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LA 31 B Law of Corporate Management Worksheet 1

“The Distribution of Power in a Company”

Re Smith & Fawcett Ltd

COMPANY; Shares

COURT OF APPEAL LORD GREENE MR, LUXMOORE LJ AND ASQUITH J 26, 27 MARCH 1942

Companies – Shares – Refusal to register transfer – Article of association conferring absolute discretion on directors – Transfer to executor of deceased member – Sale of portion of holding to director required before registration of transfer of remainder – Bona fide exercise of discretion.

The articles of association of a private company provided that “the directors may at any time in their absolute and uncontrolled discretion refuse to register any transfer of shares.” The appellant, as executor of his father, claimed to be registered in respect of 4,001 shares. The directors refused to register a transfer unless he was willing to sell 2,000 of the shares to a named director at a certain price, in which case they would register a transfer of the remainder:—

Held – having regard to the terms of the article, the only limitation on the directors’ discretion was that it should be exercised bona fide in the interests of the company. There was no ground for saying that the directors’ refusal to register the transfer was not due to a bona fide consideration of the interests of the company as seen by them.

LORD GREENE MR. The principles to be applied in cases where the articles of association of a company confer a discretion on directors with regard to the acceptance of transfers of shares are, for the present purposes, free from doubt. They must exercise their discretion bona fide in what they consider—not what a court may consider—to be in the interests of the company, and not for any collateral purpose. They must have regard to

1 those considerations, and those considerations only, which the articles upon their true construction permit them to take into consideration. In construing the relevant provisions in the articles, it is to be borne in mind that one of the normal rights of a shareholder is the right to deal freely with his property and to transfer it to whomsoever he pleases. When it is said, as it has been said more than once, that regard must be had to this last consideration, it means, I apprehend, nothing more than this: that the shareholder has such a prima facie right, and that right is not to be cut down by uncertain language or doubtful implications. The right, if it is to be cut down, must be cut down with satisfactory clarity. It certainly does not mean that articles, if appropriately 543 framed, cannot be allowed to cut down the right of transfer to any extent which the articles on their true construction permit. There is also another consideration which I think is worth bearing in mind when one comes to examine the construction of any article that falls for consideration, and that is that this type of article is one which is for the most part confined to private companies. Private companies are, of course, separate entities in law just as much as are public companies, but from the business and personal point of view they are much more analogous to partnerships than to public corporations. Accordingly, it is to be expected that, in the articles of such a company, the control of the directors over the membership may be very strict indeed. There are very good business reasons, or there may be very good business reasons, why those who bring such companies into existence should give them a constitution which gives to the directors powers of the widest description. In the present case the article is as follows:

‘The directors may at any time in their absolute and uncontrolled discretion refuse to register any transfer of shares.’ As I have said, it is beyond question that that is a fiduciary power, and the directors must exercise it bona fide in what they consider to be the interests of the company. The language of the article does not point to any particular matter as being the only matter to which the directors are to pay attention in deciding whether or not they will allow the transfer to be registered. The article does not, for instance, say, as is to be found in some articles, that they may refuse to register any transfer of shares to a person not already a member of the company, nor does it say that they may refuse to register any transfer of shares to a transferee of whom they do not approve. In cases where articles are framed with some such limitation on the discretionary power of refusal as I have mentioned in the two examples which I have given, it follows on plain principle that, if they go outside the matters which the articles say are to be the only matters to which they are to have regard, the directors will have exceeded their powers.

Lyle & Scott v. Scott’s Trustees [1959] A.C. 763( H.L.) Company – Shares – Transfer – Restrictions in articles of association -. Pre-emptive right of other members – Shareholder “desirous of “transferring” shares – Meaning of “transfer” – Contract by shareholder for sale of shares to third party – Violation of article – Company’s right to enforce pre-emptive provisions.

2 By article 9 of the articles of association of a private company ‘no registered shareholder of more than one per centum of the issued ordinary share capital of the company shall, without the consent of the directors, be entitled to transfer any ordinary share for a nominal consideration or by way of security and no transfer of ordinary shares by such a shareholder shall take place for an onerous consideration so long as any other ordinary shareholder is willing to purchase the same at a price which shall be ascertained by agreement between the intending transferor and the directors and failing agreement, at a price to be fixed by the auditor of the company…Any such ordinary shareholder who is desirous of transferring his ordinary shares shall inform the secretary in writing of the number of ordinary shares which he desires to transfer…” By article 7 the directors might in their absolute discretion, without assigning any reason, decline to register any transfer of any share.

The registered holders of ordinary shares in the company (being more than one per cent of the issued ordinary share capital) entered into an agreement with a third party under which they received and retained 3 pounds for each one pound share binding themselves (inter alia) to vote as desired, so as to put him as fully in control of the company as they could without registering transfers of shares. The company sought a declaration that these shareholders were bound to implement the terms of article 9 and decree ordaining them forthwith to do so :- Held, that the admitted actings of he shareholders were such that it could be inferred that they were “desirious of transferring” their shares within the meaning of article 9. A shareholder who has agreed to sell his shares and has received and retains the price must be deemed to be desirous of transferring them; otherwise the purpose of the article would be defeated; accordingly, the shareholders were bound to implement article 9. Viscount Simmonds, “it is not open to a shareholder, who has agreed to do a certain thing and is bound to do it, to deny that he is desirous of doing it…This makes nonsense of the article, the purpose of which would be wholly defeated if it did not apply to a desire to transfer to a particular person, who might be the person whom the company particularly wished to exclude.”

(A) The Top Echelon, The Board of Directors (i) Preliminary considerations

(ii) Legislation Appointment/Share Qualification Barbados’ ss.59-67

Appointment s.62 (1) After the issue of a share certificate of incorporation of a company, a meeting of the directors of the company must be held at which the directors may (a) make by-laws (b) adopt forms of share certificates and corporate records (c) authorize the issue of shares (d) appoint officers (e) appoint an auditor to hold office until the first annual meeting of shareholders (f) make banking arrangements

3 (g) transact any other business (2) An incorporator or director may call the meeting of the directors referred to in sub sec. (1) by giving by post no less than 5 days of the meeting to each director and stating in the notice the time and place of the meeting (3) sub sec (1) does not apply to a company to which a certificate of amalgamation has been issued under s.212

Alternate Directors s.66.1 (1) A meeting of the shareholders of a company may, by ordinary resolution, elect a person to act as a director in the alternative to a director of a company, or may authorize the directors to appoint such alternate directors as are necessary for the proper discharge of the affairs of the company.

Termination s.68 A director of a company ceases to hold office when (a) he dies or resigns (b) he is removed in accordance with s.70 (c) he becomes disqualified under ss.63 or 64

Resignation s.69 The resignation of a director of a company becomes effective the time his written resignation is sent to the company or at the time specified in the resignation, whichever is later.

Removal s.70 (1) Subject to paragraph (g) of sub sec.67, the shareholders of a company may, by ordinary resolution at a special meeting, remove any director from office (2) Where the holders of any class or series of shares of a company have an exclusive right to elect one or more directors, a director so elected may only be removed by an ordinary resolution at a meeting of the shareholders of that class or series of shares. (3) Subject to paragraph (b) to (e) of s.67, a vacancy created by the removal of a director may be filled at the meeting of the shareholders at which the director is removed, or, if the vacancy is not filled it may be filed pursuant to s.72.

Filling of Vacancies s.72

Directors Meetings S.75 (1) Unless the articles or by-laws of a company otherwise provide, the directors of a company may meet at any place, and upon such notice as the by-laws require. (2) Subject to the articles or by-laws, a majority of the number of directors or minimum number of directors required by the articles constitutes a quorum at any meeting of

4 directors; and notwithstanding any vacancy among the directors, a quorum of directors may exercise all the powers of the directors.

Re Moor Gate Metals Ltd. [1995] 1 BCLC 503 Disqualification of director – De facto director – Conduct as director – Company set up by two men – One man being undischarged bankrupt nominating wife as as de jure director but himself controlling the company’s entire trading operation –Company trading at a loss and become insolvent – Official receiver applying for disqualification orders against both men – Whether undischarged bankrupt acting as defacto director of company – Whether proper person to be disqualified –Whether disqualification orders to be made – Company directors disqualification act 1986.

M Ltd. Was ordered to be compulsorily wound up, only a year and a day after its incorporation, with losses of a half a million pounds. The company, which carried on business as a metal merchant, was the joint enterprise of two men, H and R. At the time of the company’s incorporation R was an undischarged bankrupt, so his wife acted as his nominee as both shareholder and director, but took no active part in the company’s affairs. The other shareholder and director was H, a recently discharged bankrupt, whom R had invited to join him in the business. H was aware that R was an undicharged bankrupt, but did not know that R had been bankrupted three times and his application for discharge had been refused. During the life of the company, R remained in sole charge of buying and selling while H was responsible for finance and administration. M Ltd. bought scrap metal almost exclusively from one supplier and sold almost exclusively to one client, nearly always at a loss. To cover the losses, R persuaded H that it was common practice in the metal trade to issue invoices showing sales at a loss and then to issue supplementary invoices which, if paid, would ultimately show a profit; but R intercepted any supplementary invoices duly prepared by H before they were sent out. By the time H discovered the deception, the company’s financial condition was too weak to remedy the situation. The main subject supplier served a statutory demand and in due course presented a winding up petition. After the company had been wound up, the official receiver applied for both H and R to be disqualified, in R’s case on the basis that he had been a de facto shadow director. R contended that he was not a director, even though he controlled the company’s entire trading operation, which he said was because of his professional expertise in the metal trade. Held – (1) The word “director” in s. 6 (1) included a de facto director, who for the purpose of an application for disqualification meant someone who had in fact acted as a director, though not appointed as such. In the circumstances of this case, including the facts that the company had only come into existence as a result of R inviting H to join him in a business, that R shared with H the responsibilities of managing director of the company, that R was in sole charge of the company’s trading with no limit on the extent of the commitments that he could enter into on behalf of the company, and that R received or was authorized by the board to receive equal remuneration and benefits, the court was entitled to conclude that R was a de facto director of M Ltd. and could thus then be the subject of a disqualification application under s. 6 (1)

5 (2) On the evidence presented by the official receiver, both H and R had shown themselves, in their conduct of M Ltd.’s to business, to be unfit to be concerned in the management of the company. In H’s case, despite knowing that R was an undischarged bankrupt, he had left the conduct of the company’s only business up to R, which was not only unlawful, it being an offence under s. 11 of the 1986 Act for a person who has an undischarged bankrupt to take part or be concerned in the management of a company, but in retrospect most unwise. H had also failed to keep and check adequate financial records and, notwithstanding his gullibility with respect to R’s explanations for bogus invoices, failed to take appropriate action or to revise his opinion of R’s trustworthiness once he knew the truth about R. In R’s case, in addition to his involvement in the management of M Ltd. while an undischarged bankrupt, the manner in which he conducted the company’s trade and the way he concealed what he was doing from H by means of the bogus invoices made him principal author of M ltd.’s insolvency. It was clear that R was a thoroughly dishonest, irresponsible and unscrupulous person. In the circumstances, applying the guidelines set out in Re Sevenoaks Stationers (Retail) Ltd, the proper length of disqualification to be ordered in H’s case was four years and in R’s case ten years. The official receiver’s application would be granted accordingly.

Hood Sailmakers Ltd. v. Axford and another [1997] 1 BCLC 721

Director – Proceedings of directors – Written resolution – resolution passed by one director while co-director absent from the U.K. – Quorum for meeting of directors two – Director absent from U.K. not entitled to notice of meeting – Whether resolution valid – Companies Act 1948

A and H were the directors of the U.K. subsidiary of a U.S. based company, although H lived in the United States and played no active part in the running of the company. The articles of the company incorporated regs 98, 99 and 106 of Table A. In May 1986 a major restructuring in the pension arrangements for the benefit of employees and directors of the company took place and was effected by way of written resolutions of the board, produced and signed by A. H, who was in the U.S., neither knew about, nor signed the resolutions. On H’s retirement, W and b were appointed as directors. Following differences between the directors, A and B were removed from their directorships and dismissed from employment. The company subsequently refused to pay A and B their share of the pension funds, claiming that the 1986 resolutions were invalid since they had only been signed by one director. A and B complained to the pensions Ombudsman pursuant to the provisions of the Pension Schemes Act 1993. The ombudsman upheld the complaint, holding that the resolutions were valid on the ground that they had complied with reg 106 of table A, which was not subject to the quorum provisions contained in reg.99, since under reg 98 H was not entitled to notice of a director’s meeting as he was absent from the U.K. He further held that the company was in any event estopped from denying the validity of the resolutions. The company appealed to the High Court. Held, a written resolution, passed in accordance with reg 106 of Table A signed by only one director of a company where the quorum fixed for transaction of any business of the directors was two, was invalid, notwithstanding that the sole co-director was outside the

6 U.K. and thus not entitled to notice of a meeting of directors. Reg. 106 was not directed to making a fundamental change to the quorum requirements and a director could not evade the quorum requirements simply by waiting for his fellow director or directors to leave the country. It followed that the resolutions of May 1986 were not valid resolutions. However, in the circumstances, there was sufficient evidence on which the ombudsman was entitled to be satisfied that W’s involvement with and acquiescence in the new scheme made it unconscionable for the company to deny the validity of the resolutions. The appeal would accordingly be dismissed.

