“thought I would check the position and the only documents I had to hand were the audited accounts for the period ended30th June 2001 . I checked the notes to those accounts and they confirmed the issued share capital in all three companies were fully paid up. I therefore assumed that Mr Tippins has made a mistake in his letter … The audited accounts were quite clear on this point … I did not, therefore, give the letter the urgency it may have deserved because I was quite confident that my shares were fully paid up. There was no doubt in my mind. It was something that could be clarified in due course but I did not regard it as urgent.” [TB1/78b] In cross examination the Claimant asserted that following receipt of the call letter he went back and looked at the accounts for all of the 3 subsidiaries, found the 3 erroneous notes indicating that the shareholding was allotted, called up and fully paid, and concluded that the call letter was : “very bizarre. I just did not know where it was coming from…. I checked and double checked the accounts. They showed it as fully paid up. I really did not know where this was going but clearly why make a payment for something which I could see for myself was not a true demand” [TPT 4.2.02 pp12-13]. (78). I reject the Claimant’s evidence on this matter. I find the terms of his e-mail response to the call letter, which he sent on 16th October, to be inconsistent with the Claimant’s evidence and to belie it. They are not credibly reconcilable. That e-mail [TB4/252], which was addressed to Mr Tippins, was also copied to the lawyer and the accountant then advising him, Messrs Jacobson and Cadranel respectively. I have already set it out in full in paragraph (52) above. In cross-examination the Claimant said that the last sentence was a “facetious remark”, made knowing the opposite to be true. He said that the e-mail was copied to his lawyer for the purpose of impressing Mr Tippins with his seriousness rather than in fact to seek legal advice. He said that the last sentence of the first paragraph was “a bit of bravado” [TPT 4.2.04 pp16-19]. (79). I simply do not believe that if the Claimant had made the checks he now says he made, and if his state of mind when he set about composing his e-mail response to the call letter was that he was quite certain that the call was based on an error, and that his shares were fully paid up and shown as such in notes to the statutory accounts, he would have written in these terms. Furthermore, the Claimant is not the sort of man who, if he thought he had a knock-out point available to him which would make the majority look foolish, would eschew the opportunity to throw it back at them in a very direct way in his next response, or who would plump for subtle irony instead. There is also a narrower point on the exact wording used. Even if the final sentence had been intended as a facetious, or perhaps ironic, observation, if (which I find it was not) it had been prompted by a specific consideration of the wording of 3 erroneous notes, it would have been expressed in relation to their subject matter, and have read something along the lines of “All these unpaid shares are no doubt shown in the completed company accounts”
“There is, however, an important feature of this type of estoppel, which Robert Goff J had found as a fact to have been present in the post-contract dealings between the parties before him [in Amalgamated Investment & Property Co v Texas Commercial International Bank[1982] QB 84 ], and this is that the party who is sought to be estopped must have contributed in some active way towards the creation or continuance of the mistaken basis on which the parties thereafter conducted their dealings, so that it would be unconscionable to allow him to resile from the stance he had taken, which had to a certain extent influenced the other party to behave as it did.” (95). Further to my findings in relation to the first limb of this issue, I am satisfied that, even if (contrary to my finding) the Claimant did conduct his dealings on the basis of a mistaken assumption on his own part that his shares were fully paid up or agreed to be so credited, the Defendants had not contributed in some active way towards the creation or continuance of that mistaken assumption on his part. (96). Up to 27th September there was no ‘mutually manifest conduct’ based on any assumption (whether express or implied) that the Claimant’s shares were fully paid up or agreed to be so credited as is required for an estoppel by convention (see The August Leonhardt[1985] 2 Lloyd’s Rep 28 per Kerr LJ at 34-35; contrast the facts of the other cases there discussed and Hiscox v Outhwaite[1992] 1 AC 562 (in the Court of Appeal – the estoppel point was not considered in the House of Lords, see at p599)). As to the matters pleaded in the particulars set out at paragraphs 24(1)-(7) of the Reamended Particulars of Claim (TB1/10-11), they do not support a case of ‘mutually manifest conduct’ for the reasons set out in Mr Davies’ written closing submissions at paragraph 48. (97). After 27th September, as I have already found, there can be no question