEEN PERSONAL REMEDIES 12.1 Claims to enforce statutory rights under the Companies Act 2006 (‘the 2006 Act’) and to enforce contractual rights arising under shareholders’ agreements are free-standing and are considered in the chapters dealing with those rights.1 Questions arising from the inter-relationship of rights and remedies, and the availability and appropriateness of remedies, arise with regard to relief from unfair prejudice pursuant to section 994 of the 2006 Act, derivative claims, and just and equitable winding up.2 Some of the issues arising as to the availability and appropriateness of each remedy are considered in this chapter. 12.2 Depending on the nature and severity of the breach of fiduciary, common law, statutory or contractual duties by the de facto controllers of the company, shareholders’ personal claims can be asserted: (a) in general meeting;3 (b) by winding up the company under sections 122(1)(g) and 125(2) of the Insolvency Act 1986;4 (c) as a result of relief granted under the wide discretion granted to courts in terms of section 996 of the 2006 Act;5 following presentation of a petition 1 See Chapters 3 and 7. 2 The width of the relief available under s 996 (and the importance of the court considering the design of a ‘bespoke’ solution in appropriate cases) was re-stated by Briggs J in Sikorski v Sikorski [2012] EWHC 1613 (Ch) at [75]. See also Eaton v Caulfield (No 2) [2013] EWHC 2214 (Ch), [2015] 1 BCLC 634, ChD, at [24] for the principles as set out in Hawkes v Cuddy [2007] EWHC 2999 (Ch), [2008] BCC 390, ChD, at [243]–[246]; cf Re Watercor Ltd [2017] EWHC 1814 (Ch) at [14]. 3 See Chapter 7. 4 See Chapter 11. 5 See Chapter 10.

395

12.3  Inter-relationship of Remedies

under section 994, based on unfair prejudicial conduct suffered by minority shareholders;6 or (d) by court action for non-reflective loss and damage against the directors.7 All of these remedies are distinguishable from the provisions of Part 11, Chapter 1 of the 2006 Act allowing for derivative claims8 which will not, as with the other remedies, directly benefit the shareholders, but will only do so indirectly because benefits obtained by that process are for the pocket of the company. An awareness of the potential advantages and disadvantages of each available remedy is a necessary part of identifying the appropriate cause of action to pursue, based on any particular factual circumstances.

SECTION 996 AND INTERNAL REMEDIES 12.3 Given the wideness of the scope of unfairly prejudicial conduct,9 there is limited constraint on the factual bases on which a section 994 petition may be launched. What would otherwise have been rejected as trivial or technical breaches if regarded in isolation, and in themself not capable of generating relief under section 996, may be pleaded in a section 994 petition if they are complementary to relevant material facts which, as a whole, will constitute proof of unfair prejudice and an entitlement to relief.10 If a court chooses to ignore allegations of technical or trivial breaches for purposes of section 996 relief, it does not imply condonation of them – it simply means that there are other mechanisms available to complainants about such conduct, such as raising them on the occasion of a general meeting. To bring a claim and seek a remedy in respect of loss or damage suffered by the company, a shareholder needs to come within one of the exceptions to the rule in Foss v Harbottle,11 namely that a claim in respect of a wrong done to the company may only be brought by the company. The derivative claim12 evolved as a means of achieving this, although, as explained below, a similar result may be capable of being achieved by means of an unfair prejudice petition. The rule in Foss v Harbottle does not operate to prevent what is a genuine personal claim.13 A genuine personal claim is one arising from a breach of a duty owed to the shareholder personally and which does not offend against the principle of the non-recoverability of reflective loss. There is no objection in principle to a genuine personal claim and a derivative claim being brought in the same action, where they arise between the same parties and the two may be conveniently dealt with together.14 However, the court will be likely to direct that they be dealt with separately, via separate trials or the framing of appropriate preliminary issues, where to do so would be consistent with the overriding objective

6 See Chapter 9. 7 See Chapters 2 and 8. 8 See Chapter 6. 9 Discussed in Chapter 9. 10 Re Sunrise Radio Ltd [2009] EWHC 2893 (Ch), [2010] 1 BCLC 367, ChD, at [7]. The appeal on issues of valuation leaves this point unaffected: [2013] EWCA Civ 667, [2014] 1 BCLC 427, CA. 11 67 ER 189, (1843) 2 Hare 461, ChD. As to which, see Chapter 5. 12 As to which, see Chapter 6. 13 See 7.1–7.2. 14 See CPR r 7.3.

396

Section 996 and derivative claims 12.5

of the Civil Procedure Rules 1998 (‘CPR’).15 This will be the case where separate disposal would be in the interests of justice and/or likely to save costs. 12.4 A shareholder is entitled to avail himself of the provisions of section 306 of the 2006 Act by requesting the court to order the assembling of a general meeting. All companies are covered by this provision, but it will particularly apply where there was a breakdown in the relationship between members of a quasi-partnership company.16 In Wheeler v Ross, governance of the company had become unsustainable due to deadlock between the directors. A meeting was necessary so that the claimant could exercise his majority rights as member within the scope of the company’s constitution. A suggestion that section 994 proceedings would have been more appropriate was rejected: the availability of a petition was no obstacle to a section 306 application. It is also irrelevant that a possibility existed that the meeting might have resulted in further litigation, by virtue of the provisions of section 994. The existence of an already instituted section 994 petition will similarly not be a deterrent to the grant of an order under section 306.17

SECTION 996 AND DERIVATIVE CLAIMS 12.5 It is possible that an allegation of a breach by directors of their fiduciary duties could result in a situation where it is difficult to make a choice between the procedures available under Part 11, Chapter  1 (derivative claims) and section 994 respectively.18 Should a derivative action be the chosen route, section 263(1)(f) of the 2006 Act requires a court, when considering whether to give permission to bring that action, to take into account, amongst other matters, whether the act or omission in respect of which the claim has been brought gives rise to a cause of action which the member could pursue in his own right rather than on behalf of the company. Most commonly, this will be a petition under section 994 of the 2006 Act.19 Should the shareholder choose the section 994 route, section 996(2)(c) permits a court faced with a section 994 petition to order the institution of a derivative action. In Re Charnley Davies Ltd (No  2),20 Millett J  explained the conundrum between a common law derivative action and section 459 of the Companies Act 1985 (the predecessor of section 994): ‘The very same facts may well found either a derivative action or a s 459 petition. But that should not disguise the fact that the nature of the complaint and the appropriate relief is different in the two cases. Had the petitioners’ true complaint been of the unlawfulness of the respondent’s conduct, so that it would be met by an order for restitution, then a derivative action would have been appropriate and a s  459 petition would not. But that was not the true nature of the petitioners’ complaint. They did not rely on the unlawfulness of the respondent’s conduct to found their cause of action; and they would not have been content with an 15 CPR r 1.1. 16 Wheeler v Ross [2011] EWHC 2527 (Ch). 17 Re Woven Rugs Ltd [2002] 1 BCLC 324, ChD, at [14]. 18 See Stainer v Lee [2010] EWHC 1539 (Ch), [2011] 1 BCLC 537, ChD, at [50], [51]; compare Kleanthous v Paphitis [2011] EWHC 2287 (Ch), [2012] BCC 676, ChD. 19 See Chapter 9. 20 [1990] BCLC 760, ChD, at 784a–784c.

397

12.6  Inter-relationship of Remedies

order that the respondent make restitution to the company. They relied on the respondent’s unlawful conduct as evidence of the manner in which he had conducted the company’s affairs for his own benefit and in disregard of their interests as minority shareholders; and they wanted to be bought out. They wanted relief from mismanagement, not a remedy for misconduct.’ 12.6 The choice nevertheless requires careful consideration, not least because the position with regard to costs is significantly different. A derivative claim may seem attractive because the company may be ordered to indemnify the petitioner against the costs of the action.21 Alternatively, section 994 may appear attractive because of the very wide scope for granting appropriate relief. Such relief may include an order to proceed with a derivative claim. In that event, the procedural hurdle of obtaining permission under section 261 is avoided.22 The further permutations were put as follows by Lewison J:23 ‘[82] Accordingly, it seems to me that where the petitioner’s complaint is that the company has failed to assert a good claim against a third party, the court’s powers under s 996 would include the making of an order requiring the company to assert that claim, if necessary by taking or defending proceedings. Since the company’s claim would be a claim against a third party, once the court had decided that a failure to assert that claim had unfairly prejudiced the petitioner, the directors would not need to be parties to the subsequent claim against the third party. In addition, the width of the court’s jurisdiction under s 996 enables the joinder of third parties to the petition itself, at least where relief is claimed against them: Re Little Olympian Each-Ways Ltd [1994] 2 BCLC 420; Lowe v Fahey [1996] 1 BCLC 262. [83] On the other hand, it may be that the company’s cause of action is a cause of action only against the directors for loss suffered as a result of their default or breach of duty (etc). In such a case the directors will be necessary parties to the company’s claim. It may be, therefore, that different procedural routes will be adopted depending on the company’s underlying claim.’ 12.7 A wrong choice was apparently made on behalf of the minority directors in Mission Capital Plc v Sinclair.24 Two executive directors of a company constituted the minority on the board. There were three other non-executive directors. The two executive directors were dismissed as employees of the company, due to alleged financial irregularities. They sought to reverse an injunction granted to the company by counterclaiming for an injunction prohibiting the company and the non-executive directors from preventing the dismissed directors from attending the company’s premises and performing the duties required of them under their service agreements. This was also essentially the grounds for their derivative action. The court had to consider whether permission should be granted to proceed with the derivative claim. One of the considerations that the court had regard to, in the exercise of its discretion, was section 263(3)(f) of the 2006 Act, namely whether the act or omission in respect of which the claim was brought gave rise to a cause of action that the member could pursue in his own right rather than on behalf of the company. The court found that, in this instance, the section 994 route would be more appropriate in view of the 21 See 6.47–6.48. 22 Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2011] 1 BCLC 498, ChD, at [81], [124]. 23 At [82], [83]. 24 [2008] EWHC 1339 (Ch), [2010] 1 BCLC 304, ChD.

398

Section 996 and derivative claims 12.8

personal nature of the claim. Where the real dispute is between shareholders rather than the company and a director, permission to pursue a derivative claim may not be appropriate. In Goodwin v Cook25 the company had ceased trading, disposed of its assets and was insolvent, and the real dispute was one of accounting as between three individual members/directors so permission to continue a derivative claim was refused. Similarly, in Gill v Thind26 permission to continue a head of claim was refused as the real dispute was between quasi-partner shareholders and between the company and the director. Certain relief may not be possible under a claim brought in terms of section 994. Where a group of 36 shareholders sought an order not to be bought out, but rather sought financial remedies for misconduct against directors, it was held in Stainer v Lee27 that a derivative claim was entirely appropriate, and the theoretical availability to the applicant of proceedings by way of an unfair prejudice petition was not a reason to refuse permission. Where a claimant bringing a derivative claim is unable to fund an unfair prejudice petition, they will be acting reasonably in opting to seek to pursue a derivative claim where the necessary requirements are present.28 12.8 At common law, the availability of an alternative remedy was for a long time regarded as a complete bar to permission to bring a derivative claim.29 However, more recent cases have emphasised that provided the court is satisfied that the applicant is acting bona fide,30 the potential availability to the applicant of an unfair prejudice petition will not be a bar to permission where there are good reasons for the applicant to proceed by way of a derivative claim.31 In cases under the 2006 Act the availability of another remedy is not a bar.32 It has resulted in the refusal or potential refusal of permission to continue a derivative claim under section 263 in some cases33 but in several recent cases it has not been regarded as a factor of great weight because the claimant’s decision to pursue a derivative claim was regarded as reasonable in the circumstances.34

25 26 27 28

[2018] 6 WLUK 425 at [83]. [2020] EWHC 2973 (Ch) at [88]–[90]. [2010] EWHC 1539 (Ch); [2011] 1 BCLC 537, ChD, at [51]. Although in Ritchie v Union of Construction, Allied Trades and Technicians [2011] EWHC 3613 (Ch) permission was refused by reason of the availability of an alternative remedy even though the applicant appeared to be unable to afford to pursue it, because an independent board would not have pursued such a derivative claim. 29 See 6.13, although the availability of an alternative remedy is not automatically a bar at common law: Hughes v Weiss [2012] EWHC 2363 (Ch) at [61]–[62]. 30 Bhullar v Bhullar [2015] EWHC 1943 (Ch), [2016] 1 BCLC 106, ChD, at [45]. 31 See eg Bhullar v Bhullar [2015] EWHC 1943 (Ch), [2016] 1 BCLC 106, ChD; Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] EWHC 348 (Ch), [2013] Ch 551. 32 See generally 6.43; Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2011] 1 BCLC 498, ChD, at [123]. See also Kiani v Cooper [2010] EWHC 577 (Ch), [2010] 2 BCLC 427, ChD, particularly at [39], [40]; Langley Ward Ltd v Trevor [2011] EWHC 1893 (Ch) (where winding up was the apparent and logical solution to the problem). 33 For the weight given to the availability of an alternative remedy under s 263, see 6.43, and Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2011] 1 BCLC 498, ChD, at [126]; Kleanthous v Paphitis [2011] EWHC 2287 (Ch), [2012] BCC, ChD, 676 at [81]; Franbar Holdings Ltd v Patel [2008] EWHC 1534 (Ch), [2009] 1 BCLC 1, ChD, at [53], [54], but also Hughes v Weiss [2012] EWHC 2363 (Ch) at [58]–[69] and Phillips v Fryer [2013] BCC 176 (Ch). 34 For example, Hook v Sumner [2015] EWHC 3820 (Ch), [2016] BCC 220, ChD, Cullen Investments Ltd v Brown [2015] EWHC 473 (Ch), [2016] 1 BCLC 491, ChD; McAskill v Fulton (unreported, 31 October 2014), Norris J.

399

12.9  Inter-relationship of Remedies

It is possible for a derivative claim and an unfair prejudice petition to be consolidated and heard together,35 although such a course will seldom be appropriate, given the width of remedies available under section 996. In a case where such consolidation did occur,36 relief akin to a derivative claim was ordered under the predecessor section to section 996.37 It also appears that there is a power under section 996 to award a payment to the company, as a form of relief, on an unfair prejudice petition presented by a shareholder.38 This would mean that a remedy for a company, equivalent to what would be recoverable by way of a derivative claim, may be available to a shareholder presenting a petition under section 994, thereby avoiding the two hurdles for bringing a derivative claim imposed by sections 261–264. This is a somewhat surprising position, and risks making the purpose of sections 261–264, and the apparent policy reasons39 behind reform of the common law relating to derivative claims and Parliament’s enacting of those sections, only of practical relevance where the complaining shareholder requires the benefit of an indemnity for costs from the company. For this reason at least, the availability of such a remedy under section 996 may be reconsidered.

SECTION 996 AND WINDING UP 12.9 The preconditions for obtaining a winding-up order on the ‘just and equitable basis’ under section 122(1)(g) (read with section 125(2)) of the Insolvency Act 1986, and those in relation to unfair prejudicial conduct resulting in a discretionary grant of a winding-up order under section 996 of the 2006 Act, are not coterminous. The respective routes to obtain a winding-up order must accordingly be taken account of.40 Despite previous indications to the contrary,41 it is now clearly established that the two remedies are not necessarily only available as alternatives to each other. It is not necessary, in order to obtain a just and equitable winding up, to establish that the requirements of section 994 are made out; nor is it necessary to establish unfair prejudice under section 994, and hence to be entitled to relief under section 996, to show that an order for a just and equitable winding up would also be available.42 However, in many cases the factual circumstances may meet the pre-conditions of both remedies. The adding of a claim for a just and equitable winding up to an unfair prejudice petition has long been discouraged by the courts, and carried a risk of being struck out where the real remedy sought is based on unfair prejudice (usually seeking a buy-out of the complaining minority’s shares on terms more advantageous than a winding up would bring). A winding-up petition, even if presented on the just and equitable ground, is a very serious matter, and may be used for the purpose of putting pressure on the other 35 See Clark v Cutland [2003] EWCA Civ 810, [2004] 1 WLR 783, CA. 36 Clark v Cutland [2003] EWCA Civ 810, [2004] 1 WLR 783, CA. 37 Section 461 of the 1985 Act. 38 Gamlestaden Fastigeheter AB v Baltic Partners Ltd [2007] UKPC 26, [2007] 4 All ER 164, PC. But compare Re Chime Ltd (2004) 7 HKCFAR 546. See further the discussion at 9.31. 39 See 6.15. 40 See, respectively, Chapters 10 and 11. 41 Re Guidezone Ltd [2000] 2 BCLC 321, per Jonathan Parker J. 42 Re Neath Rugby Ltd [2009] EWCA Civ 291, [2009] 2 BCLC 427, CA, at [102]–[107].

400

Section 996 and damages claims 12.10

shareholders, so is liable to be struck out where it appears that it is being used for a collateral purpose.43 A  practice direction proscribes that a claim for a just and equitable winding up should only be included where it is the petitioner’s preferred remedy, or the only one to which he is entitled.44 However, it appears that an additional or alternative claim for a just and equitable winding up will only be struck out in a clear case.45 However, the availability of an alternative remedy, such as under section 996, will frequently mean that winding up on the just and equitable ground will be refused.46 It is necessary for a respondent to establish that an alternative remedy is available in practice and not just in theory if that alternative remedy is to be a potential bar to a winding-up petition. If, for example, a buyout order would not be capable of being enforced due to the inability of a respondent to an unfair prejudice petition to fund it, then a petitioner who establishes that a clean break should be ordered will not have an alternative remedy to a winding-up.47

SECTION 996 AND DAMAGES CLAIMS 12.10 In those rare circumstances where damages claims may be brought against directors for breach of duties owed to shareholders, careful consideration should be given whether that conduct constitutes unfairly prejudicial conduct for the purposes of section 994. If such a conclusion can be drawn, it is unlikely that a petitioner will be censured for bringing a section 994 petition rather than an ordinary action for damages. It is a question of form rather than substance. The wide discretionary powers granted to a court by section 996 of the 2006 Act include power to award a payment to the shareholder equivalent to damages,48 although technically such an award may be accurately described as ‘financial or equitable or statutory compensation’.49 Such relief does not fall foul of the ‘no reflective loss’ principle.50

43 44

Re J E Cade & Son Ltd [1991] BCC 360, ChD. CPR Practice Direction 49B, para 1. Similar provision was made in a previous practice direction: Chancery 1/90 ([1990] 1 WLR 490). 45 See eg Virdi v Abbey Leisure Ltd; Re Abbey Leisure Ltd [1990] BCLC 342, CA, and Re Copeland & Craddock Ltd [1997] BCC 294, CA. But compare Re a Company (No 004415 of 1996) [1997] 1 BCLC 479, ChD, where the petition was found to have a collateral purpose of bringing pressure to bear on the majority. 46 See 11.28–11.32. 47 As was the case in the Australian case of Asia Pacific Joint Mining Pty Ltd v Allways Resources Holdings Pty Ltd [2018] QCA 48. 48 Gamlestaden Fastigeheter AB v Baltic Partners Ltd [2007] UKPC 26, [2007] 4 All ER 164, PC; Atlasview Ltd v Brightview Ltd [2004] EWHC 1056 (Ch), [2004] 2 BCLC 191, ChD. 49 Atlasview Ltd v Brightview Ltd [2004] EWHC 1056 (Ch), [2004] 2 BCLC 191, ChD, at [55]. 50 Ibid at [58]–[63].

401

Chapter 13

Procedure

Contents Introduction 13.1 Claims brought by petition

13.2

Unfair prejudice

13.3

Just and equitable winding up

13.4

Claims brought by issuing a claim form Personal claims Derivative claims

13.5 13.6 13.7

INTRODUCTION 13.1 This chapter sets out the procedure to be adopted in bringing the claims discussed in Chapters 4, 6, 7, 9 and 11. Claims brought pursuant to the principles set out in Chapters 9 and 11 must be brought by petition, while those in Chapters 4, 6 and 7 must be brought by the issue of a claim form. Derivative claims also follow a particular procedure following the issue of the claim form.

CLAIMS BROUGHT BY PETITION 13.2 Both unfair prejudice claims and claims for a just and equitable winding up of the company must be commenced by the presentation of a petition. In a suitable case, they may also be brought in a single petition.1 Both are subject to the Civil Procedure Rules 1998 (‘CPR’).

UNFAIR PREJUDICE 13.3 The procedure to be followed in bringing a claim under section 994 is set out in the Companies (Unfair Prejudice Applications) Proceedings Rules 2009 (SI 2009/2469) (the ‘2009 Rules’), which modify the provisions of the CPR.2 The CPR otherwise applies to unfair prejudice claims. As with all claims, consideration should be given to sending a letter before claim to the proposed respondents before any claim is issued – if the petitioner fails to act reasonably and proportionately in 1 2

However this is frequently not appropriate. See 11.3–11.4. 2009 Rules, r 2.

403

13.3  Procedure

pursuing his claim, his conduct may affect his entitlement to costs or the amount of those costs.3 There is no particular pre-action protocol for unfair prejudice claims but the intending petitioner should comply with the Practice Direction for Pre-Action Conduct4 unless there is a good reason not to do so, such as lack of time due to the need to obtain urgent interlocutory relief. In summary, the procedure is a follows: •

•

• •

The petitioning member presents a petition alleging unfair prejudice at the High Court of Justice5 and pays the issue fee. The requirements as to the contents of the petition are set out in the 2009 Rules and the petition must set out the grounds on which it is brought and include in the prayer for relief a statement in clear terms of the relief required,6 although it is not required to set out in detail the precise form of the order sought.7 The basic requirements as to what a petition should include are set out in the Schedule to the 2009 Rules. The particular importance of the petition enabling the clearly defining of the issues arising on a claim for unfair prejudice has been emphasised8 and the court is likely to be astute to ensure that the issues in the case are restricted to the pleaded allegations9. The company should be included as a respondent to the petition as well as those shareholders, directors and others against whom relief is sought. The petition should not include an alternative claim for the just and equitable winding up of the company unless that is the relief that the petitioner prefers or may be the only relief to which the petitioner is entitled.10 If an alternative claim for a just and equitable winding up is included, the petitioner should state whether he consents or objects to a validation order being made under section 127 of the Insolvency Act 1986.11 When the petition is presented the court will fix a date for the first hearing, known as the ‘return date’.12 The petitioner is required to serve the petition on the company and the other respondents at least 14 days before the return date.13 In London, the court usually gives automatic directions as to the procedure to be followed on the petition, including points of claim, points of defence and dates for filing and exchanging costs budgets, and fixes the return date for the

3 CPR Pt 44. 4 CPR PD PAC. 5 Section 1156 of the 2006 Act provides that a petition may be presented in the county court as an alternative, but that court’s jurisdiction is limited by reference to the amount of the share value of the company and that court is unlikely to have the relevant expertise for or experience of such claims. 6 2009 Rules, r 3. If the petition fails to include any allegations of unfairly prejudicial conduct against any of the respondents, references to that respondent in the prayer for relief will be struck out: Re Pedersen (Thameside) Ltd [2017] EWHC 3406 (Ch), [2018] BCC 58. 7 JE Cade & Sons Ltd [1992] BCLC 213, ChD; Re Antigen Laboratories [1950] WN 587, ChD. 8 This has been frequently stated by courts hearing such claims. See, for example, McKillen v Misland (Cyprus) Investments Ltd [2012] EWHC 521 (Ch), [2012] 3 WLUK 124, per David Richards J at [12] and Re G&G Properties Ltd [2019] EWCA Civ 2046, [2020] BCC 236. 9 Re G&G Properties Ltd [2019] EWCA Civ 2046, [2020] BCC 236, per David Richards LJ, [37] – [39]. 10 See Re Copeland & Craddock Ltd [2004] EWHC 3472 (Ch). The requirement was previously included in a former practice direction – Practice Direction (Companies Court: Contributory Petition) [1990] 1 WLR 490, ChD (22 February 1990). 11 An order permitting the company to continue to make dispositions and therefore trade. See 11.4. 12 2009 Rules, r 3. 13 2009 Rules, r 4.

404

Unfair prejudice 13.3

•

• • •

• • •

14 15 16 17 18 19 20 21

parties to attend before the registrar for further directions.14 At a district registry, the court fixes a day on which the petitioner and any defendant (including the company) are to attend before the District Judge for directions to be given in relation to the procedure on the petition. The 2009 Rules set out at rule 5 matters which the court is obliged to address when considering directions. In practice the directions are frequently agreed. The directions usually order that the petition shall not be advertised at least until after it has been heard.15 Parties carry out directions given by the court which may include filing of points of claim and defence, although the order is usually that the petition stand as points of claim and the respondent file points of defence, with the petitioner given permission to file points of reply to the defence if so advised. The respondent may include with his points of defence points of counterclaim16 and the petitioner will then file points of defence to counterclaim with his points of reply. Disclosure will almost always be ordered and will usually be standard disclosure.17 An order providing for the exchange of witness statements and providing for the oral evidence at trial being limited to those witnesses whose statements have been exchanged will usually be made. The court will be likely to consider whether to order a split trial, which may provide for the issue of the valuation of shares to be bought out being heard separately after a trial as to what remedy the petitioner should be granted and only if unfair prejudice is established and order for the purchase of shares is made. In appropriate cases, this enables the likely substantial costs of the valuation of the shares to be avoided and hence not wasted if no order for the purchase of shares is made. The usual interim orders of strike out18 and summary judgment19 provided for in the CPR will be available on application in appropriate cases, as well as an interim injunction if necessary.20 The hearing of the petition in the form of a trial will take place in accordance with the case management orders previously made by the court. Where unfair prejudice is established, the court will order a remedy. Where the order provides for any alteration to the constitution of the company or for a purchase of the petitioner’s shares by the company and a reduction in the company’s share capital, a copy of the order is required to be delivered to the registrar of companies together with a copy of the document amending the constitution within 14 days of the date of the order, or such other period as provided for in the order.21 These automatic directions were amended by Chief ICCJ Briggs on 31 January 2018. The notification of the existence of a petition to a third party is likely to be a breach of such a direction and a petitioner who widely publicises the petition before any direction as to advertising has been made is liable to have their petition struck out: Re Doreen Boards Ltd [1996] 1 BCLC 501. In accordance with CPR Pt 20. This applies to unfair prejudice claims although both CPR Pt 20 and the 2009 Rules are silent on the point – see Apex Global Management Ltd v Fi Call Ltd [2014] EWCA Civ 1106 at [67]. In accordance with CPR 31.6. Pursuant to CPR 3.4. See Chapter 14. Under CPR Pt 24. See also Chapter 14. See also striking out following an offer to purchase the petitioner’s shares in the form of an O’Neill v Phillips offer at 9.160. See also Chapter 14. See Pt 17 ch 10 and especially s 649 of the 2006 Act in relation to a reduction in capital and s 998 in relation to a change to the constitution.

405

13.4  Procedure

JUST AND EQUITABLE WINDING UP 13.4 As noted in Chapter 11, a petition to wind up the company on the just and equitable ground is presented pursuant to section 122(1)(g) of the Insolvency Act 1986. The procedure on presentation of the petition is governed by rules 7.25–7.32 of the Insolvency (England and Wales) Rules 201622 (the ‘Insolvency Rules’). The Insolvency Rules provide that parts of the CPR apply to insolvency proceedings, including the provisions as to costs.23 As with all claims, consideration should be given to sending a letter before claim to the proposed respondents before a petition is presented, as if the petitioner fails to act reasonably and proportionately, his conduct may affect his entitlement to costs or the amount of those costs.24 There is no particular pre-action protocol for just and equitable winding up proceedings but the intending petitioner should comply with the Practice Direction for Pre-Action Conduct25 unless there is a good reason not to do so, such as the urgency of bringing the proceedings due to the need to obtain urgent interlocutory relief. The procedure to be followed by a shareholder seeking a just and equitable winding up of the company has some similarities with that applicable to unfair prejudice petitions and is as follows: (a)

Presentation of the petition. The petition should be presented in the High Court, either in London or in a District Registry where the Business and Property Court sits and will be assigned to the appropriate list in the Business and Property Court. Although a petition may be presented in the county court also, that court’s jurisdiction is limited by reference to the amount of the share value of the company and the county court is unlikely to have the relevant expertise for, or experience of, such claims. (b) The issue fee must be paid and a deposit made.26 The court will not allow the petition to be presented without a receipt for payment of the deposit.27 (c) The company is required to be joined as a party to the petition. Where the company has only a few members, it is generally appropriate to join all of its members as respondents. Where the company has a large number of members, only those members who the petitioner considers are responsible for the matters which form the basis of the petition should be joined. (d) Rule 7.26 sets out detailed information required to be included in the petition. Most of this relates to the details of the company and the petitioner’s shareholding. The grounds for seeking the winding up of the company on the just and equitable ground must also be included. The contents of the petition must be verified by a statement of truth.28 (e) The effect of the presentation of a contributories’ petition is that any disposition of the company’s property after presentation is void unless the court makes

22 SI 2016/1024. 23 Insolvency Rules, r 7.51A. 24 CPR Pt 44. 25 CPR PD PAC. 26 The issue fee is at the time of writing £280 and the deposit is £1600. 27 Insolvency Rules, r 7.29. 28 Insolvency Rules, r 7.28.

406

Just and equitable winding up 13.4

an order validating such transactions.29 This has the effect of preventing the company from continuing to trade and will require the incurring of costs by the company to apply for a validation order from the court. Therefore, unless the petitioner intends such an immediate block on the company’s activities, the petition should include a statement that the petitioner consents to a section 127 order in the standard form.30 (f) When the petition is presented, the court will fix the day on which the first hearing of the petition will take place. This is referred to as the ‘return day’. On the return day, directions will be made for the conduct of the petition proceedings. The return day and the time of the hearing will be endorsed on the petition and a petition sealed by the court and with the endorsement will be provided to the petitioner.31 (g) The petitioner is required to serve the petition on the company (in accordance with the service provisions of the CPR32) at least 14 days before the return date.33 There is strictly no requirement to serve the petition on the other respondents but they should usually be served so that they attend on the return day and are involved in the making of directions for the conduct of the proceedings. (h) At the directions hearing on the return date, rule 7.31 requires that the court consider whether service on any person not already served is required; what the procedure for the petition is to be, including whether any particulars of claim and of defence are required; whether and if so how the petition is to be advertised;34 the manner in which evidence is to be adduced at the final hearing, which usually means exchange of witness statements; and any other matter affecting the procedure on the petition or in connection with its hearing or disposal. The proceedings will automatically be allocated to the multi-track and the provisions of the CPR concerning allocation do not apply.35 (i) The hearing of the petition or trial takes place before a judge on a date fixed by the court following the carrying out of the steps provided for in the directions made by the court. At the hearing of the petition, the judge may make an order for the winding up of the company on the just and equitable ground, or dismiss the petition.36 (j) A  petition presented on the just and equitable ground is a dispute between shareholders and the respondents may not use the money and resources of the company to finance opposition to it,37 save to the extent that the company is ordered to give disclosure separately from that given by the other parties or to make representations as to matters which affect it and not the other parties.38 29 30 31 32 33 34 35 36 37 38

Insolvency Act 1986, s 127. Where such a statement is included, the court will make such an order at the first hearing on the petition unless one has already been made by then: CPR PD 49B – Order under Section 127 of the Insolvency Act 1986, paragraph 5. Insolvency Rules, r 7.29. CPR Pt 6. However, CPR provisions on service out of the jurisdiction are not applicable and this is governed by the Insolvency Rules. Insolvency Rules, r 7.29. The petition will not normally be advertised as to do so risks causing serious damage to the company as a result of the publicising of the petition and in most cases advertising at such a stage serves no proper purpose. Insolvency Rules, r 12.1. Insolvency Act 1986, s 125. For example, Re Hydrosan Ltd [1991] BCLC 418, ChD, [1991] BCC 19, ChD. For example, Re A Company, ex p Johnson [1992] BCLC 701, ChD, [1991] BCC 234, ChD.

407

13.5  Procedure

CLAIMS BROUGHT BY ISSUING A CLAIM FORM 13.5 All claims other than those commenced by the presentation of a petition are commenced by the issue of a claim form. A  claim form may be issued under CPR Part 7 or CPR Part 8. The procedure following the issue of the claim form is slightly different in each case. The default provision is Part 7, but a claim form should be issued under CPR Part 8 where the CPR expressly provides that proceedings must be brought under Part 8 and the Part 8 procedure should generally be used where the proceedings are unlikely to involve a substantial dispute of fact.

Personal claims 13.6 The procedure for the bringing of personal claims of the sort discussed in Chapter 7 will be that provided for in Part 8 of the CPR where there is no substantial dispute of fact arising, or in accordance with CPR Part 7 where a significant factual dispute is anticipated. The procedure for a claim for rectification of the register under sections 125 or 128G of the 2006 Act is discussed at 7.30–7.32.

Derivative claims 13.7 The particular procedural requirements applicable to derivative claims are discussed in Chapter  6. The CPR  Part 19 (Parties and Group Litigation) sets out detailed procedural rules to be followed when bringing a derivative claim. The provisions are set out at rules 19.9–19.9F and in the related practice direction, PD 19C.39 These provisions set out in some detail how a claim must be started and pursued, and the two-stage test referred to in Chapter 6. In summary, the procedure for starting a new derivative claim is40: • A  derivative claim must be started by the issue of a claim form headed ‘Derivative Claim’41 and the company must be a defendant to the claim. In almost all cases the claim form should be issued under CPR Part 7 as it is likely to involve a substantial dispute of fact.42 • When the claim form is issued, the claimant must also file an application notice (in accordance with CPR Part 23) for permission to continue the claim, with written evidence in support of that application. If the claimant wishes to obtain an indemnity from the company in respect of costs, this should be included in the application. The company must not be made a respondent to the application for permission, but must be served with the claim form, application notice and evidence in support of the application for permission.43 That the company has been so served must be confirmed by a witness statement. 39 40 41 42 43

This practice direction applies to both statutory and common law derivative claims; see CPR Pt 19 PD, para 1(a). There are varied provisions of the CPR where the claimant wishes to take over claims already started by others (CPR r 19.9B) and where derivative claims arise in the course of proceedings (CPR r 19.9D). CPR Pt 19 PD, para 2. CPR Pt 8 is not appropriate – see CPR 8.1. CPR Pt 19 PD, para 4.

408

Claims brought by issuing a claim form 13.7

• • •

•

•

• •

If notifying the company may frustrate part of the remedy sought, permission can be sought for the company not to be notified of the claim for a period of time. Until the application for permission has been determined, the claimant may not take any other steps in the derivative claim, other than applying for urgent interim relief. The court initially considers the application for permission on paper.44 It will usually do so without hearing form the company.45 If it is dismissed, the claimant can seek an oral hearing to have the decision reconsidered, but must request such a hearing in writing within seven days, and must notify the company in writing of that request, unless the court has ordered otherwise. This is similar to the procedure for seeking permission to appeal. Where the court does not dismiss the application, it will order that the company and any other appropriate party be made respondents to the claim and give directions for service and the filing of evidence relating to the second stage of the permission process. A hearing takes place at which the court applies the statutory test and considers whether to give permission to pursue the derivative claim.46 If the court refuses permission, the claim as a derivative claim comes to an end. If it grants permission, the claim continues as a derivative claim. The court may also order that the claimant has the benefit of an indemnity from the company in respect of the costs of pursuing the claim and/or the liability for the costs of the defendants.47 The court can, and in appropriate cases will, impose conditions on the granting of permission, such as that the derivative claim may not be discontinued, settled or compromised without the permission of the court. The court may also impose other conditions, such as for a review of the permission to continue the claim as a derivative claim at a specified date, or when a specified stage in the claim has been reached, such as following disclosure, or exchange of witness statements.

44 See 6.22–6.26. 45 CPR Pt 19 PD, para 5. 46 See 6.27–6.46. 47 See 6.47–6.48.

409

Chapter 14

Availability of Interim Relief and Summary Judgment on Unfair Prejudice Petitions

Contents Injunctions 14.1 Serious issue to be tried 14.3 Damages an adequate remedy 14.4 Balance of convenience 14.6 Receivers 14.7 Summary judgment

14.8

Striking out

14.10

Security for costs

14.15

14.1 The Companies Act 2006 (‘the 2006 Act’) does not make provision for interim relief and neither do the 2009 Rules. The provisions of the CPR1 apply to unfair prejudice petitions as to claims brought under CPR Pt 7 and sometimes Pt 8.

INJUNCTIONS 14.2 An injunction is the form of interim relief most frequently required by petitioners under section 994. The familiar three-stage test set out in American Cyanamid Co v Ethicon Ltd2 applies, namely: (1) whether there is a serious issue to be tried; (2) if so, whether damages would be an adequate remedy for a party injured as a result of the court’s grant of, or its failure to grant, an injunction; and (3) if damages would not be an adequate remedy in such circumstances, where the balance of convenience lies.

1

CPR Pt 25 applies in relation to interim remedies and CPR Pt 24 applies to applications for summary judgment. 2 [1975] AC 396.

411

14.3  Availability of Interim Relief and Summary Judgment on Unfair Prejudice Petitions

Serious issue to be tried 14.3 The allegations contained in a properly drafted unfair prejudice petition will usually give rise to a serious issue to be tried.3 If there is such an issue, that will be sufficient to overcome the first hurdle. The court need not be satisfied that the action which the applicant seeks to restrain by the injunction raises a serious issue to be tried as to whether that conduct would amount to an interference with the applicant’s legal rights.4 However, showing that the petition has a reasonable prospect of success will be necessary or an injunction will be refused.5 Typically, an injunction will be sought to restrain the removal of the petitioner as a shareholder or director, but an injunction is an equitable remedy and therefore as wide and as flexible as justice may require in the particular case.

Damages an adequate remedy 14.4 This part of the American Cyanamid test applies just as much to applications in unfair prejudice proceedings as in other cases.6 The very wide range of relief available to a petitioner under section 996 of the 2006 Act means that where the petitioner seeks a buy-out order, that is an order that the petitioner’s shares be purchased by one or more of the respondents, damages will frequently be an adequate remedy.7 At trial the court will usually be able to compensate the petitioner for the conduct about which it complains either by awarding damages or equitable compensation, or, perhaps more frequently, adjusting the price at which the petitioner’s shares are to be purchased or the basis and/or date upon which they are to be valued.8 The fact that the acts sought to be restrained could lead to the petitioners losing their shares would not necessarily prevent damages from being an adequate remedy. The existence of a sale contract for the shares or even part performance of such a contract would not mean that the petitioner would lose the standing required to continue to pursue the petition.9 It is only necessary that the petitioners remain the legal owners of shares in order to be able to continue to pursue the petition.10 If the remedies available at trial are adequate then the balance of convenience does not arise. The application should simply be dismissed.11 14.5 However, where the petitioner seeks a sale order; that is an order that one or more of the respondents sell their shares in the company to the petitioner, it is less likely that damages will be an adequate remedy for the petitioner. In such a case, if 3

There is authority that the mere fact of a petition under s 994 does not necessarily establish this, unless what is alleged amount also to a separate cause of action: Re Premier Electronics (GB) Ltd [2002] BCC 911. Although this has been doubted and was apparently inconsistent with earlier authority, the analysis was followed in Re Bankside Hotels Ltd [2018] EWHC 1035 (Ch), [2018] BCC 617. 4 Re R-Squared Holdco Ltd [2020] EWHC 23 (Ch), per DHCJ James Pickering at [56]–[58]. 5 Katan v Feroze [2021] 7 WLUK 390. 6 Re R-Squared Holdco Ltd [2020] EWHC 23 (Ch), per DHCJ James Pickering at [53]. 7 See Chapter 10 for more details of the breadth of the relief available at trial. 8 Re Posgate and Denby (Agencies)Ltd [1987] BCLC 8 at 15 d-eb; Pringle v Callard [2008] 2 BCLC 505 at [23]–[27]; Re R-Squared Holdco Ltd [2020] EWHC 23 (Ch) at [53]. 9 Baker v Potter [2005] BCC 855; Re McCarthy Surfacing Ltd [2006] EWHC 832 (Ch). 10 Per David Richards J in Baker v Potter [2005] BCC 855 at [2]. 11 Fellowes & Son v Fisher [1976] 1 QB 122, CA, per Browne LJ at 137.