Hutton v. West Cork Railway Co. [1883] 23 Ch.654 Company – Management – Powers of General Meeting – Gratuities to Servants – Remuneration to Directors for past services – Companies Classes Act, 1845

A company carrying on business has power, by the vote of a general meeting to expend a portion of its funds in gratuities to servants or directors, provided such grants are made for the purpose of advancing the interests of the company. But this does not apply to a case where the company has transferred its undertakings to another company and is being wound up. A railway company which had no provision in its articles for paying remuneration to directors, and had never paid any, sold its undertaking to another company at a price to be determined by an arbitrator. By the act authorizing the transfer it was provided that on the completion of the transfer the company should be dissolved except for he purpose of regulating their internal affairs and winding up the same and dividing the purchase money. The purchase-money was to be applied in paying the costs of arbitration and in paying off any revenue debts or charges of the company, and the residue was to be divided among the debenture holders and shareholders. After the completion of the transfer a general meeting of the company was held at which was passed to apply 1050 pounds of the purchase-money in compensating the paid officials of the company for their loss of employment, although they had no legal claim for compensation, and 1500 pounds in remuneration to the directors for their past services:- Held, by the C.A., that the resolution was invalid, as the company was no longer a going concern, and only existed for the purpose of winding up. Per Baggallay L.J., the vote was within the powers of the company as it still retained the power of its internal affairs. (his dissent) Per Fry, J, Remuneration for past services of directors cannot be voted at an ordinary general meeting unless special notice be given of the intention to propose such a resolution. Fry J, It is said that in the first place that there is not power in the general meeting to award this sum to the directors at all. It appears that the 91st section of the Compnies Clauses Consolidation Act 1845, provides that one of the powers of the company which shall be exercised only at a general meeting of the company is that of determining the remuneration of the directors. I think therefore that it is plainly competent to a general meeting, if it be dully called, to vote the remuneration of the directors. But it is argued that under the circumstances of this case the general meeting had not that power, because the vote was retrospective and proposed to remunerate the directors not for future but for past services. It appears to me there is nothing whatever to prevent a general meeting

7 from so voting remuneration for past services. To hold otherwise would preclude directors from foregoing their right to remuneration when a company might be in trouble and difficulty, and asserting their moral right to remuneration when a company had become prosperous by reason of their services. Of course if the majority of the shareholders present think it undesirable or improper to vote remuneration for past services, directors can have no claim whatever; but in case the majority think it reasonable and fit to vote a sum of money for past services, it appears to me a matter in which the majority can bind the minority.

Craven-Ellis v. Canons Ltd. (1936) 2 K.B.403,C.A. Company – Director – Agreement to act in development of estate – Omission to acquire qualification shares – Right to sue on quantum meruit for services rendered – Companies Act 1929

The plaintiff was appointed managing director of a company by an agreement under the company’s seal which also provided for his remuneration. By the articles of association of the company, each director was required to obtain his qualification shares within two months after his appointment. Neither the plaintiff nor the other directors obtained their qualification shares within the two months or at all. The plaintiff having done work for the company claimed to recover the remuneration provided for in the agreement, or, alternatively, on the basis of quantum meruit:- Held, that the fact that the plaintiff did the work under an agreement which was in fact void did not disentitle him from recovering on a quantum meruit: Per Greer L.J.: The obligation to pay reasonable remuneration for work done when there is no binding contract between the parties is imposed by a rule of law and not by an inference of fact from acceptance of the services. Greer L.J. If the contract was an effective contract by the company, they would be bound to pay the remuneration provided for in the contract. If, on the other hand, the contract was a nullity and not binding either on the plaintiff or the defendants, there would be nothing to prevent the inference which the law draws from the performance by the plaintiff of services to the company, and the company’s acceptance of such services, which, if they had not been performed by the plaintiff, they would have had to get some other agent to carry out.

Re Halt Garage (1964) Ltd

Company – Director – Renumeration – Express power of company in general meeting

8 to award renumeration – Test of company’s capacity to award renumeration – Payment to director out of capital – Husband and wife sole shareholders and directors of company – Husband and wife drawing renumeration out of capital after company suffering trading loss – Husband working full-time in business but wife ceasing to be active because of illness – Wife remaining a director – Liquidator claiming to recover remuneration on ground of misfeasance – Whether drawings by husband and wife while company suffering loss ultra vires company – Whether company’s capacity to award renumeration under express power dependant on benefit to company – Whether genuine award of remuneration intra vires regardless of benefit to company – Companies Act 1948, s 333, Sch 1, Table A, Part I, reg 76.

In 1964 the husband acquired a ready-made company and thereafter carried on a garage business through the company. He and his wife owned the only issued share capital in the company and at all material times were the only directors of the company. The company’s articles incorporated reg 76a of Part I of Table A in Sch 1 to the Companies Act 1948, which gave the company an express power to award remuneration to a director, the remuneration to be determined by the company in general meeting. The company’s articles also included express power for the company to determine and pay directors’ remuneration for the mere assumption of the post of director. The husband and wife built up the company together and drew weekly sums from the business as 1013 their director’s remuneration. In 1967 the wife became ill. She remained a director of the company but from December 1967 it became apparent that she would not be active again in the business. The husband continued to work virtually full-time in the business until 1971, apart from two periods of three and six months, when he was away from the business because of his wife’s illness and an accident he sustained. By the year ended 30 April 1967 the business had a turnover of £106,000 and was making a substantial trading profit. However, in the year 1967–68 the profits began to decline and by the year 1968–69 the accounts showed that despite an increase in turnover the company was insolvent. In March 1971 the company went into voluntary liquidation and was subsequently compulsorily wound up. Throughout the period from January 1968 to March 1971 the husband drew director’s remuneration of some £2,500 per annum rising to £3,500 per annum, and the wife drew director’s renumeration of £1,500 per annum decreasing to some £500 per annum even though during that period she took no active part in the business. Throughout that period the drawings of remuneration were mainly out of capital because the company was suffering a trading loss. The liquidator in the winding up brought proceedings against the husband and wife under s 333(1)b of the Companies Act 1948 claiming to recover from them jointly and severally the whole of the remuneration drawn by the wife from January 1968 onwards and such part of the husband’s renumeration as exceeded the market value of his services to the company, on the ground that the husband and wife were guilty of misfeasance and breach of trust in making the drawings. The liquidator submitted that, although the amounts drawn by the husband and wife were either formally determined by the company in general meeting as directors’ remuneration or were otherwise sanctioned as

9 such by the company and although they were made in good faith, nevertheless they were ultra vires the company as being gratuitous payments made out of capital otherwise than for consideration, unless it could be shown that they were made for the benefit of the company and to promote its prosperity. The liquidator further submitted that, having regard to the amount of the drawings, they could not have been made for the company’s benefit when it was suffering a loss and the money was needed for the business. ______a Regulation 76, so far as material, provides: ‘The remuneration of the directors shall from time to time be determined by the company in general meeting. Such remuneration shall be deemed to accrue from day to day.’ b Section 333(1), so far as material, provides: ‘If in the course of winding up a company it appears that any person who has taken part in the formation or promotion of the company, or any past or present director … has misapplied or retained or become liable or accountable for any money or property of the company, or been guilty of any misfeasance or breach of trust in relation to the company, the court may, on the application of the … liquidator … examine into the conduct of the … director … and compel him to repay or restore the money or property or any part thereof respectively with interest at such rate as the court thinks just, or to contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance or breach of trust as the court thinks just.’ ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯

Held – (1) Where payments of remuneration to a director were made under the authority of the company acting in general meeting pursuant to an express power in its articles to award director’s remuneration and there was no question of fraud on the company’s creditors or on minority shareholders, the competence of the company to award the remuneration depended on whether the payments were genuinely director’s remuneration (as opposed to a disguised gift out of capital) and not on an abstract test of benefit to the company. The amount of remuneration awarded in such circumstances was a matter of company management and, provided there had been a genuine exercise of the company’s power to award remuneration, it was not for the court to determine if, or to what extent, the remuneration awarded was reasonable (see p 1038 c d, p 1039 c e to j and p 1043 a to c, post); dictum of Astbury J in Parker & Cooper Ltd v Reading [1926] All ER Rep at 328 applied; Hampson v Price’s Patent Candle Co (1876) 45 LJ Ch 437, Hutton v West Cork Rly Co (1883) 23 Ch D 654, Henderson v Bank of Australasia (1888) 40 Ch D 170, dictum of Lindley LJ in Re George Newman & Co [1895] 1 Ch at 685–686, Re Lee, Behrens & Co Ltd [1932] All ER Rep 889, Parke v Daily News Ltd [1962] 2 All ER 929, Ridge Securities Ltd v IRC [1964] 1 All ER 275, Re W & M Roith Ltd [1967] 1 All ER 427 and Charterbridge Corp Ltd v Lloyds Bank Ltd [1969] 2 All ER 1185 considered. 1014 (2) There was no evidence that, having regard to the company’s turnover, the husband’s drawings were patently excessive or unreasonable as director’s remuneration, or that they were disguised gifts of capital rather than genuine awards of remuneration. Accordingly, the court would not inquire into whether it would have been more beneficial to the company to have made lesser awards of remuneration to him, since that was a matter for the company. It followed that the claim for misfeasance in regard to the

10 husband’s drawings failed (see p 1040 b to d and f to j, p 1041 c d and p 1045 b, post). (3) In regard to the wife’s drawings, although the company’s articles included power to award remuneration for the mere assumption of the office of director even where the director was not active in the conduct of the company’s business, that power predicated that a director would receive remuneration for services rendered or to be rendered and the mere fact that the label of ‘director’s remuneration’ was attached to the drawings did not preclude the court from examining their true nature. Having regard to the wife’s inactivity during the period in question, it could not be said that the whole of the amounts drawn by the wife in that period were genuine awards of remuneration to her for holding office as a director. That part of her drawings in excess of what would have been a reasonable award of remuneration for holding office as a director amounted to a disguised gift of capital or payment of dividends in recognition of her co-proprietorship of the business and was ultra vires the company and repayable to the liquidator (see p 1042 f to j, p 1043 c to e and j to p 1044 c and e to p 1045 b, post); Ridge Securities Ltd v IRC [1964] 1 All ER 275 applied.

Oliver J. As I mentioned at the outset, the claim originally made under s 332 of the Companies Act 1948 has not been proceeded with and the present claim is restricted to a claim for misfeasance and breach of trust under s 333. So it has to be shown that in making these payments the directors were in breach of some fiduciary duty which they owed to their beneficiary, which either was not or could not be sanctioned by that beneficiary. In relation to this claim, although it is alleged that the respondents (and that means, effectively, Mr Charlesworth) knew that the company was making losses and was unable to pay its debts without at least a further injection of funds or a measure of forbearance on the part of its major creditors, there is no allegation of fraud. What is said, quite simply, is that the payments made to Mrs Charlesworth from the date on which it was known that she was incurably ill and would not return and those made to Mr Charlesworth from December 1967 onwards, so far as they exceeded £30 per week, were presents which the company had no power to make and which could not, therefore, be ratified by the shareholders. The company’s articles in the present case incorporate reg 76 of Table A, Part I (see Sch 1 to the 1948 Act), which provides that the remuneration of the directors shall from time to time be determined by the company in general meeting and shall be deemed to accrue from day to day. The directors, qua directors, are not, therefore, entitled as of right to any remuneration for their services, and in so far as remuneration has been drawn without the proper authority, they are bound to account to the company for it or to pay damages. the claim is not a very attractive one, but a liquidator has no discretion about the performance of his duties and if the claim is good in law it must succeed. If charity has, to use the words of Bowen LJ in Hutton v West Cork Rly Co (1883) 23 Ch D 654 at 673, no business to sit at the board of directors, equally sympathy has no voice at the Bar of the court.

11 While it is true that a director, under an article in this form, has no entitlement to remuneration, nevertheless his agreement with the company when he accepts office is, impliedly, to serve the company as a director and to take the responsibilities which that office entails at whatever remuneration the company in general meeting may choose to vote to him, be it mean or generous, liberal or illiberal. It may vote nothing. But, if it votes him something, he is entitled to have it and it cannot be recovered from him in misfeasance proceedings, even if it is very greatly in excess of any possible value attributable to his services. In the absence of fraud on the creditors or on minority shareholders, the quantum of such remuneration is a matter for the company. There is no implication or requirement that it must come out of profits only and, indeed, any requirement that it must be so restricted would, in many cases, bring businesses to a halt and prevent a business which had fallen on hard times from being brought round.