that the Defendants either themselves assumed that the Claimant’s shares were fully paid up or agreed to be so credited, or in any way acquiesced in such an assumption on the Claimant’s part. In any event, the Claimant did not in fact make any such assumption: see his e-mail dated 16 October [TB4/252] and my findings at paragraphs (78) – (81) above. Accordingly there can be no basis for any estoppel by convention in respect of conduct after that date. (98). I reject the Claimant’s suggestion that the Defendants or their directors had hatched some sort of plan to forfeit the Claimant’s shares, and/or had incurred legal costs in order to seek to take unfair advantage of some known or suspected mistaken assumption on the Claimant’s part to the same end. (99). Finally on this issue, I am quite satisfied that there is nothing in the circumstances of this case which renders it inequitable or unconscionable for the Defendants now to deny that the Claimant’s shares were fully paid up or agreed to be so credited. Issue 4 : Did the directors of each company decide to make a call on the Claimant’s shares on or about27 September 2002 as (purportedly) recorded in the minutes at TB 2/2, 8 and 5? (100). I am satisfied that the board meetings of 27 September did take place, essentially as described in the evidence of Messrs Cookson and Tippins, and reflected in the minutes [TB2/2, 8 & 5]. Having been specifically deputed at the end of the ETM on the previous day formally to hold such meetings, it would have been odd for them not to have done so. Mr Cookson chaired the first in time, being that of the board of SSS which both he and Mr Tippins attended at the companies’ offices in Hartley Wintney, before leaving for a business appointment in Leicester by car. Later that morning the meetings of the boards of Acquire and EAT were held. Mr Tippins, still at the offices, chaired these and Mr Cookson participated by (hands free) mobile telephone from his car en route to Leicester. The minutes produced fairly reflect the substance of what occurred. (101). The background to them was, as I have found in paragraphs (44) – (45) above, that on the previous day the subject matter had been discussed informally towards the end of the ETM by all the 4 directors, they had come to the unanimous view that a call should be made on the unpaid shares (in practice that was only the Claimant’s), and Messrs Farrier and Bevan had approved the holding of formal meetings of the boards on the next day although they were unable to attend – Mr Farrier being due to take a day’s leave and Mr Bevan being due to work at home that day (see their respective witness statements at TB1/117 and 121-122). (102). The Claimant’s case on this issue is simply that, as matters of fact, the formal board meetings never took place, and thus that the decisions to make the call recorded in the minutes were never made, at least in the manner alleged, rather than raising any narrower point regarding the formal convening of the meetings or the like. That case fails, on the basis of the findings of fact I have just made. Given the terms of Mr Griffiths’ submissions on this point, I should perhaps add that I am not persuaded that the differences in the evidence given by Messrs Cookson and Tippins before and after disclosure of the HSE documents to which he refers (with regard to whether pre-prepared minutes were or were not read out in terms) demonstrate that they or either or them fabricated any part their evidence about these meetings. Both impressed me as honest and straightforward witnesses, doing their best accurately to recollect events. Mr Cookson initially used the phrase “it is very likely that I would have read through this” in respect of the reading out of draft minutes on 27th September [TPT 23.2.04 p54 lines 30-32], thereby indicating that his evidence was at least in part based on extrapolation or reconstruction rather than direct recollection. It was only when pushed by Mr Griffiths putting to him that his use of such qualified language was “extraordinary really” [lines 35-36] that he changed to an unqualified verbal formulation on this point. He was then challenged as to the change, to which he replied “Because you required a yes or no answer” [lines 46-47]. Mr Cookson’s answers when re-called after disclosure of the documents from HSE were in my judgment reasonable and measured [see TPT 27.2.04 p7 lines 50-54 and p8 lines 3-9]. There may well have been some form of note available to him from which to “run” the SSS board meeting which he chaired before leaving the office, and available to Mr Tippins when he chaired the equivalent (with regard to the call) meetings of the Acquire and EAT boards. Further or alternatively, Messrs Cookson and/or Tippins may well have confused the process followed at different but essentially similar, formal board meetings over this period. Mr Tippins volunteered this possible explanation in his cross-examination when re-called [see TPT 26.2.04 pp46 – 47]. It may well be right. His willingness to accept the inaccuracy in his earlier oral evidence without hesitation or equivocation, and the