412

Receivers 14.7

successful, the petitioner will be remaining in and/or taking control of the company so it will more often be the case that the remedies available under section 996 will not compensate the petitioner for wrongs done between the presentation of the petition under section 994 and its final determination at trial.12

Balance of convenience 14.6 In unfair prejudice proceedings, the court will usually attach greater weight than in other cases to the continuation of the status quo pending the determination of the petition at trial.13 The length of the period for which the injunction would endure, being the period to a likely trial, is also potentially important. Where that period is lengthy and uncertain it may weigh against the granting of an injunction.14 Where the issue is the continuation in office of directors, the court will generally be wary of forcing directors who have fallen out to continue to work together against the wishes of the majority shareholders.15 Indeed, Arden LJ stated in Pringle v Callard:16 ‘In essence it is contrary to principle to impose a director on a company. It is highly impractical so to do in any event where there are disputes between the directors or, indeed, as here, allegations of improper conduct. Accordingly, the court would have to be extraordinarily cautious before imposing a director on a company by way of interim remedy.’ However, this will not necessarily be decisive, in particular where the directors have not yet been removed and the petitioner seeks an injunction to restrain such removal.17

RECEIVERS 14.7 By analogy with the law of partnership, in the case of a quasi-partnership company the court may be prepared to appoint a receiver to preserve the business and assets of the company pending determination of the petition where the evidence indicates that the business or assets may be in jeopardy.18 A receiver may be preferable to an injunction as a means of preserving the status quo in a particular case. However, the court will have in mind both the cost of a receiver and the potential negative effect on the business and reputation of a company were a receiver to be appointed, so in many cases both the court and the parties may regard injunctive relief as more suitable.19 As a result, cases where a receiver has been appointed to protect the interests of a petitioner under section 994 are fairly rare.20

12 13 14 15 16 17 18 19 20

Williams v Brinkmann [2004] EWHC 601 at [47]–[48]; Re R-Squared Holdco Ltd [2020] EWHC 23 (Ch) at [53]. Re A Company (No 002612 of 1984) [1985] BCLC 80, per Harman J at 82 I to 83 B. In Re Canterbury Travel Ltd [2010] EWHC 1464 (Ch). See eg Mission Capital Plc v Sinclair [2008] EWHC 1339 (Ch), [2008] BCC 866, at [31]. [2007] EWCA Civ 1075, [2008] 2 BCLC 505, at [33]. Re R-Squared Holdco Ltd [2020] EWHC 23 (Ch) at [69], [74]. See eg Re A Company (No 00596 of 1986) [1987] 2 BCC 99063 and Wilton-Davies v Kirk [1998] 1 BCLC 274. Re Mountforest Ltd [1993] BCC 565, per Harman J at 571–572; see also Wilton-Davies v Kirk [1998] 1 BCLC 274. See also 10.12.

413

14.8  Availability of Interim Relief and Summary Judgment on Unfair Prejudice Petitions

SUMMARY JUDGMENT 14.8 The court does not have an inherent jurisdiction to order substantive relief in favour of a petitioner under section 994 unless the statutory criteria contained in the section have been established.21 This is a consequence of the jurisdiction under section 994 being entirely statutory and the 2006 Act making no provision for such relief.22 However, the court can grant summary judgment on an unfair prejudice petition or an issue arising within a petition under CPR Pt 2423 in favour of a petitioner or a respondent24 in an appropriate case. Unfair prejudice petition proceedings frequently give rise to wide-ranging factual disputes which can only be resolved by hearing oral evidence, so successful applications for summary judgment are uncommon. However, they are not unheard of and summary judgment will be granted against a party whose case has no real prospect of success.25 14.9 Where liability is established or admitted, an interim payment may be ordered under CPR r 23.7, although it may be appropriate to make it subject to conditions.26

STRIKING OUT 14.10 Petitions may be struck out because they are hopeless or because pursuing them will amount to an abuse of process, and petitions and defences may be struck out by reason of delay or conduct creating a substantial risk that a fair trial will not be possible. It has been acknowledged that an unfair prejudice petition may be used by a petitioner as an instrument of oppression.27 However, the strike out sanction should generally be limited to clear cases.28 14.11 CPR r 3.4(2) gives the court the power to strike out a petition or defence where it discloses no reasonable grounds for bringing or defending the proceedings or is an abuse of process. This is a separate and additional power to the power to grant summary judgment under CPR Pt 24. However, it is a power that it has been said should only be exercised in a case which is plain and obvious, so that the court concludes that the petition should be prevented from continuing as there is such a low probability of the trial judge exercising his discretion to grant the relief sought that

21 22

Re A Company (No 004175 of 1986) [1987] 1 WLR 585 at 589, also (1987) 3 BCC 41. This is a matter of first principles and was also spelt out by Arden LJ in McKillen v Misland (Cyprus) Investments Ltd [2013] EWCA Civ 781, [2013] 2 BCLC 583, at [11]. 23 CPR r 24.3. 24 Borro Ltd v Aiken [2021] EWHC 1902 (Ch). 25 CPR r 24.2. See, for example, Dalby v Bodilly [2004] EWHC 3078 (Ch), [2005] BCC 627 and Hawkes v Cuddy [2007] EWHC 1789 (Ch), [2007] BCC 671. 26 Re Annacott Holdings Ltd [2011] EWHC 3180 (Ch). See also the Scottish case of Ferguson v Mclennan Salmon Co Ltd [1990] BCC 702 where most unusually, the respondents had admitted unfair prejudice and that a buyout was the appropriate relief. Exceptionally, a payment on account of the purchase price was ordered, but subject to conditions. 27 See Re Saul D Harrison & Sons plc [1995] 1 BCLC 14. 28 As is apparent from the approach taken in Virdi v Abbey Leisure Ltd [1990] BCC 60. For a recent case where the jurisdiction was considered in detail see Taylor Goodchild Ltd v Taylor [2021] EWCA Civ 1135.

414

Striking out 14.14

the petition could be described as utterly futile.29 In practice, the test for such a strike out and that for summary judgment is essentially the same.30 14.12 A reasonable offer by a respondent to purchase the petitioner’s shares may mean that the continued prosecution of the petition amounts to an abuse of process, as it remedies any alleged unfairness and offers the petitioner all that they could reasonably obtain following a trial. In such a case the petition is liable on application to stayed or struck out.31 However, a sanction will only follow if the court is satisfied that the petitioner’s conduct in rejecting the offer was clearly unreasonable.32 14.13 Various features of the offer may mean that on the facts, the petitioner’s rejection of it was not necessarily unreasonable. These may include the value, the basis of valuation, the identity of the valuer, the fact that the parties do not have an equality of arms enabling the petitioner to properly assess the offer, or because the real issues as to valuation are more suitable for determination by the court than by a valuer. Alternatively, it may be reasonable to reject the offer because it appears, on reasonable grounds, that the respondent will not be able to fund the purchase of the petitioner’s shares and therefore perform the contract which would arise on acceptance of the offer.33 It will also be reasonable to reject an offer if it is to buy (or sell) shares where the petitioner’s preferred relief is to sell (or buy) and there is a reasonable possibility that the petitioner’s preferred remedy will be granted at trial.34 14.14 An order striking out either the petition or the defence may be made on grounds of delay or some other procedural failing under CPR rr 3.1 and/or 3.4. The same principles apply to unfair prejudice petitions as apply in other cases.35 A strike out will only be proportionate on grounds of delay in extreme cases.36 Non-compliance with the rules, practice directions or a court order will be a basis for striking out. In deciding whether to strike out or apply some other sanction by reason of noncompliance, the usual principles relating to relief from sanctions set out in Denton v TH White Ltd37 are to useful guidance and should generally be applied.38 A statement

29

See eg Re Legal Costs Negotiators Ltd [1999] 2 BCLC 171; Re Brightview Ltd [2004] EWHC 1056 (Ch), [2004] 2 BCLC 191; Re FSC Andrews Ltd [2015] EWHC 4042 (Ch). 30 Three Rivers District Council v Bank of England (No 3) [2001] UKHL 16, [2003] 2 AC 1. 31 This was explained by Lord Hoffman in O’Neill v Philips [1999] 1 WLR 1092, HL at 1107B–1107C. There are numerous examples of it occurring, including Re A Company (No 006834 of 1988) ex p Kramer (1989) 5 BCC 218 and Re A company (No 00330 of 1991) ex p Holden [1991] BCC 241. See also 9.160. 32 Cf CVC/Opportunity Equity Partners Ltd v Demarco Almeida [2002] UKPC 16, [2002] BCC, PC (a just and equitable winding-up case but the same principle applies) and see the discussion and application on the facts in Re Annacott Holdings Ltd [2013] EWCA Civ 119, [2013] 2 BCLC 46, CA. 33 Re Boswell & Co (Steel) Ltd (1988) 5 BCC 145; Virdi v Abbey Leisure Ltd [1990] BCC 60; North Holdings Ltd v Southern Tropics Ltd [1999] BCC 746; West v Blanchett [2000] 1 BCLC 795, [2000] TLR 85; Re Frank Wyatt & Sons Ltd [2003] EWHC 520 (Ch); Apcar v Aftab [2003] BCC 510; Re Belfield Furnishings Ltd [2006] EWHC 183 (Ch), [2006] 2 BCLC 705. 34 Harborne Road Nominees Ltd v Karvaski [2011] EWHC 2214 (Ch), [2012] 2 BCLC 420. 35 See the notes to The White Book from time to time. For a good example of the application of the principles to a striking case of delay, see Wear v HNH International Holdings Ltd [2014] EWHC 3542 (Ch). 36 Hateley v Morris [2004] EWHC 252 (Ch), [2004] 1 BCLC 582. 37 [2014] EWCA Civ 906, [2014] 1 WLR 3926, CA. 38 Walsham Chalet Park Ltd v Tallington Lakes Ltd [2014] EWCA Civ 1607.

415

14.15  Availability of Interim Relief and Summary Judgment on Unfair Prejudice Petitions

of case, including an unfair prejudice petition, may be struck out where it is an abuse of process or otherwise likely to obstruct the just disposal of the proceedings.39

SECURITY FOR COSTS 14.15 A respondent to an unfair prejudice petition may apply for security for costs pursuant to CPR r 25.12. Security may be granted where one or more of the conditions set out in CPR r 25.13 is made out. However, the grant of security is a matter of discretion and will only be granted where the court is satisfied that it is appropriate to do so. The best guidance as to matters which the court might usually take into account remain those referred to by Lord Denning in Sir Lindsay Parkinson & Co v Triplan Ltd40 in 1973 and the analysis of the Court of Appeal in Keary Developments Ltd v Tarmac Construction Ltd41 in 1995. However, the authorities on the conditions and the exercise of security are numerous and a detailed and helpful commentary is included in The White Book in the notes following CPR r 25.13.

39 40 41

CPR r 3.4(2)(b). See eg Arrow Nominees Inc v Blackledge [2001] BCC 591, CA. [1973] QB 609, [1973] 2 WLR 632, CA. [1995] 3 All ER 534.

416

Chapter 15

Taxation Issues*

Contents Background issues

15.1

Shares and securities are capital assets

15.2

Rights can be capital assets

15.5

Capital sums derived from assets

15.6

Exempt assets and exempt capital gains

15.7

Capital gains issues for individuals

15.8

CGT reliefs for individuals

15.11

Chargeable gains issues for companies

15.13

Capital losses

15.15

Market value issues

15.15

Distributions and dividends

15.19

Tax issues on a winding up or liquidation

15.24

Employment-related securities regime

15.26

Purchase by unquoted trading company of its own shares falling within capital gains tax regime

15.28

Taxation of damages VAT and damages

15.30 15.32

Evidencing a settlement

15.33

BACKGROUND ISSUES 15.1 Whilst this book is about company law, focusing on shareholder rights and shareholders’ actions, this chapter covers tax consequences arising from parties reaching a settlement agreement in a shareholders’ dispute including one arising from a court order. In particular it covers the following issues: the tax treatment of compensation paid and received for capital assets, including shares and certain other rights; what amounts to a distribution and related tax issues; how the employmentrelated securities regime may be an issue in a settlement; the treatment of a settlement for the payer; and the taxation of damages. Essentially, the method of taxation will depend on whether the taxable amount is income in nature or is capital. *

Chapter written by Eile Gibson, retired Solicitor and Chartered Tax Advisor.

417

15.2  Taxation Issues

SHARES AND SECURITIES ARE CAPITAL ASSETS 15.2 As discussed in earlier chapters, shareholders’ rights are primarily those set out in the company’s constitution. Shares and securities represent a bundle of rights, which can include voting rights, rights to receive dividends, and rights on a winding up – and which are capital assets for UK capital gains tax purposes.1 Every gain on the disposal of a capital asset will be a chargeable gain, unless exempted or expressly provided for otherwise, under the Taxation of Chargeable Gains Act 1992 (‘TCGA 1992’)2. So long as a gain would normally be chargeable, any loss should be an allowable loss.3 If a shareholders’ dispute results in, say, a minority shareholder exiting the company, the tax treatment of any receipts for damages and compensation connected with that shareholding paid by a person (including by someone other than the company), is likely to fall within the provisions of TCGA 1992’ Any payments made in respect of the shareholder’s loss of office or employment will be taxable as employment income by virtue of section 5 and Parts 2 to 6 of the Income Tax (Earnings and Pensions) Act 2003 (‘ITEPA 2003’). Other payments made by the company relating to the shareholding will, in all likelihood, represent a distribution of profits taxable as dividend income.4 It therefore follows that any settlement agreement with a departing shareholder employee or officer should clearly set out what comprises the final payment to avoid disputes at a later date between the departing shareholder and HMRC. Where the company buys back its shares from a shareholder and the rigorous conditions under sections 1033 to 1048 of CTA  2010 (purchase by unquoted trading company of its own shares)5 do not apply, any buy-back will be treated as a distribution.6 In respect of taxation issues arising from a shareholder’s actions, it is immaterial whether the shareholder is a willing or unwilling seller, but such matters will have a bearing on the commercial negotiations, as will the negotiating strength of the parties. On resolution of a genuine shareholder’s dispute, it should generally be assumed that compensation awarded will represent a third party transaction at market value. 15.3 Under general principles, allowable deductions from consideration received or deemed consideration received, in computing a chargeable gain on disposal of a capital asset, are as follows:7 • • • •

the consideration in money or money’s worth for the original acquisition of the asset, together with incidental costs; any expenditure wholly and exclusively incurred on the asset for the purpose of enhancing the asset; any expenditure wholly and exclusively incurred in establishing, preserving or defending title to, or to a right over, the asset; and the incidental costs of making the disposal.

1 Section 21 of TCGA 1992. 2 Section 15(2) of TCGA 1992. 3 Section 16 of TCGA 1992. 4 See 15.19. 5 See 15.28. 6 See 15.19. 7 Section 38 of TCGA 1992 (acquisitions and disposal costs).

418

Shares and securities are capital assets 15.4

Anything which has been charged to income tax as income of the person making the disposal is excluded from the consideration received for a disposal.8 A likely scenario would be income tax charged on a portion of receipts in respect of employmentrelated securities or income tax charged on a participator in a close company9 whereby there has been a transfer of an asset at undervalue.10 With the end of taper relief in 2008 for individuals, the length of time a shareholder has held his or her shares is of no consequence from a chargeable gains tax perspective. Between the years 2013 to 2016 CGT rates for individuals were 18% and 28% for lower rate and higher rate taxpayers respectively. These rates were reduced in 2016/17 to 10% and 20%, save for gains arising on disposals of residential properties (taxable at 28%). A 10% rate applies where entrepreneurs’ relief (renamed as business asset disposal relief)11 or investors’ relief12 apply. Corporations benefited from an indexation allowance intended to reflect the inflationary effect on the original purchase price, but the allowance was frozen as from 1 January 2018. Chargeable gains for corporations are taxed at the company’s prevailing corporation tax rate for the year in question; but, if the substantial shareholding exemption applies, no tax should arise.13 The good news is that CGT reliefs, particularly entrepreneurs’ relief or investors’ relief, may be available for individual shareholders if the conditions (rather nonstringent) are satisfied.14 The new investors’ relief represents an extension of entrepreneurs’ relief to investors in unlisted trading companies who hold shares for a minimum of three years, starting from April 2016 with CGT at 10% where the relief applies. Alternatively, any capital gains arising from a disposal of capital assets, including shares and securities, can be rolled over into EIS company investments, with the gain frozen until the re-investment is finally disposed of.15 The pitfalls for individual shareholders who are or were also directors and employees of the company concern the employment-related securities regime, whereby any ‘special’ gain to the person arising from his or her shareholding can be taxed as income.16 15.4 UK tax law abides by company law. Rights of shareholders contained in a company’s articles are of utmost importance, representing contractual rights between the company and its shareholders and between shareholders inter se. Shareholders and the company are free to enter into other contractual agreements, usually a shareholders’ agreement, but it is not possible for such agreements to exclude or restrict a company’s statutory powers.17 In Grays Timber Products Ltd v HMRC,18 the argument that a provision in a subscription agreement, which provided that it 8 Section 37 of TCGA 1992. 9 Defined in s 439 of CTA 2010. 10 Pursuant to the anti-avoidance provision in s 125 of TCGA 1992. 11 TCGA 1992, ss 169H to 169S. 12 TCGA 1992, ss 169VA to 169VR, Sch 7ZB. 13 TCGA 1992, Sch 7AC. 14 See 15.10. 15 See 15.12. 16 See 15.26. 17 See Russell v Northern Bank Development Corp Ltd [1992] 1 WLR 588, HL. 18 [2010] 1 WLR 497. See also the discussion at 3.20.

419

15.5  Taxation Issues

should prevail over the articles, was not accepted by the Supreme Court, resulting in a portion of the director’s receipts on the sale of the company being taxable as income rather than wholly as capital gains, as the rights were held to be personal to the director shareholder and arising from his employment. For compensation or damages received in respect of a shareholding under a shareholder’s dispute, HMRC are likely to argue that any gains arising from personal or special rights attaching to an individual shareholder’s holding (reflecting the shareholder’s office or employment with the company) should be taxed as income rather than as capital. Therefore negotiations between such individuals and other shareholders of the company in a shareholders’ dispute should also pay attention to the income tax regime which will apply to any compensation paid to a director/employee shareholder involving loss of office and employment – to be treated separately from compensation for the sale of any shareholding. If income tax and National Insurance contributions (NIC) arise for the director/employee receiving such compensation the employer company involved will have deduction obligations under the pay as you earn (PAYE) regime and will be liable to employer’s NIC.

RIGHTS CAN BE CAPITAL ASSETS 15.5 Compensation received in connection with a disposal of rights are likely to fall within the CGT regime. Examples of rights which represent capital assets, as established in case law, and tax consequences which may arise in a shareholders’ dispute, include the following: •

Compensation for the revocation of a right or licence – even though a sum might be paid under statute, this does not prevent the compensation from being a capital sum derived from an asset. In Pennine Raceway Ltd v Kirklees Metropolitan Council (No 2),19 the court held that the source of the capital sum paid to the company under a statutory right was the licence to conduct drag racing, which was the asset through which the company suffered damage. It also held that each case should be examined to discover the real source rather than the immediate source of a capital sum. • Rights of an employer under a contract of services represented an asset, and therefore a payment to the employer company to release an employee from the contract constituted a capital gain arising from that right.20 • A payment under a covenant not to trade derived from an asset (ie goodwill) and which was disposed of when entering into the covenant (a non-compete agreement can be evidence of the existence of goodwill).21 • A  chose in action is an asset – a right to receive a deferred payment can represent a new asset and, on receipt of the deferred payment, the taxpayer was deemed to have made a chargeable disposal.22 • The rights under an agreement represent an asset, and payment for relinquishing those rights represents the disposal of a capital asset.23 19 [1989] STC 122. 20 O’Brien v Benson’s Hosiery (Holdings) Ltd [1979] STC 735, [1980] AC 562, HL. 21 Kirby v Thorn EMI [1987] STC 621, [1988] 1 WLR 445, CA; Marren (Inspector of Taxes) v Ingles [1980] 1 WLR 983, HL. 22 Marren v Ingles [1980] STC 500, [1980] 1 WLR 983, HL. 23 Marson v Marriage [1980] STC 177.

420

Exempt assets and exempt capital gains 15.7

•

A right to sue for compensation or damages is an asset under Zim Properties Ltd v Procter.24

The tax consequences of a payment falling within any of the above provisions can be onerous as there is likely to be no referable base cost of the asset in question to be taken into account in computing the gain.

CAPITAL SUMS DERIVED FROM ASSETS 15.6 A  disposal is deemed to occur under section 22 of TCGA  1992 where a capital sum is derived from assets, notwithstanding that an asset is not acquired by the person paying the capital sum. Therefore, the provision covers two scenarios: both when an asset may be acquired, or may not be acquired, by the other party. However, there must be a receipt of a capital sum. Scenarios involving compensation arising from a shareholders’ dispute, and falling within these provisions, could include the following: • •

capital sums received by way of compensation for any kind of damage or injury to assets or for the loss, destruction or dissipation of assets or for any depreciation or risk of depreciation of an asset (including goodwill); or capital sums received in return for forfeiture or surrender of rights, or for refraining from exercising rights.

Capital sums received under a policy of insurance and capital sums received as consideration for use or exploitation of assets also fall within the provision. ‘Capital sum’ is defined25 as any money or money’s worth which is not excluded from the consideration taken into account in the computation of the gain.

EXEMPT ASSETS AND EXEMPT CAPITAL GAINS 15.7 There are assets which are exempt from capital gains, but these are unlikely to be of relevance in a shareholders’ dispute. They include motor cars;26 some chattels;27 and gilt-edged securities and qualifying corporate bonds.28 Furthermore, there are certain gains which are exempt from CGT including those arising from: annuities and annual payments;29 a simple debt incurred30 (but excluding a debt on a security);31 winnings from betting;32 compensation or damages for personal injuries suffered by an individual;33 compensation or damages for any wrong or injury

24 25 26 27 28 29 30 31 32 33

[1985] STC 90, ChD – see also HMRC Manual CG12060. Section 22(3) of TCGA 1992. Section 263 of TCGA 1992. Section 262 of TCGA 1992. Section 115(1) of TCGA 1992. Section 237 of TCGA 1992. Section 251(1) of TCGA 1992. Essentially, being a marketable debt in the nature of an investment and capable of being realised at a profit under W T Ramsay Ltd v CIR (1981) 54 TC 101, [1982] AC 300, HL. Section 51(1) of TCGA 1992. Section 51(2) of TCGA 1992.

421

15.8  Taxation Issues

suffered by an individual in her or his person or profession;34 the sale of a principal private residence; and on sales of works of art under certain circumstances.35 Damages received for any wrong or injury suffered by an individual are accepted by HMRC36 to include more than physical injury and that ‘distress, embarrassment, loss of reputation or dignity may all be suffered in the person’ and would include compensation or damages for unfair or unlawful discrimination suffered, and for libel or slander. Furthermore, if damages received for such wrongs or injury would have been exempt, so will any compensation for professional negligence relating to any action in respect of these wrongs or injury. It is conceivable that these issues could arise in a shareholders’ dispute, either between shareholders or between a company and a shareholder who may or may not be an officer or employee.

CAPITAL GAINS ISSUES FOR INDIVIDUALS 15.8 For an individual, capital gains tax will arise on any chargeable gain in any year of assessment37 during which he or she is UK resident (usually being physically present for 183 days or more).38 Previously CGT did not apply to individuals who were non-UK resident, subject to the special rules brought in under the regime for non-UK domiciles in 2008.39 This anomaly was a strange one, but was amended whereby CGT now arises on disposals of UK residential property owned by non UK individuals and overseas companies. Capital gains become chargeable after deducting any allowable capital losses arising in the same year and any carried-forward losses of the taxpayer in any previous year of assessment,40 with losses computed in the same way as the amount of a gain being computed on a disposal.41 Trustees are also subject to CGT on disposal gains. 15.9 The anti-avoidance provision in section 10A of TCGA 1992 imposes CGT on individuals treated as temporarily non-resident, and covering any person who has been UK resident for four years out of a period of seven years immediately before the date of departure from the UK and whose period of non-UK residence lasts for less than five years. 15.10 Individuals and trustees of settlements are entitled to a capital gains annual exempt amount – for 2021–22, it is £12,300 for an individual and £6,150 for general trusts. CGT is chargeable on individuals at 10% on any unused amount of the basic rate income tax band and at 20% for higher rate tax payers. Trustees are chargeable at 28%. Since the abolition of taper relief, there is no effective indexation allowance; but, if the shares are qualifying assets for entrepreneurs’ relief, a gain on disposal will be taxed at 10% up to the individual’s lifetime capital gains limit, which is currently 34 35 36 37 38 39 40 41

Section 222 of TCGA 1992. Section 258 of TCGA 1992. HMRC Capital Gains Manual at CG13030. A tax year begins on 6 April in the UK. Section 2(1) of TCGA 1992. Sections 809A–809Z10 of the Income Tax Act 2007 (‘ITA 2007’); ss 16ZA–16ZD of TCGA 1992. Section 2(2) of TCGA 1992. Section 16(2) of TCGA 1992.

422

CGT reliefs for individuals 15.12

£1 million (and which will apply to investors relief for shares in unlisted companies and held for at least three years, beginning from April 2016).

CGT RELIEFS FOR INDIVIDUALS 15.11 Entrepreneurs’ relief42 is available for capital gains on disposals of shares in qualifying companies (which must, inter alia, be trading companies) which have been held by an individual for a period of at least one year, provided that the individual has been an employee or officer of the company or its holding company, and his or her interest has been at least 5%, for that same one-year period. It is also available on disposals of business assets and of trust business assets, but which are unlikely to be relevant in a settlement of a shareholders’ dispute involving shares and securities. When the relief is available, and for which the taxpayer must make a claim in writing within the first anniversary of the 31 January following the end of the tax year in which the qualifying disposal takes place, CGT will be taxed at 10% of the gain. For qualifying disposals made from 6 April 2011, an individual’s lifetime allowance for entrepreneurs’ relief has been £1 million. Investors relief43was introduced in respect of shares subscribed for on or after 17 March 2016 in unlisted trading companies and held for a period of at least three years on or after 6 April 2016, and in respect of which CGT of 10% will be payable, subject to all conditions being satisfied. Unlike entrepreneurs’ relief there are no employment requirements and no minimum shareholding requirements. There is a lifetime limit per individual of £1 million. The first date when the relief will be capable of being realised was 6 April 2019. A shareholder receiving compensation for his or her shareholding arising from an action against the company or co-shareholders, who would have satisfied the criteria for entrepreneurs’ relief ordinarily on a sale of the shares, should ensure that the statutory requirements and conditions can be satisfied at the time of any compensation payment. If this is not possible, the shareholder should require that the compensation be grossed up to reflect the increased CGT payable as a result of entrepreneurs’ relief being lost. Scenarios resulting in a shareholder’s action which could affect the relief include: dismissal of a shareholder director/employee so that he or she does not satisfy the ‘one year’ employment criteria; dilution of a shareholder director’s/ employee’s ordinary shareholding below 5%; and/or a change in the company’s trading status. 15.12 Relief under the Enterprise Investment Scheme (EIS)44 is available for individuals subscribing for new ordinary shares in certain unquoted trading companies, subject to a number of conditions, and whereby the investor (who must not be connected or involved with the issuing company) can claim income tax relief on the investment. If the shares have been held for at least three years and there have been no disqualifying events, any gain on a disposal of the shares will be relieved from CGT. Any required disposal of shares arising from a shareholders’ dispute which initially qualified for EIS relief, within three years of the initial investment, would represent a disqualifying event for the shareholder, and the EIS 42 43 44

Sections 169H–169S of TCGA 1992. Sections 169VA to 169VY of TCGA 1992. The scheme is set out in Pt 5 of ITA 2007 and Sch 5B to TCGA 1992.

423

15.13  Taxation Issues

relief would be clawed back – in such scenarios, compromised shareholders should negotiate for a grossed-up payment to take into account any CGT which becomes payable on the clawback. These principles will also apply if relief is available under the Seed Enterprise Investment Scheme (SEIS), similar to EIS but applying to investments in start-up, smaller companies; and Social Investment Tax Relief scheme (SITR), involving investments in social enterprises either in the form of equity or debt. If CGT arises under a settlement involving a shareholders’ dispute, CGT deferral relief under EIS or SEIS is available for individuals, which allows rolling over the capital gains into qualifying shares in a qualifying EIS or SEIS company. This is regardless of whether the relevant relief was available for the initial investment of the shares and securities. Any gains will be frozen until the investment is realised. If the gain from the second investment is re-invested in another EIS or SEIS company, it can also be frozen. This will be an issue entirely for the compensated individual as to how he or she wishes to organise his or her tax affairs, and is not something which should involve or affect the other parties to the dispute.

CHARGEABLE GAINS ISSUES FOR COMPANIES 15.13 Most scenarios for a shareholders’ dispute may not involve a disgruntled corporate shareholder being bought out of a shareholding. However, for completeness, this section briefly sets out the tax treatment for chargeable gains arising for a company. UK resident companies are chargeable to corporation tax in respect of chargeable gains,45 and non-UK companies which carry on a trade in the UK through a permanent establishment are also within the charge to corporation tax for chargeable gains. Gains for corporations were subject to an indexation allowance, which was intended to increase the base cost in line with inflation, but the allowance was frozen as from 1 January 2018. There is no annual exempt amount for chargeable gains for corporations. Substantial shareholding relief may be available to corporations on the disposal of shares, if the shareholding represents not less than 10% of the company’s ordinary share capital46 in a trading company which have been held for no less than 12 months by another trading company and, following the disposal, the investing company and the investee company both remain trading companies.47 Following consultation the regime is to be simplified with effect from April 2017.

CAPITAL LOSSES 15.14 Generally, so long as a chargeable gain would be subject to tax, any capital loss on a disposal should be capable of being offset against other gains or of being 45 46 47

Section 1(2) of TCGA 1992. As well as being beneficially entitled to not less than 10% of the profits available for distribution to equity holders of the company, and beneficially entitled on a winding up to not less than 10% of the assets of the company available for distribution to equity holders. Schedule 7AC to TCGA 1992.

424

Market value issues 15.16

carried forward for taxable individuals.48 For a corporation, net chargeable gains less any carried forward chargeable losses are included with its income for the purposes of calculating the rate of corporation tax in the relevant accounting period.

MARKET VALUE ISSUES 15.15 Market value is defined49 as the price which an asset might reasonably be expected to fetch on a sale in the open market, with no reduction to be made on account of the estimate being made, on the assumption that the whole of the asset is to be placed on the market at the same time. When determining the market value of unquoted shares and securities, there is the assumption that in an open market there is available to any prospective purchaser of the asset in question, all the information which a prudent prospective purchaser might reasonably require if he or she was proposing to purchase it from a willing vendor by private treaty and at arm’s length.50 The issue of market value arises under section 17 of TCGA  1992, whereby an acquisition or disposal of an asset is deemed to be made at market value where: •

• •

it is acquired or disposed of otherwise than by way of a bargain made at arm’s length, including: – where it is acquired or disposed of by way of gift; – on a transfer into settlement by a settlor; it is acquired or disposed of by way of distribution from a company in respect of shares in the company; it is acquired or disposed of: – wholly or partly for consideration that cannot be valued; – in connection with a person’s loss of office or employment or diminution of emoluments; or – otherwise in consideration for or recognised with services (past or otherwise) in any office or employment or of any other service rendered.

15.16 The following persons are connected for CGT purposes, some of whom may be relevant in many shareholders’ actions:51 • •

•

48 49 50 51

spouses and civil partners and their relatives (meaning brothers, sisters, ancestors or lineal descendants); trustees of a settlement and the settlor, any connected person of the settlor, any body corporate connected with the settlement where the company is close (or would be close if it was UK resident) and the participators include the trustees, and trustees of any sub-fund settlements; partners and their spouses, civil partners or a relative of any individual with whom a person is in partnership (except in relation to acquisitions or disposals of partnership assets under bona fide commercial arrangements);

Section 2 of TCGA 1992. Section 272 of TCGA 1992. Section 273 of TCGA 1992. Section 286 of TCGA 1992.

425

15.17  Taxation Issues

• •

•

companies under the same control, or under the control of a person and connected persons, or where a person and connected persons have control of the other company; where a group of two or more persons has control of two companies, and the groups either consist of the same persons or could be regarded as such by treating a member of either group as replaced by a person with whom he is connected; and a company and another person where that person has control of the company, or that person and persons connected with him together have control of it.

Any two or more persons acting together to exercise control of a company are treated, in relation to the company, as connected with one another. 15.17 As long as the parties are not entering into arrangements involving tax avoidance as a principal purpose, in any shareholders’ dispute involving connected persons it is difficult to imagine a situation where the negotiations will not be carried out on bona fide commercial terms. It therefore follows that the amount and terms of any compensation relating to assets will have been determined at market value. Whilst there may not be a willing buyer and a willing seller, certainly the negotiations are likely to have been effected on an arm’s length basis. Therefore, there should be no need to deem a market value on the disposal of the shares or other assets in question. 15.18 Under self-assessment, it is the responsibility of the taxpayer to report capital gains and income receipts and ensure that, where the market value rule is an issue, the taxpayer can justify the quantum including where negotiations have been carried out on an arm’s length, bona fide commercial basis. The Shares and Asset Valuation Unit (SAV) within HMRC serves two purposes: a tax inspector can refer a taxpayer’s valuation to the unit for consideration, and the taxpayer may request a post-transaction valuation check during the period between the date of disposal of the asset and the final date for submitting the self-assessment. A taxpayer may request HMRC to consider its valuation using form CG34 and, in the case of a post transaction check, HMRC’s unit in Nottingham will deal with it. Whilst the primary function of the SAV unit is to value shares and assets in unquoted companies, it also values loans to companies, goodwill, intellectual property and suspended and cancelled quotes on the Stock Exchange. Valuation will be an issue when any compensation or damages payment involving a capital asset has separate elements to it, some of which may be subject to capital gains and some of which will be taxed as income. Apportionment between what amounts to capital gains and what amounts to income receipts should be capable of being justified by the parties to the settlement. The date for determining the market value will be the date of disposal, namely when a binding contract is entered into or when a court order becomes effective. If the shares or assets in question have no value, the taxpayer may make a ‘negligible value’ claim under section 24 of TCGA 1992, and will be treated as if the claimant had sold and immediately reacquired the asset at the time of the claim for a consideration of the value set out in the claim. HMRC provide a list of negligible values for shares which were previously quoted but which have been accepted as having negligible

426

Distributions and dividends 15.20

value, although this issue is unlikely to be relevant in any compensation under a shareholders’ dispute.

DISTRIBUTIONS AND DIVIDENDS 15.19 The primary rule is that anything which a shareholder receives from a company connected with his or her shareholding without the shareholder giving full payment in return, will be treated and taxed as a distribution, including a share buyback by the company which is not eligible to be taxed as capital under sections 1003 to 1047 of TCGA 1992 (Purchase of own shares by unquoted trading company). There are two types of distributions – an income distribution52 and a capital distribution (which is a distribution other than an income distribution). A distribution is defined as follows:53 • •

• • • • •

• •

any dividend paid by a company, including a capital dividend, any other distributions out of the assets of the company in respect of shares in the company, except that which: – represents repayment of capital on the shares;* or – is (when made) equal to any new consideration received by the company for the distribution;* any redeemable share capital issued by the company in respect of shares in, or securities of, the company and otherwise than for new consideration;* any security issued by the company in respect of shares in, or securities of, the company and otherwise than for new consideration;* any interest or other distribution out of assets of the company in respect of securities which are non-commercial securities; any interest or other distribution out of assets of the company in respect of special securities of the company;54 any transfer of assets or liabilities by a company to its members or to a company by its members, and the amount or value of the benefit received by the member exceeds the amount or value of any new consideration given by the member; and in which case the company will be treated as having made a distribution of an amount equal to the excess; a bonus issue following repayment of share capital; certain expenses of a close company paid to participators which are treated as distributions under section 1064 of the Corporation Tax Act 2010 (‘CTA 2010’).

All the above distributions represent qualifying distributions, except those marked with an *.55 Prior to the replacement of the dividend tax credit system, only qualifying distributions entitled the shareholder to receive the tax credit so the distinction was important. Non-qualifying distributions made by a company requires notification to HMRC. 15.20 Any compensation payment received by a shareholder from the company which would represent distribution income was taxed as follows. In the hands of 52 53 54 55

Section 209 TCGA 1992. Section 1000 of CTA 2010. As defined in section 1015 of CTA 2010. Section 1136 of CTA 2010.

427

15.21  Taxation Issues

a UK resident or eligible non-UK resident individual, dividends made by a UK resident company were entitled to a tax credit equal to one-ninth of the value of the distribution (the tax credit) – tax was charged on the grossed-up amount, but giving credit for the 10% tax credit.56 The effective rate of tax for individuals, taking into account the tax credit, for basic rate taxpayers,57 where the dividend ordinary rate was 10%, was therefore 0%; for higher rate taxpayers58 for whom the dividend upper rate was 32.5%, the effective tax rate was 25%; and for additional rate taxpayers59 for whom the dividend additional rate of 42.5%, the effective tax rate was 36.1%. Similar rules for tax credits applied to distributions made by non-UK resident companies to UK-resident and eligible non-UK resident individuals.60 In April 2016 the dividend tax credit system was replaced with a tax-free dividend allowance, initially £5,000 but reduced to £2,000 as from 6 April 2018. Dividend income in excess of the allowance is taxed at 7.5% for basic rate tax payers; 32.5% for higher rate tax payers; and 38.1% for additional rate tax payers. Dividend income within the allowance nevertheless counts towards an individual’s basic or higher rate bands. The allowance is available to anyone who has UK dividend income but will be of no use to a non-UK tax payer. 15.21 A person was an eligible non-UK resident individual if, at any time in the tax year, he or she:61 • • • • • •

was a national of an EEA state; was resident in the Isle of Man or the Channel Islands; was previously UK resident but is resident abroad due to his or her health or that of a member of his or her family who is resident with the individual; was or has been employed in the service of the Crown or in the service of any territory under the Queen’s protection; was employed in the service of a missionary society; or was a person whose late spouse or late civil partner was employed in the service of the Crown.

15.22 Prior to 2006, a non-UK resident individual shareholder was entitled to a tax credit in respect of qualifying distributions made to them by UK resident companies under any double taxation arrangement pursuant to section 6(2) and (9) of the Taxation (International and Other Provisions) Act 2010 (‘TIOPA 2010’).62 No tax arises on an exempt dividend or other distribution paid to a company;63 otherwise, corporation tax on income will apply to a dividend or other distribution of a company. There are two separate regimes for determining whether a distribution is exempt: the first is in respect of distributions received by small companies; and the other is for those received by companies which are not small.64

56 57 58 59 60 61 62 63 64

Section 397 of the Income Tax (Trading and Other Income) Act 2005 (‘ITTOIA 2005’). Individuals with taxable income up to £34,370 after personal allowances for 2012–13. Individuals with taxable income of between £34,271 and £150,000 for 2012–13. Individuals with taxable income of over £150,000 for 2012–13. Section 397A of ITTOIA 2005. Section 56(3) of ITA 2007. Section 397(1) of ITTOIA 2005. Section 931A of the Corporation Tax Act 2009 (‘CTA 2009’). See ss 931B–931W of CTA 2009.

428

Tax issues on a winding up or liquidation 15.25

15.23 A  capital distribution is any distribution from a company in money or money’s worth (including on liquidation), but which is not a distribution in the hands of the recipients which constitutes income for the purposes of income tax.65 A capital distribution ordinarily constitutes a part disposal of the shares in the distributing company and is taxed as capital under section 122(1) of TCGA  1992, unless the amount is ‘small’, in which case there are special provisions. There is no separate treatment depending on whether the shareholder is an individual or a company.