1022

1024

1029

Howard Smith Ltd v Ampol Petroleum Ltd and others

COMPANY; Directors

PRIVY COUNCIL LORD WILBERFORCE, LORD DIPLOCK, LORD SIMON OF GLAISDALE, LORD CROSS OF

12 CHELSEA AND LORD KILBRANDON 26, 27, 28, 29, 30 NOVEMBER, 3 DECEMBER 1973, 14 FEBRUARY 1974

Company – Director – Fiduciary power – Abuse of power – Circumstances in which exercise of power will be set aside as abuse of power – Power of directors to issue and allot shares – Exercise of power for improper purpose – Company in need of additional capital – Takeover offer for shares of company – Majority shareholders stating that they would reject takeover – Directors favouring offer – Directors exercising power to issue and allot shares to offeror – Amount of issue related to capital requirements of company – Directors not motivated by self interest – Purpose of issue to reduce holdings of majority shareholders to minority holdings thus opening way to success of take-over – Whether issue of shares should be set aside as improper exercise of power.

Two companies (‘Ampol’ and ‘Bulkships’) owned between them 55 per cent of the issued share capital of a third company (‘Millers’). On 15 June 1972 Ampol made an offer for all the issued shares in Millers at $2·27 per share. On 22 June a fourth company (‘Howard Smith’) announced its intention to make a take-over offer at $2·50 per share. On 23 June the directors of Millers unanimously decided to recommend the rejection of the Ampol offer as too low. On 27 June Ampol and Bulkships issued a statement that they intended to ‘act jointly in relation to the future operation’ of Millers and that they had decided to reject any offer whether from Howard Smith or any other source. Under Millers’ articles of association the directors had the power to allot unissued shares to such persons on such terms and conditions and either at a premium or otherwise and at such time as they thought fit. A majority of the Millers’ directors were in favour of the Howard Smith offer and a scheme was evolved to make an issue of shares to Howard Smith of sufficient 1126 size to convert Ampol and Bulkships together into minority shareholders. The exact number of shares to be issued was worked out on the basis of Millers’ capital requirements. Millers did in fact require some $10,000,000 to finance a transaction in which it was engaged and to secure its financial position. It was therefore calculated that 4,500,000 shares should be issued at $2·30 per share. On 6 July Howard Smith addressed a letter to Millers applying for the allotment of 4,500,000 $1 ordinary shares at a premium of $1·30 per share. The letter was considered by the board of Millers on the same day and the proposal was accepted by a majority decision. The allotment and issue of the shares to Howard Smith was made immediately after the meeting. On 7 July Ampol commenced proceedings against, inter alios, Howard Smith and Millers in the Equity Division of the Supreme Court of New South Wales to set aside the issue of shares to Howard Smith. At the trial the judge found (i) that the allotment had not been made by the Millers’ directors for any reason of self interest; and (ii) that the primary purpose of the allotment was not to satisfy Millers’ need for capital but to destroy the majority holding of Ampol and Bulkships, thus opening the way to the success of the Howard Smith offer. On the basis of those findings the judge ordered that the issue of shares be set aside. Howard Smith appealed, contending that once it had been

13 found that the Millers’ directors had not been motivated by self interest, ie by a desire to retain control of the company or their positions on the board, it was not open to the court to enquire into the validity of their reasons for making the issue.

Held – (i) Although the majority of cases in which an issue of shares had been challenged were cases in which the self interest of the directors was the vitiating element, it did not follow that the absence of any element of self interest was enough to make an issue valid. On the other hand it was too narrow an approach to say that the only valid purpose for which shares might be issued was to raise capital for the company. The proper approach was to start with a consideration of the power whose exercise was in question and, having ascertained, on a fair view, the nature of the power, and having defined so far as possible the limits within which it might be exercised, to examine the substantial purpose for which it had been exercised, and to reach a conclusion whether that purpose was proper or not (see p 1133 d to g and j and p 1134 d, post); dictum of Viscount Finlay in Hindle v John Cotton Ltd (1919) 56 SLR at 630, 631 applied. (ii) Just as directors, within their management powers, were entitled to make decisions against the wishes of the majority of shareholders, so it was unconstitutional for directors to use their fiduciary powers over the shares in the company purely for the purpose of destroying an existing majority, or creating a new majority which did not previously exist; furthermore the exercise by the directors of their fiduciary power solely for the purpose of shifting the power to decide to whom and at what price shares were to be sold could not be related to any purpose for which the power over the share capital had been conferred on them (see p 1135 h to p 1136 c, post). (iii) It followed that the issue of shares by the directors of Millers for the sole purpose of diluting the majority voting power held by Ampol and Bulkships so as to enable a then minority of shareholders to sell their shares more advantageously was an exercise of the power to issue and allot shares unrelated to any considerations of management and outside the proper sphere of the directors. The power had therefore been improperly exercised and the appeal would be dismissed (see p 1135 f and p 1136 e, post); Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co No Liability (1968) 121 CLR 483 and Teck Corporation Ltd v Millar (1973) 33 DLR (3d) 288 distinguished.

LORD WILBERFORCE.

.

Their Lordships accept that such a matter as the raising of finance is one of management, within the responsibility of the directors: they accept that it would be wrong for the court to substitute its opinion for that of the management, or indeed to question the correctness of the management’s decision, on such a question, if bona fide arrived at. There is no appeal on merits from management decisions to courts of law: nor will courts of law

14 assume to act as a kind of supervisory board over decisions within the powers of management honestly arrived at. But accepting all of this, when a dispute arises whether directors of a company made a particular decision for one purpose or for another, or whether, there being more than one purpose, one or another purpose was the substantial or primary purpose, the court, in their Lordships’ opinion, is entitled to look at the situation objectively in order to estimate how critical or pressing, or substantial or, per contra, insubstantial an alleged requirement may have been. If it finds that a particular requirement, though real, was not urgent, or critical, at the relevant time, it may have reason to doubt, or discount, the assertions of individuals that they acted solely 1131 in order to deal with it, particularly when the action they took was unusual or even extreme.

Their Lordships accept these findings.

The law The directors, in deciding to issue shares, forming part of Millers’ unissued capital, to Howard Smith, acted under cl 8 of the company’s articles of association. This provides, subject to certain qualifications which have not been invoked, that the shares shall be under the control of the directors, who may allot or otherwise dispose of the same to such persons on such terms and conditions and either at a premium or otherwise and at such time as the directors may think fit. Thus, and this is not 1132 disputed, the issue was clearly intra vires the directors. But, intra vires though the issue may have been, the directors’ power under this article is a fiduciary power: and it remains the case that an exercise of such a power though formally valid, may be attacked on the ground that it was not exercised for the purpose for which it was granted. It is at this point that the contentions of the parties diverge. The extreme argument on one side is that, for validity, what is required is bona fide exercise of the power in the interests of the company: that once it is found that the directors were not motivated by self interest—ie by a desire to retain their control of the company or their positions on the board—the matter is concluded in their favour and that the court will not enquire into the validity of their reasons for making the issue. All decided cases, it was submitted, where an exercise of such a power as this has been found invalid, are cases where directors are found to have acted through self interest of this kind. On the other side, the main argument is that the purpose for which the power is conferred is to enable capital to be raised for the company, and that once it is found that the issue was not made for that purpose, invalidity follows. It is fair to say that under the pressure of argument intermediate positions were taken by both sides, but in the main the arguments followed the polarisation which has been stated.

In their Lordships’ opinion neither of the extreme positions can be maintained. It can be accepted, as one would only expect, that the majority of cases in which issues of shares are challenged in the courts are cases in which the vitiating element is the self interest of the directors, or at least the purpose of the directors to preserve their own control of the

15 management (see Fraser v Walley, Punt v Symons & Co, Piercy v S Mills & Co Ltd, Ngurli Ltd v McCann, Hogg v Cramphorn Ltd). Further it is correct to say that where the self interest of the directors is involved, they will not be permitted to assert that their action was bona fide thought to be, or was, in the interest of the company; pleas to this effect have invariably been rejected (eg Fraser v Whalley, Hogg v Cramphorn)—just as trustees who buy trust property are not permitted to assert that they paid a good price. But it does not follow from this, as Howard Smith asserts, that the absence of any element of self interest is enough to make an issue valid. Self interest is only one, though no doubt the commonest, instance of improper motive; and, before one can say that a fiduciary power has been exercised for the purpose for which it was conferred, a wider investigation may have to be made. This is recognised in several well-known statements of the law. Their Lordships quote the clearesta which has so often been cited: ______a Hindle v John Cotton Ltd (1919) 56 SLR 625 at 630, 631, per Viscount Finlay ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯

‘Where the question is one of abuse of powers, the state of mind of those who acted, and the motive on which they acted, are all important, and you may go into the question of what their intention was, collecting from the surrounding circumstances all the material which genuinely throw light upon that question of the state of mind of the directors so as to show whether they were honestly acting in discharge of their powers in the interests of the company or were acting from some bye-motive, possibly of personal advantage, or for any other reason.’ On the other hand, taking Ampol’s contention, it is, in their Lordships’ opinion, too narrow an approach to say that the only valid purpose for which shares may be issued is to raise capital for the company. The discretion is not in terms limited in this way: the law should not impose such a limitation on directors’ powers. 1133 To define in advance exact limits beyond which directors must not pass is, in their Lordships’ view, impossible. This clearly cannot be done by enumeration, since the variety of situations facing directors of different types of company in different situations cannot be anticipated. No more, in their Lordships’ view, can this be done by the use of a phrase— such as ‘bona fide in the interest of the company as a whole’, or ‘for some corporate purpose.’ Such phrases, if they do anything more than restate the general principle applicable to fiduciary powers, at best serve, negatively, to exclude from the area of validity cases where the directors are acting sectionally, or partially: ie improperly favouring one section of the shareholders against another. Of such cases it has been saidb: ______b Mills v Mills (1938) 60 CLR 150 at 164, per Latham CJ ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯

‘The question which arises is sometimes not a question of the interests of the company at all, but a question of what is fair as between different classes of shareholders. Where such a case arises some other test than that of the “interests of the company” must be applied … ’ c Mills v Mills (1938) 60 CLR at 185, 186, per Dixon J ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯

16

Appeal dismissed.

Grundt v. Great Boulder Proprietary Mines [1948] Ch.145 Company – Director – Retirement by rotation – Resolution for re-election lost – Provision in articles for retiring director, if not re-elected, to continue in office until next ordinary general meeting, or until place filled, or number of directors reduced – Effect.

By a company’s articles of association it was provided that “if at any general meeting at which an election of directors ought to take place the place of any director retiring by rotation is not filled up, he shall, if willing, continue in office until the ordinary meeting in the next year, and so on from year to year until his place is filled up, unless it shall be determined at any such meeting on due notice to reduce the number of directors in office.” At an annual general meeting in 1974 the plaintiff was the director retiring by rotation. He was proposed for re-election, but on a show of hands the resolution was declared to be lost. No poll was demanded, no other person was proposed for election instead of the plaintiff, and no resolution was proposed (nor had notice been given of any such resolution) to reduce the number of directors in office. Held, that, notwithstanding the express rejection of the resolution for the plaintiff’s re- election, he continued in office under the articles of association and was entitled to a declaration accordingly. The words “any general meeting at which an election of directors ought to take place” were not to be limited to a case where an election was compulsory to prevent the number falling below the minimum required by articles, but extended to any general meeting at which an election of directors was properly to be expected. The rejection of the resolution to re-elect the plaintiff could not be treated as a determination to reduce the number of directors in office, as to treat it ignored the words “on due notice.” Per Lord Greene M.R.: “Absurdity, like public policy, is a very unruly horse,’ and arguments based on alleged absurdity should be applied with great caution. What may appear to an outsider to be absurd, like the continuance of a director whom the shareholders have expressly rejected, may be based on sound business reasons, such as the maintenance of the board at a number for efficient working.

Allocation of Power

17 (i) Nature / Procedure Isle of Wight Railway v. Tahouridin [1883] 25 Ch.D. 320 Railway Company – General Meeting of Shareholders – Form of Requisition to call a meeting – Power to remove directors – Companies Clauses Consolidation Act, 1845

A sufficient number of shareholders required the directors of a railway company to call a meeting of the company for the following objects: 1. To appoint a committee to inquire into the working and general management of the company, and the means of reducing the working expenses, to empower such a committee to consolidate offices, to remove any of the officers and appoint others, and to authorize and require the directors to carry out the recommendations of the committee; 2. To remove, if deemed necessary or expedient, any of the present directors, and to elect directors o fill any vacancy on the board. The directors issued a notice for a meeting “for the purpose of considering and determining upon a demand of the requisitions for the appointment of a committee to inquire into the working and general management of the company and the means of reducing the reducing the working expenses. The requisitionist gave notice that they should not attend the meeting as the notice did not provide for all their objects, they did not attend, and they then themselves issued a notice under s.70 of the Companies Clauses Act, calling a meeting for the purposes mentioned in the requisition. The directors brought an action in the name of the company to retrain the requisitionist from holding the meeting. Held, Kay J, that everything in the first part of the requisition beyond the appointment of a committee was illegal for that it proposed to transfer the powers of the directors to a committee and that the directors were therefore justified in not entertaining the latter part of the first head of the requisition. Held, that the second head of the requisition was too vague an did not “fully expres the objects of the meeting” and that the directors had no power to call a meeting for that purpose, whether a general meeting had power to remove directors or not, Held therefore, that the directors had not failed to call a meeting within the meeting of the Companies’ Clauses Act 1845 s.70, that the power of the shareholders to call it had therefore not arisen and that the injunction must be granted. Held on appeal, that all the objects of the first part of the requisition were objects that could be carried out in a legal way, that the court will not restrain the holding of a meeting because the note is calling it so expressed that consistently with its terms resolutions might be passed which would be ultra vires and that the directors were not justified in excluding from their notice the objects in the first part of the requisition other than the appointment of a committee. Held also, that under s.91 of… a general meeting has power to remove directors that a notice of a proposal to remove “any of the directors” was sufficiently distinct that the general meeting could at all events fill up vacancies in the board if all the directors were removed or if the directors declined to exercise the power given by s.89, and that the directors were therefore bound to include in their notice the objects mentioned in the second part of the requisition. Held therefore, that the requisitionist were entitled to call a meeting and that the injunction must be discharged. Cotton L.J.