responses he then gave, certainly impressed me. Whatever the extent to which the 27th September meetings were scripted, I am confident in my finding that they all took place, and that the minutes produced fairly reflect the substance of what occurred. (103). In those circumstances I shall deal only very briefly with the Defendants’ alternative case, which was that if necessary they would rely on the unanimous agreement of all four of the relevant directors that such call should be made, which was made informally at the end of the ETM held on the previous day. As Simon Brown J (as he then was) said in Runciman v Walter Runciman plc[1992] BCLC 1084 at 1092d, “That directors, provided they act unanimously, can act informally appears clearly established – Re Bonelli’s Telegraph [infra] and Charterhouse Investments Trust v Tempest Diesels[1986] BCLC 1 so decide …”
“If you are satisfied that the persons whose concurrence is necessary to give validity to the act did so concur, with full knowledge of all that they were doing, in my opinion the terms of the law are fully satisfied, and it is not necessary that whatever is done by directors should be done under some roof, in some place, where they are all .. assembled”. (104). I do not consider that the fact that one of the four present (Mr Cookson) had formed his own unspoken view that if the matter went all the way to forfeiture (contrary to their joint and several expectation) the Claimant’s shares were likely to end up being transferred to SVSP, but had not expressly stated that view to any of the others, would invalidate such a decision for want of the requisite knowledge on the part of all present. That view was not in any sense a necessary part of the decision the board was making at that stage, and was no more than the private thoughts of one of their number, which were in no sense either an inevitable outcome or binding on them or the companies. Issue 5 : If so, (a) is such decision in some way invalidated by reason of any (undeclared) conflict of interest; and/or (b) did they so decide for an improper purpose? (105). As to (a), the suggested conflicting interest, which affects each of the 4 persons who were directors of one or more of the 3 subsidiaries at the material time, is the holding of shares in SVSP, to which company each of the forfeited shares were in the event transferred. In the case of Mr Cookson, Mr Griffiths additionally relies on his oral evidence that by 26th September he had formed the unspoken conclusion that if the procedure were to lead to forfeiture of the Claimant’s shares, they would then be transferred to SVSP. Though Mr Cookson apparently assumed that his three fellow directors would also (independently, since the matter was not discussed until much later) have come to the same conclusion, none of them in fact did so - the question of what would happen to the shares after any forfeiture (which none of the four expected would happen) simply did not occur to them. (106). The decision made formally on 27th September, having been agreed informally the previous day, was to make a call on shares (pursuant to Regulation 12 of Table A). It was not a decision to forfeit shares. At worst, it was a decision which, depending on how the Claimant (as the only shareholder affected) reacted to it, was capable of giving rise to a situation in which the Board could in the future make a further decision (to issue a further notice requiring payment of the call, pursuant to Regulation 18 of Table A), which in turn was capable, depending on how the Claimant reacted to that, of giving rise to a situation in which the Board could (aliter, would have the opportunity to) resolve to forfeit the Claimant’s shares pursuant to Regulation 19 of Table A. The passage of such a resolution for forfeiture would in turn give rise to the powers to sell, re-allot or otherwise dispose of the same provided for by Regulation 20 of Table A. (107). When the nature of this decision is thus analysed, it is unsurprising that Mr Griffiths did not pursue any argument that the provisions of s.317 CA85 are of any direct application to it. The resolution did not concern a contract or proposed contract (see sub-section (1)), even taking into account the expanded definition of those words to include a transaction or arrangement (see sub-section (5)). (108). Mr Griffiths relies on the general prohibition (described by Gower as ‘the common law rule’) on directors (like other species of fiduciary) putting themselves in a position where there is a conflict (actual or potential) between their duties to the company and their personal interests (or any duty owed to another person). For this he cites Palmer’s Company Law, op. cit., at paragraph 8.516 and Aberdeen Railway Co v Blakie Bros (1854) 1 Macq 461 at 471 per Lord Cranworth L-C: “A corporate body can only act by agents, and it is of course the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal (see Mr Hudson’s case, 16 Beav. 485). And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect. So strictly is this principle adhered to, that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into.”