TAX ISSUES ON A WINDING UP OR LIQUIDATION 15.24 Some shareholders’ disputes may result in the liquidation of the company and a final pay-out to the shareholders. The first issue will be taxation of the company. An end of a company’s accounting period will arise immediately before being wound up and a new one will start immediately thereafter.66 Corporation tax will be chargeable subject to special rules, at rates dependent on the financial year in which the winding up is completed (the final year) and the last financial year before the company’s final year (the penultimate year).67 A  company will be chargeable to corporation tax on profits arising in its winding up.68 Another issue in a liquidation is that the assets of the company are vested in the liquidator but, for chargeable gains purposes, the acts of the liquidation in relation to the assets shall be treated as acts of the company.69 Therefore, liquidation does not trigger an event for chargeable gains purposes. 15.25 For the shareholders of the company, a distribution in the course of a winding up is not a distribution for the purposes of the Corporation Tax Acts.70 Furthermore, a capital distribution as defined in section 122(5)(b) of TCGA  1992 includes a distribution in the course of dissolving or winding up the company, in money or money’s worth. Under section 122(1) of TCGA 1992, a capital distribution is treated as consideration for the disposal of the underlying shares, so long as it does not represent a new holding within the rules covering reorganisation or reduction of share capital, as set out in section 126(1) of TCGA 1992.71 HMRC’s Statement of Practice D3 (originally published in March 1978 but remaining relevant) states that, during the liquidation of a company when there is more than one distribution, each distribution other than the final one is to be treated as a part disposal by the shareholder, and that the residual value of the shares has to be ascertained in order to attribute a proportion of the cost of the shares to the distribution in question. If the inspector accepts that the distribution is small, it can be deducted from the cost. For unquoted shares, HMRC will in principle accept any 65 66 67 68 69 70 71

Section 122(5)(b) of TCGA 1992. Section 12 of CTA 2009. Section 626 of CTA 2010. Section 6(2) of CTA 2009. Section 8(6) of TCGA 1992. Section 1030 of CTA 2010. Whilst a reorganisation of a company or group may be necessary in a shareholders’ dispute, it should not in itself trigger any tax charges if structured and effected properly, but there will be tax issues for the departing shareholders.

429

15.26  Taxation Issues

such valuation by the taxpayer or his agent which is reasonable where the liquidation is expected to be completed within two years of the first distribution and, in fact, it does not extend beyond that period. A  targeted anti-avoidance rule (TAAR) became effective as from 6  April 2016, whereby a distribution in a winding up made to an individual will be treated as if it were a distribution, where the following conditions apply: • • • •

the individual receiving the distribution had at least a 5% interest in the company immediately before the winding up (Condition A); the company was a close company at any point in the two years ending with the start of the winding up (Condition B); the individual receiving the distribution continues to carry on or be involved with, the same trade or a trade similar to that of the wound-up company at any time within two years from the date of the distribution (Condition C); and it is reasonable to assume that the main purpose or one of the main purposes of the winding up is the avoidance or reduction of a charge to income tax (Condition D).

The TAAR will not apply if the amount of the distribution does not exceed an amount which would result in no gain accruing for capital gains tax or where the distribution is of irredeemable shares. In a shareholders’ dispute it could conceivably apply if the shareholder sets up a business following his or her exit from the company, which is similar to the company’s, although the purpose test in Condition D is unlikely to apply.

EMPLOYMENT-RELATED SECURITIES REGIME 15.26 The taxation of employment-related securities falls within the wideranging provisions of Part 7 of the Income Tax (Earnings and Pensions) Act 2003 (‘ITEPA  2003’), which essentially looks to tax any benefits arising from those securities as income from employment, and therefore subject to income tax; and, if the shares are readily convertible assets, under the Pay-As-You-Earn regime and subject to National Insurance contributions (NIC) to be paid by both the ‘employee’ and the employer. If compensation paid under a shareholders’ dispute involving an individual shareholder who is a director and/or employee falls within this regime, it could become very expensive for both the shareholder and the company, with income tax arising on the individual and possibly NIC arising on the individual and the company. HMRC are alive to arrangements whereby special values are attributed to an employee’s shares under, say, shareholders’ agreements and intended to be taxed under the CGT regime, to avoid income tax and NIC. A  director or officer of a company is treated as an employee for tax purposes under the regime, and a person who acts like a director – a shadow director – could be treated as a director by HMRC. This fact is often misunderstood by parties, whereby the director will have a contract for services with the company under the misapprehension that payments made thereunder will not represent employment income. In any shareholder dispute involving such arrangements, the situation should be rectified with HMRC. Under ITEPA  2003 securities are widely defined to include shares in any body corporate (wherever incorporated), debentures, debenture stock, loan stock, bonds, warranties and other instruments entitling their holders to subscribe for securities

430

Purchase by unquoted trading company of its own shares 15.28

and other rights.72 Employment-related securities are securities, or an interest in securities, acquired by a person where the right or opportunity to acquire the securities or interest is available by reason of an employment of that person or any other person, and where employment includes a former or prospective employment. The only carve-out within the definition of ‘employment-related’ is if the person by whom the right or opportunity is made available is an individual, and the right or opportunity is made available in the normal course of the domestic, family or personal relationships of that person.73 However, no tax issues should arise for the owner of employment-related securities so long as they are acquired and disposed of at market value on an unrestricted basis. Furthermore, where a shareholder has no employment link with the company and no managerial connection with the company the shareholding is unlikely to be employment-related. 15.27 The following should not fall to be taxed under the provisions of the employment-related securities regime: • • • •

transactions involving transferring shares between unconnected persons at market value; transactions which fall within any of the HMRC-approved shares and option schemes; public offers; and transactions whereby no income tax advantage arises to the shareholder.

Arrangements involving departing director and employee shareholders will technically fall within the regime, but it does not follow that an income tax charge for the individuals will arise under any agreement for a share buy back as long as market value requirements have been met. Payments made involving restricted securities and convertible securities, securities with artificially depressed or enhanced market values, those acquired for less than market value or disposed of for more than market value, as well as in respect of post-acquisition benefits from securities, can trigger an employment-related tax charge, as could any other special arrangements entered into between the company and the director/employee shareholders or exdirectors/employees which provide added value to the shareholder in respect of the shareholder.74

PURCHASE BY UNQUOTED TRADING COMPANY OF ITS OWN SHARES FALLING WITHIN CAPITAL GAINS TAX REGIME75 15.28 An unquoted trading company (or an unquoted holding company of a trading group) may redeem, repay or purchase its own shares and the payment will not be treated as a distribution, so long as the purchase is wholly or mainly done for the purpose of benefiting its trade (or that of any of its 75% subsidiaries), and there is no scheme or arrangement whereby the owner of the shares would be enabled to participate in the company’s profits without receiving a dividend, or for the avoidance 72 Section 420 of the Income Tax (Earnings and Pensions) Act 2003 (‘ITEPA 2003’). 73 Section 421B(3) of ITEPA 2003. 74 See Grays Timber Products Ltd v HMRC [2010] 1 WLR 497, SC. 75 Sections 1033–1047 of CTA 2010.

431

15.29  Purchase by unquoted trading company of its own shares

of tax. Alternatively, the provisions will apply if the whole (or substantially the whole) of the payment is applied, by the shareholder to whom it is made, in discharging an inheritance tax charge on a death and is applied in that way within two years after the death. In these instances, the shareholder’s gain will be subject to CGT. A payment made by the company includes anything else that is a distribution or would be a distribution but for these buy-back provisions.76 If these provisions do not apply, any payment made by a company in buying back shares which is in excess of the capital originally subscribed for the shares will constitute a distribution as discussed previously. The requirements are exacting whereby the seller must be UK resident in the tax year in which the re-purchase is made and, if the shares are held through a nominee, the nominee must meet these requirements as well. In addition, the shares must have been owned by the seller throughout the five years ending with the date of the purchase by the company. The selling shareholder’s interest in the company must be substantially reduced as a result of the share buy-back, as measured by the shareholdings of the seller and the seller’s associates, which must be not more than 75% of the seller’s prior interest. Following the share buy-back, the seller must not be connected with the company or any company within its group. A company may apply to HMRC for advance clearance that the provisions under the legislation are met, and indeed it is strongly recommended to do so. 15.29 In terms of what amounts to benefiting the trade, HMRC consider77 that, if there is a disagreement between the shareholders over the management of the company and that disagreement is having or is expected to have an adverse effect on the company’s trade, the purchase of the shareholding of any dissenting shareholder by the company will be regarded as satisfying the trade benefit test, provided the effect of the transaction is to remove the dissenting shareholder entirely. Similarly, if the purpose is to ensure that an unwilling shareholder who wishes to end his association with the company does not sell his shares to someone who might not be acceptable to the other shareholders, the purchase will normally be regarded as benefiting the company’s trade. Both these scenarios are not unusual in shareholders’ disputes. Furthermore, HMRC provide the following as examples of unwilling shareholders (although none may typically arise in a shareholders’ dispute): (a) an outside shareholder who has provided equity finance (whether or not with the expectation of redemption or sale to the company) and who now wishes to withdraw that finance; (b) a controlling shareholder who is retiring as a director and wishes to make way for new management; (c) personal representatives of a deceased shareholder, where they wish to realise the value of the shares; (d) a legatee of a deceased shareholder, where he does not wish to hold shares in the company. HMRC  Statement of Practice SP2/82 (binding on HMRC whilst in publication) states that, if the company is not buying all the shares owned by the vendor, or if, although the vendor is selling all his shares, he is retaining some other connection 76 77

Section 1033(6) of CTA 2010. SP2/82 (published 1982 but remaining relevant).

432

Taxation of damages 15.32

with the company (for example, a directorship or an appointment as consultant), it would seem unlikely that the transaction could benefit the company’s trade, so the trade benefit test will probably not be satisfied. Exceptions might include where a company does not currently have the resources to buy out its retiring controlling shareholder completely, but purchases as many of his shares as it can afford with the intention of buying the remainder where possible. In these circumstances, HMRC consider that it may still be possible for the company to show that the main purpose is to benefit its trade.

TAXATION OF DAMAGES 15.30 Damages and compensation are similar but not identical. Damages are pecuniary recompense given to a person who has suffered an actionable wrong and which can be claimed under contract, tort and equity. Compensation is pecuniary recompense which a person is entitled to receive in respect of damage or loss suffered, other than as a result of an actionable wrong. The taxation of the pecuniary recompense will depend on what it is being paid for: if it is to compensate for loss of profits, the payment will be treated and taxed as a trading receipt;78 if it represents compensation for loss of a capital asset, it will be treated as a capital receipt. An ex gratia payment will not be subject to tax, but the onus is on the taxpayers to prove that the payment truly is ex gratia and, needless to say, this may be difficult to do. The taxation of the payor will depend on whether or not the payment arises outside the normal course of a trade. Litigating a trade dispute is likely to be an allowable expense, but litigating a private dispute will not be allowable. 15.31 Section 51(2) of TCGA  1992 provides that compensation or damages received for any wrong or injury suffered by an individual in his person, profession or vocation is not a chargeable gain.79 Applying only to individuals, this will cover physical injury, distress, embarrassment, loss of reputation, torts and breaches of contractual duties. It only applies in their profession, as distinct from their finances. Interest on damages is not subject to tax under section 751 of the Income Tax (Trading and Other Income) Act 2005.

VAT and damages 15.32 Compensation payments for damage or loss arise either as a result of a court order or from an agreement between the parties to the dispute. They are, therefore, generally outside the scope of VAT because such payments do not represent consideration for a supply. However, as a payment made in consideration for a supply will be within the scope of VAT, it is important to establish the grounds under which a settlement payment arises – whether it is a payment for damages, or whether it is for a supply implicit in the terms of the final settlement agreement.80 78 Burmah Steam Ship Company v Commissioners of Inland Revenue (1930) 16 TC 67. 79 See 15.7. 80 C & E Manuals, Volume VI-3, Value Added Tax, Chapter 22, Part A, Section 9(B), Compensatory payments, 9.1.

433

15.33  Purchase by unquoted trading company of its own shares

There are conflicting judgments relating to whether an early termination of a contract,81 which could arise in a shareholders’ dispute relating, say, to a shareholders’ agreement, can amount to a supply of services. There will be no supply of services if a contract allows a right to terminate early, even if a payment is received. If no such right exists contractually, and a separate agreement is made later to terminate early, there can be a supply of services.

EVIDENCING A SETTLEMENT 15.33 The best practice for evidencing the terms of a settlement agreement is to set out the components of the final agreement and specify what comprises the payments. Stating a global sum, with no references as to a breakdown of components, will be of no help to any of the parties when determining at a later date what the tax treatment should be for both the payor(s) and the recipient. References to any capital repayment, interest, employment-related income, any gross-up to include tax and any other damages should be included.

81 See Holiday Inns (UK) Ltd [1993] VATTR 321, Croydon Hotel & Leisure Company Ltd (LON/93/2061A) and Lloyd Bank Plc (LON/95/2524).

434

Chapter 16

Shareholder Claims in Australia*

Contents Companies, their history and constituent players

16.1

Directors and their basic functions and duties 16.3 Appointment, removal and powers of directors 16.3 Directors’ duties and the concept of ‘officers’ 16.6 Shareholders and the relationship between them

16.9

Shareholder rights

16.10

Shareholder personal actions Separate and distinct losses not reflective loss Fraud on the minority and limits to constitutional amendments Fiduciary duties owed by directors to shareholders Contractual claims

16.12 16.12 16.14 16.15 16.17

Statutory derivative action Standing and leave Court powers

16.18 16.19 16.20

Oppression 16.21 Grounds for granting relief 16.21 Forms of relief 16.23 Parties who may apply for relief 16.25 Compulsory liquidation remedies Section 461(1)(e) – directors acting in their own interests Section 461(1)(f) and (g) – oppressive, unfairly prejudicial or unfairly discriminatory conduct Section 461(1)(k) – just and equitable

16.27 16.28

Other statutory claims Misleading and deceptive conduct Statutory right to injunctions and damages Other orders

16.31 16.32 16.33 16.34

The minority shareholder in a listed company Continuous disclosure ASX Listing Rules requiring approval by general meeting

16.35 16.35 16.37

16.29 16.30

Remedies 16.38 *

Chapter written by Dr Michael Legg (Professor, Faculty of Law & Justice, University of New South Wales, Sydney, Australia), Sera Mirzabegian SC (Barrister, Eleven Wentworth Chambers), and Derek Wong (Barrister, Alinea Chambers).

435

16.1  Shareholder Claims in Australia

Shareholder class actions Class action requirements Institutional shareholders Class actions and derivative suits compared

16.39 16.40 16.42 16.43

COMPANIES, THEIR HISTORY AND CONSTITUENT PLAYERS 16.1 The Corporations Act 2001 (Cth) (referred to in this chapter as ‘the Act’) is the principal legislation governing the regulation of companies in Australia. The Act commenced on 15 July 2001 and was enacted following a reference of legislative power from the states.1 The reference was required to overcome constitutional limitations on the Commonwealth’s legislative power with respect to corporations.2 The types of company that may be registered under the Act are set out in section 112 of the Act. In the case of a proprietary company (being a company which has no more than 50 non-employee shareholders),3 section 112(1) allows for the registration of a company limited by shares and a company unlimited with share capital. Four types of public companies (generally defined as a company other than a proprietary company)4 may be registered: a company limited by shares, a company limited by guarantee, a company unlimited with share capital, and a no liability company. A company limited by shares is defined in section 9 of the Act as a company formed on the basis of limiting the liability of its members to the amount (if any) unpaid on the shares held by them.5 In contrast, an unlimited company is one whose members have no limitation on their liability;6 and the members of a company limited by guarantee have their liability limited to the respective amounts that they undertake to contribute to the property of the company if it is wound up.7 A no liability company is a company with share capital which has mining purposes as its sole object, and does not have any contractual right to recover calls made on its shares from a shareholder who fails to pay them.8 Most companies are companies limited by shares. 16.2 It is trite law that a company is a fictional entity with its own legal personality separate from those of its members.9 On registration under the Act, a company comes into existence as a body corporate.10 A registered company ‘has the legal capacity and powers of an individual’ both in and outside the jurisdiction of the Act.11 Section 1

2 3 4 5 6 7 8 9 10 11

Corporations (Commonwealth Powers) Act 2001 (NSW); Corporations (Commonwealth Powers) Act 2001 (Vic); Corporations (Commonwealth Powers) Act 2001 (Qld); Corporations (Commonwealth Powers) Act 2001 (SA); Corporations (Commonwealth Powers) Act 2001 (Tas); Corporations (Commonwealth Powers) Act 2001 (WA). The referral of power by the states was triggered by the decisions of the High Court in Re Wakim; Ex parte McNally (1999) 198 CLR 511 and R v Hughes (2000) 202 CLR 535. Section 113 of the Act. See also s 45A of the Act which distinguishes between small and large proprietary companies. Section 9 of the Act. See also s 516 of the Act. Section 9 of the Act. Section 9 of the Act. Section 112(1) of the Act. ‘Mining purposes’ is defined in s 9. Salomon v A Salomon & Co Ltd [1897] AC 22, per Lord Macnaghten at 51. Section 119 of the Act. Section 124(1) of the Act.

436

Directors and their basic functions and duties 16.3

124(1) also provides that a company has all the powers of a body corporate, including the specific powers set out in that provision – for example, the power to issue and cancel shares,12 and the power to distribute any of the company’s property among the members. By enabling a registered company to come into existence as a body corporate and to have the powers of a body corporate, the Act impliedly confers on a corporation the common law attributes of a body corporate – including, for example, the power to sue and be sued, the power to hold property, and perpetual succession.13 A company’s constitution may contain restrictions on the company’s exercise of any of its powers.14 One consequence of the ‘separate entity’ doctrine is that a company has legal rights and duties that are separate from the rights and duties of a company’s members and directors. A company is owned by its members and, in the case of a company limited by shares, the separate entity doctrine facilitates the limitation of members’ liability to the value of their shares, by enabling a company to acquire obligations separate from those of its members.15 The doctrine does not, however, mean that a company is separate from its members and directors in all respects. Directors are primarily responsible for the management of the company,16 and a company can only act by its board of directors acting on its behalf or, in some circumstances, by a general meeting of members.

DIRECTORS AND THEIR BASIC FUNCTIONS AND DUTIES Appointment, removal and powers of directors 16.3 A  proprietary company must have at least one director who is ordinarily resident in Australia, and a public company must have at least three directors, two of whom are ordinarily resident in Australia.17 In order to be appointed as a director, an individual must be at least 18 years old18 and must provide a signed consent which is to be kept by the company.19 Under the Act, a person may be appointed by a resolution passed at a general meeting of members20 or by other directors and later confirmed by the company.21 These methods of appointment are designated by the Act as ‘replaceable rules’, meaning that the provisions can be ‘displaced or modified’ by the company’s constitution.22 The Act also contains ‘special rules’ in relation to the

12 13 14 15 16 17 18 19 20 21 22

A company limited by guarantee does not have the power to issue shares: s 124(1) of the Act. R P Austin and I M Ramsay, Ford, Austin and Ramsay’s Principles of Corporations Law (LexisNexis Butterworths: Sydney, 2018) at para [4.030]. Section 125(1) of the Act. See, generally, R P Austin and I M Ramsay, Ford, Austin and Ramsay’s Principles of Corporations Law (LexisNexis Butterworths: Sydney, 2018) at para [4.160]. See s 198A of the Act. Section 201A of the Act. Section 201B(1) of the Act. Section 201D of the Act. Section 201G of the Act. Section 201H of the Act. Section 135(2) of the Act.

437

16.4  Shareholder Claims in Australia

appointment of public company directors,23 as well as directors of a single director/ single shareholder proprietary company.24 16.4 A  director may be removed from office by resolution of the company.25 In the case of a public company, section 203D sets out a detailed process relating to any proposed removal and allows the director to put his or her case to the members in meeting, and section 203E prevents a director from being removed by other directors. A  person also ceases to be a director of a company if the person becomes disqualified from managing corporations, unless the court or the Australian Securities and Investments Commission (‘ASIC’) allows the person to manage the company.26 A person is automatically disqualified from managing corporations if, for example, the person is convicted of any of the offences set out in section 206B(1) or the person is an undischarged bankrupt.27 ASIC also has the power of disqualification in the circumstances set out in section 206F of the Act, and the court (on application by ASIC) is empowered to disqualify a person in certain circumstances, including where: (a) the person has contravened a civil penalty provision in the Act;28 (b) the person has, within the last seven years, been an officer of two or more companies when they have failed (for example, in the sense of becoming insolvent) and the manner in which the company was managed was responsible for the failure;29 (c) the person has engaged in repeated contraventions of the Act;30 or (d) the person has been disqualified under the law of a foreign jurisdiction;31 and the court is satisfied that disqualification is justified. 16.5 Section 198A of the Act sets out the powers of directors and is a replaceable rule. It provides that the ‘business of a company is to be managed by or under the direction of the directors’ and empowers the directors to exercise all the powers of the company except those powers that the Act or the company’s constitution require the company to exercise in general meeting. Whilst section 198A is a replaceable rule, it has been said that it reflects the historical understanding ‘that, unless a clear contrary intention is shown, functions assigned to the company in general meeting are not exercisable by the board of directors and likewise those given to the board of directors are not exercisable by the company in general meeting’.32

23 24 25 26 27 28 29 30 31 32

Section 201E of the Act. Section 201F of the Act. Sections 203C and 203D of the Act. In the case of a proprietary company, this is a replaceable rule – see s 203C. Section 203B of the Act. Section 206B(3) of the Act. Section 206C of the Act. Section 206D of the Act. Section 206E of the Act. Section 206EAA of the Act. Re Winlyn Developments Pty Ltd (2011) 86 ACSR 197, [2011] NSWSC 1218 at [19], citing Gramophone & Typewriter Ltd v Stanley [1906] 2 KB 856; Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34; and Quin & Axtens Ltd v Salmon [1909] AC 442.

438

Directors and their basic functions and duties 16.7

Directors’ duties and the concept of ‘officers’ 16.6 The relationship between a director and the company is an accepted fiduciary relationship.33 The principal fiduciary duties owed by directors (individually and collectively) to the company include: (a) (b) (c) (d)

the duty to act in good faith in the best interests of the company; the duty to act for a proper purpose; the duty to avoid a conflict of interest; and the duty not to misuse company property (including information).

Each of the fiduciary duties is reinforced by corresponding statutory duties under the Act: (a)

section 181 – the duty to act in good faith in the interests of the company and for a proper purpose; (b) section 182 – the duty to avoid improper use of the position to gain a personal advantage, or to cause detriment to the corporation; and (c) section 183 – the duty not to misuse company information to gain a personal advantage, or to cause detriment to the company. Under section 184, a breach of these statutory duties gives rise to criminal liability in certain circumstances (for example, where a director fails to act in good faith in the best interests of the company and is reckless or intentionally dishonest). 16.7 In addition to the above fiduciary and statutory duties, directors also owe a general law duty of care to the company.34 There is a corresponding statutory duty of care in section 180 of the Act. The standard of care imposed under general law and under section 180 are the same.35 Section 180(2) also contains what is known as the ‘business judgment rule’, which provides that a director or other officer of the corporation who makes a business judgment36 is taken to meet the requirements of the statutory and general law duties of care in respect of the judgment if: the judgment is made in good faith for a proper purpose; they do not have a material personal interest in the subject matter of the judgment; they inform themselves about the subject matter of the judgment; and they rationally believe that the judgment is in the best interests of the corporation. The statutory duties in sections 180 to 183 also extend to officers and ‘de facto directors’ of the corporation.37 The term ‘officer’ is broadly defined in section 9 of the Act, and includes a person who participates in making decisions that affect a substantial part of the company’s business, as well as a person in accordance with whose instructions or wishes, the directors are accustomed to act.38 Importantly, the 33 34

Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 96–7. Re City Equitable Fire Insurance Co Ltd [1925] Ch 407. There is some debate as to whether the duty of care owed by directors is a fiduciary duty. See eg J D Heydon, ‘Are the Duties of Company Directors to Exercise Care and Skill Fiduciary?’ in S Degeling and J Edelman (eds), Equity in Commercial Law (Lawbook Co, Sydney, 2005) at 185 and M Buckingham, ‘A Company Director’s Duty of Care and Diligence: Fiduciary or Non-Fiduciary?’ (2016) 31 (3) AJCL 370. 35 Daniels v Anderson (1995) 37 NSWLR 438. 36 Defined in s 180(3) of the Act. See also Australian Securities and Investments Commission v Rich (2009) 236 FLR 1; [2009] NSWSC 1229. 37 Sections 182 and 183 also extend to employees of the corporation. 38 See, also, Morley v Australian Securities and Investments Commission (2010) 247 FLR 140; Australian Securities and Investments Commission v King (2020) 376 ALR 1.

439

16.8  Shareholder Claims in Australia

definition is not limited to those who hold or occupy a named office, or a recognised position with rights and duties attached to it.39 A de facto director is an expression used to capture the extended definition of director in section 9 that includes a person who is not validly appointed as a director but acts as a director or ‘the directors of the company or body are accustomed to act in accordance with the person’s instructions or wishes’.40 16.8 The Act also imposes an obligation on a director to prevent insolvent trading. The obligation applies to a person who was a director at the time the company incurred a debt, the company was insolvent at that time (or became insolvent by incurring the debt) and, at that time, there were reasonable grounds for suspecting that the company was insolvent or would become insolvent. In such cases, a director is liable for breach of section 588G by failing to prevent the company from incurring the debt if they had the requisite knowledge in section 588G(2). Section 588G(3) also imposes criminal liability on the director in certain circumstances. Section 588H of the Act sets out the available defences, and a director may be ordered to compensate the company41 or a creditor.42

SHAREHOLDERS AND THE RELATIONSHIP BETWEEN THEM 16.9 The shareholders of a company are legally bound together in contract by the company’s constitution, replaceable rules in the Act, or a combination of both. Section 134 of the Act provides that a company’s internal management may be governed by the replaceable rules, the company’s constitution or a combination of both. Section 140(1) expressly provides that the constitution and any replaceable rules that apply to the company take effect as a contract between: (a) the company and each member; (b) the company and each director and company secretary; and (c) a member and each other member, under which each person ‘agrees to observe and perform the constitution and rules so far as they apply to that person’. The High Court has observed that the broad trend of authority has been to identify the subject matter of the ‘statutory contract’, so far as concerns the relationship between the corporation and the members, as addressing the government of the corporation and the exercise of the constitutional powers of the corporation. Such matters as inspection of the register, the right to receive a share certificate, to vote, to receive informative notice of meetings, to receive payment of duly declared and payable dividends, and the like, even where not specifically supported by statutory provision, have been treated as inherent in the relationship between the corporation and its members.43

39 Australian Securities and Investments Commission v King (2020) 376 ALR 1 at [24] and [58]. 40 See Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6 at [62]–[76], [141] and [143]. 41 Sections 588J–588Q of the Act. 42 Sections 588R–588U of the Act. 43 Bailey v NSW Medical Defence Union Ltd (1995) 184 CLR 399 at 439.

440

Shareholder rights 16.11

The approach to construing the clauses of a constitution is ‘closely analogous’ to that adopted in relation to commercial contracts,44 but ‘the range of surrounding circumstances available as aids to the construction of such a contract is perhaps more limited than in other cases’ because constitutions can be amended at different times and in different circumstances, suggesting that ‘ordinarily primacy must be given to the objective intention discernible from the language in which the constitution is expressed’.45

SHAREHOLDER RIGHTS 16.10 Shareholders have a range of rights in relation to meetings of members and access to certain company information under the Act. Members have a statutory power to call meetings. Under section 249D(1) of the Act, the directors of a company must call and arrange to hold a general meeting at the request of members with at least 5% of the votes that may be cast at the general meeting. Such a request must be in writing, state any resolution to be proposed at the meeting, be signed by the members making the request, and be given to the company.46 Section 249F provides that members with at least 5% of the votes that may be cast at a general meeting may convene a general meeting. If it is impracticable to call the meeting in any other way, the court may also call a meeting on application by any director or member who is entitled to vote at the meeting.47 Members with at least 5% of the votes that may be cast at the general meeting or at least 100 members who are entitled to vote at the general meeting may give a company notice of a resolution that they propose to move at a general meeting.48 Written notice of a meeting of members must be given to each member entitled to vote at the meeting.49 When a proposed item of business is included in a notice by directors, the directors must disclose such information as will ‘fully and fairly inform members’ of what is to be considered at the meeting, and any information given in the notice must not be given in a misleading manner – directors must not ‘turn a blind eye to relevant information in order to avoid placing before members information which may contradict or qualify’ a position taken by them.50 In most cases, the company’s constitution confers on members the right to vote at general meetings. For those companies which rely on the replaceable rules, section 250E(1) of the Act provides that, in the case of a company with share capital, and subject to any rights or restrictions attached to any class of shares, each member has one vote on a show of hands and one vote for each share they hold on a poll. Section 250J (a replaceable rule) provides that a resolution put to the vote at a meeting must be decided on a show of hands unless a poll is demanded. 16.11 Members have the statutory right to access minutes of meetings, the register and the company’s books. A  company must ensure that the minute books for the 44 45 46 47 48 49 50

Dome Resources NL v Silver (2008) 72 NSWLR 693 at 698. HNA Irish Nominee Ltd v Kinghorn [2010] FCAFC 57 at [42]. Section 249D(2) of the Act. Section 249G of the Act. Section 249N of the Act. Section 249J of the Act. Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 at 466.

441

16.12  Shareholder Claims in Australia

members’ meetings, and for resolutions of members passed without meetings, are open for inspection by members without charge.51 A member may also obtain from the company a copy of any such minutes in writing.52 Section 173(2) of the Act provides that members may inspect a register kept under Chapter 2C of the Act without charge (including the register of members referred to in section 169). A shareholder may also apply to the court for an order to inspect the company’s books under section 247A(1) – any such order may only be made if the court is satisfied that the member is acting in good faith and that the inspection is to be made for a proper purpose.53

SHAREHOLDER PERSONAL ACTIONS Separate and distinct losses not reflective loss 16.12 Members have a right of personal action to complain about certain corporate conduct, but the general rule is that a shareholder may only sue for loss suffered by the shareholder – that is, the loss must be separate and distinct from the loss suffered by the company, and a shareholder cannot recover loss which is merely reflective of the company’s loss. The rule was adopted by the English Court of Appeal in Prudential Assurance Co Ltd v Newman Industries (No 2), in which the court said that a shareholder in a company could not ‘recover damages merely because the company in which he is interested has suffered damage’ – such loss included the diminution in value of the shares or dividends payable to the shareholder and was ‘merely a reflection of the loss suffered by the company’.54 That statement of principle was approved by the High Court of Australia in Gould v Vaggelas.55 The rule has been recently re-examined by the Supreme Court of the United Kingdom.56 It remains the law in Australia, but the New South Wales Court of Appeal has recently made clear that it will not apply to circumstances where the company has no cause of action to recover the loss.57 16.13 In Johnson v Gore Wood & Co, Lord Bingham stated the relevant principles as follows:58 (a)

where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss; (b) where a company suffers loss but has no cause of action available to it, the shareholder may sue in respect of the loss if the shareholder has a cause of action to sue; and (c) where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a separate and distinct loss caused by a breach of duty owed to the shareholder, each may sue to recover the loss caused to it but neither can sue in respect of the other’s loss. 51 Section 251B(1) of the Act. 52 Section 251B(2)–(4) of the Act. 53 See Acehill Investments Pty Ltd v Incitec Ltd [2002] SASC 344 at [29]; Praetorin Pty Ltd v TZ Ltd (2009) 76 ACSR 236; [2009] NSWSC 1237 at [36]–[40]. 54 [1982] Ch 204 at 222–223. 55 (1985) 157 CLR 215, at 219–220 per Gibbs CJ and at 253 per Brennan J. 56 Sevilleja v Marex Financial Ltd [2020] UKSC 31. 57 Central Coast Council v Norcross Pictorial Calendars Pty Ltd [2021] NSWCA 75 at [119]. 58 [2002] 2 AC 1 at 35–36.

442

Shareholder personal actions 16.15

Lord Millett noted in that case that the rule against shareholder recovery of reflective loss was driven by policy considerations grounded in the ‘separate entity’ doctrine – the company is a legal entity separate from its shareholders, with its own assets and liabilities; and, where the company suffers loss as a result of a wrong done to it, the cause of action is vested in the company itself and not in its shareholders.59 These statements of principle have been accepted in Australia.60

Fraud on the minority and limits to constitutional amendments 16.14 At common law, the doctrine of fraud on the minority operates as a limitation on the majority’s voting power. The doctrine is broadly concerned with restraining an abuse of power in the sense of action beyond the scope of power. The application of the doctrine has been said to turn ‘ultimately on a value judgment formed in respect of the conduct of the majority’.61 The doctrine may, for example, invalidate an otherwise regular exercise of power which was ‘a means of securing some personal or particular gain … which does not fairly arise out of the subjects dealt with by the power and is outside and even inconsistent with the contemplated objects of power’.62 The application of the doctrine commonly arises in cases involving an amendment to the corporate constitution. Section 136(2) of the Act provides that a company may modify or repeal its constitution, or a provision of its constitution, by special resolution (being a resolution that is passed by at least 75% of the votes cast by members entitled to vote on the resolution).63 The power to alter the constitution, however, is limited by the doctrine of fraud on the minority. In Gambotto v WCP  Ltd,64 the High Court of Australia considered whether the amendment of a company’s articles of association, the effect of which was to enable a majority shareholder compulsorily to acquire the shares held by minority shareholders for a stipulated price per share, was invalid. The court held that the amendment was invalid. The majority considered that the power to alter the articles so as to confer upon the majority the power to expropriate the shares of the minority could be exercised only if ‘it was exercisable for a proper purpose’ and its exercise would not ‘operate oppressively in relation to minority shareholders’.65 The second element of the test involved considerations of procedural and substantive fairness to the minority shareholders – that is, fairness in the process used to expropriate the shares and fairness of the terms of the expropriation itself.66

Fiduciary duties owed by directors to shareholders 16.15 In some cases, a shareholder may be entitled to sue a director for breach of fiduciary duties owed by the director to the shareholder. 59 60 61 62 63 64 65 66

[2002] 2 AC 1 at 61. Thomas v D’Arcy (2005) 52 ACSR 609 at [13]. Crumpton v Morrine Hall Pty Ltd (1965) 82 WN (Pt 1) (NSW) 456 at 460. Peters’ American Delicacy Co Ltd v Heath (1939) 61 CLR 457, per Dixon J at 511. Section 9 of the Act. (1995) 182 CLR 432. (1995) 182 CLR 432 at 445 per Mason CJ and Brennan, Deane and Dawson JJ. (1995) 182 CLR 432 at 446–447 per Mason CJ and Brennan, Deane and Dawson JJ.

443

16.16  Shareholder Claims in Australia

As a general proposition, directors owe fiduciary duties to the company and not to individual members.67 The rule is grounded in the distinction between a company and its members established in Saloman v Saloman & Co68 and reinforced by the ‘proper plaintiff’ rule derived from Foss v Harbottle,69 which denies shareholders standing to sue directors for wrongs done to the company. A fiduciary relationship may, however, arise in some factual circumstances between directors and shareholders. 16.16 In Brunninghausen v Glavanics, the New South Wales Court of Appeal held that, despite the legal distinction between a company and its shareholders, the office of director in a proprietary company may, for some purposes, be a fiduciary one in relation to the shareholders, and that such a fiduciary duty may arise where there are negotiations for a takeover or an acquisition of the company’s business which require the directors to promote the interests of all shareholders.70 In that case, one of the two shareholders of the company sold his shares to the sole effective director (and majority shareholder) of the company. The business was then sold to a third party. The fact that the director had been approached to sell the business to a third party had not been disclosed to the other shareholder prior to him selling his shares. The Court of Appeal found that the director took advantage of his special knowledge of the proposed sale of the company to acquire the shares of the only other shareholder at a gross undervalue and that, in such circumstances, he owed a fiduciary duty to the other shareholder.71 The court noted that the general principle that a director owed fiduciary duties to the company and not to shareholders was ‘undoubtedly correct’, but that the principle did not apply in the case because the transaction did not concern the company, only another shareholder.72

Contractual claims 16.17 A  member may have a contractual claim against other members or the company. The claim may arise under an express agreement with the other shareholders, separate from the company’s constitution – for example, a shareholders’ agreement made between all shareholders of a company in an incorporated joint venture.73 A  contractual claim against the company may arise from the statutory contract comprising the company’s constitution and replaceable rules.74

STATUTORY DERIVATIVE ACTION 16.18 A  derivative action is one where the person who brings the action relies on a cause of action belonging to another person. Part 2F.1A of the Act confers on a member the right to sue derivatively on behalf of the company, and is a major

67 Percival v Wright [1902] 2 Ch 421. 68 [1897] AC 22. 69 (1843) 2 Hare 461. 70 (1999) 46 NSWLR 536 at 558–559. 71 (1999) 46 NSWLR 536 at 554 and 558. 72 (1999) 46 NSWLR 536 at 549. 73 R P Austin and I M Ramsay, Ford, Austin and Ramsay’s Principles of Corporations Law (LexisNexis Butterworths: Sydney, 2018) at para [10.231]. 74 Section 140(1) of the Act.

444

Statutory derivative action 16.19

statutory exception to the proper plaintiff rule in Foss v Harbottle.75 The statutory derivative action supplements a member’s personal right of action in respect of the same facts – that is, a member who has a personal right of action is not precluded from bringing a derivative suit in respect of the same facts.76

Standing and leave 16.19 Section 236(1) of the Act provides that a member, former member or a person entitled to be registered as a member may institute proceedings on behalf of a company (or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for the proceedings) if the member has been granted leave under section 237 of the Act. An action brought on behalf of the company must be brought in the company’s name,77 and an applicant for leave may apply to the court for an order under section 247A(3) to inspect the company’s books. The court must grant leave to a member under section 237 of the Act if it is satisfied that: (a)

it is probable that the company will not itself bring the proceedings or properly take responsibility for them; (b) the member is acting in good faith; (c) it is in the best interests of the company for the member to be granted leave; (d) there is a serious question to be tried (in the case of an application for leave to bring proceedings); and (e) the member has given at least 14 days written notice to the company of their intention to apply for leave and the reasons for applying or, if no such notice is given, it is appropriate to grant leave. Each of the above criteria must be satisfied for a grant of leave78 and, if all of the criteria are satisfied, the court is bound to grant leave.79 Under section 237(3), there is a rebuttable presumption that granting leave is not in the best interests of the company in certain circumstances – for example, if the proceedings are by the company against a third party, the company has decided to settle the proceedings and all the directors who participated in the decision: acted in good faith for a proper purpose; did not have a material personal interest in the decision; informed themselves about the decision to the extent they reasonably believed to be appropriate; and rationally believed that the decision was in the best interests of the company. Whilst the ratification of conduct by members does not have the effect that an application for leave under section 237 must be refused and does not prevent a person from bringing or intervening in proceedings, the court may take the ratification into account in deciding what judgment to make in the proceedings or in relation to an application for leave.80

75 76 77 78 79 80

(1843) 2 Hare 461. Hurley v BGH Nominees Pty Ltd (1982) 31 SASR 250. See also note 3 to s 236 of the Act. Section 236(2) of the Act. Goozee v Graphic World Group Holdings Pty Ltd (2002) 42 ACSR 534 at 541. Fiduciary Ltd v Morningstar Research Pty Ltd (2005) 53 ACSR 732 at 735. Section 239 of the Act.

445

16.20  Shareholder Claims in Australia

It should be noted that the question of whether the statutory derivative action is available when a company is in liquidation is not settled. Although the Supreme Court of Victoria has held that the action is available when a company is in liquidation,81 and different views have been expressed by judges of the Federal Court of Australia,82 it appears the better view is that it is not.83

Court powers 16.20 An action brought or intervened in with leave must not be discontinued or settled without the leave of the court.84 Under section 242 of the Act, the court also has a broad power to make costs orders, including requiring that the company pay the costs of the person who seeks leave, or that the person seeking leave indemnify the company for the costs it incurs.85 Section 241 sets out the general powers of the court in relation to the proceedings brought with leave or an application for leave. They include the power to make: (a) (b) (c) (d)

interim orders; directions about the conduct of the proceedings including requiring mediation; an order directing the company or an officer of the company to do, or not to do, any act; and an order appointing an independent person to investigate and report to the court on the financial affairs of the company, the facts which gave rise to the cause of action or the costs incurred in the proceedings.