18 It is not right for the directors to limit the notice so as to prevent the meeting from entering into the question simply because the terms of the notice would justify a resolution which would be ultra vires. Directors have great powers, and if a shareholder complains of the conduct of the directors while they keep within their powers, the court says to him, “if you want to alter the management of the affairs of the company go to a general meeting, and if they agree with you they will pass a resolution obliging the directors to alter their course of proceedings.”

Automatic Self-Cleaning Filter Syndicate Co. v. Cunningham [1906] 2 Ch.34 Company – Directors – Powers – Vesting of Management in Directors – Resolution by a simple majority of shareholders for sale of undertaking – Refusal of Directors to comply with Resolution.

A company had power under its memorandum of association to sell its undertaking to another company having similar objects, and by its articles of association the general management and control of the company were vested in the directors, subject to such regulations as might from time to time be made by extraordinary resolution, and in particular, the directors were empowered to sell or otherwise deal with any property of the company on such terms as they might think fit. At a general meeting of the company a resolution was passed by a simple majority of the shareholders for the sale of the company’s assets on certain terms to a new company formed for the purpose acquiring them, and directing the directors to carry the sale into effect. The directors, being of the opinion that a sale on those terms was not for the benefit of the company, declined to carry the sale into effect. Held, upon the construction of the articles, that the directors could not be compelled to comply with the resolution. Collins M.R. …the directors have absolute power to do all things other than those that are expressly required to be done by the company; and then comes the limitation on their general authority – ‘subject to such regulations as may from time to time be made by extraordinary resolution.” Therefore, if it is desired to alter the powers of the directors that must be done, not by a resolution carried by a majority at an ordinary meeting of the company, but by an extraordinary resolution. In these circumstances it seems to me that it is not incompetent for the majority of shareholders at an ordinary meeting to affect or alter the mandate originally given to the directors, by the articles of association. It has been suggested that this is a mere question of principal and agent, and that it would be an absurd thing if a principal appointing an agent should in effect appoint a dictator who is to manage him instead of his managing the agent…No doubt for some purposes directors are agents. For whom are they agents? You have no doubt, in theory and law one entity the company, which might be a principal, but you have to go behind that when you look to the particular position of directors. It is not fair to say that a majority at a meeting is for the purposes of this case the principal so as to alter the mandate of the agent. The minority must also be taken into account. There are provisions by which the minority may be over-borne, but that can only be done by special machinery in the shape of resolutions. Short of that the mandate which must be obeyed is not that of the majority – it is that of the whole entity made up of all the shareholders. If the mandate of the

19 directors is to be altered, it can only be under the machinery of the memorandum and articles themselves. Cozens-Hardy L.J. It has been decided that the articles of association are a contract between the members of the company inter se. That was finally settled by the case of Browne v. La Trinidad.

Gramophone & Typewriters Ltd. v. Shaw [1935]A.E.R.456 Account Stated – Action on – Entries in balance sheet of company and showing indebtedness of director – Claim against director. Company – Director – Powers of management given to directors – Control by shareholders

An objection by the defendant to an action to the plaintiff’s right to sue should be taken by an interlocutory motion or summons, but, if that procedure is not adopted and the matter goes to trial and the court is informed of facts which prove conclusively that the action before the court has been brought without the authority of the person named as plaintiff, the action should be struck out. The court ought not to ignore evidence of lack of authority either to bring an action or to defend it and give judgment in favour of or against a party who, ex hypothesi, is not in court. If the question of authority is left in doubt the right course for the court to take is to try the action and give judgment according to the evidence, leaving the losing party to apply to set aside the judgment on the ground that he had never authorized the action or the defence as the case might be. Greer L.J@464 If powers of management are vested in directors of a company, they and they alone can exercise those powers. The only way in which the general body of the shareholders can control the exercise of powers vested by the articles in the directors is by altering the articles of the company or refusing to re-elect the directors of whom they disapprove. They cannot usurp powers which by the articles are vested in the directors.

The balance sheet of a company was signed by two directors of the company who were indebted to the company in sums specified in the balance sheet. Held, the balance sheet was not an account rendered to the directors by the company as creditors and accepted by the directors as debtors; it was a statement by the company of the state of their assets and liabilities, and not a debtor and creditor statement between the company and the directors; it was signed by the directors as directors and not in their personal capacity ; and, therefore, it was not an account stated between the parties on which the company could sue the directors for the amount of their indebtedness.

Harold Holdsworth & Co (Wakefield) Ltd v Caddies

COMPANY; Directors

20 HOUSE OF LORDS VISCOUNT KILMUIR LC, EARL JOWITT, LORD MORTON OF HENRYTON, LORD REID AND LORD KEITH OF AVONHOLM 11, 12 JANUARY, 4 MARCH 1955

Company – Director – Managing director – Duties – Duties limited by board of directors.

The respondent, who was a director of the appellant company, was appointed managing director of the appellant company for a period of five years from 1 October 1948. Clause 1 of the agreement, which was dated 1 April 1949, was in the following terms:—the respondent “shall be and he is hereby appointed a managing director of the company and as such managing director he shall perform the duties and exercise the powers in relation to the business of the company and the businesses (howsoever carried on) of its existing subsidiary companies at the date hereof which may from time to time be assigned to or vested in him by the board of directors of the company”. The agreement further provided that the respondent should devote his whole time, attention and abilities to his duties under the contract and should obey the orders and directions of the board. At the date of the agreement the appellant company had three subsidiary companies, of which one company was a textile company of which the respondent was full-time managing director under a prior agreement. After his appointment by the agreement of 1 April 1949, the respondent was, in fact, the only managing director of the appellant company. Differences having arisen, the board of the appellant company resolved on 10 May 1950, that the respondent should confine his attention to the textile company only. Thereafter the respondent performed no executive or managerial functions for the appellant company. The respondent claimed that the resolution was a repudiation of the agreement of 1 April 1949, and brought an action against the appellant company for breach of contract.

Held – Lord Keith Of Avonholm dissenting): the appellant company was not in breach of the agreement of 1 April 1949, because the appointment of the respondent to be a managing director of the appellant company by cl 1 of the agreement and his description therein as such managing director did not limit the powers of the board under the subsequent words of the agreement and, on the true construction of the clause, the respondent’s duties could be confined to the management of a subsidiary company of the appellant company. Appeal allowed.

21 LORD REID The points which are now before the House are, no doubt, difficult, but they are short and they can be simply stated. In the first place, were the appellant company in breach of contract in requiring the respondent to confine his attention to their subsidiary company, British Textile Manufacturing Co Ltd? And, secondly, if they were, was the respondent justified in treating that breach as a repudiation of the contract? First, what was the nature of the duties in relation to the subsidiary companies which could be assigned to the respondent?; and, secondly, were the appellant company entitled to require him to devote his whole time to duties in relation to the business of the subsidiary companies and to assign to him no duties of a managerial character in relation to the business of the appellant company? It was common ground that it would have been a breach of contract to assign to the respondent duties of a wholly subordinate character in relation either to the appellant company’s business, or to the businesses of the subsidiary companies, and that the contract contemplated that any duties assigned must be of a managerial character. But there is no averment that there was any breach of contract of this kind. The respondent’s contention on this question was that the only duties in relation to the businesses of subsidiary companies which could be assigned to him under the 1949 agreement were duties which would come directly within the ordinary scope of duties of a managing director of the appellant company—duties such as co-ordinating its business with the businesses of the subsidiary companies or making an investigation of the affairs of the subsidiary companies for the information of the appellant company’s board of directors. It was argued that the subsidiary companies were separate legal entities, each under the control of its own board of directors, that in law the board of the appellant company could not assign any duties to any one in relation to the 737 management of the subsidiary companies, and that, therefore, the agreement cannot be construed as entitling them to assign any such duties to the respondent. My Lords, in my judgment, this is too technical an argument. This is an agreement in re mercatoria, and it must be construed in the light of the facts and realities of the situation. The appellant company owned the whole share capital of British Textile Manufacturing Co and, under the agreement of 1947, the directors of this company were to be the nominees of the appellant company. So, in fact, the appellant company could control the internal management of their subsidiary companies, and, in the unlikely event of there being any difficulty, it was only necessary to go through formal procedure in order to make the decision of the appellant company’s board fully effective. Moreover, before the 1949 agreement, the respondent was under obligation to act as managing director of British Textile Manufacturing Co and he avers that, after the making of that agreement, he continued to supervise the conduct of that business. It is true that he qualifies this by averring that this was pending the appointment of a managing director to succeed him there, but there is no averment that the appellant company had undertaken to relieve him of his duties as managing director of the subsidiary company, and I cannot infer from the 1949 agreement that the appellant company were under any obligation to do that. On the contrary, I read cl 1 of this agreement as entitling the appellant company to assign to him as duties under that agreement any duties in relation to British Textile Manufacturing Co which were of a managerial and not of a subordinate character. But it was argued that any duties assigned to the respondent must be duties which he could perform as a managing

22 director of the appellant company, and that he could not perform internal duties of management of a subsidiary company in that capacity. I think that this argument is not only technical, but unsound. As I have already said, the law does not prescribe the duties of a managing director, the parties are left to define his duties, and I can see nothing inconsistent in an agreement that a person shall be a managing director of a company, but shall devote his attention to managing subsidiary companies. I am, therefore, of opinion that the agreement of 1949 entitled the appellant company to require the respondent to devote his time to managing the businesses of the subsidiary companies. But then it was argued that, even if that be so and if the agreement entitled the appellant company to assign to him extensive duties in relation to the business of the subsidiary company, it did not entitle them to require him to devote his whole time throughout the agreement to such business, but required them to assign to him at least some duties of a managerial nature in relation to the business of the appellant company. I cannot agree with this argument. To begin with, it is extremely vague. It was admitted that, as the respondent was only appointed a managing director, the appellant company would have been within their rights in appointing a second managing director and assigning to him at least the greater part of the managerial functions of their company. And it was not disputed that duties in relation to subsidiary companies which might be assigned to the respondent might occupy his whole time and attention for a period. But the contention was, I think, that he must have sufficient duties in relation to the affairs of the appellant company to make his position as a managing director of that company a reality. The respondent supported this contention by a further argument. His remuneration depended on the profits of the appellant company and its subsidiary companies; and the minimum commission of £1,500 was, in fact, exceeded during the first year and would, he avers, have become still greater in subsequent years if he had been allowed to exercise the functions of management. Therefore he says that he had a right to exercise those functions. But, in my opinion, the short answer to that argument is that he was only appointed a managing director and, admittedly, the greater part of those functions could have been taken from 738 him. Even if he were right in saying that some managerial functions in the appellant company must be assigned to him, it does not follow that the exercise of a comparatively small part of the management would have any appreciable influence on the profits of the company. And, further, the respondent’s commission depended on both the profits of the appellant company and the profits of the subsidiary company, and the success of his work in managing this company would, therefore, be reflected in the amount of his remuneration. I am, therefore, unable to agree with the respondent’s arguments on the construction of the agreement, and I pass to consider the resolution of 10 May 1950. It was argued that there must be a proof of the averments in condescendence 4 to which I have already referred because, if proved, they would show that the resolution of 10 May 1950, was, in effect, a dismissal of the respondent from his position of managing director of the appellant company. At this stage, when dealing with the case on relevancy, I must, of course, assume that all these averments would be fully established by proof, but, if I am right in my interpretation of the agreement, I cannot see how proof of these averments would assist the respondent’s case. The resolution is not capable of meaning that the respondent was dismissed, but it is, I think, capable of having the meaning that the arrangement set out in it was to be permanent, and that the respondent was not at any time

23 to take any further part in the management of the appellant company’s business, but was to confine his attention in future to the business of British Textile Manufacturing Co. It may be that the facts averred would show that that was its meaning. I am not sure that that is so, but I shall assume that it is. But that is not, in my opinion, a breach of the agreement of 1949. The parties in that agreement provided what the duties of the respondent should be: he was to perform the duties from time to time assigned to him in relation to the business of the appellant company and the businesses of the subsidiary companies. This cannot mean that all duties assigned to him must be in relation to all the businesses: some duties might relate solely to one and some solely to another. It was not disputed that all the duties assigned to him might have related to the appellant company’s business, so that he had nothing to do with managing the subsidiary businesses. And, similarly, in my opinion, the agreement authorised the appellant company to require him to devote his whole attention to the business of one or both of the subsidiary companies, so that he had no share in the management of the appellant company’s own business. I have already said that, in my opinion, that is not inconsistent with his position of managing director as defined in the agreement. He would, of course, have remained a director of the appellant company with all his rights as a director, but his managerial duties would have been solely in relation to the subsidiary company. I do not think that the resolution is capable of a construction more favourable to the respondent’s case than that, and that, in my opinion, involves no breach of contract. I am, therefore, of opinion that this appeal should be allowed with the result that the appellant company’s first plea-in-law must be sustained, and the respondent’s action dismissed.