“what was unquestionably a discretion to exercise with regard to a fiduciary power – namely, a power to decide whether at a particular time a call ought or ought not to be made”
“A Director who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the Company will declare the nature of his interest at a meeting of the Directors or a committee of the Directors in accordance with Section 317 of the Act. A Director who has disclosed his interest may vote in respect of any contract, proposed contract or any arrangement in which he is interested directly or indirectly and such director will be counted in the quorum present at any meeting at which such contract or proposed contract or arrangement is being considered. Regulations 94 and 95 of Table A will not apply to the Company.” (117). The express authorisation to vote on a matter in which the director is interested is dependent on that director having “disclosed his interest”
“Proof that an envelope containing a notice was properly addressed, prepaid and posted shall be conclusive evidence that that notice was given. …” (138). On the face of things, such proof has been provided, indeed on the facts is uncontested. However Mr Griffiths ingeniously submits that the words “properly addressed …” must be construed as meaning “posted to the member at his registered address”, which words appear in Regulation 112. He points out that on this construction of the opening words of Regulation 115 the second call notice has not been so proved in respect of any of the 3 subsidiaries, because : (i) in the cases of SSS and Acquire the Claimant’s address as it appeared in the Register of Members was stated as “26 Wellfield Gardens, Carshalton, Surrey” (inaccurately omitting the word “Beeches” after Carshalton) [see TB2/129 (perhaps read with the earlier though superceded page TB2/124) and TB2/187 respectively]. Mr Griffiths disavows reliance on the addition of the (correct) postcode to the registered address on the second call notice (which was posted in a ‘window’ envelope). I observe that in the earlier though superceded page of the SSS Register of Members the Claimant’s address appeared with the postcode (but without the county); (ii) in the case of EAT no address for the Claimant was shown in its Register of Members [TB2/268 – again, rather than the Register of Applications and Allotments at TB2/264 - is the relevant document for the purposes of this submission]. (139). Mr Griffiths’ argument runs thus : (i) In order for the first sentence of Regulation 112 to have any operative effect, the word “may” in “The company may give any notice …” has to be read as “must”; (ii) Once Regulation 112 is so read, “properly” in Regulation 115 is to be read as meaning in the manner required (aliter the only manner permitted) by Regulation 112; (iii) If the address in the Register of Members is wrong, the company is free to address a notice correctly but (unless it first rectifies the address in the Register of Members) if it does so it loses the benefit of the conclusive deeming provision in Regulation 115; (iv) Any deeming provision is bound to have absurd results, because the nature of such a provision is to deem something to be what it is not; (v) There is no greater absurdity in this argument than there would be in deeming the Claimant to have received something which he did not. (140). Mr Davies submits that the Claimant’s approach to the interpretation of regulation 115 is misconceived and should be rejected for the following reasons: (i) It restricts the ordinary scope of the words “properly addressed” in circumstances where there is no need, in terms of making sense of the words, to do so; (ii) In so far as it involves taking into account the terms of regulation 112, it misunderstands the purpose of regulation 112, which is to provide certainty for the company when giving notice at the registered address, rather than to stipulate that service by post must be to the registered address; (iii) It results in absurdity in that it may, as in the present case (according to the Claimant’s evidence), require service on an address that does not exist. This is contrary to the established approach to the construction of articles of association, which was set out by Vaisey J in Rayfield v Hands[1960] Ch 1 as follows [at 4]: “It has been said that articles of association ought not to be construed too meticulously. See per Wynn-Parry J. in In re Hartley Baird Ltd, where he said: ‘In the interpretation of such a commercial document as articles of association, the maxim ut res magis valeat quam pereat should certainly be applied, and I propose to interpret these articles in the light of that maxim.’ I am not aware that this maxim has ever been put into English, but I suggest that it directs us to ‘validate if possible’. And see per Jenkins LJ in Holmes v Keyes, where he is reported as saying that in his view the ‘articles of association of the company should be regarded as a business document and should be construed so as to give them reasonable business efficacy…in preference to a result which would or might prove unworkable.’” (141). I find no necessity for construing the permissive word ‘may’ in the first sentence of Regulation 112 as if it were the mandatory word ‘must’, and prefer Mr Davies’ submissions on this point. It would in my judgment be somewhat absurd, and contrary to the approach commended by Vaisey J in the passage cited above, to construe the phrase ‘properly addressed’ in such a way that a notice in