OPPRESSION Grounds for granting relief 16.21 Part 2F.1 of the Act governs relief from oppression. Section 232 sets out the grounds on which a court may grant relief under section 233 (discussed further below), namely if: ‘(a) the conduct of a company’s affairs; or (b) an actual or proposed act or omission by or on behalf of a company; or (c) a resolution, or a proposed resolution, of members or a class of members of a company; is either (d) contrary to the interests of the members as a whole; or (e) oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member or members whether in that capacity or any other capacity.’

81

Fresh Start Australia Pty Ltd; Scuteri v Lofthouse and Cauchi as liquidators of Fresh Start Australia Pty Ltd (in liq) (2006) 59 ACSR 327. 82 See eg Mhanna v Sovereign Capital Ltd [2004] FCA 1040 at [9]; and Smart Company Pty Ltd (in liq) v Clipsal Aust Pty Ltd (2011) 82 ACSR 154, [2011] FCA 35 at [8]. 83 Chahwan v Euphoric Pty Ltd (2008) 65 ACSR 661. 84 Section 240 of the Act. 85 See Roach v Winnote Pty Ltd (2006) 57 ACSR 138 at [29]; Wood v Links Golf Tasmania Pty Ltd [2010] FCA 570.

446

Oppression 16.22

Although Part 2F.1 can apply to any type of company, it is generally used in relation to small or closely held companies. Part 2F.1 applies to listed companies, although it has been said that it would be a rare circumstance where a listed company is wound up based on the oppression remedy, and even rarer where the company is solvent.86 The expression ‘oppressive to, unfairly prejudicial to, or unfairly discriminatory against’ in section 232(e) is viewed as a compound expression,87 while the expression ‘contrary to the interests of the members as a whole’ in section 232(d) is a separate ground for relief.88 The compound expression has been equated with commercial unfairness,89 which is primarily assessed by an objective test of whether reasonable directors would have decided that it was unfair to make that decision.90 16.22 Oppression will not exist merely ‘because the Court may, on the information available, disagree with the decision of the directors, or because the wisdom of hindsight may show that the decision of the directors was unwise and perhaps grossly so, or because the directors or management did not conduct the affairs of the company as well as the Court considers they may have’.91 The statutory oppression remedy is, however, wide in scope. The breadth of the statutory oppression remedy was emphasised by the High Court of Australia in Campbell v Backoffice Investments Pty Ltd,92 where French CJ stated that the language and history of the remedy indicated that it was to be read broadly, and that any imposition of limitations on the remedy by courts was ‘to be approached with caution’. In Campbell, it was found that the fact that the plaintiff had been excluded from management in the company, despite an agreement in the shareholders’ agreement that the plaintiff and the defendant were to be joint managing directors, constituted oppression. The types of conduct that can be regarded as oppressive are extensive, provided the requisite unfairness is found. Types of conduct that have been found to be oppressive include: (a) (b) (c) (d)

86 87

88 89

90 91 92

improper diversion of business opportunities; payment of excessive remuneration to a controller; failure to prosecute an action; unfairly restricting dividends;

Noble Investments Pty Ltd v Southern Cross Exploration NL (2008) 174 FCR 301; 69 ACSR 304 at 314; [2008] FCA 1963 at [64]. Tomanovic v Global Mortgage Equity Corporation Pty Ltd (2011) 84 ACSR 121; [2011] NSWCA 104 at [140]; HNA Irish Nominees Pty Ltd v Kinghorn (No 2) (2012) 290 ALR 372 at 489–490; Knights Quest Pty Ltd v Daiwa Can Company [2018] VSCA 349 at [130]. Turnbull v NRMA Ltd (2004) 50 ACSR 44 at 49–52; 22 ACLC 1094; [2004] NSWSC 577; Szencorp Pty Ltd v Clean Energy Council Ltd (2009) 69 ACSR 365 at 378; [2009] FCA 40 at [59]. Tomanovic v Global Mortgage Equity Corporation Pty Ltd (2011) 84 ACSR 121; [2011] NSWCA 104 at [140]; Hillam v Ample Source International Ltd (No 2) (2012) 289 ALR 192 at [4]; HNA Irish Nominees Pty Ltd v Kinghorn (No 2) (2012) 290 ALR 372 at 489–90. For a contrary view, see Campbell v Backoffice Investments Pty Ltd (2008) 66 ACSR 359; [2008] NSWCA 95 at [184]. Wayde v NSW Rugby League Ltd (1985) 180 CLR 459 at 471; [1985] HCA 68; Mackay Sugar Ltd v Wilmar Sugar Australia Ltd (2016) 338 ALR 374, [2016] FCAFC 133 at [11]–[12]. Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688 at 740; Territory Realty Pty Ltd v Garraway [2009] FCA 292 at [312]; Ananda Marga Pracaraka Samgha Ltd v Thomas (No 6) (2013) 300 ALR 492 at 556. (2009) 257 ALR 610; 73 ACSR 1; [2009] HCA 25 at [72].

447

16.23  Shareholder Claims in Australia

(e) making a share issue with the dominant purpose of reducing a shareholder’s proportional stake in the company; (f) improper exclusion from participation in management; (g) denial of access to information; (h) use of company funds to defend oppression proceedings; (i) oppressive conduct of board meetings; (j) decisions for the benefit of related companies rather than the shareholders in the company; (k) unlawful divestiture of shares; (l) misappropriation of company funds constituting breaches of fiduciary duty; and (m) improper action to secure the incumbency of the board of directors.93

Forms of relief 16.23 Section 233(1) provides that the court may grant any order it considers appropriate if it is satisfied that oppression has taken place, including an order: (a) (b) (c) (d) (e)

winding up the company; modifying or repealing the company’s existing constitution; regulating the conduct of the company’s affairs in the future; for the purchase of shares by any member or by the company; directing the company to institute, prosecute, defend or discontinue specified proceedings, or authorising a member or members of the company to institute, prosecute, defend or discontinue specified proceedings in the name of and on behalf of the company; (f) appointing a receiver, or a receiver and manager, of any or all of the company’s property; (g) restraining a person from engaging in specified conduct or from doing a specified act; or (h) requiring a person to do a specified act. The orders above are only examples, and so other forms of relief may be possible. Courts have a wide discretion as to whether to grant a remedy and, if so, what remedy to grant.94 There are usually two objectives in granting remedies for oppression: first, to bring an end to the oppressive conduct; and, secondly, to compensate the injured party for the injury done to him or her by the oppressive conduct.95 16.24 Courts will generally try to remedy the causes of conduct leading to oppression, rather than wind the company up, particularly in circumstances where the business of the company is successful.96 Orders for winding up will, however, be made where the relationship between shareholders in a closely held corporation has 93 94 95 96

Ian Ramsay, ‘Current Issues in Shareholder Remedies Under the Corporations Act’, Supreme Court of Victoria Inaugural Commercial Law Conference, 12 November 2009 at 12. Smith Martis Cork & Rajan Pty Ltd v Benjamin Corp Pty Ltd (2004) 207 ALR 136; [2004] FCAFC at [70]; Falkingham v Peninsula Kingswood Country Golf Club (2015) 318 ALR 140, [2015] VSCA 16 at [79]. Re Hollen Australia Pty Ltd [2009] VSC 95 at [77]. See eg Cumberland Holdings Ltd v Washington H Soul Pattinson & Co Ltd (1977) 2 ACLR 307; 13 ALR 561; Re Weedmans Ltd [1974] Qd R 377; Re Hollen Australia Pty Ltd [2009] 27 ACLC 199; [2009] VSC 95 at [79].

448

Oppression 16.26

completely broken down.97 An order for the purchase of the oppressed party’s shares will often be sought when that party wishes to exit the company. A  contentious issue here is the method for valuing the shares. The court’s task is to fix a price that represents a fair value in all the circumstances. Courts have adopted a range of valuation methods and applied them to different dates (eg  just prior to oppressive conduct, commencement of proceedings or date of final orders).98

Parties who may apply for relief 16.25 Section 234 provides that an application for relief under section 233 may be brought by: (a) a member (ie a person whose name is on the register of members), whether personally affected or not, or acting in his or her capacity as a member or not; (b) a person removed from the register of members because of a selective reduction of capital; (c) a person who has ceased to be a member if the application relates to the circumstances in which membership ceased; (d) a person to whom a share in the company has been transmitted by will or operation of law; or (e) a person whom ASIC thinks appropriate, having regard to its present or past investigations into the company’s affairs. With respect to (e), it is currently unclear whether the section should be read as meaning that ASIC cannot itself bring an application under Part 2F.1 where it believes this is appropriate in the circumstances.99 16.26 Views about which parties are eligible to be applicants have changed over the past decade. In Re Polyresins Pty Ltd,100 it was held that it was not possible for a controlling or majority shareholder in a company to be an applicant under the oppression remedy. This approach was not followed by Bergin J in Watson v James;101 and, in Goozee v Graphic World Group Holdings Pty Ltd,102 Barrett J found that it was possible for a sole shareholder of a company to be the victim of oppression, which could be caused by the company’s directors. In Haselgrove v Lavender Estates Pty Ltd,103 the applicant was a 62.55% shareholder, and it was held that the majority shareholder had been oppressed in a variety of ways, such as by being denied information about the company’s affairs, being excluded from management, and by the defendant director acting in his own interests in running the company.

97 98

See eg Kokotovich Constructions Pty Ltd v Wallington (1995) 17 ACSR 478; 13 ACLC 1113. R P Austin and I M Ramsay, Ford, Austin and Ramsay’s Principles of Corporations Law (LexisNexis Butterworths: Sydney, 2018) at para [10.480]. 99 Under former s 246AA(1)(b), ASIC had standing to apply for relief following an investigation: see Australian Securities Commission v Multiple Sclerosis Society of Tasmania (1993) 10 ACSR 489; 11 ACLC 461. The Explanatory Memorandum accompanying the Corporate Law Economic Reform Bill 1999 does not state that the law is intended to change in that respect. 100 (1998) 28 ACSR 671; 16 ACLC 1674. 101 [1999] NSWSC 600. 102 (2002) 42 ACSR 534; 20 ACLC 1502; [2002] NSWSC 640. 103 [2009] NSWSC 1076.

449

16.27  Shareholder Claims in Australia

COMPULSORY LIQUIDATION REMEDIES 16.27 Section 461(1) of the Act governs the grounds on which a company may be wound up by a court, and outlines four grounds that may provide relief to aggrieved shareholders. These relate to circumstances where: • •

•

•

directors have acted in affairs of the company in their own interests rather than in the interests of the members as a whole, or in any other manner whatsoever that appears to be unfair or unjust to other members (section 461(1)(e)); affairs of the company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members or in a manner that is contrary to the interests of the members as a whole (section 461(1)(f)); an act or omission, or a proposed act or omission, by or on behalf of the company, or a resolution, or a proposed resolution, of a class of members of the company, was or would be oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members or was or would be contrary to the interests of the members as a whole (section 461(1)(g)); and the court is of the opinion that it is just and equitable that a company be wound up (section 461(1)(k)).

Standing is conferred by section 462 on a range of entities including the company, creditors, ASIC (in defined circumstances), the liquidator of the company and a contributory. A contributory includes past and present shareholders.104

Section 461(1)(e) – directors acting in their own interests 16.28 The reference to ‘directors’ in section 461(1)(e) does not limit the application of the provision to circumstances in which the whole board acts unanimously. The provision may apply where it can be shown that the effective majority has acted in its own interests or in the interests of one or more of those board members, or even where one director, by some means or other, has caused his or her will to be carried into effect by the board with the result that the director’s personal interest has been preferred.105 Section 53 of the Act now defines ‘affairs of the company’ to include not only the business of the company but also its internal management and proceedings. Examples of directors acting in their own interests include issuing shares to a third company so as to reduce the voting power of an existing shareholder, and a chairman diverting company funds to other companies related to him for unauthorised purposes.106

Section 461(1)(f) and (g) – oppressive, unfairly prejudicial or unfairly discriminatory conduct 16.29 The grounds for winding up, as set out in section 461(1)(f) and (g) are the same as those provided under section 232 in relation to oppressive or unfairly prejudicial conduct (see above). 104 Section 9 of the Act. 105 Re Cumberland Holdings Ltd (1976) 1 ACLR 361. 106 Netbush Pty Ltd v Fascine Developments Pty Ltd (2005) 23 ACLC 1123; [2005] WASC 73; Australian Securities and Investments Commission v Green Pacific Energy Ltd (2006) 59 ACSR 142; [2006] FCA 1254.

450

Other statutory claims 16.32

Section 461(1)(k) – just and equitable 16.30 Since the introduction of the oppression remedy, there has been a reduction in the number of cases relying on the ‘just and equitable’ cause of action, and only a small number of Australian cases that have been argued solely on the grounds of just and equitable winding up.107 The main categories of winding up under section 461(1)(k) were summarised in Australian Securities and Investments Commission v Letten (No 10),108 and include a breakdown of mutual trust and confidence,109 where the company was fraudulent from inception, denial of information, when there is a deadlock or irreconcilable differences between directors,110 when there has been an action outside the ‘common understanding’ of members (‘failure of substratum’),111 where there has been fraud, misconduct or oppression,112 where the nature of the company’s business has drastically changed,113 and, in an application brought by a public authority, where it is in the public interest that a company be wound up.114 Under section 461(1)(k), a court may give relief even if the conduct complained of is strictly legal.115

OTHER STATUTORY CLAIMS 16.31 The following statutory provisions allow shareholders to sue directly: prohibitions on misleading or deceptive conduct, sections 1324 and 1325 of the Act.

Misleading and deceptive conduct116 16.32 The Act contains a number of provisions prohibiting conduct that is misleading or deceptive in relation to a financial product or a financial service,117 107 R P Austin and I M Ramsay, Ford, Austin and Ramsay’s Principles of Corporations Law (LexisNexis Butterworths: Sydney, 2018) at para [10.386]. 108 [2011] FCA 498 at [12]–[13]. 109 See eg Re Wondoflex Textiles Pty Ltd [1951] VLR 458; Kotokovich Constructions Pty Ltd v Wallington (1995) 13 ACLC 1113; Stapp v Surge Holdings Pty Ltd (1999) 17 ACLC 896; Malos v Malos (2003) 44 ACSR 511; and Nassar v Innovative Precasters Group Pty Ltd (2009) 71 ACSR 343; [2009] NSWSC 342; Queensland Phosphate Pty Ltd v Korda [No 2] [2019] VSCA 215 at [263]–[266]. 110 See eg Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426; Re Superbee Pty Ltd (1989) 7 ACLC 418; and Gregor v British-Israel-World Federation (NSW) (2002) 41 ACSR 641. 111 Strong v J Brough & Son (Strathfield) Pty Ltd (1991) 5 ACSR 296 at 300; Protocom Holdings Pty Ltd v Kent St Chambers Pty Ltd [2015] FCA 751 at [45]. 112 See eg Loch v Blackwood Ltd [1924] AC 783; and DCT v Casualife Furniture International Pty Ltd [2004] VSC 157. 113 See eg Re Tivoli Freeholds Ltd [1972] VR 445. 114 Re Storm Financial Ltd (recs and mgrs apptd) (admin apptd) Australian Securities and Investments Commission (2009) 71 ACSR 81; [2009] FCA 269; Australian Securities and Investments Commission v ActiveSuper Pty Ltd (No 2) [2013] FCA 234 at [23]; Gognos Holdings Ltd v Australian Securities and Investments Commission [2018] QCA 181 at [90]. 115 Ebrahami v Westbourne Galleries Ltd [1973] AC 360. 116 For a discussion of the requirements for a cause of action based on misleading or deceptive conduct, see eg Colin Lockhart, The Law of Misleading or Deceptive Conduct (LexisNexis Butterworths, 5th edn, 2018). 117 Section 1041H of the Act. See also Australian Securities and Investments Commission Act 2001 (Cth), s 12DA.

451

16.33  Shareholder Claims in Australia

prospectuses118 and takeover documents.119 Standing to commence proceedings is given to any person who suffers loss or damage as a result of the misleading conduct.120 Misleading or deceptive has been given its ordinary meaning: to lead into error or to cause someone to believe what is false.121 Intent is irrelevant.122 The provision originally emanated from Australian consumer protection legislation,123 but has been used in a wide range of circumstances including notices and information about meetings,124 contents of a prospectus,125 information releases to the ASX126 and offers for the purchase of shares.127 The conduct regulated by the statutory provisions is not just affirmative representations or conduct. Silence may amount to misleading and deceptive conduct where the context requires disclosure to avoid a person being misled or deceived.128 In the securities context, the continuous disclosure regime (discussed below) will frequently create the need to disclose.129 Forecasts and forward-looking statements, a staple of takeovers and initial public offerings, are subject to the misleading and deceptive conduct regime.130

Statutory right to injunctions and damages 16.33 Section 1324(1) grants the court power to grant an injunction on appropriate terms where a person has engaged, or is proposing to engage, in conduct that constituted, constitutes or would constitute: (a) a contravention of the Act; (b) attempting to contravene the Act; (c) aiding, abetting, counselling or procuring a person to contravene the Act; 118 Section 670A of the Act. 119 Section 728 of the Act. 120 Sections 670B, 729, 1041I of the Act. See also Australian Securities and Investments Commission Act 2001 (Cth), s 12GF. 121 Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 198; Weitmann v Katies Ltd (1977) 29 FLR 336 at 343 and Johnson Tiles Pty Ltd v Esso Australia Pty Ltd (2000) 104 FCR 564 at 589–590. 122 Hornsby Building Information Centre Ltd (1978) 140 CLR at 223; Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 197; Australian Securities and Investments Commission v Stone Assets Management Pty Ltd [2012] FCA 630 at [33]. 123 Trade Practices Act 1974 (Cth), s 52 which was replaced by the Australian Consumer Law, cl 18, which is Sch 2 to the Competition and Consumer Act 2010 (Cth). 124 Australian Securities and Investments Commission v Wellington Investment Management Ltd [2008] QSC 243. 125 Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 at 483 (the persistent repetition of a statement in a prospectus that shares were free, when in fact various rights had to be given up to obtain the shares, was misleading and deceptive conduct). 126 GPG (Australia Trading) Pty Ltd v GIO Australia Holdings Ltd (2001) 117 FCR 23; 40 ACSR 252; [2001] FCA 1761; Australian Securities and Investments Commission v Narain (2008) 66 ACSR 688; 247 ALR 659; [2008] FCAFC 120. 127 National Exchange Pty Ltd v Australian Securities and Investments Commission (2004) 49 ACSR 369; [2004] FCAFC 90. 128 Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31; Rhone-Poulenc Agrochimie S A v UIM Chemical Services Pty Ltd (1986) 12 FCR 477 at 490, 504 and 508; and Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 39 FCR 546 at 557. 129 GPG (Australia Trading) Pty Ltd v GIO Australia Holdings Ltd (2001) 117 FCR 23 at [101]. 130 Sections 670A(2), 728(2) of the Act; Australian Securities and Investments Commission Act 2001 (Cth), s 12BB(1).

452

Other statutory claims 16.34

(d) inducing or attempting to induce, by threats, promises or otherwise, another person to contravene the Act; (e) being in any way concerned in, or party to, the contravention of the Act; or (f) conspiring with others to contravene the Act. The jurisdiction which the court exercises under s 1324 is a statutory jurisdiction, not the court’s traditional equity jurisdiction so that the discretionary factors influencing the exercise of the power are to be found mainly, if not entirely, within the framework of the statute.131 Section 1324(10) stipulates that, where the court has power to grant an injunction, it may, either in addition to or substitution for the grant of that injunction, make an order for damages.132 The court may make such orders on the application of persons whose interests have been or would be affected by such conduct.133

Other orders 16.34 Section 1325 provides that the court may make ‘other orders’ in relation to proceedings instituted under, or for a contravention of, inter alia, Chapters  5C (managed investment schemes), 6CA (continuous disclosure) or 6D (fundraising), subsection 798H(1) (market integrity rules) or Part 7.10 (market manipulation, misleading conduct, insider trading) of the Act. Standing is conferred on a person who has suffered, or is likely to suffer, loss or damage because of conduct of another person in contravention of the above provisions. Section 1325(5) sets out the types of order that may be made, namely: (a)

an order declaring the whole or any part of a contract to be void and, if the court thinks fit, to have been void ab initio or at all times on and after a specified day before the order is made; (b) an order varying a contract or arrangement; (c) an order refusing to enforce any or all of the provisions of a contract; (d) an order directing the contravening party to refund money or return property to the person who suffered the loss or damage; (e) an order directing the contravening party to pay the person who suffered the loss or damage the amount of the loss or damage; and (f) an order directing the contravening party, at the person’s own expense, to supply specified services to the person who suffered, or is likely to suffer, the loss or damage. 131 The principles applicable to the granting of a statutory injunction are set out in Australian Securities and Investments Commission v Mauer-Swisse Securities Ltd (2002) 42 ACSR 605 at [36]; Australian Securities and Investments Commission v Wealth & Risk Management Pty Ltd [2017] FCA 477 at [14]. 132 Jovanovic v Commonwealth Bank of Australia (2004) 87 SASR 570; Waterhouse v Waterhouse (1998) 46 NSWLR 449. There have been conflicting judgments on whether damages pursuant to s 1324(10) can be obtained when no injunction is sought. Recent judgments, however, have taken the view that damages can only be obtained when an injunction is sought. See R P Austin and I M Ramsay, Ford, Austin and Ramsay’s Principles of Corporations Law (LexisNexis Butterworths: Sydney, 2018) at para [10.310.18]. 133 Allen v Atalay (1993) 11 ACSR 753; QIW Retailers Ltd v Davids Holding Pty Ltd (No 2) (1992) 112 ALR 683; Waterhouse v Waterhouse (1998) 46 NSWLR 449.

453

16.35  Shareholder Claims in Australia

THE MINORITY SHAREHOLDER IN A LISTED COMPANY Continuous disclosure134 16.35 The purpose of the continuous disclosure obligation ‘is to ensure an informed market in listed securities’ so that ‘all participants in [that] market … have equal access to all the information which is relevant to, or more accurately, likely to, influence decisions to buy or sell those securities’.135 The ASX  Listing Rules contain several provisions which require listed bodies to make immediate disclosure of information to the market. The main provision is Listing Rule 3.1, which requires an entity immediately to inform ASX of information that a reasonable person would expect to have a material effect on the price or value of the entity’s securities. The obligation is subject to certain exceptions, such as: it would be a breach of a law to disclose the information; the information concerns an incomplete proposal; or the information is generated for internal management purposes, provided in all instances the information remains confidential.136 If the ASX considers, however, that there is or is likely to be a false market in an entity’s securities, and asks the entity to give it information to correct or prevent a false market, the entity must immediately give the ASX the information.137 Chapter  6CA of the Act gives the ASX  Listing Rules legislative backing. Before 26  May 2020 this was achieved by requiring listed disclosing entities to notify the ASX of information required to be disclosed by Listing Rule 3.1 where that information is not generally available and is information that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of enhanced disclosure securities of the entity.138 The entity and any person involved in the entity’s contravention may be held liable,139 although a due diligence defence is available for individuals.140 As part of temporary measures to address the COVID-19 pandemic, the Australian Treasurer made a determination which replaced the ‘reasonable person’ test above with a fault requirement that the entity knows, or is reckless or negligent with respect to whether the information would, if it were generally available, have a material effect on the price or value of the entity’s securities. The instrument was effective from 26 May 2020 until 25 November 2020, 134 For a detailed discussion of continuous disclosure requirements and applicable penalties, see eg Ashley Black and Pamela Hanrahan, Securities and Financial Services Law (LexisNexis, 10th edn, 2021) Ch 7, and Michael Legg, Public and Private Enforcement of Securities Laws: The Regulator and the Class Action in Australia’s Continuous Disclosure Regime (Hart, 2022). 135 Jubilee Mines NL v Riley (2009) 226 FLR 201; [2009] WASCA 62 at [87]. See also National Australia Bank Ltd v Pathway Investments Pty Ltd [2012] VSCA 168 at [61]. 136 ASX Listing Rule 3.1A. 137 ASX Listing Rule 3.1B. 138 Section 674 of the Act deals with listed disclosing entities and s 675 deals with other disclosing entities. When information is generally available is defined in s 676, and the material effect on price or value is defined in s 677. Section 111AD of the Act defines enhanced disclosure securities. The legislation is discussed in detail in Grant-Taylor v Babcock & Brown Ltd (in liq) (2016) 245 FCR 402, 330 ALR 642, [2016] FCAFC 60. 139 Sections 674(2A) and 675(2A) of the Act. 140 Sections 674(2B) and 675(2B) of the Act.

454

The minority shareholder in a listed company 16.37

and extended by further instrument on 23 September 2020 until 22 March 2021.141 The temporary measures were made permanent by Schedule 2 of the Treasury Laws Amendment (2021 Measures No 1) Act 2021 (Cth) which took effect from 14 August 2021.142 Between 22  March and 14  August 2021 the continuous disclosure laws reverted to the earlier requirements. The purpose of the amendments was expressed to be the raising of the liability standard so that companies and their officers can ‘more confidently provide guidance to the market without exposing themselves to the risk of opportunistic class actions’.143 16.36 Under the Act, contravention of the above provisions may directly ground a claim for damages. The substantive subsections are financial services civil penalty provisions for which the court must make a declaration of contravention if satisfied that a contravention has occurred.144 Any person who suffers damage in relation to a contravention of a financial services civil penalty provision may apply for a compensation order.145 The court may order a person (the liable person) to compensate another person (including a corporation) for damage suffered by the person if (a) the liable person has contravened a financial services civil penalty provision, and (b) the damage resulted from the contravention.146 Proceedings for a compensation order may be started no later than six years after the contravention.147 Alternatively, proceedings may be commenced against a person or body corporate to enforce compliance with the ASX Listing Rules by ASIC or a person aggrieved by the failure, which is defined to include shareholders of the body corporate.148 In addition, a disclosure that is inaccurate, or a failure to disclose when obligated to, provides key evidence of misleading and deceptive conduct for the purposes of section 1041H of the Act and section 12DA of the Australian Securities and Investments Commission Act.149 The Treasury Laws Amendment (2021 Measures No 1) Act 2021 (Cth) amended both of these provisions, however, so that the new fault requirement for a contravention of the continuous disclosure regime could also be relied on in relation to an allegation of misleading or deceptive conduct.

ASX Listing Rules requiring approval by general meeting 16.37 The Listing Rules contain provisions which require listed companies to gain shareholder approval before proceeding. For example, to issue or agree to issue equity securities exceeding 15% of capital,150 acquire a substantial asset from, or dispose 141 The Corporations (Coronavirus Economic Response) Determination (No 2) 2020 (Cth) and Corporations (Coronavirus Economic Response) Determination (No 4) 2020 (Cth) made by the Treasurer under s 1362A of the Act. 142 Treasury Laws Amendment (2021 Measures No 1) Act 2021 (Cth) s 2 provides that Sch 2 commences the day after Royal Assent was received. Assent was received on 13 August 2021. 143 The Hon Michael Sukkar MP, House of Representatives, Hansard (17 February 2021) 10. 144 Section 1317E of the Act. 145 Section 1317J(3A) of the Act. 146 Section 1317HA(1) of the Act. 147 Section 1317K of the Act. See also s 1314 of the Act which creates a continuing obligation to comply until the disclosure is made. 148 Section 793C of the Act. See also s 1101B of the Act. 149 See eg Forrest v Australian Securities and Investments Commission (2012) 291 ALR 399; [2012] HCA 39. 150 ASX Listing Rule 7.1.

455

16.38  Shareholder Claims in Australia

of a substantial asset to, a related entity or subsidiary,151 or if there is a significant change to a company’s activities that involves disposing of its main undertaking, the approval of the holders of ordinary securities is required.152 Section 247A of the Act, allowing for inspection of a company’s books, has been employed to determine if a corporation has complied with these types of listing rules.153

REMEDIES 16.38 Many of the remedies associated with the above claims or causes of action are set out above. Indeed, the remedy is often the signature aspect of the claim, ie a statutory injunction. The extensive coverage of the Act means that, in many cases, the most important remedies are statutory, eg the statutory derivative suit, oppression and misleading conduct. Equitable remedies, however, also exist which may be of assistance.154 If a fiduciary, such as a director, threatens to breach or to continue to breach his or her fiduciary duty, the court may grant an injunction at the suit of the principal to prevent the breach from occurring or continuing.155 A breach of duty by a director can, at the election of the company, make a transaction to which the company is a party voidable.156 A director who makes a profit through a breach of fiduciary duty may be accountable to the company for that profit under equitable principles, regardless of whether the company suffered any loss.157 Where a breach of fiduciary duty causes loss to the company, equitable monetary compensation may be ordered.158 A  director as a fiduciary will hold on constructive trust any property or benefit derived in breach of fiduciary duty, to the extent that that property or benefit remains extant or can be traced in the fiduciary’s hands.159 The principle extends to any part of company property that the director should have transferred to a third person but which the third person secretly allowed the director to retain as a bribe.160 151 ASX Listing Rule 10.1. 152 ASX Listing Rule 11.2. 153 Smartec Capital Pty Ltd v Centro Properties Ltd (2011) 83 ACSR 461; [2011] NSWSC 495 at [83]. See generally, Rasley (Singapore) Pte Ltd v Financial and Energy Exchange Ltd [2020] FCA 1462. 154 See eg Matthew Conaglen, Fiduciary Loyalty (Hart Publishing, Oxford, 2010) at 158–176. 155 See Marks & Spencer plc v Freshfields Bruckhaus Deringer [2004] 1 WLR 2331; [2004] 3 All ER 773, affirmed by the Court of Appeal [2004] EWCA Civ 741 (in relation to solicitors); and J D Heydon, M J Leeming and P G Turner, Meagher, Gummow & Lehane’s Equity: Doctrines and Remedies (LexisNexis Butterworths: Sydney, 5th edn, 2015) at [5-265]. 156 Camelot Resources Ltd v MacDonald (1994) 14 ACSR 437 at 443–4. The right to elect will be lost if the rights of innocent third persons would be prejudiced by the company avoiding the transaction: Transvaal Lands Co v New Belgium (Transvaal) Land and Development Co [1914] 2 Ch 488. 157 Streeter v Western Areas Exploration Pty Ltd (No 2) (2011) 278 ALR 291 at [367], citing Chan v Zacharia (1984) 154 CLR 178 at 198–9. 158 Streeter v Western Areas Exploration Pty Ltd (No 2) (2011) 278 ALR 291 at [367], citing Breen v Williams (1996) 186 CLR 71 at 135–6. 159 Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6 at [183]–[185], citing Furs Ltd v Tomkies (1936) 54 CLR 583; and John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1 at [126]–[129]. 160 Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6 at [574]–[582].

456

Shareholder class actions 16.41

SHAREHOLDER CLASS ACTIONS 16.39 Shareholder class actions do not create new causes of action but, rather, provide a procedure that aids in the pursuit of existing claims. Shareholder class actions have become prevalent in Australia due to: • • • •

an accessible class action procedure; statutory causes of action based on misleading or deceptive conduct and breach of continuous disclosure requirements, for which individual shareholders have standing to pursue monetary damages; increasing numbers of individual and institutional shareholders that are willing to sue; and the acceptance of third party litigation funding as a method for financing litigation, including high-value class actions.161

Class action requirements 16.40 The legislation creating class actions in Australia at the federal level is Part IVA of the Federal Court of Australia Act 1976 (Cth), which was enacted in 1992.162 A  class action brought under this legislation usually has three procedural hurdles to overcome: complying with the requirements for commencing the proceedings in section 33C (seven or more persons who have claims against the same person, arising out of the same, similar or related circumstances, and giving rise to a substantial common issue of law or fact); complying with the additional pleading requirements in section 33H; and avoiding being discontinued pursuant to section 33N (eg  the proceeding will not provide an efficient and effective means of dealing with the claims of group members or it is otherwise inappropriate that the claims be pursued by means of a representative proceeding). The procedural elements are dealt with in more detail elsewhere.163 Shareholder class actions usually resolve before judgment on the merits, but there have been two proceedings that have recently been handed down by judges of the Federal Court: one against Worley Parsons,164 and the other against Myer.165 16.41 The statutory causes of action are discussed above. While each has its own elements that must be satisfied, the main areas of controversy have been causation and damages. Traditionally, Australian courts have held that each shareholder must demonstrate that they were aware of, and directly relied on, the corporate misconduct

161 Michael Legg, ‘Shareholder Class Actions in Australia – The Perfect Storm?’ (2008) 31 (3) UNSWLJ 669. 162 The only other Australian jurisdictions to enact class action legislation to date are the State of Victoria in Part 4A of the Supreme Court Act 1986 (Vic), the State of New South Wales in Part 10 of the Civil Procedure Act 2005 (NSW) and the State of Queensland in Part 13A of the Civil Proceedings Act 2011 (Qld), which are similar to the federal legislation. 163 For an overview of the Australian class action procedures, see R Mulheron, The Class Action in Common Law Systems (Hart Publishing: Oxford, 2004); D Grave, K Adams and J Betts, Class Actions in Australia (Thomson: Sydney, 2nd edn, 2012); and Michael Legg and Ross McInnes, Annotated Australian Class Actions Legislation (LexisNexis: Sydney, 2nd edn, 2017). 164 Crowley v Worley Ltd [2020] FCA 1522. 165 TPT Patrol Pty Ltd (as trustee for Amies Superannuation Fund) v Myer Holdings Ltd (2019) 140 ACSR 38.

457

16.42  Shareholder Claims in Australia

in question.166 In recent cases, however, the concept of indirect or market-based causation has been held as arguable,167 and was recently accepted in the class action brought against Myer Holdings.168 In that case, the Court held that market-based (or indirect) causation is available for both continuous disclosure and misleading or deceptive conduct cases. In respect of continuous disclosure, the Court held that the statutory regime did not require direct causation and that it would be conceptually incoherent to require shareholders to prove reliance on a non-disclosure. In respect of misleading or deceptive conduct, the Court held (consistently with the decision of Brereton J in Re HIH Insurance Ltd (in liq)169) that it is sufficient to show that the plaintiff acquired shares at the prevailing market price during the period of inflation. The ordinary measure of damages, where a person has purchased shares in reliance on a misrepresentation, is the difference between the price paid for the shares and their real value at the time they were purchased.170 A number of alternatives have been put forward to this measure to take account of later misrepresentations which further reduced the true value of the shares.171 Further, a ‘no transaction’ basis has been pleaded, that is, shareholders would not have invested in shares at all if they knew of the misrepresentation and so should recover all their loss, namely the purchase price of the shares less the sale price of the shares.172

Institutional shareholders 16.42 Although class actions are often advanced on the policy basis that they allow many small uneconomic claims to be combined, making access to the courts feasible, class actions are also used by institutional shareholders with large shareholdings. This can arise because the class action allows for the institution to be a group member that is relatively anonymous and protected against costs if the claim is unsuccessful. If the institution is acting as a trustee (eg fund manager), agent (eg investment manager), or trustee of a superannuation fund or life company, various statutory and general law obligations will apply with respect to its beneficiaries or principal. Generally speaking, these obligations create a standard of undivided loyalty requiring the 166 See eg Guglielmin v Trescowthick (No 2) (2005) 220 ALR 515, [2005] FCA 138 at [73]. 167 See eg Camping Warehouse Australia Pty Ltd v Downer EDI Ltd [2014] VSC 357 at [60]; GrantTaylor v Babcock & Brown Ltd (in liq) (2015) 104 ACSR 195, [2015] FCA 149 at [219]; Caason Investments Pty Ltd v Cao (2015) 236 FCR 322 at 332–334 [59]–[72] per Gilmour and Foster JJ and at 352 [152]–[155] per Edelman J. It was also recognised and applied in in a shareholder claim that was not a class action. In Re HIH Insurance Ltd (in liq) (2016) 335 ALR 320, [2016] NSWSC 482, Brereton J held that shareholders rely on the share price as an accurate reflection of share value. Accordingly, when corporate misconduct inflates the share price, the corporation indirectly causes shareholders to suffer loss. 168 TPT Patrol Pty Ltd (as trustee for Amies Superannuation Fund) v Myer Holdings Ltd (2019) 140 ACSR 38. 169 See n 167 above. 170 Potts v Miller (1940) 64 CLR 282 at 289 (Starke J), 297 (Dixon J), 307 (Williams J); and Gould v Vaggelas (1985) 157 CLR 215 at 220. 171 See Gould v Vaggelas (1985) 157 CLR 215 at 221–222, and Smith New Court Securities Ltd v Citibank NA [1997] AC 254 at 266. It may also be argued that a focus on the value of a share at the time they were originally purchased would under-compensate where the misrepresentation has continued to operate after the date of acquisition so as to induce the shareholder to retain the share. See HTW Valuers v Astonland Pty Ltd (2004) 217 CLR 640 at [66]. 172 See Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 at [19]–[20] which, subject to sufficient evidence being available, states that the ‘no transaction’ approach is viable, but also that the returns that could have been made on an alternative investment may be recoverable.

458

Shareholder class actions 16.43

institution to act in the best interests of its beneficiaries or principal. This can mean participating in a class action even when it is not in the institution’s own interest to do so.173 Further, the availability of litigation funding has encouraged institutions to sue because the funder pays the costs of the litigation (such as the lawyers’ fees, disbursements, project management and claim investigation costs) and usually accepts the risk of paying the other party’s costs in the event that the claim fails through providing the plaintiff with an indemnity. If the claim is successful, however, the funder will receive a pre-agreed percentage (between 25 and 40% usually) of any funds recovered by the litigants either by way of settlement or judgment, and the litigants will assign the funder the benefit of any costs order they receive.174

Class actions and derivative suits compared 16.43 Shareholder class actions and statutory derivative suits have been frequently compared as ways to address shareholder grievances. On closer examination, however, they are quite different. While the applicant in a derivative suit must obtain the court’s leave through demonstrating compliance with a number of factors to be able to commence the suit, a shareholder class action in Australia can be filed without seeking leave or establishing compliance with the above requirements. Indeed, it will be up to the respondent to challenge the class action.175 The class action will usually be directed at a large listed company and rely on allegations of misleading and deceptive conduct and/or breach of the continuous disclosure regime. In contrast, the derivative suit involves a person standing in the position of a company, usually a private company, to bring actions involving director’s duties. The class action may also involve claims against directors, but is usually based on allegations of direct or accessorial liability for misleading and deceptive conduct and/or breach of the continuous disclosure regime. The class action results in compensation direct to the shareholder (leaving aside issues of litigation funding and the fees charged by a plaintiff law firm; whilst a derivative action, if successful, results in any relief, including damages or compensation, being for the benefit of the company, with the result that the member receives only an indirect benefit. The class action will, however, frequently include group members who are past shareholders, so that company resources are taken out of the company but not paid to current shareholders, thus diluting the funds available for investment or dividends.176 The uncertainty in relation to costs in the derivative suit does not apply to class actions. The Australian litigation costs regime, that a losing party is liable for the other side’s 173 Michael Legg, ‘Institutional investors and shareholder class actions: The law and economics of participation’ (2007) 81 Australian Law Journal 478. See also Mike Taylor, ‘How an industry fund has piled on an AMP class action’ Money Management, 26 August 2020 (reporting that the health industry superannuation fund HESTA was participating in 21 class actions and explained its involvement as being because it had a ‘primary duty to advance its members’ retirement outcomes’). 174 Michael Legg, ‘Reconciling Litigation Funding and the Opt Out Group Definition in Federal Court of Australia Class Actions — The Need for a Legislative Common Fund Approach’ (2011) 30 Civil Justice Quarterly 52. 175 See, eg, Federal Court of Australia Act 1976 (Cth), s 33N. 176 Michael Legg, ‘Institutional investors and shareholder class actions: The law and economics of participation’ (2007) 81 Australian Law Journal 478 at 482.

459

16.43  Shareholder Claims in Australia

costs, applies in the class action context, but is limited to the representative party only and does not apply to other group members.177 If the class action is successful, the representative party will be entitled to its reasonable costs from the respondent, which will be the company. The derivative suit and class action are affected by different incentives. They also seek to achieve different objectives: a benefit for the company in the case of the former; and compensation for the shareholder in the latter.