La Compagnie De Mayville v. Whitley Company – Directors – Notice of Meeting of Directors – Notice of business to be transacted – Authority to use Name of the company.

Directors of a company, being the select managing body, can at any meeting of the board deal with all affairs of the company then requiring attention, whether ordinary or not, and previous notice of the special business is not a necessary condition of the proceedings being valid. S., T., and W. were the directors of a newly-formed company, no share in which had been allotted, two directors being a quorum. T. and W. , without notice to S., held a meeting on February 14, at which they appointed X. a director, appointed solicitors and bankers, and accepted an offer for the use of offices. On the 22nd, S., who had heard of these resolutions, obtained a memorandum, signed by five of the seven signatories to the memorandum of association, authorizing him to use the name of the company in an action to prevent the directors from carrying out the resolutions of the 14th, and on the same day issued a writ against T. and W., in which he and the company were co- plaintiffs. On the same day, before the writ had been served, S., received notice that a board meeting would be held on the 24th, not stating the nature of the business to be done,

24 and a letter from W. stating that the business done on the 14th would be brought up again. On the 24th S. did not attend, and T. ad W. appointed X and Y. directors, and allotted to each of themselves the number of shares which was the qualification of a director, and affirmed the resolutions of the 14th. The writ was amended by adding X. and Y. as defendants, and asking a declaration that the resolutions of the 24th were void, and an injunction to restrain the defendants from acting upon them, and to restrain X. and Y. from acting as directors. The company, pursuant to a resolution passed on the 24th, moved, by the solicitors appointed by the above resolutions, to have the name of the company struck out as used without authority. Held, that the resolutions of Feb.24 were valid and X. and Y. duly elected directors; Held, further, that S. had used the name of the company without authority; that, as the resolutions of Feb.24 were valid, the motion to strike the name out was authorized; and costs to be paid by S. Lindley L.J. The great point is whether, when a directors’ meeting is to be held, it is necessary to give a notice not only of the meeting, but of the business to be transacted at the meeting. I am not prepared to say as a matter of law that it is necessary. As a matter of prudence it is very often done, and it is a very wise thing to do it; but it strikes, as it struck Lord Tenterden in Rex v. Pulsford that there is an immense difference between meetings of shareholders or corporators and meetings of those whose business it is to attend to the transaction of the affairs of the company or corporation…Being paid for their services – as generally they are, and as is the case in this company- it is their duty to go when thre is any business to be done, and to attend to that business whatever it is; and I cannot now say for the first time that as a matter of law the business conducted at a directors’ meeting is invalid if the directors have had no notice of the kind of business which is to come before them. Such a rule would be extremely embarrassing in the transaction of the business of companies.

Kay J. Can the directors of a joint stock trading company pass resolutions at their meetings as to matters not mentioned in the notice summoning the meeting or in an agenda paper accompanying the notice, and saying what matters are to be discussed at that meeting? As I understand the learned judge’s judgment, he does not hold that notice to summon a directors’ meeting must shew, or be accompanied by an agenda paper shewing, all the business to be done at the meeting. But he says,…that if the business is of an extraordinary or unusual character, then notice must be given of it, or else any resolution passed at the meeting with reference to it will be invalid. It is seen at once in what an enormous difficulty that would place directors. Who is to decide what is such extraordinary business that notice of it ought to be given?

It would put directors in very great difficulty, and the only safe course would be to send to every director, along with the notice of the meeting, an agenda paper full of all the businesses to be done at it, in order that they might be sure of not omitting some business which, in the opinion of a judge before whom the matter might come, was such that notice of it ought to have been given. We know very well that is not the ordinary course…

25 I therefore think that…in point of law, even when extraordinary business is to be transacted at a director’s meeting, it is not necessary to give notice beforehand of the intention to transact that extraordinary business.

Re Homer District Consolidated Gold Mines Ltd.Ex.p. Smith (1888)39 Ch.D.546 Company – Directors – Meeting – Notice – Informality

Application was invited by a company for 106,000 preference shares. At a meeting of all the directors, five in number, it was resolved not to allot till 14,000 shares were applied for; at a meeting of two (a quorum of) directors held shortly afterwards it was resolved that the previous resolution was cancelled, and that the shares then applied for, about 3000, should be allotted. The meeting was held at two o’clock, on a few hours’ notice to two of the directors who did not attend, of whom one did not receive his notice till the next day, and the other gave notice he could not attend till three; the fifth director was abroad and no notice was sent to him. Held, that the allotments made under the later resolution were void against the allottees. North J. No doubt a bare quorum is capable to act and bind the company at a meeting duly convened, with proper notice given to the other directors, at which therefore all the other directors may, if they please, be present; but these two directors having abstained from telling the others what they intended to do, and proceeded to pass the resolution in the full belief, and knowledge that if the others had had notice and been able to be there they would have objected; and further than that, with notice as to one that would be there at three, they proceeded to pass their resolution at two. They ought certainly to have waited. What was done on that occasion was not the act of the board of directors, and did not bind the company, and had not the effect of getting rid of the resolutions previously passed by the board.

Browne v. La Trinidad (1887) 37 Ch.D.1 Company – Extraordinary General Meeting – Irregularity in Board Meeting summoning General Meeting – Adoption of Agreement prior to formation of Company – Removal of Directors.

A meeting of directors passed a resolution to summon an extraordinary general meeting at which were to be proposed special resolutions for removing B. from the office of director, and for increasing capital. The articles gave power to remove directors by special resolution. The only notice B. had of the board meeting was a notice given less than ten minutes before the time of holding it, and not stating the nature of the business. The notices for the general meeting were issued, and four days before the time for the meeting B., who up to the time had made no complaint of the short notice, brought this action to restrain the company from holding the meeting, on the ground that the board which summoned it was not duly constituted, as B. had not received proper notice and could not attend. The general meeting was held and passed the resolutions. Charles, J. , after this granted an injunction restraining the company from confirming the resolution to remove B.

26 Held, on appeal, that assuming the board meeting to be so far irregular that the plaintiff might have objected and required another to be summoned, the general meeting, having been summoned, in all other respects regularly, by directors acting as a board, was competent to act. Whether the plaintiff had at once complained of the short notice and required a fresh board meeting to be called, the Court would not have prevented the holding of the general meeting till this had been done. Before the formation of the company an agreement was entered into between B. and a person as trustee for the intended company, by which it was stipulated (inter alia) that B. should be a director and should not be removed till after 1888. The 6th clause of the articles provided that the directors should adopt and carry into effect the agreement with or without modification, and that subject to such modifications (if any) the provisions of the agreement should be construed as part of the articles. The agreement was acted upon, but no contract adopting it was entered into between the plaintiff and the company. Held, that treating the agreement as embodied in the articles, still there was no contract between B. and the company that he should not be removed from being a director, the articles being only a contract between the members inter se, and not between the company and B. Held, therefore, that the order for an injunction must be discharged. Whether a stipulation that a director shall not be removable will be enforced by he court, quaere. Cotton L.J In my opinion, if there was an irregularity at the board meeting it was not such an irregularity as to vitiate the action of the board, and even if there had had been an irregularity in the constitution of the board, it would not have deprived the general body of the shareholders of the power of acting, when the notice was issued by the directors as such, and was signed in the usual way by the secretary as required in the articles on behalf of the directors. I think Mr. Justice Charles failed to give due consideration to the principle that a court of Equity refuses to interfere where an irregularity has been committed, if it is within the power of the persons who have committed it at once to correct it by calling a fresh meeting and dealing with the matter with all the due formalities. But in my opinion there was sufficient notice sent to the Plaintiff to prevent him from contending now that the meeting of the board was a meeting of persons who were not competent to act as board directors. There was nothing to make the issue of the notice irregular, and even if there was an irregularity in the board meeting which might have enabled the plaintiff to insist that it should be postponed and another board meeting called, that would not vitiate the special general meeting so as to prevent its exercising the powers which are given to it by the articles. We ought not to interfere in the present case, because there is no such contract between the Plaintiff and the company. The memorandum of agreement of…, is in no way a contract between the Plaintiff and the Company. It is said that it was adopted and incorporated into the articles, but I cannot accede to that. The company by its directors acted upon the agreement, but that does not make it binding upon the company. Then is it incorporated into the articles in such a way as to entitle the plaintiff to say have such a contract between me and the company as can be enforced by a court of law, and as I might enforce in equity by way of specific performance?

27 Lindley J. I think it is important that a 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.

(ii) Delegation of Authority Legislation Barbados S.80

Case Law Totterdell v.Fareham Blue Brick Co., (1866) L.R. 1C.P., 674 Company – Authority of directors – Executed contract

A company was incorporated under the 25 & 26 Vict. C. 89; the memorandum of association being signed by seven shareholders; no deed of association was filed and no shares allotted; A. entered into an agreement to act as foreman of the “company’s” works, which was signed by B. and C., two of the persons signing the memorandum of association as “chairman” and “managing director,” respectively. In an action by A. against the company for work done under the agreement :- Held, that in the absence of evidence to the contrary, the jury were justified in presuming that B. and C. had authority to bind the company. Wiles J. By clause 66 of that schedule the directors can fix the number who shall be a quorum, and they might therefore, fix the number at to, by clause 68 they can delegate their powers to committees of their own body. It is clear, therefore that the two directors might have had authority to make the agreement. There is the fact that they ostensibly had, and dealt with the plaintiffs as if they had such authority. The effect of this was much considered in the case, The Royal British Bank v. Turquand where the directors represented that a vote had been passed at a meeting of the shareholders, which was necessary to give them powers they professed to exercise. The court gave judgment for the bank on the ground that the plaintiffs had a right to assume that the vote had been passed.

Huth v. Clarke (1890)25 Q.B.D.391 Local Government – County Council – Executive Committee – Delegation of Powers to Sub-Committee – Meaning of the word “delegation” – Contagious Diseases (Animals)

Under Sch. 6 , clauses 5 and 6, of the Contagious diseases (Animals) Act, 1878, a local authority may appoint an executive committee, which is to have all the powers of the local authority, except rating powers, and the executive committee may appoint sub- committees and delegate to them all or any of the powers of the executive committee with or without restrictions, and may from time to time revoke or alter any such delegation. The duly appointed executive committee of a county council (which, by virtue of the Local Government Act, 1888, is the local authority for the purpose of the contagious Diseases (Animals) Acts) made an order delegating to the local sub-committees its power under the Contagious….Acts and under certain Orders in Council, including the rabies

28 order…Subsequently to such delegation the executive committee, without expressly revoking the delegation, issued certain regulations under the Rabies…, as to the muzzling of dogs and keeping them under control; no regulations under the Rabies Ord. Had been issued by the local sub-committee: Held, that the delegation was not equivalent to a resignation by the executive committee of its own powers, that the delegated authority was subject to resumption at any time, and that the resignations were therefore valid. Wiles J. Delegation, as the word is generally used, does not imply a parting with powers by the person who grants the delegation, but points rather to the conferring of the authority to do things which otherwise that person would have to do himself. The best illustration of the use of the word is afforded by the maxim, Delegatus, non protest delegare, as to the meaning of which it is significant…the word delegate means little more than an agent.

Horn v. Faulder & Co.Ltd [1908] 99 L.T.524 Company – Ultra Vires – Articles of association – Special Agreement with manager of department – Restricting right of company to control a portion of company’s business.