all respects accurately addressed (as was the case in respect of the second call notice) is nevertheless not ‘properly addressed’, and I would reject such a construction unless there was no other way of giving effect to the express words. That is by no means the position here, and the words ‘properly addressed’ can and should be given their natural meaning. Any absurdity (as Mr Griffiths would put it) inherent in the operation of a conclusive deeming provision need not and should not be added to with any further and avoidable absurdity in its construction. I would also observe that in most cases, the effect of construing Regulations 112 and 115 in such a manner as conclusively to deem the addressee to have received an inaccurately addressed notice would be to disadvantage - and potentially to cause considerable hardship to - the addressee; it just so happens that on the facts of the present case such a construction would fortuitously advantage the Claimant. Issue 9(i) : Were the decisions of the directors of the 3 subsidiaries made on or about3 November 2002 (a) to forfeit the Claimant’s shares for non payment of the call, and (b) to transfer the forfeited shares to Servicespan made for an improper purpose? (142). The decision to forfeit, contrary to the Claimant’s case, was not made pursuant to any plan or plot to remove the Claimant as a shareholder, nor for the purpose or with the intention of benefitting SVSP. I have rejected that suggestion at both the earlier stages of what has been called the ‘forfeiture process’, and I reject it in respect of these two decisions made formally on 3rd November, and informally in advance (in case the unexpected eventuality of non-payment by 2nd November should occur) on or about 24th October. It is true that the relevant formal meetings were held on a Sunday, which at first blush could give the impression of indecent haste and/or snatching at a welcome opportunity. More prosaically, however, I accept the Defendants’ evidence that the day was simply chosen for convenience, as both Mr and Mrs Tippins were working in the office on that day in any event. At that time Mr Tippins was doing a lot of work for IBM, and was not to be in the office the next day. Mrs Tippins attended the meetings as company secretary. Mr Cookson participated by telephone. (143). Understandably, Mr Griffiths seeks to make play of what I am satisfied were some rather confused answers of Mr Cookson (TPT 24.2.04 pp12-13) in which at times he appeared to be saying that he was acting in the interests of SVSP when the decision to forfeit the Claimant’s shares were made. Whilst he did not always express himself clearly, I am satisfied that what he was trying to say overall was that until the resolution to forfeit the Claimant’s shares had been passed, in dealing with first the call (both stages) and then the forfeiture, he was seeking to act in the interests of the shareholders of SSS as a whole. (144). The passages mentioned by Mr Griffiths have to be read in the context of the pages which preceded them. Mr Cookson first agreed (as is obvious in an objective sense) that the forfeiture of the Claimant’s shares and their transfer to SVSP was in the interests of SVSP (aliter benefited SVSP) : TPT 24.2.04 p10 lines 1-17. I would observe that, given that by the time of the forfeiture SVSP held all the remaining (ordinary) shares in each of the 3 subsidiaries, and given the alternatives as to how forfeited shares may be dealt with provided for by Regulation 20 of Table A, SVSP would almost inevitably benefit from a forfeiture, simply viewing the matter objectively. (145). The subject of the questioning then moved to intention to benefit SVSP (lines 19-25). After an intervention by me (lines 27-34) to ensure that Mr Cookson distinguished between 2 distinct points covered by the same question (lines 19-25) Mr Cookson stated (as to the relevant point) : “In respect of Mr Hunter’s shares .. I was acting in the interests of the shareholders of [SSS] in seeking to bring about the closure and winding up of the security business” (lines 42-45). His answers on the following pages are undoubtedly somewhat confused, but that which I find most nearly reflected what he was trying to state was that on page 12 at lines 33-36, when he sought to clarify previous answers as to the point at which he thought he had ceased acting in the interests of the shareholders of SSS as a whole and started acting in the interests of SVSP, by saying it was “at the point when the resolution [for forfeiture – see his next answer, to me] had been passed … that was the point where I was advised that [the Claimant] no longer became a shareholder.” (146). Once the forfeiture had occurred, SVSP was the sole (ordinary) shareholder in each of the 3 subsidiaries, and so its interests and those of the whole body of (ordinary) shareholders were one and the same thing. Neither party has made any submission suggesting that the existence of a comparatively small number of issued ‘A’ shares in each of the 3 subsidiaries should make any difference to the outcome of this or indeed any other issue in the case. (147). Nor do I accept the suggestion that the directors wanted to get rid of the Claimant as a shareholder because they were at loggerheads with him as regards various unresolved issues relating to the distribution of the proceeds of sale of the security business. As Mr Davies rightly submits, and as both Mr. Cookson and Mr. Tippins indicated in their evidence, none of