177 Federal Court of Australia Act 1976 (Cth), s 43(1A). The disincentive created by the costs rules has largely been overcome through litigation funding.

460

Chapter 17

Canada – Comparisons*

Contents Introduction: the nature of Canadian corporations

17.1

Shareholder remedy one: compliance and restraining orders

17.5

Shareholder remedy two: the statutory representative action

17.6

Shareholder remedy three: the oppression remedy

17.8

Shareholder remedy four: a class veto

17.11

Shareholder remedy five: an appraisal remedy

17.12

Unanimous shareholder agreements

17.15

INTRODUCTION: THE NATURE OF CANADIAN CORPORATIONS 17.1 For almost half a century now, Canadian corporate law has followed its own unique development. It abandoned the English company law model without thoroughly adopting the American model. The Canadian approach is most easily explained through a basic analysis of the Canada Business Corporations Act (‘CBCA’) – the federal statute on which most other Canadian corporate statutes are based.1 One creates a corporation under the CBCA by filing a couple forms, notably the ‘Articles of Incorporation’ with a civil servant known as ‘the Director’ [with a capital *

This chapter was originally written by Professor Bruce Welling, University of Western Ontario, Barrister and Solicitor (Ontario Bar). It has been revised by Jakub Adamski, McGill University, and Angela Swan, Aird & Berlis LLP. Please seek professional advice on the latest position before making decisions based on this chapter.

1

The federal nature of the Canadian constitution allocates the power to incorporate to both the federal government and the 10 provinces and 3 territories. In 1975, the federal government revolutionised Canadian corporate law by enacting the Canada Business Corporations Act (‘CBCA’) RSC 1985 c C-44, as its general incorporation law. This law abandoned English company law as its primary model and created a unique approach. Subsequently, virtually all other Canadian jurisdictions have copied this approach with some modifications. This chapter takes the CBCA as its model. It is still possible to incorporate in some provinces under other, older statutes, but such incorporation is generally only used to structure certain financial transactions to obtain tax efficiency.

461

17.2  Canada – Comparisons

‘D’].2 Few details are required.3 At least one director [with a small ‘d’] must be named in the application to shepherd the new corporation through its early days.4 That ‘first director’ has all the powers of a board of directors, including the statutory power to ‘manage … the business and affairs of [the] corporation’.5 A  CBCA corporation is created without any shareholders. It is generally assumed that the first director(s) will cause the corporation to issue some shares, and that the shareholders will then convene and elect a board of directors. There is no direct statutory compulsion6 to issue any shares, though doing so is the universal practice. Shareholders, once shares are issued, have only those powers that the CBCA gives them: the board of directors wields statute-based managerial power, subject only to what the statute defines as a ‘unanimous shareholder agreement’.7 17.2 Each CBCA corporation is a legal person. Section 15(1) is unambiguous: ‘[a CBCA] corporation has the capacity and, subject to this Act, the rights, powers and privileges of a natural person’. Nonetheless, the Supreme Court of Canada has been clear that not all constitutional protections granted to individuals apply to corporations as legal persons.8 Anyone – a shareholder or otherwise – hoping to enforce a corporation’s rights, to exert its powers, or to defend its privileges in a court of law, will encounter the same resistance as would Amos who showed up to defend the rights, powers or privileges of Betsy. A rule of civil procedure prevents one person from doing so on behalf of or in the name of another person, absent a specific grant of authority to do so. In Canadian corporate law such grant must be found in the statute.

2

The Director has much the same function as the ‘Registrar’ in jurisdictions that have incorporation by registration. 3 CBCA s 6. The Director prescribes the forms to be completed, identifying the location of a ‘registered office’ somewhere in Canada, requiring minimal details of the capital structure (eg ‘an unlimited number of shares may be issued’), asking whether there will be share transfer restrictions (‘no’ will suffice), the number of directors required at any time (it is sufficient to set out a minimum and maximum number: eg ‘min 1; max 9’), and whether any restrictions on corporate business are proposed (‘not applicable’ is an acceptable response). Further complications may, but need not, be set out. If no name is proposed, the corporation’s name will be the next incorporating number: thus corporations like 176719 Canada Inc. It is now also possible to fill out the required information online – either for a basic incorporation or a custom incorporation depending on whether bespoke articles of incorporation are required. Under this process the required forms are combined into a single set of questions. A small fee must be paid – $200 CAD or $300 CAD, if one requires the incorporation to be completed within four hours – and incorporation soon follows. 4 CBCA s 106(1) and Form 6 require ‘first directors’ to be named. A lawyer’s clerk is a popular choice. The first director’s name is filed with the Director. She will remain the only director until replacements are elected and their names are dutifully filed in the public record. 5 CBCA s 102(1). This power, being an original grant of managerial power from the Parliament of Canada to the board of directors, excludes any argument for residual shareholder managerial power under the CBCA. The term ‘affairs’ is defined by s 2(1) of the CBCA to mean ‘the relationships among the corporation, its affiliates, directors and officers … but does not include the business carried on’. Thus, having control over both business and affairs, the board of directors wields managerial power over all corporate matters not statutorily assigned to the shareholders. 6 The CBCA s 133(1)(a) merely requires that a shareholder meeting be held with 18 months of incorporation. 7 See 17.14. 8 See, eg, Québec (Attorney General) v 9147-0732 Québec Inc 2020 SCC 32 (corporations cannot challenge a regulatory penalty as cruel and unusual punishment due to its quantum as the constitutional protection against cruel and usual punishment only applies to natural persons).

462

Introduction: the nature of Canadian corporations 17.3

One complicating feature of English company law is conspicuous by its absence. The CBCA does not say that the Articles of Incorporation constitute a contract.9 Whether a particular provision in the Articles of Incorporation (or in subsidiary documents known as ‘by-laws’) can be legally enforced depends on what the statute says about their enforcement, not on any common law or equitable cause of action. 17.3 Most shareholder powers are political in nature. Each share carries one vote unless the Articles of Incorporation specify otherwise.10 The board of directors must call shareholder meetings at least once every 15 months.11 The shareholders at such meetings must be invited to approve, by a majority, any by-laws passed by the board since the last meeting: a by-law that fails to get majority support lapses.12 The CBCA also allows shareholders to have a say on some corporate changes, such as amendments to the Articles of Incorporation, the sale of all or substantially all the assets of the corporation, amalgamations with other corporations, and emigration from the jurisdiction of incorporation, but these are covered later as they will trigger statute-based minority remedies, such as dissent rights. The most important shareholder power is the election of directors. Elections must be held periodically and the majority may elect whom they please, provided those proposed directors meet the statutory requirements imposed on directors,13 subject to optional statutory provisions for directors elected by classes of shares or cumulative voting.14 Every director owes a statutorily imposed fiduciary duty exclusively to the corporation, not to the electing shareholders.15 9

Nor did any of the predecessor Canadian federal corporate statutes. Canada become a country in 1867, and has had federally incorporated letters patent statutes throughout its history. We thus came to our present, statute-based scheme of minority shareholder protection from a historical background quite unlike the English post-1844 experience. Nevertheless, for the purposes of interpreting then, some courts continue to state that the articles of incorporation are a contract between the company and the shareholders: see, eg, Boffo Family Holdings Ltd v Moutainview Developments Ltd 2010 BCSC 560 at [36]. 10 CBCA s 140(1). A unique feature of the Canadian corporate landscape is the widespread use of dual-class share structures to maintain the founding family’s control over even long-established businesses whereby the family holds the vast majority of the multiple vote shares. In some cases, when combined with exceptional voting provisions under one of the provincial incorporation statutes, holders of multiple vote shares could replace directors of a public corporation by resolution even without a shareholders’ meeting: see, eg, Rogers v Rogers Communications Inc 2021 BBSC 2184. 11 CBCA s 133(1)(b). But the initial meeting must be within 18 months’ of incorporation: CBCA s 133(1)(a). 12 CBCA s 103(2), (4). The statute also authorises a shareholder to submit a proposal for a by-law to the shareholder meeting, and suggests that the meeting can approve it; but the statutory scheme is flawed, since there is no provision requiring the board of directors to implement it. 13 See CBCA s 105. There is also a requirement that some directors be Canadian residents. 14 The latter two provisions are meant to ensure that significant minorities among the shareholders will have a voice at board meetings. The class vote provisions (s 111(3)) are simple; the cumulative voting provisions (s 107) are too complicated for explanation here. 15 CBCA s 122(1): ‘Every director and officer of a corporation in exercising their [sic] powers and discharging their [sic] duties shall (a) act honestly and in good faith with a view to the best interests of the corporation’. Grammatical infelicity aside, lawyers and judges in Canada agree that these words enact the traditional equitable fiduciary obligation. Two important Supreme Court of Canada cases, Peoples Department Store Inc (Trustee of) v Wise [2004] 3 SCR 68, and BCE Inc v 1976 Debentureholders [2008] 3 SCR 560, affirmed that this duty is owed exclusively to the corporation and does not shift even in instances of insolvency or fundamental transactions like a take-over bid. In 2019, the CBCA was amended to include explicitly what was already implicit in the Supreme Court’s reading of CBCA s 122, by permitting the directors to look at certain factors beyond corporate profit in considering what is in the best interests of the corporation: see CBCA s 122(1.1).

463

17.4  Canada – Comparisons

An important aspect of the political power of shareholders granted in the CBCA is the power given to some shareholders to requisition any shareholder meeting permitted under the CBCA.16 This power is granted to any shareholder(s) who hold no less than five per cent of the shares entitled to vote at the meeting that is requisitioned.17 17.4 The previous paragraph describes the ‘division of powers’ in CBCA corporations. The corporation is a person. The board of directors has statutorily imposed managerial powers. Each director, when exercising those powers, owes fiduciary obligations to the corporation. Shareholders have no residual managerial powers. The obvious consequences of the political nature of corporate governance and the resulting risks to minority shareholders, have been dealt with in the CBCA. The CBCA gives the minority protection in five remedies. They are: (i) (ii) (iii) (iv) (v)

compliance and restraining orders, statutory representative actions, the oppression remedy, a class veto, and an appraisal remedy.

After outlining each minority remedy, we shall briefly introduce the final CBCA innovation, unanimous shareholder agreements.

SHAREHOLDER REMEDY ONE: COMPLIANCE AND RESTRAINING ORDERS 17.5 Section 247 of the CBCA gives any shareholder18 standing to seek a judicial order either for compliance with, or to restrain future breaches of, specified provisions of the corporate constitution. Any provision in the statute, regulations, articles, bylaws, or a unanimous shareholder agreement qualifies, so long as the alleged or anticipated breach was caused by the corporation, a director, or anyone else listed in the section.19 Because none of those provisions is statutorily made a contractual

16

17 18

19

CBCA s 143. The process is carefully explained in Wells v Bioniche Life Sciences Inc 2013 ONSC 4871. This power has come to play a significant role in Canada with respect to shareholder activism and unsolicited bids, especially when combined with the fact that in Canada takeover defensive measures are, unlike in Delaware, regulated by securities regulation and not corporate law, and Canadian securities regulators have historically taken a hostile approach to such devices. In short, such devices can be temporary in duration and cannot generally deprive the shareholders of their final say. But securities regulation lies outside the scope of this chapter. CBCA s 143(1). Any registered shareholder or beneficial shareholder qualifies: s 238(a). The remedy is also available to a broad range of other applicants, defined as ‘complainants’ by s 238. Present or former registered or equitable holders of ‘a security [sweeping in holders of registered debt instruments] of [the] corporation’ or one of its affiliates qualify: s 238(a). So do present or former directors and officers of the corporation or an affiliate: s 238(b). So does the Director: s 238(c). Finally, anyone not qualified under those sub-sections can apply under s 238(d) to be named ‘in the discretion of a court, … a proper person to make an application under this Part’. Creditors are also named as qualified applicants in s 247. The list in s 247 includes any ‘officer, employee, agent, auditor, trustee, receiver, receiver-manager or liquidator’ of the corporation.

464

Shareholder remedy two: the statutory representative action 17.6

obligation, the shareholder could not enforce the provision but for the statutory grant of standing. The applicant must specifically request a judicial order ‘directing any such person [on the statutory list] to comply with, or restraining any such person from acting in breach of’ the specified provision. The court then has statute-based discretion to make two orders: the one specifically requested by the applicant, plus ‘any further order it thinks fit’. The section makes it clear that the applicant has standing to seek a compliance or restraining order ‘in addition to any other right [the applicant may] have’.20

SHAREHOLDER REMEDY TWO: THE STATUTORY REPRESENTATIVE ACTION 17.6 The CBCA has provided for statutorily authorised actions by shareholders on behalf of corporations since 1975. Before then, derivative actions, or representative actions, as they are called in English law, by shareholders to represent corporations were probably not possible in Canada.21 While the steps are laid out before a court will grant permission to a shareholder to undertake a derivative action, earlier judicial authorities made it clear that no such shareholder actions could proceed without following the statutory steps,22 more recently, some Canadian courts have questioned the necessity of those steps.23

20

The judge may in her discretion refuse to issue the order on the grounds that one of the other statutory remedies affords a more appropriate way to proceed. That was the approach recommended in Caleron Properties Ltd v 510207 Alberta Ltd 2000 ABQB 720, 9 BLR (3d) 218 (Alta QB), in which the Alberta court interpreted the functionally identical s 240 of the Alberta Business Corporations Act RSA 2000 c B-9, and criticised the conclusion of an earlier Ontario case, Re Goldhar and Quebec Manitou Mines Ltd (1976) 9 OR (2d) 740, 61 DLR (3d) 612 (HCJ Div Ct), in which an Ontario judge dismissed such an application for lack of jurisdiction, misinterpreting the similar s 261 of the Ontario Business Corporations Act RSO 1970 c 53. The judge may order a trial if the facts are in dispute: Re Pemstar Holdings Ltd (1981) 12 ACWS (2d) 60. 21 ‘Derivative action’ is an American term. Americans use it to describe a common law action brought by a shareholder on behalf of a corporation. It is said to be ‘derived’ through the corporation by virtue of shareholder’s holding the shares. It is not clear how this gets around what English analysts call the ‘no reflective loss’ principle; but, more importantly in Canadian law, it would appear to violate the fundamental principle of the common law that, in general, A cannot sue to redress a wrong done to B: the Supreme Court of Canada recently affirmed that fundamental principle in Brunette v Legault Joly Thiffault sencrl 2018 SCC 55, [2018] 3 SCR 481, where it held that a shareholder has no claim or default standing to sue for harms to the corporation (but see Tran v Bloorston Farmes Ltd 2020 ONCA 440, 151 OR (3d) 563 for the inverse situation). Nonetheless, the American term is now adopted by the CBCA. 22 This requirement was recognised by Canadian judges soon after the introduction of statutory representative actions in Canada. See, eg, Farnham v Fingold [1973] 2 OR 132, 33 DLR (3d) 156 (CA) (interpreting what was then s 99 of the Ontario Business Corporations Act RSO 1970 c 53 (now RSO 1990 c B 16, s 246) and Shield Development Co Ltd v Snyder and Western Mines Ltd [1976] 3 WWR 44, at 52 (interpreting the similar British Columbia statutory derivative (representative) action). 23 See Johnson v Meyer, Johnson and Chieftain Industrial Contractors & Consultants Ltd (1987) 57 Sask R 161 (QB), and Holdyk v Adolph, 2012 BCCA 37, 29 BCLR (5th) 79.

465

17.7  Canada – Comparisons

Section 239 of the CBCA gives any shareholder24 standing to appear before a judge and seek judicial permission to bring an action on behalf of the corporation. The action, if brought, would redress an alleged wrong done to the corporation. The shareholder would have no such standing, and the motion would be dismissed but for section 239, as it would violate basic common law rules.25 The shareholder must convince the judge of three statutory prerequisites set out in section 239(2). First, the shareholder must have given the board of directors at least 14 days’ notice of the proposed application. This requirement permits the directors to show that they have other plans to redress the wrong to the corporation.26 Second, the shareholder must be acting ‘in good faith’.27 Third, it must appear to be in the best interests of the corporation that the action be brought. It is generally agreed that the applicant must show a ‘prima facie case’ at this stage. A shareholder who satisfies the three prerequisites might, or might not, get judicial permission to proceed to trial. Section 240 clearly gives the court statutory power to ‘make any order it thinks fit’. The section sets out a short list of orders that the judge might want to consider, but the list is offered ‘without limiting the generality of’ the grant of statutory discretion. Section 242(1) further emphasises the judicial discretion: neither the application nor an ensuing trial ‘shall be stayed or dismissed by reason only that … an alleged breach of a right or duty owed to the corporation … has been or may be approved by the shareholders, but evidence of approval by the shareholders may be taken into account by the court in making an order’. 17.7 The special and idiosyncratic features of the derivative action (and the oppression remedy) are a response to even out what may well be a very unequal struggle between an individual shareholder or complainant and the corporation. It is also a characteristic of the special remedies in the CBCA (and other provincial Business Corporation Acts) that the judge hearing the matter is given a very wide discretion with respect to the preliminary requirements of each remedy and the relief that can be given if the applicant is successful. A settlement of the action requires court approval.28 The shareholder cannot be required to give security for costs,29 but 24

25

26

27

28 29

Meaning, for simplicity here, a registered shareholder or a beneficial shareholder of the corporation. Readers interested in fully understanding the scope of statutory representative actions in Canada should review n 18: the CBCA gives standing to any ‘complainant’, defined in s 238; a shareholder is just one of many qualified complainants who have standing to make the application and may be permitted to pursue the action as corporate representative. Note there is a slight complication at this stage. The CBCA is a federal statute, but the motion would be brought in the courts of one of Canada’s provinces or territories. Each province and territory, except Quebec, has the common law and its own civil procedure rules. The CBCA simply assumes the existence of local provincial rules dealing with the right to bring actions on behalf of others. A letter to the board of directors or their lawyer will suffice: Re Bellman and Western Approaches Ltd (1982) 130 DLR 3d 193 (BCCA); Armstrong v Gardner (1978) 20 OR (2d) 648, at 652 (HC), summarised the notice requirement as follows: ‘I do not think that this section … ought to be construed in an unduly technical or restricted manner’. An application was dismissed for want of applicant’s good faith in McAskill v Transatlantic Petroleum Corp [2003] 5 WWR 178, where the judge described the applicant’s conduct as ‘a personal vendetta’. See also Abraham v Prosoccer Ltd (1980) 119 DLR (3d) 167, where the applicant’s motivation was an attempt to obtain a better settlement of a personal claim. But a lack of finding of good faith is not fatal where the applicant has ulterior motives but the proposed action has merit: 2538520 Ontario Ltd v Eastern Platinum Limited 2020 BCCA 313. CBCA s 242(2). CBCA s 242(3).

466

Shareholder remedy three: the oppression remedy 17.8

the corporation may be ordered to pay the shareholder’s interim costs at any time.30 Section 240 gives the court a discretion to make ‘at any time … any order it thinks fit [in] connection with an action brought … under section 239’.

SHAREHOLDER REMEDY THREE: THE OPPRESSION REMEDY 17.8 Section 241 of the CBCA enacts what Canadian corporate lawyers call ‘the oppression remedy’. This remedy has become the dominant corporate law remedy in Canada. The label may be misleading for English lawyers. The wording of the section was recommended by an independent committee commissioned to reform fundamentally Canadian federal corporate law in the early 1970s.31 The committee said the following about what became section 241.32 ‘[The recommended provisions were made] to strip away the self-imposed judicial qualifications that have limited the application of section 210 [of the 1948 English statute] … . [The aim was] to set a standard that gave life to the often cited case Elder v Elder and Watson “… the essence of the matter seems to be that the conduct complained of should at the lowest involve a visible departure for the standard of fair dealing, and a violation of the conditions of fair play on which every shareholder who entrusts his money to a company is entitled to rely”.’ Section 241 is often described as having enacted the broadest corporate law remedy in the common law world. Any current or past shareholder 33 may apply to a Canadian court for an order under section 241(1). The grounds for the application can be pleaded in any of the alternatives set out in section 241(2): ‘If, on application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates – (a) any act or omission of the corporation or any of its affiliates effects a result, (b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner, or (c) the powers of the directors of the corporation or any of its affiliates are or have been exercised in a manner, that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer, the court may make an order to rectify the matters complained of.’ 30 31

32 33

CBCA s 242(4). The Committee is known to Canadian corporate lawyers as ‘the Dickerson Committee’. Its report is cited as Robert WV Dickerson, John L Howard & Leon Getz, Proposal for a New Business Corporations Law for Canada, Vol 1 (Ottawa Information Canada 1971) [Dickerson Report] at 162. Ibid at 163, para 485. Again, the range of potential applicants is much broader than shareholders. Any statutorily defined ‘complainant’ has standing to apply under the section: see n 18 for details. And courts have taken a board approach to this issue: for example, a trustee in bankruptcy has held to be a complainant under the Alberta version of the CBCA (PricewaterhouseCoopers Inc v Perpetual Energy Inc 2021 ABCA 16).

467

17.9  Canada – Comparisons

The applicant is invited to identify (i) what happened, to then connect that to (ii) some consequences of what happened, and to then specify (iii) who suffered those consequences. 17.9 A  complainant,34 who may be a shareholder, can seek relief under the oppression remedy, and can seek a remedy not just against the corporation of which the shareholder is or was a shareholder of, but also against any subsidiary or affiliate of that corporation or their current or past director who decisions oppressed that shareholder.35 It is also possible to hold the directors personally liable under the oppression remedy, if the oppressive conduct was properly attributable to the directors’ actions and the imposition of personal liability on the directors is fit under the circumstances.36 The Supreme Court of Canada has repeatedly stated that the test for imposing the oppression remedy involves a two-step test. The test was first laid out in BCE Inc v 1976 Debentureholders.37 The applicant shareholder is invited to identify any one of (a) corporate behaviour, (b) the manner of conduct of business or affairs,38 or (c) the manner of exercise of directors’ powers. Note that no breach of any rules need be alleged.39 Such conduct must then first be shown to have disappointed the reasonable expectations of the shareholder. While such expectations can be created through contract they do not have to be; they can be created through the course of dealing between the parties and even modify existing contractual relations. The Supreme Court of Canada has suggested that such expectations existing beyond strict contractual obligations will be more easily shown to have existed in the context of a closely held corporation than in a widely held corporation. Step two requires then that those reasonable expectations be disappointed in a manner that is (a) ‘oppressive’, or (b) ‘unfairly prejudicial to’, or (c) ‘unfairly disregards the interests of’ someone. Courts have recognised that these are three quite different tests and that any one will suffice. Note that oppression will also arise if the various acts of the corporation or its affiliates ‘threaten’ the expectations of the complainant. Who suffered the consequences? Some Canadian cases suggest that the applicant must have been affected, but that is clearly not required by the section. The court need only be satisfied that the required consequences were visited upon ‘any security holder, creditor, director or officer’.40 The word ‘any’ cannot be ignored. 34

35 36 37 38 39 40

The definition of ‘complainant’ is very broad and means: (a) a registered holder or beneficial owner, and a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates, (b) a director or an officer or a former director or officer of a corporation or any of its affiliates, (c) the Director, or (d) any other person who, in the discretion of a court, is a proper person to make an application under this Part. A creditor can also be a complainant. CBCA s 248(2). Wilson v Alharayeri, 2017 SCC 39, [2017] 1 SCR 1037. 2008 SCC 69, [2008] 3 SCR 560. ‘Affairs’ means internal, non-business ‘relationships among the corporation, its affiliates, directors and officers’. Brant Investments Ltd v KeepRite Inc (1991) 3 OR (3d) 289 (CA), (‘bad faith’ not a prerequisite); Loveridge Holdings Ltd v King-Pin Ltd (1992) 5 BLR (2d) 195 (dishonesty and illegality not prerequisites). ‘An applicant need not be an aggrieved person whose interests have been affected. Rather, an applicant can be “someone whose interest is righting a wrong done to others”’: Joncas v Spruce Falls Power & Paper Co Ltd (2000) 48 OR (3d) 179, 6 BLR (3d) 109, aff’d 15 BLR (3d) 1 (Ont CA)

468

Shareholder remedy five: an appraisal remedy 17.12

17.10 The remedy is purely discretionary. Section 241(3) of the CBCA says ‘the court may make any interim or final order it thinks fit’. An extensive list of sample orders follows, but the list is preceded by the words ‘without limiting the generality of the foregoing’. Any remedy that is granted pursuant to an oppression remedy must, however, be broadly compensatory in the sense that the aim is to rectify the oppressive conduct not punish.41 Finally, Canadian courts have considered the relation between the availability of the derivative action and the oppression remedy. In a closely-held corporation, a shareholder can choose whether to pursue the derivative action or the oppression remedy.42 Where, however, some shareholders of a public or widely held corporation, seek an oppression remedy against the directors of that corporation, courts have held that those shareholders must seek a derivative remedy and are precluded from seeking an oppression remedy unless they can show that they have been prejudiced in a manner that is distinct or specific to them as opposed to the manner in which the other shareholders have been prejudiced.43 This approach is consistent with the original purpose of the oppression remedy as a device to protect minority shareholders of a closely-held corporation.

SHAREHOLDER REMEDY FOUR: A CLASS VETO 17.11 Section 176 of the CBCA enacts a class veto. It arises when a majority of the shareholders propose an amendment of the Articles of Incorporation that would adversely affect a class of shares. Section 176(1) carefully defines what types of proposed amendments trigger the remedy. The wording appears prolix, but it was designed to make it clear that all direct and indirect shuffling of the share class hierarchy are covered.44 The remedy works without judicial involvement. Whether the proposed amendment is on the statutory list is easy to determine. If it is on the list, any affected class votes separately on the proposal. The proposed amendment fails if the majority of any affected class fails to approve it.

SHAREHOLDER REMEDY FIVE: AN APPRAISAL REMEDY 17.12 Section 190 of the CBCA allows a shareholder to force the corporation to buy its shares in a few clearly defined circumstances. If no transfer price is agreed, the statute mandates a judicially determined ‘fair value’.45 41 42 43 44

45

See, eg, Naneff v Con-Crete Holdings Ltd (1995) 23 OR (3d) 481, 23 BLR (2d) 286 (CA). Malaga Group (HK) Ltd v Jung (1996) 89 OR (3d) 36 (CA). Rea v Wildeboer 2015 ONCA 373, 126 OR (3d) 178. The legislative objective was to get round decisions under previous corporate statutes that held, for example, that minority shareholders’ rights were not affected by the creation of new voting shares, despite the fact that issuing the new shares would dilute the minority’s relative voting power. See Greenhalgh v Arderne Cinemas Ltd [1946] 1 All ER 512 (Eng CA), and similar cases. Section 190(1), (2). The appraisal remedy is also available in a ‘going private’ transaction where a minority shareholder is being ‘squeezed out’ in a takeover: s 206.

469

17.13  Canada – Comparisons

The circumstances involve corporate reorganisations. Five major types of reorganisations trigger the remedy: (i) amalgamation with another corporation; (ii) imposition or removal of restrictions on corporate objects, or transfers of substantially all of the corporate property; (iii) emigration moving the corporation to another jurisdiction through ‘continuation’ (in effect, reincorporation) under another statute; (iv) varying share provisions changing share issue or transfer restrictions, or affecting class rights in one of the ways set out in the ‘class veto’ section; or (v) a court-supervised ‘arrangement’. With the rise of appraisal remedy and claims in connection with take-over transactions in the last decade, Canadian courts have spent much time reflecting on what constitutes fair value.46 17.13 Any of those major changes would have required a shareholder vote. The appraisal remedy is available to a ‘dissenting’ shareholder – one who filed written notice of its opposition before the vote and voted against the change, but was on the losing side. The corporation must notify each dissenting shareholder within 10 days that the resolution was adopted. Each dissenting shareholder has 20 days after that to demand in writing that the corporation buy its shares at fair value.47 Thus begins a statutorily mandated exchange of offers. Absent agreement on price after a relatively short time, a shareholder or the corporation may apply to the court for determination of fair value per share for all dissenting shareholders. The judge may appoint a business valuator to assist in setting fair value, or the parties may present their own experts. Several Canadian cases have considered the appraisal remedy over the past 40 years and some clear valuation principles have emerged. The most important principle, however, is imbedded in the statute: the circumstances call for a divorce, and the only issue is money.

UNANIMOUS SHAREHOLDER AGREEMENTS 17.14 To appreciate how Canadian corporate law really works, one must understand one final shareholder remedy – the unanimous shareholder agreement. Under the CBCA managerial power is statutorily given to the board of directors. No residual managerial power is left to the shareholders. If, however, all the shareholders agree, they can seize managerial powers at any time. Section 146 of the CBCA sets out what must be done. 100% of the shareholders must agree. They must do so in writing. The statute requires that the written document

46 47

See, eg, Carlock v ExxonMobil Canada Holdings ULC 2020 YKCA 4 and Bamrah v Waterton Precious Metals Bid 2020 BCCA 122. After filing the demand for payment, the dissenting shareholder ‘ceases to have any rights as a shareholder other than to be paid … fair value’: s 190(11). As astutely noted by Anderson J in Brant Investments Ltd v Keeprite Inc (1987) 60 OR (2d) 737, only rights are terminated: the dissenting shareholder still has standing to pursue any of the other remedies available to a minority shareholder.

470

Unanimous shareholder agreements 17.14

‘restricts, in whole or in part, the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation’.48 Whatever portion of the directors’ managerial power has been thus restricted immediately belongs either to the shareholders (the default position) or to ‘parties to the unanimous shareholder agreement who are given that power to manage’ by the terms of the written agreement.49 That power could be given to anyone, since non-shareholders can also be made parties to the unanimous shareholder agreement. Each person who is given managerial powers by a unanimous shareholder agreement owes fiduciary obligations to the corporation; the directors are relieved of their fiduciary obligations to the extent that their managerial powers have been restricted.50 Curiously, shareholders who obtain managerial powers by unanimous shareholder agreement are statutorily authorised to contract away those powers, but nonshareholders are not.51 Unanimous shareholder agreements can be important governance tools in corporations with relatively few shareholders. They were described by the Supreme Court of Canada as ‘a constating document [to be treated as] part of the corporate constitution, along with and equivalent to the articles of incorporation and the bylaws’.52 A  unanimous shareholder agreement is a statutory remedy for a united shareholder body faced with a politically unresponsive board of directors. Used properly, it provides instant relief.

48 49 50 51 52

CBCA s 146(1). That restriction is possible because the board’s managerial power, given by s 102(1), is specifically made ‘[s]ubject to any unanimous shareholder agreement’. Section 146(5). Those who acquire managerial powers by unanimous shareholder agreement ‘have all the rights, powers, duties and liabilities of a director’ within the restricted managerial area, and ‘the directors are relieved of their rights, powers, duties and liabilities … to the same extent’: s 146(5). Section 108(5.1) says that ‘[n]othing in this section prevents shareholders from fettering their discretion when exercising the powers of directors’. Corporate lawyers will recognise that arcane terminology from old cases preventing directors from contracting out of their fiduciary obligations. Duha Printers (Western) Ltd v The Queen [1998] 1 SCR 795 at [61],159 DLR (4th) 457 at 482.

471

Chapter 18

An Overview of South African Law*

Contents Company law origin

18.1

Key concepts

18.4

Governance 18.8 Constitutional documents 18.8 Shareholders’ governance powers 18.9 Directors 18.13 Director’s duties 18.16 Shareholders’ right: declaration of delinquency

18.25

Protection against unfairly prejudicial conduct – section 163 Section 163(1) Section 163(2) – relief

18.27 18.27 18.33

Derivative actions – section 165 A codified procedure Demand Setting aside the demand Investigation Refusal of complying with the demand Court’s residual powers

18.34 18.34 18.35 18.36 18.37 18.38 18.40

Winding up

18.41

COMPANY LAW ORIGIN 18.1 Erstwhile South African colonies’ company legislation was modelled on English companies’ legislation.1 After Union in 1910 the model was perpetuated by the first South African Companies Act in 19262 and the next major version, the Companies Act 1973 (the ‘1973 Act’). The current version, the Companies Act 2008 (the ‘2008 Act’) parted ways with the past by adopting certain features from

* 1 2

Chapter written by Johan du Toit SC (Advocate of the High Court of South Africa) and Maisa Merabe (Advocate of the High Court of South Africa). This chapter seeks to introduce the main tenets of South African shareholder law. It is impossible to comprehensively cover all relevant facets of the Companies Acts and related common law. The choice of material included for that purpose, is ours. Roodepoort United Main Reef GM Co Ltd (in liq) v du Toit NO 1928 AD 66 at 71.

473

18.2  An Overview of South African Law

jurisdictions other than the UK, particularly Australia3 and Canada,4 albeit with the retention of many familiar features of English companies legislation. However, save for derivative actions which the 2008 Act explicitly seeks to codify,5 the vast body of English company common law received into South Africa over time remains largely unaffected. Insofar as the principles underlying shareholders’ remedies are concerned, South African courts have strongly relied on English judgments6 not merely by reference to, but by expressly adopting them.7 In 2008, when the 1973 Act was still in force, the Supreme Court of Appeal observed that: ‘[t]he principles enunciated in the cases I have cited are in my view in accordance with our law. Indeed in the argument before us counsel on both sides referred freely to English and Australian cases and never suggested that our law differed from the (company) law in those jurisdictions.’8 This remains true under the 2008 Act.9 18.2 The principles of the interpretation of statutes are clearly established.10 The 2008 Act demands further important qualifications to its interpretation: first, section 5(1) demands that it must be applied and interpreted in accordance with the purposes set out in section 7, one of which is to ‘continue to provide for the creation and use of companies, in a manner that enhances the economic welfare of South Africa as a partner within the global economy’;11 and, second, it explicitly provides that, to the extent appropriate, a court interpreting the 2008 Act may consider foreign company law.12 18.3 The 2008 Act came into operation on 1 May 2011.13 It repealed the 1973 Act save for the provisions regarding the winding up and liquidation of insolvent companies.14

3 See Chapter 16 for the current position in Australia. 4 See Chapter 17 for the current position in Canada. 5 By s 165(1) of the 2008 Act. 6 South African judgments are replete with references to eg Salomon v Salomon & Co Ltd [1897] AC 22; re Yenidje Tobacco Co Ltd [1916] 2 Ch 426 (CA); Ebrahimi v Westbourne Galleries [1973] AC 360, HL; O’Neill v Phillips [1999] 1 WLR 1092, HL. 7 For example Rentekor (Pty) Ltd v Rheeder and Berman NNO 1988 (4) SA 469 (T) at 500F–G and most recently De Sousa v Technology Corporate Management (Pty) Ltd 2017 (5) SA 577 (GJ) at [33]–[58], an unfair prejudice matter decided under s 252 of the 1973 Act. 8 Trinity Asset Management (Pty) Ltd v Investec Bank Ltd 2009 (4) SA 89 (SCA) at [35]. See Chapter 4, n 47. 9 See eg the English judgments listed in Lewis Group Ltd v Woollam 2017 (2) SA 547 (WCC) at 549F–J. 10 See Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA 593 (SCA) at [18]–[23]. 11 Section 7(e) of the 2008 Act. 12 Section 5(2) of the 2008 Act. 13 The 2008 Act remains unamended since the publication of the 2nd edition hereof. However, a Companies Amendment Bill was published for comment on 21 September 2018, but has not yet passed as legislation. 14 By virtue of para 9 of Sch 5 to the 2008 Act.

474

Key concepts 18.7

KEY CONCEPTS 18.4 All companies must have directors15 but only profit companies16 have shareholders. A shareholder means, subject to section 57(1),17 ‘the holder of a share issued by a company and who is entered as such in the certificated or uncertificated securities register, as the case may be’ with ‘share’ meaning ‘one of the units into which the proprietary interest in a profit company is divided’. They are further categorised: first, a ‘public company’ which is a profit company that is not a stateowned company, private company or a personal liability company; second, a ‘private company’ which is a profit company that is not a public, personal liability, or stateowned company and satisfies the criteria set out in section 8(2)(b) of the 2008 Act;18 and third, a ‘personal liability company’ which is a profit company that satisfies the criteria in section 8(2)(c) of the 2008 Act.19 18.5 ‘Memorandum’, or ‘Memorandum of Incorporation’ (‘MOI’), means ‘the document, as amended from time to time, that sets out rights, duties and responsibilities of shareholders, directors and others within and in relation to a company, as well as other matters as contemplated in section 15 of the 2008 Act,20 and by which the company is incorporated under the 2008 Act.21 18.6 There is a Companies and Intellectual Property Commission (‘CIPC’) established by section 185 of the 2008 Act with the primary obligation of achieving the efficient and effective registration of companies and keeping of company information.22 There is a Companies Tribunal established by section 193. Its main functions are to adjudicate on applications made to it when so stated in the 2008 Act and to assist in the resolution of disputes as contemplated in Part C of Chapter 7.23 The functions of the Takeover Regulation Panel established by section 196 fall outside the scope of this chapter. 18.7 The notion of ‘related persons’ plays an important role on several levels. ‘Related’, when used in respect of two persons, means persons who are connected to one another in any manner contemplated in section 2(1)(a)–(c) whilst ‘inter-related’, when used in respect of three or more persons, means persons who are related to one another in a linked series of relationships, such that two of the persons are related in a manner contemplated in section 2(1), and one of them is related to the third in any such manner, and so forth in an unbroken series. Section 2(1) determines in detail instances of relatedness for all purposes of the 2008 Act whilst section 2(2) 15 16 17

18 19 20 21 22 23

The directors of state-owned companies, non-profit and profit companies bear precisely the same duties and obligations. Defined as companies ‘incorporated for the purpose of financial gain for its shareholders’ obliged to keep a securities register established in terms of s 50(1) of the 2008 Act. Section 57(1) of the 2008 Act determines that, for purposes of Part F (Governance of companies), voting rights extend beyond shareholders to include persons who are entitled to exercise any voting rights in relation to a company, irrespective of the form, title or nature of the securities to which those voting rights are attached. It may not be a state-owned company and its MOI must prohibit it from offering any of its securities to the public and must restrict the transferability of its securities. It is such if it meets the criteria for a private company, with its MOI stating that it is a personal liability company. Dealing with the MOI, shareholder agreements and rules. See Part B (ss 13–22) of the Act. Section 186 of the 2008 Act. Section 195 of the 2008 Act.

475

18.8  An Overview of South African Law

details the circumstances of control of a company. Section 3 explains the governance relationship between companies in group structure.24

GOVERNANCE Constitutional documents 18.8 Apart from the 2008 Act, the MOI and shareholder agreements, the 2008 Act introduces the creation of ‘rules’. If not prohibited by the MOI, a board may make, amend or repeal any necessary or incidental rules relating to the governance of the company in respect of matters not addressed in the 2008 Act or the MOI.25 The rules will take effect ten business days after they are filed26 and are provisionally binding until approved by shareholders in general meeting when they become permanently binding.27 The MOI must be consistent with the 2008 Act and is void to the extent of any inconsistency.28 An MOI may include any provision not dealt with in the 2008 Act, altering any alterable provision29 of the 2008 Act, and may impose on the company a higher standard, greater restriction, longer period of time or any similarly more onerous requirement, than would otherwise apply to the company in terms of an unalterable provision of the 2008 Act.30 The MOI and rules are binding between the company and each shareholder; between or among the shareholders of the company; and between the company and, first, each director or prescribed officer31 of the company and second, any other person serving the company as a member of a committee of the board in the exercise of their respective functions within the company.32 Insofar as the quasi-partnership companies are concerned, in addition to the ‘strict rules’ encompassed by the above, the understandings between and the legitimate expectations harboured by shareholders constitute a further cornerstone governing their relationship.33

Shareholders’ governance powers In general meeting 18.9 Shareholders in general meeting remain the ultimate authority over the company’s affairs, not least due to their power to dismiss directors.34 Extensive 24 25 26 27 28 29

See for its application eg De Klerk v Ferreira 2017 (3) SA 502 (GP). Section 15(3) of the 2008 Act. Section 15(4)(b) of the 2008 Act. Section 15(4)(c) of the 2008 Act. Section 15(1) of the 2008 Act. An ‘alterable provision’ means a provision of the Act in which it is expressly contemplated that its effect on a particular company may be negated, restricted, limited, qualified, extended or otherwise altered in substance or effect by that company’s MOI. ‘Unalterable’ obviously denotes the opposite. 30 Section 15(2) of the 2008 Act. 31 ‘Prescribed officer’ is defined in reg 38 of the Companies Regulations 2011, GN R351 in GG 34239 of 26 April 2011(as amended). 32 Section 15(6) of the 2008 Act. 33 See 9.74–9.77 and 18.31. 34 See 18.23.