An article of association of a limited company provided that “the governing directors as such should have the supreme control in the management and affairs of the company.” A special agreement made between the company and the manager of a department provided “that the department and all extensions of the same should be under the sole management of the manager in all respects, and he should have full power to conduct in a reasonable manner the practical and commercial business of the…without in any way being interfered with by the governing directors or board of directors” with certain exceptions. Held, that the special agreement was ultra vires of the articles of association. Neville J., it seems to me that that is a very substantial parting with the control and management of the business by the governing directors, and the question then arises whether on the true construction of the articles of association that is within the powers of the directors. First of all, is it within the powers of the company itself? The company have by their articles of association delegated by article 78 to the governing directors the supreme control in the management of the business affairs of the company. I think therefore that if, the articles standing as they stand, the company were to attempt to appoint persons who should have a share in the management of the company independently of the control of the governing directors, the majority in such a case would be infringing the rights of the minority who are entitled, as long as these articles stand to say that they are entitled to have the whole business managed by the governing directors and by nobody else. I think therefore the company itself could not have entered into the agreement which was entered on its behalf by the directors, and the directors have no higher power than the company itself and, if it were necessary to go further, I think that, even supposing that the company had power to enter into such an agreement, it does not follow that the directors would have the power, because here would come in the question the delegation of authority, which does not of course arise on the point on which I have decided the question. Treated as an appointment by the directors, it seems to me that it would not only be outside the articles of association, but it would be an attempt to

29 delegate some substantial part of that authority to third persons, which in itself, I think, would be outside their authority. I think therefore, the agreement was ultra vires of the articles of association – that is, that it is an infringement of the articles of association – and therefore cannot be enforced.

(iii)Delegation to Managing Directors and Director Committees/ Non-Director & Executives

(iv) Types of Directors

Re Hydrodam (Corby) Ltd. [1994] 2 BCLC 180 Eagle Trust Plc. had a wholly owned subsidiary, Midland City Partnerships Ltd. (MCP), which in turn had a wholly-owned subsidiary, Landsaver MCP Ltd. (Landsavr19). Hydrodam (Corby) Ltd. (the company) was a wholly owned subsidiary of Landsaver 19. The company had two corporate directors. The company went into liquidation and the liquidator commenced proceedings against two of the directors of Eagle Trust Plc. alleging that they were liable under s.214 of the Insolvency Act 1986 as de facto or shadow directors in connection with the affairs of the company. The directors applied to have the liquidator’s application against them struck out. The applications by the directors were dismissed and the directors appealed. Held, appeals allowed. Where a body corporate was a director of a company, whether de jure, shadow or de facto, it did not follow that its own directors must ipso facto be shadow directors of that company. On the facts, the liquidator had neither pleaded nor adduced evidence that either of the directors against whom the wrongful trading proceedings had been commenced were at the material times directors of the company. Accordingly, the appeal would be allowed. Millett J. Liability for wrongful trading is imposed by s.214 of the Insolvency Act 1986. The statutory liability is imposed exclusively upon persons who are or were at the material time directors of the company in liquidation. But s.214 (7) provides that in the section “director” includes a shadow director. A shadow director is defined in s.251 of the Insolvency Act 1986 in these terms: ‘ “ Shadow director” in relation to a company, means a person in accordance with whose directions or instructions the directors of the company are accustomed to act.” Directors may be of three kinds: de jure directors, that is to say, those who have been validly appointed to the office; de facto directors, that is to say directors who assume to act as directors without having been appointed validly or at all; and shadow directors who are persons falling within the definition which I have read. A de facto director… is one who claims to act and purports to act as a director, although not validly appointed as such. A shadow director, by contrast, does not claim to be a director. He lurks in the shadows, sheltering behind others who, he claims, are the only directors of the company to the exclusion of himself. He is not held out as a director by the company. To establish that a defendant is a shadow director of a company it is necessary to allege and prove (1) who are the directors of the company, whether de facto or de jure, (2), that the defendant directed those how to act in relation to the company or that he was one of the persons who did so; (3) that those directors acted in accordance

30 with such directions; and (4) that they were accustomed so to act. What is needed is first, a board of directors claiming and purporting to act as such; secondly a pattern of behaviour in which the board did not exercise any discretion or judgment of its own, but acted in accordance with the direction of others. D. General Meeting – The AGM

Tiesen v. Henderson [1899] 1 Ch 861 Company – Shareholder – General Meeting – Notice – Irregularity – Special Resolutions – Directors’ interest – No-disclosure – Conditional Notice.

The notice of an extra-ordinary general meeting must disclose all facts necessary to enable the shareholder receiving it to determine in his own interest whether or not he ought to attend the meeting; and pecuniary interest in the matter of a special resolution to be proposed at the meeting is a material fact for this purpose. A notice of two meetings to be held in immediate succession to consider seriatim two alternative resolutions, one at each meeting is not rendered an invalid notice of the second meeting by an express provision that it will only be held in the event of the first resolution not being passed at the first meeting.

Gibson v. Barton [1875] L.R.10 Q.B. 329 By s.49 of the Companies Act, 1862, a general meeting of every company under this act shall be held at least once every year :- Held, that the word “year” means the period of time commencing on the 1st of January and ending on the 31st of December, and not the period of twelve months commencing from the day of registration of a company. By s.26: ‘Every company…shall make once at least in every year a list of all persons who on the fourteenth day succeeding the day on which the ordinary general meeting…is held are embers of the company…and a copy shall forthwith be forwarded to the registrar of joint stock companies.” By s.27 “if any company…makes default in complying with the provisions of the Act with respect to forwarding such list such company shall incur a penalty…and every director and manager of the company who knowingly and willfully authorize or permit such default shall incur a like penalty.” The Appellant was the secretary of a company registered under the companies act, 1862. The articles of association did not provide for the appointment of a manager, and none had been appointed. At a meeting of directors in 1872, the appellant reported that he had called a general meeting of shareholders; and in 1874 he had, in a letter to the directors, stated that unless certain contracts were carried out he should feel it his duty to summon a general meeting of the shareholders. No ordinary general meeting of the shareholders had been held in the year 1873, and no list of shareholders had been forwarded to the registrar in compliance with s.26, and the appellant had not taken any steps to cause a meeting to be held in 873. He was convicted on an information charging him, as manager, with authorizing a default in forwarding a copy of the list of shareholders to the registrar in 1873:- Held, that the conviction ought to be affirmed: for that there was evidence that the appellant was manager de facto, and therefore a manager within s.26; and as he took no steps in 1873 to call a meeting, and thereby made it impossible for him to forward to the

31 register a list of all the members, there was evidence that he had knowingly and willfully authorized a default within s.27. Blackburn J. A manger would be, in ordinary talk, a person who has the management of the whole affairs of the company; not an agent who is to do a particular thing, or a servant who is to obey orders, but a person who is [sic]intrusted with power to transact the whole affairs of the company.

Re Railway Sleepers Supply Co. [1885] 29 Ch.D.204 The interval of not less than fourteen days which under s.51 of the Companies Act, 1862, is to elapse between the meetings and confirming a special resolution of a company is an interval of fourteen clear days, exclusive of the respective days of meeting, and therefore a special resolution for the reduction of capital passed at a meeting held on the 25th of February, 1885, and confirmed at a meeting held on the 11th of March 1885, was held to be bad.

Re Hector Whaling Ltd. [1936] Ch. 208 Company – Special resolution – notice convening meeting – Length of notice – “not less than twenty-one days” – Interpretation – Articles of Association cannot modify the Statute – Companies Act, 1929

The period of not less than twenty-one days prescribed by s.117 (2), of the Companies Act, 1929, relating to notices of meetings in connection with the passing of special resolutions, means a period of not less than twenty-one clear days, exclusive of the day of service of the notice and exclusive of the day on which the meeting is to be held. Provisions in the articles regulating the date on which a notice is to be deemed to be served must be considered; but an article which provides that the day of service of a notice is to be counted in the relevant number of days must be disregarded.

Boschoek Rlwy. Co. Ltd. v. Fuke [1906] 1 Ch. 148 Company – Directors – Qualifications – Shares held “in his own right” – Shares held as Liquidator of another company – Income Tax On Directors’ fees – General meeting convened by de facto Directors – Validity of resolutions – Ratification of Acts contrary to Articles – No alteration of Articles – Special business notice.

The qualification of a director being the holding of 250 shares in his own right, F. was registered as “F. liquidator to the H. company” with a holding of 500 shares. Held, that he was not qualified to be a director. Apart from special provision in the articles directors are not entitled to their fees free from income tax. The resolutions of a general meeting convened by de facto directors are not invalidated by any irregularity in the constitution of the board. Articles fixing the qualification and remuneration of directors being binding on the company as well as the directors, the company cannot ratify an act of the director sin contravention of such articles without first altering them by special resolution.

32 The notice convening a general meeting stated that it would beheld for the purpose of receiving the directors’ report, and the election of directors and auditors. The directors’ report sent therewith mentioned certain special business not referred to in the notice, viz., the ratification of the board’s previous election of R. as a director:- Held, that the notice and report together were sufficient notice of this special business.

Bamford v. Bamford [1970] Ch.212 A public company had an authorized capital of 1,000,000 pounds in five million shares of 4 s. each, of which 4,500,000 shares were issued. By its articles the power to allot the unissued shares was vested in the directors of the company. A bid having been made by another company to take over its shares, the directors allotted the unissued 500,000 shares at par to a principal distributor of the company’s products. The plaintiffs two shareholders in the company, issued a writ against the defendants, the directors and the company, claiming inter alia, a declaration that the allotment was invalid on the ground that the directors in making the allotment had not acted bona fide, but from an improper motive in that their primary purpose was to block the take over bid. As a counter to that writ the directors gave notice convening a general meeting of the shareholders of the company to consider a resolution ratifying and approving the allotment. The plaintiffs issued a second writ claiming, inter alia, a declaration that any resolution passed at the proposed meeting was and would be a nullity. At the meeting the resolution was passed on a poll by a substantial majority of the votes of the shareholders, the allotted shares not being voted. The two actions were then consolidated and, by consent, an order was made for the trial of the preliminary point of law whether, even if the directors had acted in bad faith as alleged by the plaintiffs, the allotment was not capable of being ratified and approved by a general meeting of the shareholders of the company. Plowman J. held that the allotment was capable of being thus ratified and approved by a general meeting of the shareholders, and he, therefore, held that the allotment had been approved by the shareholders, it was validated, even if the directors had acted from an improper motive in making the allotment. He, accordingly, dismissed the plaintiff’s action. On appeal by the Plaintiffs:- Held, dismissing the appeal, that even if the directors had acted in bad faith and from an improper motive in making the allotment of the 500,000 unissued shares, any impropriety on their part could be and had been waived by a majority of the votes of the shareholders at the general meeting of the company; and, therefore, even if the allotment was initially voidable, it had subsequently been validated by the shareholders and was thus a valid allotment.

E. Other Meetings

Re El Sombreo Ltd.[1958] Ch.90 The applicant was the holder of 900 shares in a private company whose capital was 1000 pounds divided into 1,000 shares of 1 pound each. The two respondents, who were at all material times the only directors of the company, each held 50 shares. No general meeting of the company had ever been held and no annual return filed. The company’s articles of association had adopted part 11, Table A in the first schedule of the companies

33 Act, 1948, subject to the alteration that the quorum of general meetings should be two persons present in person or by proxy. The applicant by originating summons asked the court to make an order under s. 135 (1) of the Companies Act, 1948, directing the convening and holding of a meeting, which was opposed by the respondents. On appeal from the registrar’s refusal to make such an order:- Held, (1) that the question raised by the word “impracticable” was merely whether in the particular circumstances of the case the desired meeting of the company could as a practical matter be conducted. (2) That on the true construction of s.135 there was nothing to prevent the court intervening in a proper case and where the application before it was opposed by other shareholders. (3) That the present case was eminently one in which the court ought to exercise its discretion, because otherwise it would be depriving the applicant of his statutory right under s.184 (1) to remove the respondents as directors, and because the respondents had failed to perform their statutory duty to call an annual general meeting.

Re Windward Islands (Enterprises) UK Ltd. [1983] BCLC 293 Extra-ordinary general meeting – Obligation of directors to convene meeting within twenty-one days from deposit of requisition – Whether meeting must also be held within twenty-one days from date of requisition – Companies Act, 1948.

For a meeting to be properly requisitioned under s.132 of the Companies Act 1948, it must be convened by the directors within twenty-one days from the deposit of the requisition but it does not have to be held within that period. By a motion dated 5th July 1982, the plaintiffs, Raphael Cruickshank, Mosley Neckles and Roy Philips sought against the defendants, S K Noel, T W Jack, J L Wilson and W H Andall, inter alia, (1) a declaration that the plaintiffs were the only directors of Winward enterprises (UK) Limited; (2) a declaration that the meeting convened by the first defendant and held at his home address situated at…on the 30th May 1982, was not a validly constituted extraordinary meeting of the company; (3) a declaration that the resolutions purportedly passed at the said meeting were void and of no effect; and (4) an injunction restraining the defendants from holding themselves out as or in any way passing themselves off as directors of the company. Nourse J. It is to be noted that the obligation of the directors is ‘forthwith,’ i.e. as soon as practicable, to proceed duly to convene an extra-ordinary general meeting of the company. 132 (1) itself gives no further guidance as to what the directors’ obligations are, in particular in regard to the period within which he meeting must be convened and the period within which it must be held. (2), sets out the requirements which the requisition must satisfy… In this case it is clear that the requisitionists gave at most 12 days’ notice of their meeting on May 30…there can be no doubt that the effect of the material provisions of the 1948 Act in regard to notice is that the period was insufficient for the transaction of the business proposed to be transacted at the meeting, or indeed of any business. On that ground also the applicant’s would be entitled to succeed on this motion. Application for injunction granted, application for declaration not granted.