the matters relied upon on behalf of the Claimant as such unresolved issues (principally, the disputes as to the level of costs charged to SSS by Servicespan, as to the invoicing arrangements with Temple and as to his expectation of receiving an interim distribution) would have prevented the parties proceeding with the proposed winding up of the security business. Nor, I would add, were they insoluble by any means other than removing him as a shareholder. If a consensual resolution was impossible, there was always the fall-back recourse of legal proceedings. (148). Mr Griffiths is on stronger ground, however, when he raises the question of what the true purpose of passing these resolutions was. In the case of SSS, a forfeiture would ex hypothesi not facilitate the payment of a dividend rateably to all shareholders (including the Claimant) at the conclusion of the informal winding-up process. In the case of each of the 3 subsidiaries, good corporate housekeeping is an entirely credible purpose for making a call for payment of modest sums amounting in aggregate to£300 on the Claimant’s shares, but on the face of things a forfeiture of the Claimant’s shares would appear wholly disproportionate merely for that purpose, and thus at least prima facie lack credibility as an explanation for taking that step. The answer as to why these two resolutions were passed lies in issue 9(ii) to which I must in a moment turn. (149). So far as the decision to transfer the forfeited shares to SVSP is concerned, given that SVSP was by the time of the forfeiture the only other (ordinary) shareholder in each of the 3 subsidiaries, I find nothing improper in the making of that further and consequential decision pursuant to Regulation 20 of Table A once the decision to forfeit had been taken. Issue 9(ii) : Were the decisions of the directors of the 3 subsidiaries made on or about3 November 2002 (a) to forfeit the Claimant’s shares for non payment of the call, and (b) to transfer the forfeited shares to Servicespan flawed because all or some of the directors made the decision on the mistaken basis that that was the only available course? (150). None of the 4 directors actively wished or desired to forfeit the Claimant’s shares. All of them wanted him to pay the call, so that the informal winding-up could proceed without avoidable difficulty. Furthermore they were all convinced that he would pay, if only at the last minute and perhaps with a large quantity of small coins, just to be awkward or make a point. Thus the non-receipt of the payments due from the Claimant on the call by the expiration of the second 14 day period represented an undesired and unexpected situation for them all. (151). As I have already found at paragraph (54) above, the first (and only) time when there was a considered discussion about what should happen should this undesired and unexpected situation arise between all 4 of the directors was at the end of the ETM held on 24th October. They agreed that if such eventuality should occur then the forfeiture procedure should be followed and that as before (ie on 27th September, following the discussion at the end of the ETM on 26th September) Messrs Cookson and Tippins were to hold the necessary formal board meetings to that end. Each of the 4 were of course cross-examined as to their reasons or purpose for agreeing or deciding that (in such eventuality) the Claimant’s shares should be forfeited. (152). Mr Cookson, having first made it clear that he had had no desire adversely to affect the Claimant, stated that “it was a case of bringing the matter .. all matters to a conclusion… I was called upon to vote on the grounds that [the Claimant] had been asked to make payment for his shares along the lines of advice given to us by our legal advisers and voted accordingly” (TPT 24.2.04 p30). By the time he was re-called the subject of this issue had emerged, and he was asked about it. By that stage in the hearing its potential significance must have been obvious to him. That makes what I find to be the scrupulously fair and honest nature of his answers on this point the more impressive. He said (TPT 27.2.04 p10) “I believe the advice Mr Tippins received was that we could [in contrast to ‘should’ in the question] forfeit [the Claimant’s] shares – if he did not pay them up … I do not recall any other option, although I do recall vividly the fact that none of us believed the shares would remain unpaid .. I do not recall any other option being discussed”
“obviously .. if he did not pay for his shares, then we had to go to the next step. There would seem little point in doing the whole process if we did not follow it as per the next step.” (TPT 25.2.04 p52 lines 21-24). A few minutes later he added “I wanted to follow the Articles of Association, as I was instructed to do, advised to do. I mean, if we have Articles of Association within the company and we follow them step by step, I could see that that had to be right. It seemed proper. Everybody thought it was proper.”
“Before the shares can be forfeited you need to pass a board resolution. I will prepare this for you a few days before 2 November so the paperwork is ready in the event payment is not received on the due date.”
“It is now common to sue for a call on a specially indorsed writ. After judgment has been obtained against the defaulting shareholder the company can, if needs be, proceed against him in bankruptcy, or, if it has these powers in its articles, declare his shares as forfeit.”