476

Governance 18.11

provision is made for the orderly calling of meetings by the board, or any other person specified in the company’s MOI or rules.35 The company, or any shareholder of the company, may apply to a court for an order setting aside a demand by shareholders for a meeting on the grounds that it is frivolous; that it calls for a meeting for no other purpose than to reconsider a matter that has already been decided by the shareholders; or is otherwise vexatious.36 Immaterial non-compliance in the process of calling a meeting does not invalidate any action taken at the ensuing meeting.37 Any failure to hold a meeting as required by section 61 does not affect the existence of the company, or the validity of any action by the company.38 Special provisions apply39 to the frequency of annual general meetings and the matters for consideration thereat by public companies.40 Failure to call a meeting may be met by an appropriate application to court to compel.41 18.10 The company is responsible for giving notice of meetings.42 Preferring substance over form, a meeting may proceed if there was a material defect in the giving of the notice of a shareholders meeting on condition that every person with voting rights in respect of any item on the meeting agenda, is present at the meeting and votes to approve the ratification of the defective notice.43 When the company is unable to convene a meeting because it has no directors or all the directors are incapacitated, a person so authorised under the MOI may convene same and if there is no such person, the Companies Tribunal, on a request by any shareholder, may issue an administrative order for a shareholders meeting to be convened on a date, and subject to any terms, that the Tribunal considers appropriate in the circumstances.44 Shareholders’ resolutions require a quorum as determined in section 64. Matters requiring passing of a special resolution are listed in section 65(11)45 whilst an MOI may require a special resolution to approve any other matter not contemplated in that section.46 18.11 At any time before the start of the meeting at which a resolution will be considered, a shareholder or director who believes that the form of a proposed resolution does not satisfy the requirements of section 65(4)47 may seek leave to apply to a court for an order restraining the company from putting the proposed resolution to a vote until those requirements are satisfied; and for an order requiring 35 36 37 38 39 40 41 42 43 44 45 46 47

Section 61(1) and (3) of the 2008 Act. See CDH Invest NV v Petrotank South Africa (Pty) Ltd and Another 2018 (3) SA 157 (GJ). Section 61(5) of the 2008 Act. Section 62(6) of the 2008 Act. Section 61(14) of the 2008 Act. Section 61(7) and (8) of the 2008 Act. A ‘public company’ means a profit company that is not a state-owned company, a private company or a personal liability company. Section 61(12) of the 2008 Act. Section 62 of the 2008 Act. Section 62(4) of the 2008 Act. Section 61(11) of the 2008 Act. The margin is 75% – see 2008 Act, s 65(9), or such other higher threshold determined in the MOI. Ordinary resolutions require more than 50% – 2008 Act, s 65(7). Section 65(12) of the 2008 Act. It reads: ‘A proposed resolution is not subject to the requirements of section 6(4), but must be – (a) expressed with sufficient clarity and specificity; and (b) accompanied by sufficient information or explanatory material, to enable a shareholder who is entitled to vote on the resolution to determine whether to participate in the meeting and to seek to influence the outcome of the vote on the resolution.’

477

18.12  An Overview of South African Law

the company, or the shareholders who proposed the resolution, as the case may be, to: (i) take appropriate steps to alter the resolution so that it satisfies those requirements; and (ii) compensate the applicant for costs of the proceedings, if successful.48 Once a resolution has been approved, it may not be challenged or impugned by any person in any forum on the grounds that it did not satisfy section 65(4).49

Deregulation 18.12 The 2008 Act endeavours to relieve small companies of unnecessary formalities. By section 57(2) ‘one shareholder’ companies are exempted from the provisions of sections 59–65.50 Profit companies with one director may exercise any power without reference to internal formalities.51 With the exception of a state-owned company, in a company where all the shareholders are also the directors, any matter required to be referred by the board to the shareholders, may be decided by the shareholders without notice or formality.52 However, any business of a company that is required by the 2008 Act or the company’s MOI to be conducted at an annual general meeting of the company, may not be conducted in the more relaxed manner contemplated in section 60.53

Directors Directors’ appointment 18.13 The business and affairs of a company must be managed by or under the direction of its board, which has the authority to exercise all of the powers and perform any of the functions of the company, except to the extent that the 2008 Act or the company’s MOI provides otherwise.54 Each incorporator of a company is a first director thereof and serves until sufficient other directors to satisfy the minimum requirements of the 2008 Act, or the company’s MOI, have been appointed or elected.55 In this first round, vacancies must be filled at a shareholders meeting called for the purpose within 40 days from incorporation.56 A private company or a personal liability company must have at least one director, and a public company, at least three.57 An MOI may provide for appointments and removals of certain categories of directors.58 By section 66(6) the election or appointment of a person as a director is a nullity if, at the time of the election or 48 49 50 51 52 53 54 55 56 57 58

Section 65(5) of the 2008 Act. Section 65(6) of the 2008 Act. These sections relate to formalities for the convening of meetings and passing of resolutions. Section 57(3) of the 2008 Act. Sections 71(3)–(7) (removal of directors), 73 (board meetings) and 74 (directors acting other than at meeting) do not apply to such a company. Section 57(4) of the 2008 Act. Section 60(5) of the 2008 Act. Section 66(1) of the 2008 Act. A director is not per se entitled to partake in the day-to-day management of a company: Kaimowitz v Delahunt and Others 2017 (3) SA 201 (WCC). Section 67(1) of the 2008 Act. For the election of directors of profit companies, see s 68. Section 67(2) of the 2008 Act. Section 66(2) of the 2008 Act. An MOI may prescribe a higher number – see s 66(3). Section 66(4) of the 2008 Act.

478

Governance 18.15

appointment, that person is ineligible or disqualified under the terms of section 69.59 Any failure by a company at any time to have the minimum number of directors required by the 2008 Act or the company’s MOI, does not limit or negate the authority of the board, or invalidate anything done by the board or the company.60

Ineligibility and disqualification of directors61 18.14 By section 69(1), and for purposes of section 69, ‘director’ includes an alternate director, a prescribed officer;62 or a person who is a member of a committee of a board of a company, or of the audit committee of a company, irrespective of whether or not the person is also a member of the company’s board.63 A person is ineligible to be a director of a company if the person is: a juristic person; an unemancipated minor, or is under a similar legal disability; or does not satisfy any qualification set out in the company’s MOI.64 18.15 A person is disqualified to be a director of a company in instances where, broadly, the honesty and integrity of the person can be impugned.65 It includes someone whom a court has prohibited to be a director, or declared to be delinquent in terms of section 16266 or in terms of section 47 of the Close Corporations Act 1984;67 or, subject to subsections (9)–(12),68 the person is eg an unrehabilitated insolvent; otherwise statutorily prohibited to act as such; has been removed from an office of trust, has been convicted and imprisoned on charges of theft, fraud, forgery, perjury; or an offence in connection with the promotion, formation or management of a company or in terms of a number of specified financial market-related Acts.69 A  person who becomes ineligible or disqualified while serving as a director, immediately ceases to act as such, subject to a judicial review process provided for in section 70(2).70 An MOI may impose additional grounds of ineligibility or disqualification of directors and minimum qualifications to be met by directors of that company.71

59 60 61 62 63 64 65 66 67

68 69 70 71

That is for reasons of ineligibility or disqualification. See 18.14–18.15. Section 66(11) of the 2008 Act. Section 69 of the 2008 Act. That means a person who, within a company, performs any function that has been designated by the Minister in terms of s 66(10). This the Minister did by reg 38 of the Companies Regulations 2011. See also n 31. Section 69(1) of the 2008 Act. Section 69(7) of the 2008 Act. Section 69(8) of the 2008 Act. See the discussion of s 162 at 18.25–18.26. A close corporation is a uniquely South African corporate form. By 2008 Act, s 29(1) and (1A) of the Close Corporations Act 1984, members may only be individuals or beneficiaries under inter vivos trusts; membership is never to exceed ten. This chapter is devoted only to the rights of shareholders of companies and will not explore peculiarities pertaining to the members of close corporations. Section 69(9) of the 2008 Act determines when disqualification ends. Subsection (10) provides for the CIPC, before expiry of the disqualification, to apply to court for an extension thereof and subsections (11) and (11A) deal with the power of the courts. Subsection (12) is devoid of content. Section 69(8)(b)(iv) of the 2008 Act. Section 69(4) of the 2008 Act. Section 69(6) of the 2008 Act.

479

18.16  An Overview of South African Law

Director’s duties 18.16 The 2008 Act does not codify directors’ duties, despite the detailed provisions in connection therewith. No provision in the 2008 Act in this regard appears to amend the common law position. A harmonious interpretation of the statutory law and the common law is called for. The basic premise in common law is the existence of a fiduciary duty owed to the company.72 That requires directors to exercise their powers in good faith, avoid conflict of interest, not to misappropriate corporate opportunities, not to compete improperly with the company and to disclose interest in contracts of and with the company. Recently the position was set out as follows (footnotes omitted):73 ‘[35] At common law directors have an overarching and paramount fiduciary duty to exercise their powers in good faith and in the best interests of the company. Section 76(3)(c) of the Companies Act 71 of 2008 codifies this duty, but its content is still informed by the common law. The basic duty is one of loyalty, which is “unbending and inflexible” so as to ensure that it is not abused. The duty encompasses at least three rules: Directors may not place themselves in positions of conflicts of interest or duty (the no-conflict rule); make secret profits (the noprofit rule); or acquire economic opportunities for themselves (the corporate opportunity rule) that properly belong to the company. The rules are distinct but are mutually reinforcing and usually overlap.  [36] The no conflict rule does not require an actual conflict to be established; only that a reasonable person would think that there was a real sensible possibility of conflict. In the same vein the no-profit rule applies even if the company would not itself have made a profit, in other words, even if the director has not profited at the company’s expense. Profit in this context is not confined to money but includes every advantage or gain obtained by the offending director. Similarly, the corporate opportunity rule is not confined to assets or property only, but extends to confidential information that directors use for their personal gain.’

Personal financial interests74 18.17 ‘Director’ for the purposes of section 75 bears a broadened meaning.75 The meaning of ‘related person’76 is also extended to include eg a second company of 72

Howard v Herrigel NNO 1991 (2) SA 660 (A) at 678B–C; Robinson v Randfontein Estates Gold Mining Co Ltd 1921 AD 168 at 180. In Lewis Group Ltd v Woollam 2017 (2) SA 547 (WCC) at [49] a contentious statement was made that this duty exists alongside a fiduciary duty owed to shareholders, which cannot be accepted without substantial qualification. Such a fiduciary duty owed to shareholders is limited to: (1) the sufficient information duty; and (2) in special relationships such as where the director acts as agent for shareholders in small quasi-partnership companies when disposing of their shares to a third party. See Johan du Toit SC, ‘Fiduciary duties towards shareholders?’ in Without Prejudice, Vol 17 No 9, October 2017. Cf the position in English law at 4.8–4.20; However, the correct position, that the fiduciary duty is owed to the company, was held to be the position in De Bruyn v Steinhoff International Holdings NV 2020 JDR 1405 (GJ) at [138], [141]. 73 Modise v Tladi Holdings (Pty) Ltd 2020 JDR 2036 (SCA). And see also for the correct position: De Bruyn v Steinhoff International Holdings NV 2020 JDR 1405 (GJ) at [136]. 74 Section 75 of the 2008 Act. 75 See s 75(1)(a) of the 2008 Act. It includes an alternate director; a prescribed officer; and a person who is a member of a committee of the board of a company, irrespective of whether the person is also a member of the company’s board. 76 See 18.7.

480

Governance 18.20

which the director or a related person is also a director.77 By section 75(2) certain conduct is excluded from the operation of section 75. Timely and full disclosure of any existing personal financial interest is key to the further provisions of this section.78 The same applies to the subsequent acquisition of a personal financial interest in an agreement or other matter in which the company has a material interest, or knowledge that a related person has acquired a personal financial interest in the matter.79 By section 75(7) a decision by a board, or a transaction or agreement approved by the board, or by a company as contemplated in section 75(3), is valid despite any personal financial interest of a director or person related to the director under certain prescribed circumstances.80 A court, on application by any interested person, may declare valid a transaction or agreement that had been approved by the board, or shareholders, as the case may be, despite the failure of the director to satisfy the disclosure requirements of section 75.81

Standards of directors’ conduct82 18.18 For purposes of section 76, ‘director’ bears a broader meaning,83 by the inclusion of inter alia a member of the audit committee who is not a director. 18.19 The standards of directors’ conduct are imposed by the 2008 Act, particularly section 76, the MOI and the rules. They are all rooted in the common law fiduciary duty and/or a delictual (tortious) duty of care.84 The prescribed standards reach far and wide: a director must not use his position, or any information obtained while acting in that capacity to gain an advantage for himself, or for a person other than the company or a wholly-owned subsidiary of the company;85 he must exercise the powers and perform the functions of director: (a) in good faith and for a proper purpose; (b) in the best interests of the company; and (c) with the degree of care, skill and diligence that may reasonably be expected of a person: (i) carrying out the same functions in relation to the company as those carried out by that director; and (ii) having the general knowledge, skill and experience of that director.86 18.20 Section 76(4) is the pivot on which the conduct of a director hinges to establish whether he acted in accordance with the set standards such as whether he has taken reasonably diligent steps to become informed about a matter. He is entitled to rely on advice given to him by employees of the company, legal counsel and the like.87 King IVTM 88 – albeit it does not constitute law but ‘a set of voluntary principles 77 Section 75(1)(b) of the 2008 Act. 78 Section 75(4) of the 2008 Act read with s 75(5). 79 Section 75(6) of the 2008 Act. 80 See Omar v Inhouse Venue Technical Management (Pty) Ltd and Others 2015 (3) SA 146 (WCC). 81 Section 75(8) of the 2008 Act. 82 Section 76 of the 2008 Act. 83 Section 76(1) of the 2008 Act. 84 See the comprehensive discussion by Van der Linde J in CDH Invest NV v Petrotank South Africa (Pty) Ltd and Another 2018 (3) SA 157 (GJ). 85 Section 76(2) of the 2008 Act. 86 Section 76(3) of the 2008 Act. These considerations inform the business judgment rule. 87 Section 76(5) of the 2008 Act. 88 The Institute of Directors, King IV Report on Corporate Governance for South Africa, 2016.

481

18.21  An Overview of South African Law

and leading practices’89 – is a helpful guide for the practical determination of such standards: 90 ‘A  court considers all relevant circumstances in determining the appropriate standard of conduct for those charged with governance duties … King IV recommend leading practices for how governance duties should be discharged … the more widely certain recommended practices in codes of governance are adopted, the more likely it is that a court would regard conduct that conforms to these practices as meeting the required standard of care.’

Liability of directors91 18.21 Section 77 provides for a detailed list of the circumstances under which a director may be held liable. That does not include liability imposed by other provisions of the 2008 Act such as section 2292 read with section 218(2),93 or section 20(6).94 In addition, as a relic of the retention of the liquidation provisions of the 1973 Act, personal liability for directors and others may follow for recklessly or fraudulently conducting a business.95 The most important circumstances listed in section 77 are: •

liability (a) in accordance with the principles of the common law relating to breach of a fiduciary duty, for any loss, damages or costs sustained by the company as a consequence of any breach by the director of a duty contemplated in sections 75,96 76(2) or 76(3)(a) or (b)97; or (b) in accordance with the principles of the common law relating to delict for any loss, damages or costs sustained by the company as a consequence of any breach by the director of: – a duty contemplated in section 76(3)(c);98

89 90

The Institute of Directors, King IV Report on Corporate Governance for South Africa, 2016, p 35. Ibid. Cf Minister of Water Affairs and Forestry v Stilfontein Gold Mining Co Ltd 2006 (5) SA 333 (W) at [16.7]. In Mthimunye-Bakoro v Petroleum Oil and Gas Corporation of South Africa (SOC) Ltd [2015] JOL 33744 corporate governance was defined as ‘… the animating idea of which is to ensure net gains in wealth for shareholders, protect the legitimate concerns of other stakeholders and improve efficiency, organisational performance and resource allocation.’ 91 By s 77(1) of the 2008 Act the same extended meaning is given to ‘directors’ as in s 75(1). 92 Prohibition of reckless trading. 93 ‘Any person who contravenes any provision of this Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention.’ This extends to liability of a director towards a shareholder – see Rabinowitz v Van Graan 2013 (5) SA 315 (GSJ). However, it does not substitute the limitations imposed by the no reflective loss rule; the special provisions of s 77(3) should rather have been employed: Hlumisa Investment Holdings RF Ltd and Another v Kirkinis and Others 2019 (4) SA 569 (GP), confirmed on appeal 2020 (5) SA 419 (SCA). The reflective loss principle was correctly applied in London v Department of Transport, Roads and Public Works, Northern Cape 2019 JDR 2137 (SCA). It is pleasing that it is in line with the definitive judgment by the UK Supreme Court in Marex Financial Ltd v Sevilleja [2020] UKSC 31, delivered on 15 July 2020. 94 Whereby each shareholder has a claim for damages against any person who intentionally, fraudulently or due to gross negligence causes the company to do anything inconsistent with: (a) the Act; or (b) a limitation, restriction or qualification contemplated in s 20, unless that action has been ratified by the shareholders in terms of s 20(2). 95 Section 424 of the Companies Act 1973. 96 See 18.17. 97 See 18.18–18.19. 98 See 18.18–18.19.

482

Governance 18.23

– any provision of the 2008 Act not otherwise mentioned in section 77; or – any provision of the company’s MOI;99 liability for loss, damages or costs sustained by the company when a director represents the company knowing that he is not entitled to do so, or if he signed, consented to, or authorised, the publication of any financial statements; a prospectus or similar documents that were false or misleading in a material respect;100 liability for involvement in unauthorised share issues101 or participating in unlawful distributions of company assets.102

•

•

Proceedings to recover any loss, damages or costs for which a person is or may be held liable in terms of section 77 may not be commenced more than three years after the act or omission that gave rise to that liability.103 18.22 By section 77(9) a director may be exonerated of liability in certain circumstances: ‘In any proceedings against a director, other than for wilful misconduct or wilful breach of trust, the court may relieve the director, either wholly or partly, from any liability set out in this section, on any terms the court considers just if it appears to the court that – (a) the director is or may be liable, but has acted honestly and reasonably; or (b) having regard to all the circumstances of the case, including those connected with the appointment of the director, it would be fair to excuse the director.’ Certain purported indemnifications to absolve a director of duties or liability are void.104 Finally, a director who has reason to apprehend that a claim may be made alleging that he is liable, other than for wilful misconduct or wilful breach of trust, may apply to a court for relief, and the court may grant relief to the director on the same grounds as if the matter had come before the court in terms of section 77(9).105

Directors’ removal from office106 18.23 After following due process107 a director may be removed by an ordinary resolution adopted at a shareholders meeting by the persons entitled to exercise voting rights in an election of that director.108 No grounds for taking this step are stipulated: it appears that disillusionment or a breakdown in good working relationships may justify such a removal. It is simply a manifestation of democratic majority voting. This right exists despite anything to the contrary stipulated in an MOI or rules, or in any agreement between a company and a director, or between any shareholders and a director.109 99 100 101 102 103 104 105 106 107 108 109

By s 77(2) of the 2008 Act. Section 77(3) of the 2008 Act. Section 77(3)(e) of the 2008 Act. Section 77(3)(d)(vi) of the 2008 Act. Section 77(7) of the 2008 Act. See s 78(2) and (6) of the 2008 Act. By s 77(10) of the 2008 Act. Section 71 of the 2008 Act. Section 71(2) of the 2008 Act. Section 71(1) of the 2008 Act. Section 71(1) of the 2008 Act.

483

18.24  An Overview of South African Law

18.24 A different situation arises if a shareholder or director has alleged that a director of the company has become either ineligible or disqualified in terms of section 69, other than on the grounds contemplated in section 69(8)(a);110 or incapacitated to the extent that the director is unable to perform the functions of a director, and is unlikely to regain that capacity within a reasonable time; or has neglected, or been derelict in the performance of, the functions of director.111 Either the board or the Companies Tribunal will take charge. If the company has three or more directors, the board, excluding the director concerned, must determine the matter by resolution, and may remove a director whom it has determined to be within the aforesaid categories, after following due process provided for in section 71(4). A director so dismissed has a right of judicial review.112 On the other hand, a favourable finding triggers the right for any director who voted otherwise, or any holder of voting rights entitled to be exercised in the election of that director, to apply for a judicial review of the board’s determination.113 With a board consisting of less than three members, one of whom is an alleged aberrant director, the board (excluding of course the aberrant director) can obviously not decide the issue. Hence, the Companies Tribunal is empowered to make a determination.114 Nothing in section 69 deprives a person removed from office as a director to exercise any right that person may have at common law or otherwise to apply to a court for damages or other compensation for loss of office as a director; or loss of any other office as a consequence of being removed as a director.115 Section 69 does not prevent a person from applying to a court for an order declaring a director delinquent, or placing a director on probation, as provided for in section 162.116

SHAREHOLDERS’ RIGHT: DECLARATION OF DELINQUENCY 18.25 By section 162 of the 2008 Act shareholders117 may apply to have a director declared delinquent or placed under probation. As formulated it is a novel remedy.118 ‘Its purpose is to protect the investing public, whether sophisticated or 110 That is when a court has prohibited that person to be a director, or declared the person to be delinquent in terms of s 162, or in terms of s 47 of the Close Corporations Act 1984. 111 Section 71(3) of the 2008 Act. 112 Section 71(5) of the 2008 Act. 113 Section 71(6) of the 2008 Act. 114 Section 71(8) of the 2008 Act. 115 Section 71(9) of the 2008 Act. 116 See 18.25. 117 The focus is on shareholders, but standing is granted also to the company itself, another director, company secretary or prescribed officer of a company, a registered trade union that represents employees of the company or another representative of the employees of a company (s 162(2) (a)); the Commission or the Takeover Panel (see s 162(3)); or an organ of state (s 162(4)). For applications of delinquency matters, see Steenkamp v Central Energy Fund Soc Ltd 2018 (1) SA 311 (WCC); Companies and Intellectual Property Commission v Cresswell and Others [2017] ZAWCHC 38; Msimang NO and Another v Katuliiba and Others [2013] 1 All SA 580 (GSJ). 118 Lewis Group Ltd v Woollam 2017 (2) SA 547 (WCC) at [5]. Probation is indeed novel, but, albeit on a much more limited basis, ‘disqualification’ of directors and officers was provided for in s 219 of the 1973 Act. In essence it equated to a declaration of delinquency because it put a stop to being a director or being involved in the management of a company.

484

Protection against unfairly prejudicial conduct – section 163 18.27

unsophisticated, against the type of conduct that leads to an order of delinquency, and to protect those who deal with companies against the misconduct of delinquent directors.’119 It is a personal action, one not to be brought on a derivative basis on behalf of the company.120 The derivative action provided for in section 165121 is for the protection of the legal interests of a specific company, not of an individual.122 The section has been held to be constitutionally sound.123 By its nature the conduct required for a declaration of delinquency is more serious than for an order of probation. The court is compelled to make an order for delinquency under six defined circumstances.124 By way of example: consenting or serving as a director while ineligible or disqualified or under an order of probation;125 conduct in conflict with any of the many of the standards prescribed by section 76 such as gross abuse of the position of director, taking personal advantage of information or an opportunity; inflicting harm upon the company or a subsidiary of the company; and gross negligence. 18.26 A  court may make an order placing a person under probation126 if, while serving as a director, he: (i) was present at a meeting and failed to vote against a resolution despite the inability of the company to satisfy the solvency and liquidity test127; (ii) otherwise acted in a manner materially inconsistent with the duties of a director; or (iii) acted in, or supported a decision of the company to act in, a manner contemplated in section 163(1).128 A director against whom an order is sought, must be a director at the time or have been so within 24 months immediately preceding the application.129

PROTECTION AGAINST UNFAIRLY PREJUDICIAL CONDUCT – SECTION 163 Section 163(1) Scope and nature 18.27 Section 163 of the 2008 Act replaced section 252 of the 1973 Act effective 1 May 2011. Both sections, despite substantial differences in formulation, provide for relief to shareholders who have been unfairly prejudiced by the conduct of 119 Gihwala v Grancy Property Ltd 2017 (2) SA 337 (SCA) at [142]; cf Lewis Group Ltd v Woollam 2017 (2) SA 547 (WCC) at [42]. 120 Lewis Group Ltd v Woollam 2017 (2) SA 547 (WCC) at [27]. The company has standing in its own right – see n 117. 121 See 18.34–18.40. 122 Lewis Group Ltd v Woollam 2017 (2) SA 547 (WCC) at [39]–[40]. 123 Gihwala v Grancy Property Ltd 2017 (2) SA 337 (SCA) at [142]; see also at [144]. 124 Section 162(5)(a)–(f) of the 2008 Act. 125 The disqualification is lifelong in these two instances (s 162(6)(a)). In other instances an order may be made subject to any conditions the court considers appropriate. It will subsist for at least seven years (s 162(6)(a)). This, in turn, is subject to subsections (11) and (12) which provide for a range of relief afforded to a person declared delinquent, inter alia for suspension of such an order. 126 Section 162(7)(a) of the 2008 Act. 127 For which see s 4, read with ss 46 and 47, of the 2008 Act. 128 See for a discussion of s 163 of the 2008 Act at 18.27. 129 Section 162(2)(a) of the 2008 Act.

485

18.28  An Overview of South African Law

the de facto governors of the company.130 Despite its repeal, section 252 remains relevant first insofar as some key formulations were repeated in section 163;131 second, as remote as it may seem, litigation in respect of section 252 relief which had arisen before 1 May 2011 is still possible as a result of a recent judgment by the Constitutional Court holding that claims brought under section 252 do not constitute ‘debts’ in terms of the Prescription Act 68 of 1969 and are accordingly not subject to prescription.132 The drafters of section 163 apparently drew upon its Australian and Canadian counterparts.133 Jurisprudence in those jurisdictions is likely to have a material effect on the development of South African jurisprudence on section 163, but there remains a vast body of South African judgments on section 252 as well as English judgments on similar provisions which will remain relevant. An interpretation directed towards advancing the section 252 remedy instead of limiting it,134 is likely to apply in respect of section 163.135 18.28 Headed ‘Relief from oppressive or prejudicial conduct or from abuse of separate juristic personality136 of company’, section 163(1) determines as follows: ‘(1) A shareholder137 or a director138 of a company may apply to a court for relief if – (a) any act or omission of the company, or a related person,139 has had a result that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, the applicant; (b) the business of the company, or a related person, is being or has been carried on or conducted in a manner that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, the applicant; or 130 The notion of unfairly prejudicial conduct was comprehensively considered in relation to s 252 of the 1973 Act in De Sousa v Technology Corporate Management (Pty) Ltd 2017 (5) SA 577 (GJ) at [33]–[58], an analysis equally applicable to s 163 of the 2008 Act. For an informative comparison between s 252 of the 1973 Act and s 163 of the 2008 Act, see Visser Sitrus (Pty) Ltd v Goede Hoop Sitrus (Pty) Ltd 2014 (5) SA 179 (WCC) at [53]–[54]; Off-Beat Holiday Club v Sanbonani Holiday Spa Shareblock Ltd 2017 (5) SA 9 (CC) at [27]–[28]. 131 The provisions of ss 33 and 49 of the Close Corporations Act 1984 are similar to s 252 of the 1973 Act as well as to s 163 of the 2008 Act. See n 67. 132 Off-Beat Holiday Club v Sanbonani Holiday Spa Shareblock Ltd 2017 (5) SA 9 (CC). A debt would ordinarily prescribe in three years’ time. 133 They respectively are ss 232 and 233 of the Australian Corporations Act 50 of 2001 and s 241(1) and (2) of the Canada Business Corporations Act RSC, 1985, c C-44 – per Count Gotthard SA Pilati v Witfontein Game Farm (Pty) Ltd [2013] 2 All SA 190 (GNP) at [17.9]. 134 As was held in Donaldson Investments (Pty) Ltd v Anglo-Transvaal Collieries Ltd 1980 (4) SA 204 (T) at 209E–F; confirmed on appeal 1983 (3) SA 96 (A). 135 See Grancy Property Ltd v Manala 2015 (3) SA 313 (SCA) at [26], [31]; Peel v Hamon J&C Engineering (Pty) Ltd 2013 (2) SA 331 (GSJ) [52], [53]. Paragraph [53] was not followed in Visser Sitrus (Pty) Ltd v Goede Hoop Sitrus (Pty) Ltd 2014 (5) SA 179 (WCC). 136 Unsurprisingly, the separate juristic personality of companies is fundamental in South African company law: Pepkor Holdings Ltd and Others v AJVH Holdings (Pty) Ltd and Others 2021 (5) SA 115 (SCA). 137 Under the 1973 Act a member included a person that could demonstrate that its interests have been adversely affected, eg a director whose family trust, and not the director, was the member/ shareholder: McMillan NO v Pott 2011 (1) SA 511 (WCC); a contrary conclusion was arrived at by a court of equal status, also under s 252 of the 1973 Act (Smyth v Investec Bank Ltd 2016 (4) SA 363 (GP) at [67], [71] and [74]), affirmed on appeal 2018 (1) SA 494 (SCA). 138 The inclusion of a director as possible claimant is novel. 139 See 18.7.

486

Protection against unfairly prejudicial conduct – section 163 18.29

(c) the powers of a director or prescribed officer of the company, or a person related to the company, are being or have been exercised in a manner that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, the applicant.’ English legislation discarded ‘oppression’ as a basis for liability because the concept was considered to be too restrictive for the purpose for which it was introduced. It was replaced with the notion of ‘unfair prejudice’, a far less restrictive expression.140 Oppression does not encompass all conduct which is unfairly prejudicial, but certainly unfairly prejudicial conduct encompasses all matters oppressive. The use of both terms in the section is accordingly unnecessary – ‘unfair prejudice’ should have been sufficient. Despite the heading, the section does not refer in the text to ‘abuse of separate juristic personality’. Not only would unfairly prejudicial conduct cover it, but it seems to be covered in any event by the provisions of section 20(9) of the 2008 Act which provides for remedies for ‘unconscionable abuse of the juristic personality of the company as a separate entity’. In Peel v Hamon J&C  Engineering (Pty) Ltd141 the court refers to Australian authority142 which had held that the combination in one section of the expressions ‘oppressive to’, ‘unfairly prejudicial to’ and ‘unfairly discriminatory to’ should be seen as a ‘composite whole and the individual elements mentioned in the section should be considered merely as different aspects of the essential criterion, namely, commercial unfairness’. The same should apply to the various related expressions employed in section 163(1) as having unfairly prejudicial conduct as an appropriate umbrella term.

Unfairly prejudicial conduct 18.29 The English common law of the concept of unfairly prejudicial conduct has been accepted into South African law. Having considered Ebrahimi v Westbourne Galleries143 and Re Yenidje Tobacco Co Ltd144 together with earlier South African judgments to similar effect, Kriegler J held (in 1988) that: ‘Our law thus recognises that in the relationship between shareholders in a company there may at one and the same time be … a special relationship of mutual personal trust. Where that relationship is breached, even dehors the affairs of the company… a winding-up order may be found to be just and equitable.’145 The same underlying principle was recently reiterated in McMillan NO v Pott146 with reference to O’Neill v Phillips147 and Re Saul D Harrison & Sons plc.148 140 See 9.3. 141 2013 (2) SA 331 (GSJ) at [49]. 142 Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692 ((1987) 5 ACLC 222) per Young J. 143 [1973] AC 360, HL. 144 [1916] 2 Ch 426 (CA). 145 Rentekor (Pty) Ltd v Rheeder and Berman NNO 1988 (4) SA 469 (T) at 500F–G. 146 2011 (1) SA 511 (WCC) at [33]; see n 23 in the judgment for the list of English authorities to which the court makes reference. See also Omar v Inhouse Venue Technical Management (Pty) Ltd 2015 (3) SA 146 (WCC) at [5]–[8]. 147 [1999] 1 WLR 1092, HL. 148 [1995] 1 BCLC 14, CA.

487

18.30  An Overview of South African Law

Although decided under section 252 of the 1973 Act, the finding that the failure to allow the removal of capital by making a fair offer equates to unfairly prejudicial conduct149 most certainly applies to section 163 of the 2008 Act.150 Both elements – unfairness and prejudice – must be present.151 ‘Unfairly prejudicial’ has a wide import and encompasses both legal and commercial unfairness.152 Affairs of one company in a corporate structure may well constitute the affairs of another company in the same stable.153 Due to the elaborate definitions in the 2008 Act of related persons and subsidiary relations,154 it is possible that in future the common law may yield before the statutory law on the point. 18.30 It has been held that section 163 applies in the event of future oppressive or unfairly prejudicial conduct.155 The express language of the section, applying the widest possible interpretation, does not appear to support this: section 163(1) relates to the past and present (continuous) only – ‘has had’, ‘is’, ‘is being or has been’; ‘are being or have been’ are being used. It appears that specific provision has been made elsewhere for future conduct that might require protection. Section 20 more appropriately provides for interdictory relief against probable future conduct and not only current conduct: one or more shareholders may apply to the High Court for an appropriate order to restrain the company from doing anything inconsistent with the 2008 Act;156 shareholders may apply to the High Court for an appropriate order to restrain the company or the directors from doing anything inconsistent with any limitation, restriction or qualification contemplated in section 20(2) of the 2008 Act.157 Despite the wide ambit of section 163, it was held not to incorporate the power to authorise the institution of an action against a third party in the absence of a proper company resolution to that effect.158 Ordinarily a situation of deadlock159 will be resolved by an order of winding up instead of relief granted under section 163,160 but it is no hard and fast rule, since winding up may cause undue hardship to the innocent shareholder.161

‘Unfairly disregards the interests of’ 18.31 An act or omission that ‘unfairly disregarded the interests’ of an applicant is new. ‘Interests’ comprise a far wider concept than ‘rights’.162 The phrase was considered in Count Gotthard SA  Pilati v Witfontein Game Farm (Pty) Ltd,163 the 149 McMillan NO v Pott 2011 (1) SA 511 (WCC) at [39]–[40]. 150 Omar v Inhouse Venue Technical Management (Pty) Ltd 2015 (3) SA 146 (WCC) at [3], [5]–[8], [44] (quoting O’Neill), [45]; Knipe v Kameelhoek (Pty) Ltd 2014 (1) SA 52 (FB) at [32]. 151 De Sousa v Technology Corporate Management (Pty) Ltd 2016 (6) SA 528 (GJ) at [46]; Visser Sitrus (Pty) Ltd v Goede Hoop Sitrus (Pty) Ltd 2014 (5) SA 179 (WCC) at [55]; Omar v Inhouse Venue Technical Management (Pty) Ltd 2015 (3) SA 146 (WCC) at [8]. 152 De Sousa v Technology Corporate Management (Pty) Ltd 2016 (6) SA 528 (GJ) at [47]. 153 McMillan NO v Pott 2011 (1) SA 511 (WCC) at [42]. 154 See 18.7. 155 Peel v Hamon J&C Engineering (Pty) Ltd 2013 (2) SA 331 (GSJ) [56]–[61]. 156 Section 20(4) of the 2008 Act. 157 Section 20(5) of the 2008 Act. 158 Larrett v Coega Development Corp (Pty) Ltd 2015 (6) SA 16 (ECG). 159 See 18.43–18.44. 160 Knipe v Kameelhoek (Pty) Ltd 2014(1) SA 52 (FB) at [22]. 161 De Klerk v Ferreira 2017 (3) SA 502 (GP) at [97]. 162 Grancy Property Ltd v Manala 2015 (3) SA 313 (SCA) at [26]. 163 [2013] 2 All SA 190 (GNP).

488

Protection against unfairly prejudicial conduct – section 163 18.32

court concluding that the phrase means no more than the common law position set out in Re Saul D Harrison164 as comprising of those understandings and expectations amongst shareholders in a domestic (quasi-partnership) company over and above the rules contained in the constitutional documents.165 The court found that ‘interests unfairly prejudiced’ must result in commercial unfairness affecting an applicant in such capacity.166 This component of an eventuating result, is an essential jurisdictional fact for section 163 to operate.167 Section 163, strictly interpreted, confines relief to unfair prejudice suffered by the applicant only. This is in marked contrast to the UK’s position under section 994(1) (a) of the CA 2006 which expressly extends relief to an applicant if unfair prejudice is suffered by members generally or some part of its members, including at least the (applicant) member itself or that an actual or proposed act or omission of the company is or would be so prejudicial. It is a difference more apparent than real: in both jurisdictions the applicant/claimant itself must be affected by the impugned conduct. In South Africa it will mean that an applicant need not prove conduct affecting the interests of members generally or some part of the members to personally obtain relief. It also extends to all members and not only part of the members.168

Related person and control 18.32 As regards the question of control, the facts in De Klerk v Ferreira169 illustrate the position under the 2008 Act well: A and B were equal shareholders in C, a landowning company, and co-members of close corporation D. A  was mostly abroad whilst B managed D and D farmed the land of C. B controlled the daily operations and finances of both C  and D, and had, on the evidence, inappropriately farmed the land for his own benefit to the detriment of D. The question for determination under section 2(2)(d) of the 2008 Act170 was whether B had the ability to materially influence the policy of C and D in a manner comparable to a person who would be able to exercise the element of control in the majoritarian situations envisaged in the other subparagraphs of section 2(2).171 The court continued: ‘The provision takes “control” beyond the ordinary corporate law principles of voting control. The purpose of the provision is to provide, inter alia, for a circumstance where the controlling person does not have majority voting power but has an element of control comparable to a person who would. Whether a person has control will depend on the circumstances. The question is unavoidably a factual one. It can include the situation where the controlling person, a minority or equal shareholder, has de facto control to materially influence the policy of the company, akin to a person who has de jure majority control. Thus, it is possible 164 165 166 167 168

[1995] 1 BCLC 14, CA. [2013] 2 All SA 190 (GNP) at [17.4]. [2013] 2 All SA 190 (GNP) at [17.12]. Kudumane Investment Holding Ltd v Northern Cape Manganese [2012] 4 All SA 203 (GSJ). Louw v Nel 2011 (2) SA 172 (SCA) at [28], finding support in Re Sam Weller & Sons Ltd [1990] BCLC 80. 169 2017 (3) SA 502 (GP). 170 Ie one of the factors to determine whether a person is related, is to establish that the first person has the ability to materially influence the policy of the juristic person in a manner comparable to a person who, in ordinary commercial practice, would be able to exercise an element of control. 171 2017 (3) SA 502 (GP), at [80]. See also at [82], [86].

489

18.33  An Overview of South African Law

for a person to control a juristic person despite not having de jure control or the majority of controlling votes in the company.’ B had had exclusive control of the financial affairs, the management and day-to-day running of the two entities in an unfairly prejudicial manner, with the inevitable result that relief in terms of section 163 was granted.

Section 163(2) – relief 18.33 • • • • • •

• • • • • •

The relief listed in section 163(2) is non-exhaustive.172 It includes:

any interim or final order it considers fit; an order restraining the conduct complained of; an order appointing a liquidator, if the company appears to be insolvent; an order to regulate the company’s affairs by directing the company to amend its MOI or to create or amend a unanimous shareholder agreement; an order directing an issue or exchange of shares;173 an order: – appointing directors in place of or in addition to all or any of the directors then in office;174 or – declaring any person delinquent or under probation, as contemplated in section 162; an order directing the company or any other person to restore to a shareholder any part of the consideration that the shareholder paid for shares, or pay the equivalent value, with or without conditions; an order varying or setting aside a transaction or an agreement to which the company is a party and compensating the company or any other party to the transaction or agreement; an order requiring the company, within a time specified by the court, to produce to the court or an interested person financial statements in a form required by this Act, or an accounting in any other form the court may determine; an order to pay compensation to an aggrieved person, subject to any other law entitling that person to compensation; an order directing rectification of the registers or other records of a company; or an order for the trial of any issue as determined by the court.