34 Re Opera Photographic Ltd. [1989] BCLC 763 Company meeting – Quorum of two required – Director refusing to attend so that quorate meeting could not be held – Purpose of quorum requirement – Whether would order meeting so that the quorate meeting could be held – Companies Act 1985

The company had issued share capital of 100 shares, 51 were held by the applicant and 49 by the second respondent. The articles provided that a necessary quorum for a meeting of the directors or the shareholders was two. The applicant and the respondent fell out and the applicant had summoned a meeting under s.368 (5) of the Companies Act 1985 to remove the second respondent from office as director and since the second respondent did not attend the meeting could not be held because of lack of quorum. The applicant sought an order under s.371 of the 1985 Act that the court make an order convening a meeting of the company at which one member shall constitute a quorum for the purpose of considering a resolution that the second respondent be removed from office as director. Held, order granted. The quorum requirements in the company’s articles of association could not be treated as conferring on the second respondent a form of veto to prevent the holding of shareholders’ meeting to consider removing him from office as director. Accordingly, since the applicant held a majority of the shares and possessed a statutory right to remove the second respondent from office but it was impracticable to hold a meeting because of quorum requirements, the court would make the order sought.

MaConnell v. Prill [1916] 2 Ch 57 Although, as decided in re Penarth …the notice of the first meeting to pass a special resolution need not state that the resolution proposed to be passed at that meeting is to be an extraordinary resolution, where an extraordinary resolution is proposed to be passed the notice of the general meeting must comply with s.69 of the Companies (Consolidation) Act, 1908, by “specifying the intention to propose the resolution as an extraordinary resolution.” As regards the whole subject of an “extraordinary resolution,” the Act of 1908 differs materially from the Companies Act 1862, and its definition of that term is general; and having regard to the plain words of its enactments in this respect, those enactments must, according to the principles laid down by Lord Herschell in Bank of England v. Vagliano Bros., although forming part of a consolidation statute, be construed apart from the provisions of the Act of 1862 for which they are substituted and the decisions thereon. Notice of a meeting of a company to increase or sanction the increase of the share capital of a company is not sufficient if it merely refers generally to a proposed resolution to increase the share capital; it must show an intention to make the specific increase embodied in the resolution that is actually passed.

Re Moorgate Mercantile Holdings Ltd

35 COMPANY; Other Company

CHANCERY DIVISION SLADE J 18, 19, 20, 26 JUNE 1979

Company – Resolution – Special resolution – Validity – Special resolution proposing that share premium account of £1,356,900 be cancelled entirely – Resolution passed stating that account be reduced to £321 – Application to court to confirm reduction of account – Whether resolution as passed substantially the same as that proposed – Whether court having jurisdiction to confirm reduction – Companies Act 1948, s 141(2).

A company’s articles of association empowered it by special resolution to reduce its share premium account. On 2 April 1979 the secretary sent a notice to each of the company’s members informing them that an extraordinary general meeting of the company would be held on 26 April 1979 at which a special resolution would be proposed to the effect that ‘the share premium account of the Company amounting to £1,356,900·48p be cancelled’. That figure included the sum of £321·17 which had been credited to the share premium account on 12 March 1979 by virtue of an issue of shares made on that day and which could not be regarded as lost when, as it was proposed to do, the court was asked to approve the proposed cancellation of the share account on the basis that the amount credited to the account had all been lost. Before the meeting on 26 April the company was advised of the consequent legal difficulty that there was no other basis on which the cancellation of the £321·17 could be justified. Therefore, at the extraordinary general meeting on 26 April the chairman, acting on legal advice, proposed that the special resolution should be passed in the form: ‘That the share premium account of the Company amounting to £1,356,900·48p be reduced to £321·17p.’ Not all the members of the company entitled to vote at the meeting were present but the amended version of the resolution was passed unanimously on a show of hands by those who were there and a poll was not demanded. By a petition the company asked the court to confirm the reduction of the company’s share premium account. The petition alleged that before the passing of the special resolution on 26 April the entire share premium account had been lost with the exception of the £321·17 credited to it in March 1979. No member or creditor of the company appeared before the court to oppose the petition. At the hearing of the petition the question arose whether the resolution of 26 April had been validly passed, ie whether one of the conditions precedent to the validity of a special resolution imposed by s 141(2)a of the Companies Act 1948 had been complied with, namely whether the resolution had been passed at a general meeting of which requisite notice ‘specifying the intention to propose the resolution as a special resolution [had] been duly given’. The company contended that 40 it had, despite the difference in wording

36 between the resolution as set out in the notice and the resolution as passed, because (i) no member who has formed a view or intention on the resolution as circulated in the notice could reasonably have adopted a different view on the amended version of the resolution or alternatively, (ii) the effect of the amendment was merely to whittle down the effect of the special resolution as set out in the notice. ______a Section 141(2), so far as material, is set out at p 44 c, post ¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯

Held – (i) A notice of intention to propose a special resolution was valid for the purpose of s 141(2) of the 1948 Act only if it identified the intended resolution by specifying either the text or the entire substance of the resolution which it was intended to propose, and a special resolution was validly passed in accordance with s 141(2) only if it was the same resolution as that identified in the preceding notice. In deciding whether there was complete identity between the substance of the resolution as passed and the substance of the intended resolution as notified there was no room for the application of the de minimis principle. If, however, the resolution as passed either departed in some respects from the text of the resolution set out in the preceding notice (eg on account of the correction of grammatical or clerical errors or the use of more formal language) or was reduced into the form of a new text which was not included in the notice, it could properly be regarded as ‘the resolution’ identified in the notice provided there had been no departure from the substance of the circulated text. Otherwise only where all the members, or a class of members, of a company unanimously agreed to waive their rights to notice under s 141(2) could a special resolution be validly passed (see p 44 h to p 45 a, p 52 g to p 53 c, p 54 a to g and p 55 f, post); MacConnell v E Prill & Co Ltd [1916] 2 Ch 57, Re Pearce, Duff & Co Ltd [1960] 3 All ER 222 and Re Duomatic Ltd [1969] 1 All ER 161 applied; Re Bridport Old Brewery Co (1867) LR 2 Ch App 191, Henderson v Bank of Australasia (1890) 45 Ch D 330, Re Teede & Bishop Ltd (1901) 70 LJ Ch 409 and Torbock v Lord Westbury [1902] 2 Ch 871 considered. (ii) In the instant case the resolution had not been validly passed in accordance with s 141(2) because it differed not only in form but also in substance from the one set out in the notice of 2 April and the members of the company had not unanimously agreed to waive their rights to notice under s 141(2). Accordingly the court had no jurisdiction to confirm the reduction of the share premium account and the petition would be dismissed (see p 44 g h and p 55 g to p 56 a, post). Per Curiam. In the case of notice of intention to propose a special resolution nothing is achieved by the addition of such words as ‘with such amendments and alterations as shall be determined on at the general meeting’ (see p 54 c, post).

Was the resolution of 26 April 1979 validly passed? Section 141(1) of the Companies Act 1948 defines an extraordinary resolution as follows:

‘A resolution shall be an extraordinary resolution when it has been passed by a majority of not less than three fourths of such members as, being entitled so to do,

37 vote in person or, where proxies are allowed, by proxy, at a general meeting of which notice specifying the intention to propose the resolution as an extraordinary resolution has been duly given.’ Section 141(2) of that Act, omitting an immaterial proviso, defines a ‘special resolution’ as follows:

‘A resolution shall be a special resolution when it has been passed by such a majority as is required for the passing of an extraordinary resolution and at a general meeting of which not less than twenty-one days’ notice, specifying the intention to propose the resolution as a special resolution, has been duly given … ’ Section 141(5) provides that for the purposes of the section—

‘… notice of a meeting shall be deemed to be duly given and the meeting to be duly held when the notice is given and the meeting held in manner provided by this Act or the articles.’ This case is thus, in my judgment, clear authority for the following propositions. (i) If the members of a company passed a special resolution it could, in appropriate circumstances, be legitimately claimed that ‘notice specifying the intention to propose such a resolution has been duly given’, within the meaning of s 51 of the 1862 Act, even though, owing to an amendment at the first meeting, the resolution passed was not in the identical terms of the resolution referred to in the notice. (ii) All that was necessary was that ‘proper and sufficient notice’ of the intention to propose the resolution had been given. (iii) The special resolution confirmed at the second meeting had, nevertheless, to be in the identical terms of that passed at the first meeting.

Re Sticky Fingers Restaurant Ltd. [1992] BCLC 84 The company which ran a successful restaurant business, had an issued share capital of 100 ordinary shares of which 66 were held by W and 34 by M. W and M were the only directors of the company and were in dispute. No effective meetings of the board or of the company could be held because of the quorum provisions in the company’s articles and M’s refusal to attend any such meetings. The restaurant was managed be a manageress and L was authorized to sign cheques required in the course of the business. Board meetings were needed to deal with the accounts, statutory returns and VAT, amongst other things. M claimed to be entitled pursuant to two agreements to control the day to day running of the company; and when W complained of financial irregularities and sought M’s resignation as a director, M presented a petition under s.459 of the Companies Act 1985 seeking an order that W purchase his shares. In these proceedings W sought an order under s.371 of 1985 Act convening a meeting at which one member would constitute a quorum for the purpose of considering resolutions for the appointment of two new directors. Held, M’s refusal to attend the meetings should not prevent the company from dealing with its accounts, VAT etc. The discretion under s.371 of the 1985 Act should be exercised to enable an effective board to be brought into being but not so as to give W the opportunity of harming M pending the outcome of the s.459 petition causing him to be dismissed as a director or excluded from participation in the company’s affairs. Accordingly, the order sought would be made subject to the proviso that each of the

38 directors appointed pursuant to it would be restrained from acting as a director until he had delivered to M’s solicitors an undertaking that pending the outcome of the petition he would not exercise his rights to exclude M from his directorship; or interfere in M’s day to day conduct of the business; or effect any alteration in the constitution or capital of the company.

F. Voting Rights

Northern Counties Securities Ltd v Jackson & Steeple Ltd

COMPANY; Directors, Shareholders

CHANCERY DIVISION WALTON J 22, 28 MARCH 1974

Company – Director – Duty – Extent of duty – Duty in respect of court order – Order for specific performance of agreement to allot and issue shares – undertaking by company to use best endeavours to obtain quotation for and permission to deal in shares and issue same to plaintiffs – Stock exchange requiring that issue be subject to consent of ‘company in general meeting – Extraordinary general meeting summoned – Circular accompanying notice of meeting stating that no recommendation was being made by directors – Circular in effect inviting rejection of resolution to issue shares – Whether directors bound to recommend members to vote in favour of resolution – Whether directors in capacity of shareholders bound to vote in favour of resolution.

Contempt of court – Company – Shareholders – Order for specific performance of share agreement – Company undertaking to use best endeavours to obtain quotation for and permission to deal share and issue same – Stock exchange requiring that issue be subject to consent of ‘company in general meeting’ – Whether shareholders would be in contempt of court if voting against resolution to issue shares.

An agreement made between the plaintiffs and the defendants (‘the company’) provided, inter alia, that, on the completion of a certain option, the plaintiffs should deliver to the company a duly executed transfer or transfers of certain shares in favour of the company or their nominee, and the company should issue to the plaintiffs certain shares ranking pari passu with the company’s other shares and ‘with permission to deal in and quotation

39 for such shares’ on the London Stock Exchange. The plaintiffs fulfilled their part of the agreement but the company did not issue the shares to them. The plaintiffs brought an action for specific performance of that portion of the agreement and applied for summary judgment under RSC Ord 86. In December 1972 it was ordered (i) that the agreement be specifically performed; (ii) that an enquiry be taken as to the shares and an account taken of the dividends that would have been payable to the plaintiffs if the shares had been allotted to plaintiffs on 3 June 1969; (iii) that the company, undertaking ‘forthwith at their expense to apply for and to use their best endeavours to obtain quotation for and permission to deal on the London Stock Exchange’ in the shares concerned, allot and issue the shares to the plaintiffs within 28 days of such question being obtained. The company further undertook not until after the allotment and issue of the shares to the plaintiffs, without the plaintiffs’ prior written consent, to increase the authorised share capital of the company or do any other thing requiring the authority of the members of the company in general meeting. In November 1973 the company discovered that the stock exchange required that the issue of the shares be subject to the consent of ‘the company in general meeting’, and that a class 1 circular to shareholders including an accountants’ report would have to be issued. No such meeting of the company having been summoned by the directors by 19 March 1974, the plaintiffs applied, inter alia, for (1) an order that the company and the directors should despatch to all members a notice convening an extraordinary general meeting of the company to approve a resolution for the issue and allotment to the plaintiffs of the shares; (2) an order that the notice should include, or be accompanied by, a circular including all relevant information calculated to induce the members of the company to vote in favour of the resolution; (3) an order that the notice should 625 include, or be accompanied by, a circular including a recommendation by the directors to the members to vote in favour of the resolution; and (4) an order restraining the directors from voting against it. On the same day (ie 19 March) the company gave its shareholders notice of an extraordinary general meeting to be held on 5 April when the following resolutions would be proposed: (i) that the capital of the company be increased by the creation of 370,000 ordinary shares, ranking pari passu as to dividend with the ordinary shares of the company; (ii) that the directors be authorised to issue those shares fully paid to the plaintiffs and that the shares should, when issued, carry dividend at the rates declared from 3 June 1969. The notice was accompanied by a circular which stated, inter alia, that the company had taken the opinion of leading counsel as to the rights and obligations of the board, the company, and its shareholders as a result of the court order and that in accordance with that advice the shareholders were free to vote in whatever way they wished. In view of that the board were making no recommendation to the shareholders but leaving the decision on how to vote to the individual judgment of the shareholders. The circular pointed out that if the resolution were passed the company would have to pay £300,873 for the asset it had acquired from the plaintiffs, but, if it were not, the cost would not be much over £183,873. A summary of the advice of leading counsel was set out in an appendix to the circular. If stated, inter alia, (i) that the undertaking and court order did not bind the shareholders, so there could be no penalty on them if they did not approve the issue of the shares to the plaintiffs, and (2) that if the quotation for and permission to deal in the shares were not obtained, the order for the allotment of the shares could not take effect. It

40 was admitted that the company had sufficient unissued shares to enable them to make the required issue without increasing the company’s capital.