“It is, in my judgment, vital to remember that actions of boards of directors cannot simply be justified by invoking the incantation ‘a decision taken bona fide in the interests of the company’…. If it were to be proved that directors resolved to exercise their powers to recommend dividends to a general meeting … without regard to the right of members to have profits distributed so far as was commercially possible, I am of opinion that the directors’ decision would be open to challenge. This is an application, in a sense, of the principle affirmed in so many local government cases and usually called ‘the Wednesbury principle’…” (167). In Byng v London Life Association[1990] Ch 170 CA, the defendant company’s AGM was convened at a location which proved of wholly inadequate capacity for the number of members who attended. The Chairman adjourned the meeting until later that day at a different location with a greater capacity. The Court first held that in any circumstances where there is a meeting at which the views of the majority cannot be validly ascertained, the chairman has a residual common law power to adjourn “so as to give all persons entitled a reasonable opportunity of voting” and speaking (see at 188 per Sir Nicholas Browne-Wilkinson V-C). The question then arose of whether the Chairman exercised that discretion validly. As to that the Vice-Chancellor said (at 189): “The chairman’s decision will not be declared invalid unless on the facts which he knew or ought to have known he failed to take into account all relevant factors, took into account irrelevant factors, or reached a conclusion which no reasonable chairman could have reached, i.e. the test is the same as that applicable on judicial review in accordance with the [Wednesbury principles]”
“It seems to us no coincidence that the courts, considering the exercise of discretionary powers by those to whom such powers have been entrusted (albeit in different contexts), should reach similar and consistent conclusions; and should express those conclusions in much the same language” and went on to cite extensively from Lord Greene MR’s judgment in the Wednesbury case, supra. It is right to add that at the end of that citation Chadwick LJ went on to draw a comparison between the grounds on which the pension trustees in that case were chosen and Lord Greene MR’s exposition of the reason why Parliament entrusts local authorities with various discretionary powers (see at 630B-C). (174). The Hastings Bass principle as it now stands in light of subsequent cases was concisely summarised by Etherton J in Hearn v Younger[2002] WTLR 1317 (another pension trust case) at 1338, paragraph [86] thus : “a decision of trustees to exercise a discretion will be void if (a) the trustees have failed to take into account a material consideration, and (b) that consideration might have materially affected their decision”. (175). In using the word ‘void’ rather than ‘voidable’, Etherton J was agreeing with the earlier observations on that point of Lawrence Collins J in AMP (UK) v Barker supra, again in paragraph [90] of his judgment. (176). Abacus Trust v Barr[2003] Ch 409 Lightman J, like Hastings Bass itself, concerned a private trust, not a pension trust. The learned judge considered the present state of the rule in Hastings Bass in paragraphs [16]-[20] of his judgment, and concluded that “the choice between the two criteria [‘would’ or ‘might’ have taken a different decision] remains open”, citing Scott v National Trust[1998] 2 All ER 705 , 718. Later he went on to consider the ‘void’ or ‘voidable’ question in paragraphs [28]-[33] of his judgment. Contrary to the views of inter alios Etherton and Lawrence Collins JJ mentioned above, Lightman J concluded that “A successful challenge made to a decision under the rule [in Hastings Bass] should in principle result in the decision being held voidable and not void.” (177). In the company law context Mr Griffiths submits that a decision made by directors who have failed to take into account a material consideration in breach of the Wednesbury principles is ‘unconstitutional’ in the language of Lord Wilberforce in Howard Smith v Ampol Petroleuminfra, adopted by Dillon LJ in Lee Panavision v Lee Lightingsupra at 29i-30g. However that language, even if applicable to such cases, does not expressly address the ‘void’ or ‘voidable’ distinction. Looking back at two of Mr Griffiths’ main cases on this point, in the passage from Re A Company, ex parte Glossop cited supra Harman J spoke of decisions being ‘open to challenge’. I am confident he was not contemplating such decisions being void even without being set aside by the Court. The language used and relief granted in Byng v London Life Associationsupra (the chairman’s decision to adjourn was said and declared to have been “invalid” and a declaration made that the proceedings conducted at the resumed and relocated meeting were “invalid and of no effect” (see at 191 per the Vice-Chancellor)) does not unambiguously address the distinction. (178). Finally on this issue, Mr Davies cites Charterbridge Corporation v Lloyds Bank[1970] Ch 62 . In that case Pennycuick J’s primary ruling was that in construing the ambit of purposes and powers expressly provided for by a company’s Memorandum of Association (for the purposes of an issue as to ultra vires), there should be no implied limitation by reference to the state of mind of the directors dealing with the transaction (see at 74B). Pennycuick J then went