172 Grancy Property Ltd v Manala 2015 (3) SA 313 (SCA) [26], [31]; a court is under no obligation to grant relief in the terms sought; it has wide powers to make an order which it considers just and equitable: Freedom Stationery (Pty) Ltd and Others v Hassam and Others 2019 (4) SA 459 (SCA). 173 See the comprehensive order made in De Sousa v Technology Corporate Management (Pty) Ltd 2017 (5) SA 577 (GJ) to achieve this. It is further settled that, as a default position, no discount should be permitted, accordingly a purely pro-rated basis should apply – McMillan v Pott 2011 (1) SA 511 (WCC) at supplementary judgment [4]: ‘In English company law authority it has been observed that “fair value” in such circumstances “will ordinarily be a value representing an equivalent proportion of the total issued share capital, that is, without a discount for its being a minority holding. The Law Commission … has recommended a statutory presumption that in cases to which the presumption of unfairly prejudicial conduct applies, the fair value of the shares should be determined on a pro rata basis. This too reflects the existing practice.” The practice of the English courts commends itself to South African practice. It is not inflexible, but is departed from only if the peculiar circumstances of a case so justify.’ Cf 10.20–10.21. 174 Grancy Property Ltd v Manala 2015 (3) SA 313 (SCA).

490

Derivative actions – section 165 18.35

DERIVATIVE ACTIONS – SECTION 165 A codified procedure 18.34 The rule in Foss v Harbottle175 has been adopted as South African law.176 Section 266 of the 1973 Act177 provided for a statutory derivative action supplementing the common law. It was replaced by section 165 of the 2008 Act.178 This provision unequivocally supplants the common law and codifies the law on the topic.179 Yet, the essence of derivative claims remains: a company must recover loss or damage for its account whilst a shareholder can only step in to do so, on behalf of the company, in limited circumstances.180

Demand 18.35 The proceedings181 commence by a person serving182 a demand upon a company to commence or continue with legal proceedings, or take related steps, to protect the legal interests of the company.183 A shareholder or a person entitled to be registered as a shareholder184 of the company or of a related185 company has standing to make the demand.186 Although section 165(2) determines that a person ‘may’ serve a demand, it is interpreted as meaning ‘must’.187 However, in exceptional circumstances an applicant will be able to avoid the demand and approach the court directly for leave to bring proceedings in the name and on behalf of the company.188 The court may grant such leave only if it is satisfied that the delay necessitated by the prescribed procedures may result in: (i) irreparable harm to the company; or (ii) substantial prejudice to the interests of the applicant or another person; and (iii) that 175 (1843) 2 Hare 461, (1843) 67 ER 189. Cf the discussion in Chapter 5. 176 Lewis Group Ltd v Woollam 2017 (2) SA 547 (WCC) at [30]. For a summary of the position see Mbethe v United Manganese of Kalahari 2017 (6) SA 409 (SCA) at [14]; Lewis Group Ltd v Woollam 2017 (2) SA 547 (WCC) at [28], [31]. 177 To be read with ss 267 and 268 of the 1973 Act. See for a brief discussion Mbethe v United Manganese of Kalahari 2017 (6) SA 409 (SCA) at [15]; Off-Beat Holiday Club v Sanbonani Holiday Spa Shareblock Ltd 2016 (6) SA 181 (SCA) at [41], [58]–[59] (reversed on appeal sub nom 2017 (5) SA 9 (CC), but not on this aspect). 178 Its formulation is premised on foreign law: s 237 of the Australian Corporations Act 2001 which, in turn, derived from s 165 of the New Zealand Companies Act 1993, the latter in turn deriving from s 239 of the Canada Business Corporations Act 1985: see Mouritzen v Greystones Enterprises (Pty) Ltd 2012 (5) SA 74 (KZD) at [36]. However, the requirement of prior demand provided for in s 165(3) does not have a foreign origin but derives from s 266 of the 1973 Act: Lewis Group Ltd v Woollam 2017 (2) SA 547 (WCC) at [91]. 179 Section 165(1); see Mouritzen v Greystones Enterprises (Pty) Ltd 2012 (5) SA 74 (KZD) at [35]; Mbethe v United Manganese of Kalahari 2017 (6) SA 409 (SCA) at [6]; Lewis Group Ltd v Woollam 2017 (2) SA 547 (WCC) at [23], [25]. 180 Lewis Group Ltd v Woollam 2017 (2) SA 547 (WCC) at [31]. 181 ‘Proceedings’ include an appeal – s 165(8)(b) of the 2008 Act. 182 Service may take place in any manner recognised by the Rules of the High Court: Mouritzen v Greystones Enterprises (Pty) Ltd 2012 (5) SA 74 (KZD) at [33]. 183 Section 165(2) of the 2008 Act. 184 It is somewhat baffling that the same provision does not form part of the just and equitable provisions provided for in s 163. 185 See 18.7. 186 Section 165(2)(a) of the 2008 Act. There are three more categories listed under s 165(2). 187 Mouritzen v Greystones Enterprises (Pty) Ltd 2012 (5) SA 74 (KZD) at [24]. 188 Section 165(6) of the 2008 Act.

491

18.36  An Overview of South African Law

there is a reasonable probability that the company may not act to prevent that harm or prejudice, or act to protect the company’s interests that the applicant seeks to protect; and, lastly, that the requirements of section 165(5)(b)189 are satisfied. The purpose of the demand is to give the company an opportunity to have a proper investigation undertaken to enable it to make a properly informed decision whether to abide by the demand or not.190

Setting aside the demand 18.36 A company that has been served with a demand may apply within 15 business days to a court to set same aside on the basis that the demand is frivolous, vexatious or without merit.191 At this stage the grounds for opposition in terms of section 165(5) is not available, anomalously so,192 although facts underlying mala fides on the part of the complainant may well fit into the categories of ‘frivolous’ or ‘vexatious’ contemplated in section 165(3). The conduct of a complainant, who elected to forfeit his personal claim in terms of section 162 to have directors declared delinquent, was held to be vexatious in seeking relief on a derivative basis.193 As demonstrated in Amdocs SA Joint Enterprise (Pty) Ltd v Kwezi Technologies (Pty) Ltd194 these grounds are very much overlapping: a case was to be regarded as frivolous or vexatious if it could be demonstrated that it is manifest that the action is so unfounded that it could not possibly be sustained; an action which is obviously unsustainable is vexatious. There is no requirement that a claim enjoys good prospects of success195 – it must simply not be ‘without merit’. The onus to establish any one of these grounds is on the company, on the ordinary civil proof of a balance of probabilities.196

Investigation 18.37 The purpose of the investigation is for the company to consider the merits of the case alleged by the complainant and the viability of the company itself pursuing or continuing with that case.197 If the company abides by the notice or it is not set aside pursuant to a section 165(3) application, the company must, as a first step, appoint an independent and impartial person or committee to investigate the demand.198 The appointee must report to the board. The report must deal with any facts or circumstances that may have given rise to a cause of action contemplated in the demand or that may relate to any proceedings contemplated in the demand; the probable costs that would be incurred if the company pursued any such cause of action or continued any such proceedings; and, lastly, whether it appears to be in the 189 See 18.39. 190 Lewis Group Ltd v Woollam 2017 (2) SA 547 (WCC) at [47]. 191 Section 165(3) of the 2008 Act. 192 Lewis Group Ltd v Woollam 2017 (2) SA 547 (WCC) at [91]–[92]. 193 Ibid at [21], [52]. 194 2014 (5) SA 532 (GJ) at [11]–[14]. 195 Mbethe v United Manganese of Kalahari 2017 (6) SA 409 (SCA) at [53]. 196 Lewis Group Ltd v Woollam 2017 (2) SA 547 (WCC) at [55]. There is no question of the onus being any higher than the civil measure as, ostensibly incorrectly, suggested in Amdocs SA Joint Enterprise (Pty) Ltd v Kwezi Technologies (Pty) Ltd 2014 (5) SA 532 (GJ) at [15]. 197 Lewis Group Ltd v Woollam 2017 (2) SA 547 (WCC) at [56]. 198 Section 165(4)(a) of the 2008 Act.

492

Derivative actions – section 165 18.39

best interests of the company to pursue any such cause of action or continue any such proceedings.199 It is implied that the report must be at hand before the expiry of 60 business days from date of receipt of the demand, because the company must within that period, or within a longer time as a court may allow, either initiate or continue legal proceedings, or take related legal steps to protect the legal interests of the company, as contemplated in the demand; or serve a notice on the person who made the demand, refusing to comply with it.200

Refusal of complying with the demand 18.38 If the complainant wishes to proceed, it needs to approach the court for leave to bring or continue proceedings. The court may grant leave only if the company has failed to take into account any particular step required by subsection (4); appointed an investigator or committee which was not independent and impartial; accepted a report that was inadequate in its preparation, or was irrational or unreasonable in its conclusions or recommendations; if it acted in a manner that was inconsistent with the reasonable report of an independent, impartial investigator or committee; or has served a notice refusing to comply with the demand.201 18.39 • • •

The court must further be satisfied that: 202

the applicant is acting in good faith;203 the proposed or continuing proceedings involve the trial of a serious question of material consequence to the company; and it is in the best interests of the company204 that the applicant be granted leave to commence the proposed proceedings or continue the proceedings, as the case may be.

These latter factors have to be considered conjunctively and not in isolation.205 The applicant bears the onus to establish these requirements on a balance of probabilities.206 Even if all the elements have been proven, the court retains an overriding discretion to grant or refuse relief.207 This discretion must be exercised in the face of a rebuttable presumption, in certain defined circumstances, that granting leave is not in the best interests of the company.208 199 Section 165(4)(a)(i) of the 2008 Act. 200 Section 165(4)(b) of the 2008 Act. 201 Section 165(5)(a) of the 2008 Act. Note that leave will only be granted in respect of proceedings properly authorised at inception: Larrett v Coega Development Corporation (Pty) Ltd and Others 2019 (3) SA 510 (ECG). 202 Section 165(5)(b) of the 2008 Act. 203 At least there should be a demonstration of good conscience and sincere belief in the existence of reasonable prospects of success in the proposed litigation and, therefore, absence of ulterior motive – see Mouritzen v Greystones Enterprises (Pty) Ltd 2012 (5) SA 74 (KZD) at [58]. 204 In considering the best interests of the company where there are alternative means to obtain the same relief, it would be an important consideration whether or not to grant leave and saddle the company with costs and effort to do so: Mbethe v United Manganese of Kalahari 2017 (6) SA 409 (SCA) at [33]. 205 2017 (6) SA 409 (SCA) at [19]. 206 Ibid at [8], [17]. 207 Ibid at [18]. 208 Section 165(7) of the 2008 Act lists them.

493

18.40  An Overview of South African Law

Court’s residual powers 18.40 If a court grants leave to a person under section 165, it must also make an order stating who is liable for the remuneration and expenses of the person so appointed; the court may vary the order at any time; the persons who may be made liable under the order, or the order as varied, are: (i) all or any of the parties to the proceedings or application; and (ii) the company. If the order, or the order as varied, makes two or more persons liable, the order may also determine the nature and extent of the liability of each of those persons; and the person to whom leave has been granted is entitled, on giving reasonable notice to the company, to inspect any books of the company for any purpose connected with the legal proceedings.209 The court retains discretion regarding costs210 and security for costs.211 Provision is made for the substitution of the person to whom leave was granted with another person.212 The court retains ultimate control over the proceedings, because proceedings may not be discontinued, compromised or settled without the leave of the court.213

WINDING UP 18.41 Prior to the commencement of the 2008 Act, the provisions of the 1973 Act provided for winding up of companies, one of the grounds of which was on a just and equitable basis. This left room under the 1973 Act for the winding up of solvent companies in the event of deadlock. The 2008 Act determines that sections 343, 344, 346 and 348 to 353 of the 1973 Act no longer apply to the winding up of solvent companies. Winding up of solvent companies is now regulated by Part G of the 2008 Act. In Boschpoort Ondernemings (Pty) Ltd v Absa Bank Ltd214 the Supreme Court of Appeal held that ‘solvent’ in the 2008 Act means ‘commercially solvent’; only commercially solvent companies (whether factually solvent or insolvent) may be wound up under the 2008 Act. By virtue of the provisions of section 157 of the 2008 Act, a Minister of state was held to have standing to apply for the winding up of a solvent company.215 By contrast, commercially insolvent companies (factually solvent or insolvent) may only be wound up in terms of chapter 14 of the 1973 Act. Commercially solvent companies may not be wound up under that chapter.216 209 210 211 212 213 214

Section 165(9) of the 2008 Act. Section 165(10) of the 2008 Act. Section 165(11) of the 2008 Act. Section 165(12) and (13) of the 2008 Act. Section 165(15) of the 2008 Act. 2014 (2) SA 518 (SCA); see also Murray NO and Others v African Global Holdings (Pty) Ltd and Others 2020 (2) SA 93 (SCA). 215 Minister of Environmental Affairs v Recycling and Economic Development Initiative of South Africa NPC 2018 (3) SA 604 (WCC). 216 Boschpoort Ondernemings (Pty) Ltd v Absa Bank Ltd 2014 (2) SA 518 (SCA) at [21]–[22] and [24]. See also previous judgments on the same issue: Firstrand Bank Ltd v Lodhi 5 Properties Investment CC 2013 (3) SA 212 (GNP); Herman v Set-Mak Civils CC 2013 (1) SA 386 (FB); Standard Bank of South Africa ltd v R-Bay Logistics CC 2013 (2) SA 295 (KZD) at [29].

494

Winding up 18.44

18.42 Section 81 of the 2008 Act deals with the involuntary winding up of solvent companies by court order.217 Section 81(1)(d) introduces the right of shareholders to apply for winding up on the just and equitable ground. A court may order a solvent company to be wound up if the company, one or more directors or one or more shareholders have applied to the court for an order to wind up the company on the grounds that:218 ‘(i) the directors are deadlocked in the management of the company, and the shareholders are unable to break the deadlock, and – (aa) irreparable injury to the company is resulting, or may result, from the deadlock; or (bb) the company’s business cannot be conducted to the advantage of shareholders generally, as a result of the deadlock; (ii) the shareholders are deadlocked in voting power, and have failed for a period that includes at least two consecutive annual general meeting dates, to elect successors to directors whose terms have expired; or (iii) it is otherwise just and equitable for the company to be wound up;’ 18.43 Section 81(1)(d)(i) and (ii) evidently addresses deadlock in the classical form of the impossibility of achieving a majority vote, or so-called complete deadlock.219 The competing interests are represented by exactly equal voting strength, neither side of which will yield its position. One of two other factors must be present in these instances: either that irreparable injury to the company is, or may, result from the deadlock; or the company’s business cannot be conducted to the advantage of shareholders generally, as a result of the deadlock. It is difficult to imagine how business decisions can at all be taken by a board deadlocked in this sense and how that in turn cannot automatically result in injury or result in an impossibility to conduct the company’s business in the best interest of the body of shareholders.220 18.44 The third ground under section 81(1)(d)(iii), evidently so, is a self-standing cause of action premised purely on a finding that it will be just and equitable to wind up the company. The Supreme Court of Appeal attributed the common law meaning to this phrase, subsequent to two conflicting judgments on the point.221 In Thunder Cats Investments 92 (Pty) Ltd v Nkonjane Economic Prospecting & Investment (Pty) Ltd222 the facts were that there were four members each holding 25% of the issued shares. Each shareholder had the right to appoint one director. Although the shareholders were not partners prior to incorporation and could hardly have been classified as quasi-partners, the shareholders’ agreement required the exercise of utmost good faith between the shareholders. This incorporated the partnership model which made them quasi-partners. In addition, shares were not freely tradeable. In due course the four shareholders and their appointed directors divided into two camps with equal numbers, with the result that a deadlock arose on the directors’ level as well as at the shareholders’ level. It became practically impossible to conduct the 217 One is not concerned here with voluntary winding up for which provision is made in ss 79(1), 80 and 81(1)(a), (b) or (c) of the 2008 Act. 218 Section 81(1)(d) of the 2008 Act. See in general for the application of this subsection Knipe v Kameelhoek (Pty) Ltd 2014 (1) SA 52 (FB). 219 See Cilliers NO v Duin & See (Pty) Ltd 2012 (4) SA 203 (WCC). 220 Cf the facts in Knipe v Kameelhoek (Pty) Ltd 2014 (1) SA 52 (FB). 221 They were Muller v Lilly Valley (Pty) Ltd [2012] 1 All SA 187 (GSJ) and Budge v Midnight Storm Investments 256 (Pty) Ltd 2012 (2) SA 28 (GSJ). 222 2014 (5) SA 1 (SCA).

495

18.44  An Overview of South African Law

business of the company. Application was made for the winding up of the company under section 81(1)(d)(iii), since the circumstances for relief under paragraphs (i) and (ii) were clearly absent. The company was indeed solvent. The court granted the order and stated:223 ‘Section 344(h) of the 1973 Act provides that a company may be wound up by the court when it is “just and equitable” to do so. A  winding-up on this basis “postulates not facts but only a broad conclusion of law, justice and equity, as a ground for winding-up”. The subsection is not confined to cases which were analogous to the grounds mentioned in other parts of the section. Nor can any general rule be laid down as to the nature of the circumstances that had to be considered to ascertain whether a case came within the phrase. There is no fixed category of circumstances which may provide a basis for a winding-up on the just and equitable ground.’ Section 81(1)(e) provides further relief to shareholders since they may apply, with leave of the court, to wind up a company on the grounds that: (i) the directors, prescribed officers or other persons in control of the company are acting in a manner that is fraudulent or otherwise illegal; or (ii) the company’s assets are being misapplied or wasted. The onus is on the shareholder to establish these grounds.224

223 2014 (5) SA 1 (SCA), at [15]. 224 Pinfold v Edge to Edge Global Investments Ltd 2014 (1) SA 206 (KZD).

496

Index

[All references are to paragraph number]

Acting within powers directors’ duties, and, 2.14–2.21 ‘Affairs’ of the company’ See also Unfairly prejudicial conduct blurring the dividing lines, 9.56–9.64 by whom are the affairs conduct, 9.66– 9.67 conclusion, 9.65 conduct of affairs of another company, 9.65 cross-pollination of companies and subsidiaries’ affairs, 9.56–9.64 dividing line, 9.50–9.55 duties owed by parent company, 9.59– 9.60 examples of companies’ affairs, 9.50–9.51 examples of members’ personal affairs, 9.52–9.55 generally, 9.47–9.49 parent company giving preference to own affairs, 9.62 parent interfering in subsidiary’s affairs, 9.63–9.64 time of affairs, 9.68–9.72 Appointment of receivers interim relief, and, 14.7 Appraisal remedy Canadian law, and, 17.12–17.13 Arbitration unfairly prejudicial conduct, and, 9.12– 9.15 Articles of association amendment, 3.11–3.13 Canadian law, and, 17.2 changes in CA 2006, 3.5–3.7 contractual source, as, 3.3 generally, 3.8 interpretation, 3.29–3.34 introduction, 3.1 pre-CA 2006 status, 3.4 rule in Foss v Harbottle, and, 5.7

Articles of association – contd specific nature, 3.9–3.10 unfair prejudice, and, 10.47 Associations generally, 1.9 Australia ASX Listing Rules approval by general meeting, 16.37 continuous disclosure, 16.35–16.36 breach of fiduciary duty, 16.15–16.16 class actions compared with derivative claims, 16.43 generally, 16.40–16.41 institutional shareholders, 16.42 introduction, 16.39 compulsory liquidation directors acting in their own interests, 16.28 introduction, 16.27 just and equitable, 16.30 oppressive, unfairly prejudicial or unfairly discriminatory conduct, 16.29 constitution of company, 16.9 damages, 16.33 derivative claims compared with class claims, 16.43 generally, 16.18–16.20 institutional shareholders, 16.42 introduction, 16.39 directors appointment, 16.3–16.5 duties, 16.6–16.8 powers, 16.3–16.5 removal, 16.3–16.5 directors acting in their own interests, 16.28 fraud on the minority, 16.14 injunctions, 16.33 introduction, 16.1–16.2 just and equitable, 16.30

497

Index Australia – contd legal personality, 16.2 liquidation directors acting in their own interests, 16.28 introduction, 16.27 just and equitable, 16.30 oppressive, unfairly prejudicial or unfairly discriminatory conduct, 16.29 minority shareholders in a listed company approval by general meeting, 16.37 continuous disclosure, 16.35–16.36 misleading and deceptive conduct, 16.32 officers, 16.6–16.8 oppression, relief for applicants, 16.25–16.26 forms, 16.23–16.24 grounds for grant, 16.21–16.22 oppressive conduct, 16.22 oppressive conduct, 16.29 other orders, 16.34 personal claims breach of fiduciary duty, 16.15–16.16 contractual claims, 16.17 fraud on the minority, 16.14 limits on constitutional amendments, 16.14 separate and distinct losses, 16.12– 16.13 reflective losses, 16.12–16.13 remedies, 16.38 shareholder class actions compared with derivative claims, 16.43 generally, 16.40–16.41 institutional shareholders, 16.42 introduction, 16.39 shareholder rights, 16.10–16.11 shareholders’ relationships, 16.9 statutory basis, 16.1 types of company, 16.1 unfairly discriminatory conduct, 16.29 unfairly prejudicial conduct, 16.29 winding up directors acting in their own interests, 16.28 introduction, 16.27 just and equitable, 16.30 oppressive, unfairly prejudicial or unfairly discriminatory conduct, 16.29 Avoidance of conflicts of interest declaration of interest in transactions, 2.40–2.43 generally, 2.38–2.39

Breach of directors’ duties civil consequences, 2.52–2.53 liability to shareholders See also Liability of directors all companies limited by shares, 4.5–4.21 introduction, 4.1–4.4 listed companies, 4.23–4.34 regulated companies, 4.23–4.34 ratification, 2.54 Breach of fiduciary duty Australian law, and, 16.15–16.16 derivative claims at common law, and, 6.5 directors dealing with shareholders’ proprietary rights, 4.20–4.21 directors giving advice or information, 4.8–4.19 introduction, 4.7 Breach of strict legal rules See also Unfairly prejudicial conduct allotment of shares, 9.115–9.118 bonuses, 9.105–9.110 contravention of the Companies Act convening meetings, 9.120–9.121 seriousness of transgression, 9.119 convening meetings, 9.120–9.121 effect of condoning a breach, 9.91–9.93 effect of non-compliance with rules, 9.94–9.96 equitable considerations distinguishing features, 9.122–9.124 exclusion from management, 9.149– 9.162 failure to consult petitioner, 9.163– 9.166 legitimate expectations, 9.125–9.130 limitation on transfer of shares, 9.148 quasi-partnerships, 9.131–9.143 understandings or arrangements, 9.146–9.147 event putting an end to association, 9.170–9.172 examples allotment of shares, 9.115–9.118 bonuses, 9.105–9.110 contravention of the Companies Act, 9.119–9.121 failure to pay reasonable dividends, 9.111–9.114 mismanagement of company’s business, 9.101–9.104 remuneration, 9.105–9.110 rights issues, 9.115–9.118 exercise of powers for illegitimate or ulterior purpose, 9.167–9.169

498

Index Breach of strict legal rules – contd excess of powers, 9.167–9.169 exclusion from management fairness, 9.156–9.159 general, 9.149–9.152 reasonable offer making unfair exclusion fair, 9.160–9.162 unfair, 9.153–9.155 failure to consult petitioner, 9.163–9.166 failure to pay reasonable dividends, 9.111–9.114 fair exclusion from management, 9.156– 9.159 generally, 9.88–9.100 introduction, 9.88–9.90 legitimate expectations generally, 9.125–9.130 public company context, in, 9.144– 9.145 mismanagement of company’s business, 9.101–9.104 non-compliance with rules, 9.94–9.96 overriding considerations distinguishing features, 9.122–9.124 exclusion from management, 9.149– 9.162 failure to consult petitioner, 9.163–9.166 legitimate expectations, 9.125–9.130 limitation on transfer of shares, 9.148 quasi-partnerships, 9.131–9.143 understandings or arran‑gements, 9.146–9.147 quasi-partnerships companies since formation, 9.133–9.136 continuation despite newcomer joining company, 9.140–9.141 conversion into commercial relationship, 9.142–9.143 general concept, 9.131–9.132 initial commercial relationship converted, 9.137–9.139 reasonable offer making unfair exclusion fair, 9.160–9.162 remuneration, 9.105–9.110 rights issues, 9.115–9.118 rules prevailing, 9.97–9.100 seriousness of transgression, 9.119 transfer of shares, 9.148 understandings or arrangements, 9.146– 9.147 unfair exclusion from management, 9.153–9.155 Breakdown of personal relationships just and equitable winding up, and, 11.38–11.42

Bribery directors, and, 2.46 Buy-out basis of valuation break-up, 10.31–10.32 discounted, 10.27–10.30 generally, 10.19–10.21 liquidation, 10.31–10.32 undiscounted, 10.22–10.26 break-up value, 10.31–10.32 ‘clean break’ principle, 10.17 discounted basis, 10.27–10.30 generally, 10.15–10.16 interest, 10.41–10.43 liquidation value, 10.31–10.32 majority ordered to sell to minority, 10.18 undiscounted basis for valuation, 10.22– 10.26 valuation basis break-up, 10.31–10.32 discounted, 10.27–10.30 generally, 10.19–10.21 liquidation, 10.31–10.32 undiscounted, 10.22–10.26 valuation process adjustments pursuant to court order, 10.36 date of determination, 10.37–10.40 generally, 10.33–10.35 Canada appraisal, 17.12–17.13 articles of association, 17.2 class veto, 17.11 compliance and restraining orders, 17.5 corporations, 17.1–17.4 introduction, 17.1 legal personality, 17.2 nature of corporations, 17.1–17.4 oppression, 17.8–17.10 remedies appraisal, 17.12–17.13 class veto, 17.11 compliance and restraining orders, 17.5 oppression, 17.8–17.10 representative action, 17.6–17.7 shareholder powers, 17.3–17.4 statutory basis, 17.1 statutory representative action, 17.6–17.7 types of company, 17.1–17.4 unanimous shareholder agreements, 17.14 Capital gains tax capital losses, 15.14 capital sums derived from assets, 15.6 chargeable gains for companies, 15.13

499

Index Capital gains tax – contd damages, 15.30 Enterprise Investment Scheme, 15.12 entrepreneurs’ relief, 15.11 exempt assets, 15.7 exempt capital gains, 15.7 market value, 15.15–15.18 purchase by company of own shares, 15.28–15.29 reliefs for individuals, 15.11–15.12 rights as capital assets, 15.5 shares as capital assets, 15.2–15.4 City Code on Takeovers and Mergers liability of directors, and, 4.29–4.34 Civil procedure claims brought by issue of claim form derivative claims, 13.7 introduction, 13.5 personal claims, 13.6 claims brought by petition introduction, 13.2 just and equitable winding up, 13.4 unfair prejudice claims, 13.3 derivative claims, 13.7 introduction, 13.1 issue of claim form derivative claims, 13.7 introduction, 13.5 personal claims, 13.6 just and equitable winding up, 13.4 personal claims, 13.6 petition-based claims introduction, 13.2 just and equitable winding up, 13.4 unfair prejudice, 13.3 Rules, 13.2 unfair prejudice claims, 13.3 Claim forms derivative claims, 13.7 introduction, 13.5 personal claims, 13.6 Class actions See also Derivative claims Australian law, and compared with derivative claims, 16.43 generally, 16.40–16.41 institutional shareholders, 16.42 introduction, 16.39 Class rights abrogation, 7.50 ‘class rights’, 7.44–7.49 consent to variation, 7.51–7.52 introduction, 7.43 objection to variation, 7.51–7.52 variation, 7.50–7.52

Class vetoes Canadian law, and, 17.11 Companies introduction, 1.1–1.3 legal personality exception, 1.15–1.25 implications, 1.26–1.36 origins, 1.8–1.12 Salomon v Salomon, 1.13–1.14 meaning, 1.4–1.5 types. 1.4 ‘Company’ definition, 1.4–1.5 Company meetings personal claims, and class rights, 7.43–7.52 power of court to order meetings, 7.38–7.44 power of members to require general meeting to be held, 7.33–7.37 Company registers personal claims, and procedure, 7.30–7.32 refusal to register transfer of shares, 7.27–7.29 register of members, 7.5–7.32 Compensation for false or misleading statements dishonest intention, 4.25 fraud, 4.25 introduction, 4.24 key investor information, 4.27 listing particulars, in, 4.25–4.26 published information relating to securities, 4.28 Compensation payments taxation, and generally, 15.30–15.31 VAT, 15.32 Compliance and restraining orders Canadian law, and, 17.5 Compulsory liquidation See also Just and equitable winding up Australian law, and directors acting in their own interests, 16.28 introduction, 16.27 just and equitable, 16.30 oppressive, unfairly prejudicial or unfairly discriminatory conduct, 16.29 inter-relationship of remedies, and, 12.9 South African law, and, 18.41–18.44 taxation, and, 15.24–15.25

500

Index Constitution of the company articles of association amendment, 3.11–3.13 changes in CA 2006, 3.5–3.7 contractual source, as, 3.3 generally, 3.8 interpretation, 3.29–3.34 introduction, 3.1 pre-CA 2006 status, 3.4 specific nature, 3.9–3.10 Australian law, and, 16.9 changes in CA 2006, 3.5–3.7 contractual source, 3.3 fiduciary duty, and, 3.2 interpretation of contractual documents general principles, 3.29 implications, 3.30–3.34 introduction, 3.1 memorandum of association changes in CA 2006, 3.5–3.7 introduction, 3.1 pre-CA 2006 status, 3.4 pre-emption as between shareholders, 3.36–3.38 CA 2006, and, 3.39 introduction, 3.35 references to a company’s constitution in CA 2006, 3.28 resolutions agreed to by members, as, 3.16–3.17 agreed to by members of a class of shareholders, as, 3.22–3.25 bind members of a class though not agreed by all, which, 3.26 changes in CA 2006, 3.6 Duomatic principle, 3.16–3.17 other enactment, under, 3.27 special resolutions, 3.15 rule in Foss v Harbottle, and, 5.7 shareholders’ agreements changes in CA 2006, 3.7 contractual source, as, 3.3 generally, 3.18–3.21 source, 3.3 special resolutions changes in CA 2006, 3.6–3.7 generally, 3.15 statutory basis, 3.1 Contributories just and equitable winding up, and allottees, 11.20 inclusions and exclusions, 11.17–11.23 meaning, 11.14–11.16 shareholding for six months, 11.21–11.22 shares devolving through death, 11.23

Contributories’ petitions just and equitable winding up application of provisions, 11.33–11.49 availability of alternative remedies, 11.28–11.32 circumstances preventing relief, 11.50 contributories, 11.14–11.23 introduction, 11.1–11.4 nature, 11.5–11.9 standing, 11.10–11.27 special resolution winding-up, 11.51– 11.52 Control derivative actions generally, 5.14 introduction, 5.2 overview, 6.1 introduction, 5.1 majority rule principle breach of shareholder’s personal rights, and, 5.13 exceptions, 5.14 generally, 5.11–5.12 introduction, 5.2 powers of directors and members as to litigation, 5.7–5.10 rule in Foss v Harbottle, 5.2–5.6 separate legal personality, and, 5.2 Corporate governance South African law, and constitutional documents, 18.8 directors, 18.13–18.15 duties of directors, 18.16–18.24 shareholders’ powers, 18.9–18.12 Corporation tax taxation, and, 15.24–15.25 Damages Australian law, and, 16.33 capital gains tax, 15.30–15.31 injunctions, and, 14.4–14.5 inter-relationship of remedies, and, 12.10 VAT, 15.32 De facto directors See also Directors generally, 2.4 De jure directors See also Directors’ duties generally, 2.3 Deadlock just and equitable winding up, and, 11.35–11.37 unfairly prejudicial conduct, and, 9.173– 9.175

501

Index Declarations of delinquency South African law, and, 18.25–18.26 Declarations of interest existing transactions, 2.40–2.43 proposed transaction or arrangement, 2.47–2.51 Delinquency declarations South African law, and, 18.25–18.26 Demergers unfair prejudice, and, 10.14 Deregulation South African law, and, 18.12 Derivative claims Australian law, and compared with class claims, 16.43 generally, 16.18–16.20 institutional shareholders, 16.42 introduction, 16.39 breach of fiduciary duty, 6.5 claim forms, 13.7 common law, at breach of fiduciary duty, 6.5 complainant’s personal benefit, 6.11 discretion, 6.12–6.14 equitable fraud, 6.7 introduction, 6.3 negligence by director, 6.6 personal benefit, 6.7 ultra vires acts, 6.4 wrongdoer control, 6.8–6.10 Companies Act 2006, under See also Derivative claims (statute) application of provisions, 6.18–6.20 conditions or limitations attached to permission, 6.46 costs, 6.47–6.48 definition, 6.18 exercise of discretion by court, 6.27– 6.44 foreign companies, and, 6.50 hurdles, 6.21–6.45 introduction, 6.17 other factors, 6.45 prima facie case, 6.22–6.26 procedure, 6.46–6.50 scope of provisions, 6.18–6.20 control, and generally, 5.14 introduction, 5.2 discretion common law, at, 6.12–6.14 statutory procedure, under, 6.27–6.44 double claims, 6.15–6.16 equitable fraud, 6.7 fiduciary duty, and, 6.5

Derivative claims – contd foreign companies, and, 6.50 insolvent companies, 6.15–6.16 inter-relationship of remedies, and, 12.5–12.8 introduction, 6.1–6.2 issue of claim form, 13.7 majority rule principle, and, 6.2 multiple claims, 6.15–6.16 negligence by director, 6.6 personal benefit complainant, 6.11 defendant, 6.7 procedure, 13.7 rule in Foss v Harbottle, and generally, 5.14 introduction, 5.2 overview, 6.1 South African law, and court’s residual powers, 18.40 demand, 18.35 generally, 18.34 investigation, 18.37 procedure, 18.34 refusal of compliance with demand, 18.38–18.39 setting aside demand, 18.36 ultra vires acts, 6.4 unfair prejudice, and, 10.46 wrongdoer control, 6.8–6.10 Derivative claims (statute) application of provisions, 6.18–6.20 conditions attached to permission to continue, 6.46 continuation of claim commenced by applicant member, 6.23 conversion of claim commenced by company into derivative claim generally, 6.24 procedure, 6.25 costs, 6.47–6.48 definition, 6.18 exercise of discretion by court approach of court, 6.28–6.30 considerations of court, 6.32–6.36 importance that a director would attach to continuing the claim, 6.38–6.40 introduction, 6.27 other factors, 6.45 views of members with no interest in the matter, 6.44 whether act or omission on which action based could be and would be likely to be authorised or ratified by company, 6.41

502

Index Derivative claims (statute) – contd exercise of discretion by court – contd whether alternative remedy open to member in own right, 6.43 whether company has decided not to pursues claim, 6.42 whether member acting in good faith, 6.37 wrongdoer control, 6.31 foreign companies, and, 6.50 hurdles exercise of discretion by court, 6.27– 6.44 introduction, 6.21 prima facie case, 6.22–6.26 indemnity as to costs, 6.47–6.48 insolvent companies, and, 6.49 introduction, 6.17 limitations attached to permission to continue, 6.46 other factors, 6.45 prima facie case application to continue claim commenced by applicant member, 6.23 conversion of claim commenced by company into derivative claim, 6.24 introduction, 6.22 taking over claim brought by another member, 6.26 taking over claim commenced by company, 6.25 procedure foreign companies, 6.50 generally, 6.46 indemnity as to costs, 6.47–6.48 insolvent companies, 6.49 scope of provisions, 6.18–6.20 taking over claim brought by another member, 6.26 taking over claim commenced by company, 6.25 Directors appointment Australia, 16.3–16.5 South Africa, 18.13 Australian law, and acting in their own interests, 16.28 appointment, 16.3–16.5 duties, 16.6–16.8 powers, 16.3–16.5 removal, 16.3–16.5 bribery, and, 2.46 de facto directors, 2.4 de jure directors, 2.3

Directors – contd disqualification South Africa, 18.14–18.15 duties See also Directors’ duties Australia, 16.6–16.8 generally, 2.3–2.59 South Africa, 18.16–18.24 former directors, 2.6 introduction, 2.1 liability to shareholders See also Liability of directors generally, 4.1–4.34 South Africa, 18.21–18.22 nature of office, 2.2 nominee directors, 2.8 removal from office Australia, 16.3–16.5 South Africa, 18.23–18.24 rule in Foss v Harbottle, and, 5.7–5.10 shadow directors, 2.4–2.5 South African law, and appointment, 18.13 conduct, 18.18–18.20 disqualification, 18.14–18.15 duties, 18.16–18.24 eligibility, 18.14 generally, 18.13–18.15 ineligibility, 18.14 liability, 18.21–18.22 need, 18.4 personal financial interests, 18.17 removal from office, 18.23–18.24 standards of conduct, 18.18–18.20 Directors’ duties acting within powers, 2.14–2.21 Australian law, and, 16.6–16.8 avoidance of conflicts of interest declaration of interest in transactions, 2.40–2.43 generally, 2.38–2.39 breach civil consequences, 2.52–2.53 liability to shareholders, 4.1–4.34 ratification, 2.54 bribery, and, 2.46 civil consequences of breach, 2.52– 2.53 common law duties generally, 2.9–2.12 shareholders, to, 2.56 declarations of interest existing transactions, 2.40–2.43 proposed transaction or arrangement, 2.47–2.51

503

Index Directors’ duties – contd ‘directors’ de facto directors, 2.4 de jure directors, 2.3 former directors, 2.6 generally, 2.3–2.8 nominee directors, 2.8 shadow directors, 2.4–2.5 equitable duties, 2.9–2.12 exercise of independent judgment, 2.31–2.32 exercise of reasonable care, skill and diligence, 2.33–2.37 fiduciary duties, 2.57 introduction, 2.1 liability to shareholders See also Liability of directors generally, 4.1–4.34 promote the success of the company, 2.22–2.29 reflective losses, and, 2.58 refusal of benefits from third parties, 2.44–2.45 relief from liability, 2.59 reporting own wrongdoing, 2.30 rule in Foss v Harbottle, and, 5.7– 5.10 shareholders, to common law, at, 2.56 fiduciary duties, 2.57 introduction, 2.55 source common law, 2.9–2.12 statute, South African law, and, 18.16–18.24 statutory duties acting within powers, 2.14–2.21 avoidance of conflicts of interest, 2.38–2.43 bribery, and, 2.46 declaration of interest in proposed transaction or arrangement, 2.47– 2.51 exercise of independent judgment, 2.31–2.32 exercise of reasonable care, skill and diligence, 2.33–2.37 generally, 2.9–2.12 promote the success of the company, 2.22–2.29 refusal of benefits from third parties, 2.44–2.45 reporting own wrongdoing, 2.30 scope and nature, 2.13–2. tortious duties, 2.12

Directors’ liability all companies limited by shares, for common law, at, 4.5–4.6 fiduciary duty, 4.7–4.21 statute, under, 4.22 breach of duties, for all companies limited by shares, 4.5–4.21 introduction, 4.1–4.4 listed companies, 4.23–4.34 regulated companies, 4.23–4.34 breach of fiduciary duty directors dealing with shareholders’ proprietary rights, 4.20–4.21 directors giving advice or information, 4.8–4.19 introduction, 4.7 City Code on Takeovers and Mergers, and, 4.29–4.34 common law, at, 4.5–4.6 compensation for false or misleading statements dishonest intention, 4.25 fraud, 4.25 introduction, 4.24 key investor information, 4.27 listing particulars, in, 4.25–4.26 published information relating to securities, 4.28 fiduciary duty, under, 4.7–4.21 Financial Services and Markets Act 2000, and introduction, 4.24 s 90, 4.25–4.26 s 90A, 4.28 s 90ZA, 4.27 introduction, 4.4 listed companies, for FSMA 2000, under, 4.24–4.28 introduction, 4.23 Takeover Code, under, 4.29–4.34 Misrepresentation Act 1967, and, 4.22 pure economic loss, 4.6 reflective loss, and, 4.4 regulated companies, for FSMA 2000, under, 4.24–4.28 introduction, 4.23 Takeover Code, under, 4.29–4.34 shareholders for breach of duties, to all companies limited by shares, 4.5–4.21 introduction, 4.1–4.4 listed companies, 4.23–4.34 regulated companies, 4.23–4.34 South African law, and, 18.21–18.22