Held – (1) The meeting convened for 5 April 1974 should not be allowed to proceed, and the first three orders sought by the plaintiffs should be made, for the following reasons— (i) the circular court not stand in the form in which it had been issued; in order to comply with the company’s undertaking to the court to use its best endeavours to see that the shareholders passed a resolution for the issue of the shares to the plaintiffs, it had to be phrased in positive terms, inviting a favourable response (see p 636, e, post); (ii) in any event, the first resolution was, in the absence of the plaintiffs’ written consent, a breach of the undertaking given by the company in December 1972; and the second resolution was misconceived in that (a) in the circumstances the proposed backdating would involve a form of double payment, and (b) once a company’s accounts for any year had been duly passed, they could not be retrospectively reopened in the manner proposed (see p 632 a to d, post). (2) No order would however be made restraining the directors from voting against the resolution for they were only bound in their capacity as directors to cause the company to comply with the undertaking given to the court (ie by convening the requisite meeting and placing a positive circular before the members); once they had fulfilled that obligation they were entitled as individual shareholders to enjoy the same unfettered and unrestricted right of voting at general meetings of the members of the company as they would have had if they were not directors (see p 637 c e to and j to p 638 a, post). Per Walton J. (i) While the defeat of the resolution would prevent the shares from receiving a quotation, it would not prevent their allotment and issue to the plaintiffs for there was nothing conditional about the obligation undertaken by the company under the agreement and the order did not make that absolute obligation a conditional one (see p 630 b and p 634 b and c, post). (ii) For a shareholder to vote against a resolution to issue the shares to the plaintiffs would not be a contempt of court for decisions taken by a ‘company in general 626 meeting’ and the resolutions passed thereat are decisions taken by, and resolutions passed by, the members of the company and not the company itself. When a shareholder casts his vote in general meeting he is not casting it as agent of the company (see p 634 j to p 635 a d to g and p 636 a, post).

(i) Voting mechanisms Proxies

(ii) Voting agreements- pooling agreements, unanimous shareholder agreements Legislation

41 Barbados s.132 A written agreement between two or more shareholders of a company may provide that in exercising voting rights the shares held by them will be voted as provided in the agreement. s.133 (1) An otherwise lawful written agreement among all the shareholders of a company, or among all the shareholders and a person who is not a shareholder, that restricts, in whole or in part, the powers of the directors of the company to manage the business affairs of the company is valid. (2) A shareholder who is a party to any unanimous shareholder agreements has all the rights, powers and duties, and incurs all the liabilities of a director of the company to which the agreement relates, to the extent that the agreements restricts the discretion or powers of the directors to manage the business and affairs of the company; and the directors are thereby relieved of their duties and liabilities to the same extent. (3) If a person who is the beneficial owner of all the issued shares of a company makes a written declaration that restricts in whole or in part the powers of the directors to manage the business and affairs of the company, the declaration constitutes a unanimous shareholder agreement. (4) Where any unanimous shareholder agreement is executed or terminated, written notice of that fact, together with the date of the execution or termination thereof, must be filed with the registrar within 15 days after the execution of the termination.

Puddephat v. Leith [1916] 1 Ch. 200 A mandatory injunction will be granted to enforce an agreement by the mortgagee of shares in a limited company to vote in accordance with the wishes of the mortgagor.

Grenwell v. Porter [902] 1 Ch. 530 Executors holding shares in a company agreed to sell part of them to G., who stipulated that as part of the transaction he would nominate X. and W. as directors, and that the executors should, when X or W a should retire by rotation, vote for and not against his re- election. The agreement extended to shares whether held by the executors in that capacity or in their own personal capacity. W as about to retire by rotation, and some of the executors threatened to oppose his re-election. Held, that the agreement was valid as regarded the shares held by the executors as such or as directors, and that on W. undertaking to retire, if required by the court, at the ordinary meeting next after the trial, an injunction must be granted until the trial restraining such of the executors as threatened to do so from voting against the re-election of W. on his retirement by rotation.

Greenhalgh v Mallard and Others

42 COMPANY; Incorporation: CONTRACT

COURT OF APPEAL LORD GREENE MR, LUXMOORE AND GODDARD LJJ 25, 26, 27 MAY 1943

Companies – Private company – Articles of association – Restriction on transfer of shares – Whether applicable to all sales both to members and non-members.

Contract – Implied terms – Undertaking to vote as required – Transfer of shares – Breach of contract – Whether obligation binding upon transferees with notice.

On 28 March 1941, the appellant entered into an agreement by which he undertook to provide £11,000 in the form of subscriptions for debentures in a private company which was in urgent need of that sum. The agreement also provided for the allotment of certain shares to the appellant and to 3 directors of the company. By a collateral agreement made about the same time it was provided that the 3 directors should vote with and support the appellant, who would thus gain control of sufficient votes to enable 234 him to carry an ordinary resolution; but this control was lost when, in November 1941, each of the 3 directors sold all but 100 of his shares to certain other members of the company. Art 10, para (a) of the company’s articles of association provided that no shares in the company should be transferred to a person not a member of the company so long as any member of the company might be willing to purchase them at a fair value in accordance with para (b). Para (b) began by providing that, if any member desired to sell or transfer any of his shares, he should notify his desire to the directors by sending them a notice in writing to that effect. It was contended for the appellant (i) that the restrictions on transfer applied to sales to members as well as to non-members and that, since in this case the shares had not been offered to members as a whole, the transfers were invalid (ii) that the 3 directors, in parting with their shares broke their contract by putting it out of their power to support the appellant with the votes necessary to carry an ordinary resolution (iii) that the burden of the contract followed the shares in the hands of the purchasers who acquired them with notice of the contract and these purchasers were, therefore, unable to use their voting power against the appellant:—

Held – (i) the language of art 10, para (b) was not sufficiently clear to cut down the right of transfer inherent in the ownership of shares, and the restriction must, therefore, be

43 taken to apply only to cases of sales to non-members. (ii) the obligation under the contract was only to vote in respect of whatever shares the 3 directors might have or from time to time acquire and it came to an end when the shares were sold. There could, therefore, be no question of restrictive covenant affecting the shares in the hands of the purchasers.

East v. Bennett Brothers, Ltd. [1911] 1 Ch. 163 Company – Memorandum of Association – Increase of Capital – Alteration of Rights of preference shareholders – sanction of preference shareholders by resolution at separate meeting – all preference share held by one person – “meeting”

A company was incorporated with a capital didvided into preference and ordinary shares. The memorandum of association empowered the company to increase its capital, but it provided that no new shares should be issued so as to rank equally with or in priority to the preference share, unless such issue was sanctioned by an extraordinary resolution of the holders of the preference shares present at a separate “meeting” of such holders especially summoned for the purpose of considering the question. The articles of association contained a similar provision. Shortly after the incorporation of the company meetings were held at which a special resolution was passed and confirmed increasing its capital by a fresh issue of shares. At that time B. was the holder of all the original preference shares. He presided at the first meeting, moved the resolution for the issue of new preference shares, and signed

Kerr v John Mottram Limited

COMPANY; Other Company

CHANCERY DIVISION SIMONDS J 7 MAY 1940

Companies – Minute book – Minutes to be conclusive evidence of facts therein stated – Evidence tending to disprove such facts – Evidence inadmissible – Companies Act 1929 (c 23), s 117(3).

Where the articles of association of a limited company provide that the minutes made at the general meeting “shall be conclusive evidence without any further proof of the facts

44 therein stated,” and the minute book and signatures attached thereto are proved, then, in the absence of fraud on the part of the company’s officers, it is not open to a party to adduce evidence tending to prove facts inconsistent with those recorded in the minute book. 629

By the Companies Act 1929, s 120, the minutes of meetings of the company or of the directors are in effect made prima facie evidence of the proceedings. In the present case, the articles of association provided that the minutes should be conclusive evidence of the proceedings, and it is held that the evidence of the minutes can only be rebutted by showing that they were fraudulently compiled SIMONDS J. This action raises a curious point upon which, I am told, there is no previous decision. The plaintiff, Ewen Mackinnon Kerr, sues a limited company, John Mottram, Ltd, claiming specific performance of a contract for the sale to him by the company of certain preference shares and ordinary shares of the company, which it was in a position to sell by virtue of a lien given to it by the articles of association. For the purpose of establishing that contract, he has to lead evidence to show that such a contract was in fact entered into without any qualification, and, in order to lead that evidence, he has to displace the record in the minutes of the company of what took place. When counsel for the plaintiff sought to lead such evidence, objection was taken by counsel for the defendant company that he was not entitled to do so, inasmuch as the evidence which he proposed to lead was inconsistent with what was recorded in the minutes of the company. In support of that contention he relied upon art 114 of the articles of association of the company, which provides as follows:

‘The directors shall cause proper minutes to be made of all general meetings of the company and also of all appointments of officers, and of the proceedings of all meetings of directors and committees, and of the attendance’s thereat, and all business transacted at such meetings, and any such minute of any meeting, if purporting be be signed by the chairman of such meeting, or by the chairman of the next succeeding meeting, shall be conclusive evidence without any further proof of the facts therein stated.’ In order to support his objection to the evidence proposed to be led by the plaintiff, the defendants had to prove the minute book, and had to prove that the signature to the minutes of 7 February 1939, which were the minutes in question, was the signature of the chairman. They accordingly called the secretary of the company, who was also a director, 630 to prove that this was the minute book of the company, that the minutes were the minutes of the meeting in question, and that the signature was that of the chairman of the meeting. That gave counsel for the plaintiff the opportunity of establishing, if he could, that the minutes were not a bona fide record of what took place, and that they had been falsely and fraudulently written up after the events, with a view to setting up a story which was not in accordance with the facts. I am quite satisfied, after hearing the evidence of the secretary, that that minute is correct. I am satisfied that this was a bona fide record of what took place on 7 February 1939. I am not saying that it is in every

45 respect an accurate report. That I do not know, but I am satisfied that it is not a fraudulent report, and not written up. Accordingly, I have to examine, without considering the element of fraud, whether the objection taken by counsel for the defendants to the leading of the suggested evidence is sustainable. Article 114 represents the agreement between the shareholders as to what is to be, as between them, the value and effect of the minutes of the company as recorded in its minute book and signed by the chairman, and their bargain is that it is to be:

‘… conclusive evidence without any further proof of the facts therein stated.’ I have no doubt that the words “conclusive evidence” mean what they say—namely, that they are to be a bar to any evidence being tendered to show that the statements in the minutes are not true. The words “conclusive evidence” which appear in this article are the words which appear also in the Companies Act 1929, s 117(3), which provides as follows:

‘At any meeting at which an extraordinary resolution or a special resolution is submitted to be passed, a declaration of the chairman that the resolution is carried shall, unless a poll is demanded, be conclusive evidence of the fact without proof of the number or proportion of the votes recorded in favour of or against the resolution.’ Those words, which appear in the sections which were the predecessors of that section, have been interpreted by the court, first, in Re Hadleigh Castle Gold Mines Ltd and again by the Court of Appeal in Arnot v United African Lands Ltd, and from those decisions it is clear that the words as they are used are to bear their natural meaning. That is to say, they are to be regarded as evidence which is not to be displaced, and evidence which is conclusive as between the parties who are bound by the minutes. If that is so, that is an end of the plaintiff’s case, because it is clear, upon a reading of the minutes, that no contract such as the plaintiff seeks to establish was entered into on 7 February 1939.

Action dismissed with costs.

Solicitors: Lovell White & King, agents for Pickering & Pickering, Stafford (for the plaintiff); Gibson & Weldon, agents for Hand Morgan & Co, Stafford (for the defendants).

F Honig Esq Barrister. 631

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