504

Index

Enterprise Investment Scheme capital gains tax, and, 15.12 Entrepreneurs’ relief capital gains tax, and, 15.11 Equitable fraud derivative claims, and, 6.7 Equitable rights unfairly prejudicial conduct, and, 9.74– 9.77 Escape clauses unfair prejudice, and, 10.13 Ex turpi causa one-man companies, and, 1.2 Exclusion from management just and equitable winding up, and, 11.43–11.44 Exercise of independent judgment directors’ duties, and, 2.31–2.32 Exercise of reasonable care, skill and diligence directors’ duties, and, 2.33–2.37

Foreign companies derivative claims, and, 6.50 Former directors See also Directors’ duties generally, 2.6 Foss v Harbottle application of rule, 5.6 articles of association, and, 5.7 breach of shareholder’s personal rights, and, 5.13 definition, 5.3 derivative actions generally, 5.14 introduction, 5.1 directors’ role, 5.7–5.10 exceptions to rule, 5.4–5.5 explanation, 5.3 extent of rule, 5.6 general rule, 5.2–5.6 inter-relationship of remedies, and, 12.3 introduction, 5.1 majority rule principle breach of shareholder’s personal rights, 5.13 exceptions, 5.14 generally, 5.11–5.12 introduction, 5.2 meaning of rule, 5.6 powers of directors and members as to litigation, 5.7–5.10 rule, 5.2–5.6 separate legal personality, and, 5.2 shareholders’ role, 5.7–5.10 summary, 5.6 Fraud on the minority Australian law, and, 16.14 Future conduct unfair prejudice, and, 10.44

Fairness unfairly prejudicial conduct, and, 9.84–9.85 Fiduciary duty constitution of the company, and, 3.2 derivative claims, and, 6.5 directors’ duties, and, 2.57 liability of directors, and, 4.7–4.21 Financial Services and Markets Act 2000 dishonest intention, 4.25 fraud, 4.25 introduction, 4.24 key investor information, 4.27 listing particulars, in, 4.25–4.26 published information relating to securities, 4.28

General meetings inter-relationship of remedies, and, 12.4 South African law, and, 18.9–18.11 Governance South African law, and constitutional documents, 18.8 directors, 18.13–18.15 duties of directors, 18.16–18.24 shareholders’ powers, 18.9–18.12 Groups of companies legal personality of companies, and, 1.24–1.25 Guarantee companies And see Companies generally, 1.4

Directors’ liability – contd statute, under, 4.22 Takeovers and Mergers Code, and, 4.29–4.34 Disappearance of substratum of company just and equitable winding up, and, 11.45–11.48 Discretion derivative claims, and common law, at, 6.12–6.14 statutory procedure, under, 6.27–6.44 unfair prejudice, and, 10.3–10.8 Dispute resolution unfairly prejudicial conduct, and arbitration, 9.12–9.15 litigation, 9.11 mediation, 9.16

505

Index Income tax damages, 15.30–15.31 distributions and dividends, 15.19–15.23 employment-related securities, 15.26– 15.27 Independent judgment directors’ duties, and, 2.31–2.32 Injunctions adequacy of damages as remedy, 14.4– 14.5 Australian law, and, 16.33 balance of convenience, 14.6 generally, 14.2 serious issue to be tried, 14.3 unfair prejudice, and, 10.45 Insolvent companies derivative claims, and generally, 6.15–6.16 statute, under, 6.49 unfairly prejudicial conduct, and, 9.45– 9.46 Inspection of register of members generally, 7.5–7.20 procedure, 7.30–7.32 Interim relief appointment of receivers, 14.7 injunctions adequacy of damages as remedy, 14.4–14.5 balance of convenience, 14.6 generally, 14.2 serious issue to be tried, 14.3 introduction, 14.1 receivers, 14.7 security for costs, 14.15 striking out, 14.10–14.14 summary judgment, 14.8–14.9 Interpretation of contractual documents general principles, 3.29 implications, 3.30–3.34 Inter-relationship of remedies damages claims, 12.10 derivative claims, 12.5–12.8 general meeting, 12.4 internal remedies, 12.3 introduction, 12.1–12.2 just and equitable winding-up, 12.9 rule in Foss v Harbottle, 12.3 Joint stock companies generally, 1.9 Just and equitable winding up application of provisions breakdown of personal relationships, 11.38–11.42

Just and equitable winding up – contd application of provisions – contd deadlock, 11.35–11.37 disappearance of substratum of company, 11.45–11.48 exclusion from management, 11.43– 11.44 introduction, 11.33–11.34 loss of confidence, 11.38–11.42 poor management, 11.49 Australian law, and, 16.30 availability of alternative remedies, 11.28–11.32 breakdown of personal relationships, 11.38–11.42 circumstances preventing relief, 11.50 civil procedure, 13.4 contributories allottees, 11.20 inclusions and exclusions, 11.17–11.23 meaning, 11.14–11.16 shareholding for six months, 11.21– 11.22 shares devolving through death, 11.23 CPR Practice Direction, 11.4 deadlock, 11.35–11.37 disappearance of substratum of company, 11.45–11.48 exclusion from management, 11.43–11.44 inter-relationship of remedies, and, 12.9 introduction, 11.1–11.4 loss of confidence, 11.38–11.42 nature, 11.5–11.9 petitions, 13.4 poor management, 11.49 procedure, 13.4 quasi-partnerships, and, 11.9 scope, 11.5–11.9 standing contributories, 11.14–11.23 general, 11.10–11.13 resolution of disputes concerning, 11.27 tangible interest, 11.24–11.26 strict legal rules, and, 11.5 tangible interest, 11.24–11.26 unfairly prejudicial conduct, and, 11.1 Legal personality of companies Australian law, and, 16.2 Canadian law, and, 17.2 ‘company’, 1.4–1.5 company perpetrates a crime, 1.22–1.23 exception company perpetrates a crime, 1.22–1.23

506

Index Legal personality of companies – contd exception – contd general, 1.15–1.17 insufficient reasons to lift the veil, 1.21 Petrodel v Prest, 1.18–1.20 sham companies, 1.21 tax legislation, 1.22 groups of companies, 1.24–1.25 implications company has right to sue and be sued in own name, 1.33 company makes agreements in its own name, 1.27–1.30 profits generated by company, 1.31 shareholders no rights to assets of company, 1.32 shareholders not liable for company’s debts, 1.26 shareholders not owe company a duty of care, 1.35 shareholders not per se entitled to represent company, 1.36 wrongs committed by company are not chargeable to members, 1.34 introduction, 1.1–1.3 origins, 1.8–1.12 piercing the corporate veil company perpetrates a crime, 1.22–1.23 general, 1.15–1.17 insufficient reasons to lift the veil, 1.21 Petrodel v Prest, 1.18–1.20 sham companies, 1.21 tax legislation, 1.22 rule in Foss v Harbottle, and, 5.2 Salomon v Salomon, 1.13–1.14 sham companies, and, 1.21 ‘shareholder’, 1.6–1.7 tax legislation, and, 1.22 Legitimate expectation breach of strict legal rules generally, 9.125–9.130 public company context, in, 9.144– 9.145 generally, 9.81–9.82 Liability of directors advice or information, for, 4.8–4.19 all companies limited by shares, for common law, at, 4.5–4.6 fiduciary duty, 4.7–4.21 statute, under, 4.22 breach of duties, for all companies limited by shares, 4.5–4.21 introduction, 4.1–4.4 listed companies, 4.23–4.34

Liability of directors – contd breach of duties, for – contd regulated companies, 4.23–4.34 breach of fiduciary duty directors dealing with shareholders’ proprietary rights, 4.20–4.21 directors giving advice or information, 4.8–4.19 introduction, 4.7 City Code on Takeovers and Mergers, and, 4.29–4.34 common law, at, 4.5–4.6 compensation for false or misleading statements dishonest intention, 4.25 fraud, 4.25 introduction, 4.24 key investor information, 4.27 listing particulars, in, 4.25–4.26 published information relating to securities, 4.28 dealing with shareholders’ proprietary rights, 4.20–4.21 fiduciary duty, under, 4.7–4.21 Financial Services and Markets Act 2000, and introduction, 4.24 s 90, 4.25–4.26 s 90A, 4.28 s 90ZA, 4.27 giving advice or information, 4.8–4.19 introduction, 4.4 listed companies, for FSMA 2000, under, 4.24–4.28 introduction, 4.23 Takeover Code, under, 4.29–4.34 Misrepresentation Act 1967, and, 4.22 pure economic loss, 4.6 reflective loss, and, 4.4 regulated companies, for FSMA 2000, under, 4.24–4.28 introduction, 4.23 Takeover Code, under, 4.29–4.34 shareholders for breach of duties, to all companies limited by shares, 4.5–4.21 introduction, 4.1–4.4 listed companies, 4.23–4.34 regulated companies, 4.23–4.34 statute, under, 4.22 Takeovers and Mergers Code, and, 4.29–4.34 Limited companies And see Companies generally, 1.4

507

Index Limited liability partnerships generally, 1.8 legal personality, 1.8 Liquidation See also Just and equitable winding up Australian law, and directors acting in their own interests, 16.28 introduction, 16.27 just and equitable, 16.30 oppressive, unfairly prejudicial or unfairly discriminatory conduct, 16.29 inter-relationship of remedies, and, 12.9 South African law, and, 18.41–18.44 taxation, and, 15.24–15.25 Listed companies liability of directors, and FSMA 2000, under, 4.24–4.28 introduction, 4.23 Takeover Code, under, 4.29–4.34 Litigation unfairly prejudicial conduct, and, 9.11 Loss of confidence just and equitable winding up, and, 11.38–11.42 Majority rule principle breach of shareholder’s personal rights, and, 5.13 derivative claims, and, 6.2 exceptions, 5.14 generally, 5.11–5.12 introduction, 5.2 Management of affairs of a company ‘affairs’ of the company’ blurring the dividing lines, 9.56–9.64 by whom are the affairs conduct, 9.66–9.67 conclusion, 9.65 conduct of affairs of another company, 9.65 cross-pollination of companies and subsidiaries’ affairs, 9.56–9.64 dividing line, 9.50–9.55 duties owed by parent company, 9.59–9.60 examples of companies’ affairs, 9.50– 9.51 examples of members’ personal affairs, 9.52–9.55 generally, 9.47–9.49 parent company giving preference to own affairs, 9.62

Management of affairs of a company – contd ‘affairs’ of the company’ – contd parent interfering in subsidiary’s affairs, 9.63–9.64 time of affairs, 9.68–9.72 ‘company’, 9.43–9.46 insolvent companies, 9.45–9.46 ‘management’, 9.40–9.42 third party companies, 9.44 Market value capital gains tax, and, 15.15–15.18 Mediation unfairly prejudicial conduct, and, 9.16 Members’ interests unfairly prejudicial conduct, and affected other than as member, 9.78–9.80 equitable rights, 9.74–9.77 generally, 9.73 legitimate expectation, 9.81–9.82 Memorandum of association changes in CA 2006, 3.5–3.7 introduction, 3.1 pre-CA 2006 status, 3.4 Misleading and deceptive conduct Australian law, and, 16.32 Misrepresentation Act 1967 liability of directors, and, 4.22 Memorandum of incorporation South African law, and, 18.5 Multiple claims derivative claims, and, 6.15–6.16 Negligence by director derivative claims, and, 6.6 Nominee directors See also Directors’ duties generally, 2.8 Officers Australian law, and, 16.6–16.8 Oppressive conduct Australian law, and applicants, 16.25–16.26 forms, 16.23–16.24 grounds for grant, 16.21–16.22 oppressive conduct, 16.22 Canadian law, and, 17.8–17.10 unfairly prejudicial conduct, and, 9.83 Partnerships generally, 1.8 Personal benefit derivative claims, and complainant, 6.11 defendant, 6.7

508

Index Personal claims Australian law, and breach of fiduciary duty, 16.15– 16.16 contractual claims, 16.17 fraud on the minority, 16.14 limits on constitutional amendments, 16.14 separate and distinct losses, 16.12– 16.13 civil procedure, 13.6 class rights, and abrogation, 7.50 ‘class rights’, 7.44–7.49 consent to variation, 7.51–7.52 introduction, 7.43 objection to variation, 7.51–7.52 variation, 7.50–7.52 company meetings, and class rights, 7.43–7.52 power of court to order meetings, 7.38–7.44 power of members to require general meeting to be held, 7.33–7.37 company registers, and procedure, 7.30–7.32 refusal to register transfer of shares, 7.27–7.29 register of members, 7.5–7.32 Companies Act 2006, under generally, 7.4 introduction, 7.1 rights relating to company meetings, 7.33–7.52 rights relating to company registers, 7.5–7.32 rights relating to removal of directors, 7.63–7.66 rights relating to takeover offers, 7.53–7.62 definition, 7.1 inspection of register of members generally, 7.5–7.20 procedure, 7.30–7.32 introduction, 7.1–7.3 meaning, 7.1 non-statutory rights, and, 7.67–7.72 procedure, 13.6 rectification of register of members costs, 7.32 generally, 7.21–7.26 procedure, 7.30–7.31 refusal to register transfer of shares generally, 7.27–7.29 procedure, 7.30–7.31

Personal claims – contd register of members, and costs, 7.32 inspection, 7.5–7.20 procedure, 7.30–7.31 rectification, 7.21–7.26 removal of directors, and, 7.63–7.66 rights relating to company meetings class rights, 7.43–7.52 power of court to order meetings, 7.38–7.44 power of members to require general meeting to be held, 7.33–7.37 rights relating to company registers procedure, 7.30–7.32 refusal to register transfer of shares, 7.27–7.29 register of members, 7.5–7.32 rights relating to removal of directors, 7.63–7.66 rights relating to takeover offers introduction, 7.53 opposition to notices, 7.56–7.62 ‘sell-out’, 7.55 ‘squeeze-out’, 7.54 rule in Foss v Harbottle, and, 7.2 ‘sell-out’, 7.55 ‘squeeze-out’ generally, 7.54 opposition to notices, 7.56–7.62 shareholders’ agreements, under, 7.67– 7.72 takeover offers, and introduction, 7.53 opposition to notices, 7.56–7.62 ‘sell-out’, 7.55 ‘squeeze-out’, 7.54 third parties, and, 7.73 Petition by company member ‘affairs’ of the company’, 9.47–9.72 breach of strict legal rules examples, 9.101–9.121 generally, 9.88–9.100 overriding equitable considerations, 9.122–9.166 categorisation breach of strict legal rules, 9.88–9.121 equitable considerations overriding strict legal rules, 9.122–9.166 event putting end to the association, 9.170–9.172 exercise of powers for illegitimate or ulterior purpose, 9.167–9.169 introduction, 9.87 powers exceeded, 9.167–9.169

509

Index Petition by company member – contd ‘company’ generally, 9.43–9.46 insolvent companies, 9.45–9.46 third party companies, 9.44 conduct which is unfairly prejudicial categorisation, 9.87–9. fairness, 9.84–9.85 interpretation, 9.83 prejudice, 9.86 scope, 9.83 deadlock, and, 9.173–9.175 dispute resolution arbitration, 9.12–9.15 litigation, 9.11 mediation, 9.16 elements for successful claim introduction, 9.17–9.18 management of affairs of a company, 9.40–9.72 members’ interests, 9.73–9.82 standing, 9.19–9.39 unfairly prejudicial conduct, 9.83–9.172 equitable considerations overriding strict legal rules distinguishing features, 9.122–9.124 exclusion from management, 9.149– 9.162 failure to consult petitioner, 9.163– 9.166 legitimate expectations, 9.125–9.130 limitation on transfer of shares, 9.148 quasi-partnerships, 9.131–9.143 understandings or arrangements, 9.146–9.147 equitable rights, 9.74–9.77 event putting end to the association, 9.170–9.172 exceeding powers, 9.167–9.169 exercise of powers for illegitimate or ulterior purpose, 9.167–9.169 fairness, 9.84–9.85 insolvent companies, 9.45–9.46 interpretation, 9.83 legitimate expectation, 9.81–9.82 management of affairs of a company ‘affairs’ of the company’, 9.47–9.72 ‘company’, 9.43–9.46 insolvent companies, 9.45–9.46 ‘management’, 9.40–9.42 third party companies, 9.44 ‘member’, 9.19–9.21 members’ interests affected other than as member, 9.78– 9.80

Petition by company member – contd members’ interests – contd equitable rights, 9.74–9.77 generally, 9.73 legitimate expectation, 9.81–9.82 objective test for construction, 9.8–9.10 oppressive conduct, and, 9.83 powers exceeded, 9.167–9.169 predecessor provisions CA 1948 s 210, 9.2 CA 1980 s 75, 9.3 CA 1985 s 459, 9.4 introduction, 9.1 prejudice, 9.86 procedure, 9.176 standing excluded circumstances, 9.38–9.39 generally, 9.22–9.29 ‘member’, 9.19–9.21 other issues, 9.30–9.37 statutory basis ambit, 9.5–9.7 dispute resolution, 9.11–9.16 elements for successful claim, 9.17– 9.18 objective test for construction, 9.8–9.10 predecessor provisions, 9.1–9.4 scope, 9.5–9.7 third party companies, 9.44 unfairly prejudicial conduct categorisation, 9.87–9. fairness, 9.84–9.85 interpretation, 9.83 prejudice, 9.86 scope, 9.83 Petition-based claims introduction, 13.2 just and equitable winding up, 13.4 unfair prejudice claims, 13.3 ‘Piercing the corporate veil’ company perpetrates a crime, 1.22–1.23 general, 1.15–1.17 insufficient reasons to lift the veil, 1.21 Petrodel v Prest, 1.18–1.20 sham companies, 1.21 tax legislation, 1.22 Poor management just and equitable winding up, and, 11.49 Pre-emption rights as between shareholders, 3.36–3.38 CA 2006, and, 3.39 introduction, 3.35 Prejudice unfairly prejudicial conduct, and, 9.86

510

Index Procedure Civil Procedure Rules, 13.2 claims brought by issue of claim form derivative claims, 13.7 introduction, 13.5 personal claims, 13.6 claims brought by petition introduction, 13.2 just and equitable winding up, 13.4 unfair prejudice claims, 13.3 derivative claims, 13.7 introduction, 13.1 issue of claim form derivative claims, 13.7 introduction, 13.5 personal claims, 13.6 just and equitable winding up, 13.4 personal claims, 13.6 petition-based claims introduction, 13.2 just and equitable winding up, 13.4 unfair prejudice, 13.3 Rules, 13.2 unfair prejudice claims, 13.3 Promoting the success of the company directors’ duties, and, 2.22–2.29 Purchase of own shares capital gains tax, and, 15.28–15.29 Pure economic loss liability of directors, and, 4.6 Quasi-partnerships just and equitable winding up, and, 11.9 Reasonable care, skill and diligence directors’ duties, and, 2.33–2.37 Receivers interim relief, and, 14.7 Rectification of register of members costs, 7.32 generally, 7.21–7.26 procedure, 7.30–7.31 Reflective loss Australian law, and, 16.12–16.13 burden of proof, 8.28 claim vesting in company and shareholder, 8.34–8.37 claim vesting in company only, 8.30–8.33 claim vesting in shareholder to exclusion of company, 8.38–8.43 directors’ duties, and, 2.58 Gardner v Parker, 8.20–8.21 Giles v Rhind, 8.16–8.19 introduction, 8.1–8.4 Johnson v Gore Wood, 8.11–8.15

Reflective loss – contd liability of directors, and, 4.4 Marex Financial v Sevilleja conclusions, 8.22 consideration of Prudential decision, 8.9–8.10 generally, 8.8 subsequent developments, 8.23–8.27 treatment of Gore Wood decision, 8.11–8.15 non-recoverability burden of proof, 8.28 determinative judgments, 8.5–8.27 essence of rule, 8.1–8.4 practical application of rule, 8.29–8.43 onus of proof, 8.28 practical application of rule claim vesting in company and shareholder, 8.34–8.37 claim vesting in company only, 8.30– 8.33 claim vesting in shareholder to exclusion of company, 8.38–8.43 introduction, 8.29 Prudential Assurance v Newman Industries consideration in Marex decision, 8.9–8.10 generally, 8.5–8.7 Webster v Sanderson Solicitors, 8.27 Refusal to register transfer of shares generally, 7.27–7.29 procedure, 7.30–7.31 Register of members costs, 7.32 inspection, 7.5–7.20 procedure, 7.30–7.31 rectification, 7.21–7.26 Related persons South African law, and, 18.7 Remedies Australian law, and, 16.38 Canadian law, and appraisal, 17.12 class veto, 17.11 compliance and restraining orders, 17.5 oppression, 17.8–17.10 representative action, 17.6–17.7 damages claims, 12.10 derivative claims, 12.5–12.8 general meeting, 12.4 internal remedies, 12.3 introduction, 12.1–12.2 just and equitable winding-up, 12.9 rule in Foss v Harbottle, 12.3

511

Index Remedies – contd unfair prejudice, and alteration of articles, 10.47 buy-out, 10.15–10.43 derivative action, 10.46 future conduct, 10.44 implementation of court’s order, 10.48 injunctions, 10.45 winding-up, 12.9 Removal of directors Australian law, and 16.3–16.5 personal claims, and, 7.63–7.66 South African law, and, 18.23–18.24 Reporting own wrongdoing directors’ duties, and, 2.30 Resolutions agreed to by members, as, 3.16–3.17 agreed to by members of a class of shareholders, as, 3.22–3.25 bind members of a class though not agreed by all, which, 3.26 changes in CA 2006, 3.6–3.7 Duomatic principle, 3.16–3.17 other enactment, under, 3.27 special resolutions, 3.15 Rule in Foss v Harbottle articles of association, and, 5.7 definition, 5.3 derivative actions generally, 5.14 introduction, 5.1 directors’ role, 5.7–5.10 explanation, 5.3 generally, 5.2–5.6 inter-relationship of remedies, and, 12.3 introduction, 5.1 majority rule principle breach of shareholder’s personal rights, and, 5.13 exceptions, 5.14 generally, 5.11–5.12 introduction, 5.2 personal claims, and, 7.2 powers of directors and members as to litigation, 5.7–5.10 separate legal personality, and, 5.2 shareholders’ role, 5.7–5.10 summary, 5.6 Security for costs interim relief, and, 14.15 ‘Sell-out’ generally, 7.55

Separate legal personality Canadian law, and, 17.2 ‘company’, 1.4–1.5 company perpetrates a crime, 1.22–1.23 exception company perpetrates a crime, 1.22–1.23 general, 1.15–1.17 insufficient reasons to lift the veil, 1.21 Petrodel v Prest, 1.18–1.20 sham companies, 1.21 tax legislation, 1.22 groups of companies, 1.24–1.25 implications company has right to sue and be sued in own name, 1.33 company makes agreements in its own name, 1.27–1.30 profits generated by company, 1.31 shareholders no rights to assets of company, 1.32 shareholders not liable for company’s debts, 1.26 shareholders not owe company a duty of care, 1.35 shareholders not per se entitled to represent company, 1.36 wrongs committed by company are not chargeable to members, 1.34 introduction, 1.1–1.3 origins, 1.8–1.12 Petrodel v Prest, 1.18–1.20 piercing the corporate veil company perpetrates a crime, 1.22–1.23 general, 1.15–1.17 insufficient reasons to lift the veil, 1.21 Petrodel v Prest, 1.18–1.20 sham companies, 1.21 tax legislation, 1.22 rule in Foss v Harbottle, and, 5.2 Salomon v Salomon, 1.13–1.14 sham companies, and, 1.21 ‘shareholder’, 1.6–1.7 tax legislation, and, 1.22 Settlement agreements taxation, and, 15.33 Shadow directors See also Directors’ duties generally, 2.4–2.5 Sham companies legal personality of companies, and, 1.21 Shareholder class actions Australian law, and compared with derivative claims, 16.43 generally, 16.40–16.41

512

Index Shareholder class actions – contd Australian law, and – contd institutional shareholders, 16.42 introduction, 16.39 Shareholders Australian law, and class actions, 16.39–16.43 relationships, 16.9 rights, 16.10–16.11 Canadian law, and, 17.3–17.4 definition, 1.6–1.7 directors’ duties, and common law, at, 2.56 fiduciary duties, 2.57 introduction, 2.55 liability of directors for breach of duties, and all companies limited by shares, 4.5–4.21 introduction, 4.1–4.4 listed companies, 4.23–4.34 regulated companies, 4.23–4.34 statute, under, 4.22 rule in Foss v Harbottle, and, 5.7–5.10 South African law, and delinquency declaration, 18.25–18.26 deregulation, 18.12 general meeting, in, 18.9–18.11 generally, 18.4 powers, 18.9–18.1 right, 18.25–18.26 Shareholders’ agreements Canadian law, and, 17.14 changes in CA 2006, 3.7 contractual source, as, 3.3 generally, 3.18–3.21 personal claims, and, 7.67–7.72 Shareholders’ relationships articles of association amendment, 3.11–3.13 changes in CA 2006, 3.5–3.7 contractual source, as, 3.3 generally, 3.8 interpretation, 3.29–3.34 introduction, 3.1 pre-CA 2006 status, 3.4 specific nature, 3.9–3.10 Australian law, and, 16.9 changes in CA 2006, 3.5–3.7 contractual source, 3.3 fiduciary duty, and, 3.2 interpretation of contractual documents general principles, 3.29 implications, 3.30–3.34 introduction, 3.1

Shareholders’ relationships – contd limitation on contractual rights, 3.14 memorandum of association changes in CA 2006, 3.5–3.7 introduction, 3.1 pre-CA 2006 status, 3.4 notice requiring information as to holding of shares, 3.14 pre-emption as between shareholders, 3.36–3.38 CA 2006, and, 3.39 introduction, 3.35 references to a company’s constitution in CA 2006, 3.28 resolutions agreed to by members, as, 3.16–3.17 agreed to by members of a class of shareholders, as, 3.22–3.25 bind members of a class though not agreed by all, which, 3.26 changes in CA 2006, 3.6 Duomatic principle, 3.16–3.17 other enactment, under, 3.27 special resolutions, 3.15 shareholders’ agreements changes in CA 2006, 3.7 contractual source, as, 3.3 generally, 3.18–3.21 source, 3.3 special resolutions changes in CA 2006, 3.6–3.7 generally, 3.15 statutory basis, 3.1 Sole traders generally, 1.8 legal personality, 1.8 South Africa background to law, 18.1–18.3 Companies and Intellectual Property Commission, 18.6 concepts, 18.4–18.7 constitutional documents, 18.8 delinquency declaration, 18.25–18.26 deregulation, 18.12 derivative actions court’s residual powers, 18.40 demand, 18.35 generally, 18.34 investigation, 18.37 procedure, 18.34 refusal of compliance with demand, 18.38–18.39 setting aside demand, 18.36 directors appointment, 18.13

513

Index South Africa – contd directors – contd conduct, 18.18–18.20 disqualification, 18.14–18.15 duties, 18.16–18.24 eligibility, 18.14 generally, 18.13–18.15 ineligibility, 18.14 liability, 18.21–18.22 need, 18.4 personal financial interests, 18.17 removal from office, 18.23–18.24 standards of conduct, 18.18–18.20 general meeting, 18.9–18.11 governance constitutional documents, 18.8 directors, 18.13–18.15 duties of directors, 18.16–18.24 shareholders’ powers, 18.9–18.12 interpretation of statute, 18.2 introduction, 18.1–18.3 memorandum of incorporation, 18.5 related persons, 18.7 shareholders, 18.4 shareholders’ powers deregulation, 18.12 general meeting, in, 18.9–18.11 shareholders’ right delinquency declaration, 18.25– 18.26 statutory interpretation, 18.2 unfairly prejudicial conduct control, 18.32 general protection, 18.27–18.32 meaning, 18.29–18.30 nature of provisions, 18.28 related persons, 18.32 relief, 18.33 scope of provisions, 18.27 unfairly disregards the interests of, 18.31 winding up, 18.41–18.44 Special resolutions changes in CA 2006, 3.6–3.7 generally, 3.3 ‘Squeeze-out’ generally, 7.54 opposition to notices, 7.56–7.62 Standing just and equitable winding up, and contributories, 11.14–11.23 general, 11.10–11.13 resolution of disputes concerning, 11.27 tangible interest, 11.24–11.26

Standing – contd unfairly prejudicial conduct, and close connection with member, 9.32 excluded circumstances, 9.38–9.39 generally, 9.22–9.29 majority shareholders, 9.36–9.37 ‘member’, 9.19–9.21 member as creditor, 9.31 name already removed from register, 9.38 nominee shareholders, 9.33–9.35 other issues, 9.30–9.37 personal representatives, 9.29 shares sold but name not yet removed from register, 9.39 third parties, 9.32–9.35 transfer of shares executed, 9.23–9.28 Statutory interpretation South African law, and, 18.2 Strict legal rules breach allotment of shares, 9.115–9.118 bonuses, 9.105–9.110 contravention of the Companies Act, 9.119–9.121 convening meetings, 9.120–9.121 effect of condoning a breach, 9.91–9.93 effect of non-compliance with rules, 9.94–9.96 equitable considerations, 9.122–9.166 event putting an end to association, 9.170–9.172 examples, 9.101–9.121 exercise of powers for illegitimate or ulterior purpose, 9.167–9.169 excess of powers, 9.167–9.169 exclusion from management, 9.149– 9.162 failure to consult petitioner, 9.163–9.166 failure to pay reasonable dividends, 9.111–9.114 generally, 9.88–9.100 introduction, 9.88–9.90 legitimate expectations, 9.125–9.130 mismanagement of company’s business, 9.101–9.104 non-compliance with rules, 9.94–9.96 overriding equitable considerations, 9.122–9.166 quasi-partnerships, 9.131–9.143 remuneration, 9.105–9.110 rights issues, 9.115–9.118 rules prevailing, 9.97–9.100 seriousness of transgression of contravention of CA, 9.119

514

Index Strict legal rules – contd breach – contd transfer of shares, 9.148 understandings or arrangements, 9.146–9.147 constitution of company, and, 9.88–9.90 equitable rights, and, 9.74 fairness, and, 9.84–9.85 interpretation, 9.83 introduction, 9.73 just and equitable winding up, and, 11.5 prejudice, 9.86 scope, 9.83 Striking out interim relief, and, 14.10–14.14 Summary judgment interim relief, and, 14.8–14.9

Taxation – contd income tax – contd distributions and dividends, 15.19– 15.23 employment-related securities, 15.26– 15.27 introduction, 15.1 legal personality of companies, and, 1.22 purchase by unquoted trading company of own shares, 15.28–15.29 winding-up, and, 15.24–15.25 Third parties personal claims, and, 7.73 Third party companies unfairly prejudicial conduct, and, 9.44 Torts directors’ duties, and, 2.12

Takeover offers introduction, 7.53 opposition to notices, 7.56–7.62 ‘sell-out’, 7.55 ‘squeeze-out’, 7.54 Takeovers and Mergers Code liability of directors, and, 4.29–4.34 Tangible interest just and equitable winding up, and, 11.24–11.26 Taxation background, 15.1 capital gains tax capital losses, 15.14 capital sums derived from assets, 15.6 chargeable gains for companies, 15.13 damages, 15.30 Enterprise Investment Scheme, 15.12 entrepreneurs’ relief, 15.11 exempt assets, 15.7 exempt capital gains, 15.7 market value, 15.15–15.18 purchase by company of own shares, 15.28–15.29 reliefs for individuals, 15.11–15.12 rights as capital assets, 15.5 shares as capital assets, 15.2–15.4 compensation payments generally, 15.30–15.31 VAT, 15.32 corporation tax, 15.24–15.25 damages generally, 15.30–15.31 VAT, 15.32 evidencing settlement agreements, 15.33 income tax damages, 15.30–15.31

Ultra vires acts derivative claims, and, 6.4 Unfair prejudice alteration of articles, 10.47 buy-out bases of valuation, 10.19–10.32 break-up value, 10.31–10.32 ‘clean break’ principle, 10.17 discounted basis, 10.27–10.30 generally, 10.15–10.16 interest, 10.41–10.43 liquidation value, 10.31–10.32 majority ordered to sell to minority, 10.18 undiscounted basis for valuation, 10.22–10.26 valuation bases, 10.19–10.32 valuation process, 10.33–10.40 civil procedure, 13.3 demergers, 10.14 derivative action, 10.46 discretion, 10.3–10.8 escape clauses, 10.13 future conduct, 10.44 implementation of court’s order, 10.48 injunctions, 10.45 introduction, 10.1–10.2 orders, 10.10–10.12 petition-based claims, 13.3 prayer for relief, 10.9 procedure, 13.3 remedies alteration of articles, 10.47 buy-out, 10.15–10.43 derivative action, 10.46 future conduct, 10.44 implementation of court’s order, 10.48 injunctions, 10.45

515

Index Unfair prejudice – contd valuation adjustments pursuant to court order, 10.36 bases, 10.19–10.32 break-up basis, 10.31–10.32 date of determination, 10.37–10.40 discounted basis, 10.27–10.30 generally, 10.33–10.35 liquidation basis, 10.31–10.32 undiscounted basis, 10.22–10.26 Unfairly prejudicial conduct ‘affairs’ of the company’ blurring the dividing lines, 9.56–9.64 by whom are the affairs conduct, 9.66–9.67 conclusion, 9.65 conduct of affairs of another company, 9.65 cross-pollination of companies and subsidiaries’ affairs, 9.56–9.64 dividing line, 9.50–9.55 duties owed by parent company, 9.59–9.60 examples of companies’ affairs, 9.50– 9.51 examples of members’ personal affairs, 9.52–9.55 generally, 9.47–9.49 parent company giving preference to own affairs, 9.62 parent interfering in subsidiary’s affairs, 9.63–9.64 time of affairs, 9.68–9.72 Australian law, and, 16.29 background CA 1948 s 210, 9.2 CA 1980 s 75, 9.3 CA 1985 s 459, 9.4 introduction, 9.1 breach of strict legal rules allotment of shares, 9.115–9.118 bonuses, 9.105–9.110 contravention of the Companies Act, 9.119–9.121 convening meetings, 9.120–9.121 effect of condoning a breach, 9.91–9.93 effect of non-compliance with rules, 9.94–9.96 equitable considerations, 9.122–9.166 event putting an end to association, 9.170–9.172 examples, 9.101–9.121 exercise of powers for illegitimate or ulterior purpose, 9.167–9.169

Unfairly prejudicial conduct – contd breach of strict legal rules – contd excess of powers, 9.167–9.169 exclusion from management, 9.149– 9.162 failure to consult petitioner, 9.163– 9.166 failure to pay reasonable dividends, 9.111–9.114 generally, 9.88–9.100 introduction, 9.88–9.90 legitimate expectations, 9.125–9.130 mismanagement of company’s business, 9.101–9.104 non-compliance with rules, 9.94–9.96 overriding equitable considerations, 9.122–9.166 quasi-partnerships, 9.131–9.143 remuneration, 9.105–9.110 rights issues, 9.115–9.118 rules prevailing, 9.97–9.100 seriousness of transgression of contravention of CA, 9.119 transfer of shares, 9.148 understandings or arrangements, 9.146–9.147 categorisation breach of strict legal rules, 9.88–9.121 equitable considerations overriding strict legal rules, 9.122–9.166 event putting end to the association, 9.170–9.172 exercise of powers for illegitimate or ulterior purpose, 9.167–9.169 introduction, 9.87 powers exceeded, 9.167–9.169 ‘company’ generally, 9.43–9.46 insolvent companies, 9.45–9.46 third party companies, 9.44 conduct which is unfairly prejudicial categorisation, 9.87–9.172 fairness, 9.84–9.85 interpretation, 9.83 prejudice, 9.86 scope, 9.83 deadlock, and, 9.173–9.175 dispute resolution arbitration, 9.12–9.15 litigation, 9.11 mediation, 9.16 elements for successful claim introduction, 9.17–9.18 management of affairs of a company, 9.40–9.72

516

Index Unfairly prejudicial conduct – contd elements for successful claim – contd members’ interests, 9.73–9.82 standing, 9.19–9.39 unfairly prejudicial conduct, 9.83– 9.172 equitable considerations overriding strict legal rules distinguishing features, 9.122–9.124 exclusion from management, 9.149– 9.162 failure to consult petitioner, 9.163– 9.166 legitimate expectations, 9.125–9.130 limitation on transfer of shares, 9.148 quasi-partnerships, 9.131–9.143 understandings or arrangements, 9.146–9.147 equitable rights, 9.74–9.77 event putting end to the association, 9.170–9.172 exceeding powers, 9.167–9.169 exercise of powers for illegitimate or ulterior purpose, 9.167–9.169 fairness, 9.84–9.85 forums for dispute resolution arbitration, 9.12–9.15 litigation, 9.11 mediation, 9.16 insolvent companies, 9.45–9.46 interpretation, 9.83 just and equitable winding up and, 11.1 legitimate expectation, 9.81–9.82 management of affairs of a company ‘affairs’ of the company’, 9.47–9.72 ‘company’, 9.43–9.46 insolvent companies, 9.45–9.46 ‘management’, 9.40–9.42 third party companies, 9.44 ‘member’, 9.19–9.21 members’ interests affected other than as member, 9.78– 9.80 equitable rights, 9.74–9.77 generally, 9.73 legitimate expectation, 9.81–9.82 objective test for construction, 9.8–9.10 oppressive conduct, and, 9.83 powers exceeded, 9.167–9.169 predecessor provisions CA 1948 s 210, 9.2 CA 1980 s 75, 9.3 CA 1985 s 459, 9.4 introduction, 9.1 prejudice, 9.86

Unfairly prejudicial conduct – contd procedure, 9.176 South African law, and control, 18.32 general protection, 18.27–18.32 meaning, 18.29–18.30 nature of provisions, 18.28 related persons, 18.32 relief, 18.33 scope of provisions, 18.27 unfairly disregards the interests of, 18.31 standing close connection with member, 9.32 excluded circumstances, 9.38–9.39 generally, 9.22–9.29 majority shareholders, 9.36–9.37 ‘member’, 9.19–9.21 member as creditor, 9.31 name already removed from register, 9.38 nominee shareholders, 9.33–9.35 other issues, 9.30–9.37 personal representatives, 9.29 shares sold but name not yet removed from register, 9.39 third parties, 9.32–9.35 transfer of shares executed, 9.23–9.28 statutory basis ambit, 9.5–9.7 dispute resolution, 9.11–9.16 elements for successful claim, 9.17– 9.18 objective test for construction, 9.8–9.10 predecessor provisions, 9.1–9.4 scope, 9.5–9.7 third party companies, 9.44 Unincorporated companies generally, 1.8 legal personality, 1.8 Unlimited companies And see Companies introduction, 1.4 legal personality, 1.8 Valuation unfair prejudice, and adjustments pursuant to court order, 10.36 bases, 10.19–10.32 break-up basis, 10.31–10.32 date of determination, 10.37–10.40 discounted basis, 10.27–10.30 generally, 10.33–10.35 liquidation basis, 10.31–10.32

517

Index Valuation – contd unfair prejudice, and – contd undiscounted basis, 10.22–10.26 generally, 10.33–10.35 Settlement agreements taxation, and, 15.33 Winding-up See also Just and equitable winding up Australian law, and directors acting in their own interests, 16.28

Winding-up I– contd Australian law, and – contd introduction, 16.27 just and equitable, 16.30 oppressive, unfairly prejudicial or unfairly discriminatory conduct, 16.29 inter-relationship of remedies, and, 12.9 South African law, and, 18.41–18.44 taxation, and, 15.24–15.25 Wrongdoer control derivative claims, and, 6.8–6.10

518