on to consider (in case his primary ruling was wrong) the consequences of an earlier finding which he had made that the directors had failed to give separate consideration to the benefit of the particular company concerned (as opposed to its group as a whole) (see at 74C). The effect of the passage in his judgment which follows (74C-75B) is that provided an intelligent and honest man in the position of a director of the relevant company could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company, the decision would not be set aside notwithstanding the earlier finding I have mentioned. This cannot be directly equated with the ‘would’ test considered in the trust cases mentioned above, but it is certainly the application of an objective test to uphold a decision which had been made without taking into account a material consideration (the benefit to the particular company concerned). (179). In the absence of any clearer guidance on the ‘void’ or ‘voidable’ question in the context of company law, and in particular decisions of directors, in any of the cases cited to me on this point, I conclude that the appropriate legal consequence of a relevant failure by directors to take into account a material consideration is voidability. Pragmatic considerations undoubtedly point in favour of relief in such cases being discretionary. This fits in with the judgment of Pennycuick J in Charterbridge Corporation v Lloyds Banksupra. This would also appear to accord with general principles in relation to what in old fashioned language would have been described as ‘fraud on a (directors’) power’ (as to which I note the observations of Helsham J in a New South Wales case Provident International Corporation v International Leasing Corporationinfra, citing Dixon J at 439 [32]-[35], and then in the passage I cite in paragraph (196) below), and is consistent with the views of Lightman J in Abacus Trust v Barrsupra, the most recent of the series of trustee cases discussed above. (180). Thus, as the directors’ decision to forfeit the Claimant’s shares is (subject to locus standi) voidable not void, I must go on to consider the ‘would’ or ‘might’ question for the purposes of deciding whether the resolution to forfeit should be set aside, in case it makes a material difference on the facts of this case. (181). Mr Davies points out that because this point was not pleaded, none of the 4 directors dealt with how they would have decided the forfeiture issue if they had been conscious of the existence of a genuine discretion as to whether to forfeit, and duly considered the alternative courses of action (beyond mere inactivity) available to them, in their witness statements. Nor were they cross-examined as to such. This is correct, though it is a by-product of the way in which the factual basis for this particular point emerged during the course of the trial. He submits that in these circumstances it would be unfair to assume against the directors that they would have acted differently. That submission is only applicable to the application of the ‘would’ test. Further, if the ‘would’ test is the one which should be applied, what this submission amounts to is a warning against assumption and perhaps also against speculation without a sufficient evidential basis; such a warning is a proper one. That said, any finding as to how a person or persons would have acted in hypothetical circumstances can only be a matter of inference to be determined from all the circumstances (Allied Maples v Simmons & Simmons[1995] 4 All ER 907 per Stuart-Smith LJ at 915d). Further, there are considerable inherent limitations to the value of witnesses’ evidence, albeit honest and well-intentioned, as to what they would have done in hypothetical situations; a fortiori where they have any sort of interest in the outcome. (182). Mr Davies submitted that so far as the ‘would’ test is concerned, the appropriate finding looking at the evidence overall is that the directors would have decided to proceed to forfeiture in any event. He referred in particular to Mr Farrier’s answers in cross-examination at TPT 26.02.04, p31. I have already quoted some passages from that page of the transcript in paragraph (154) above. I find Mr Farrier’s evidence helpful on this hypothetical question, but it does not point me towards the same conclusion as that which Mr Davies urges. I am confident that Mr Farrier at least (the witness who described his ‘sinking feeling’) would almost certainly have preferred a sensible and constructive alternative to forfeiture (such as alternative (v) mentioned in para. (162) above) had one been considered by him, and I so infer. I do not consider that his earlier answer about following a process through having started it undermines such an inference. In the hypothetical circumstances now under consideration, one approaches the question on the assumption that (assuming the directors would have received legal advice and would have had that it in the forefront of their minds) they would have been advised that in the event of non-payment within the time limited by the second call notice served pursuant to Regulation 18 of Table A, they had a genuine discretion as to whether to forfeit, and should consider the realistic alternative courses of action available to them (as to which see paragraph (162) above). If the ‘would’ test rather than the ‘might’ test should be applied, in all the circumstances of the case the inference I draw, applying the balance of probabilities, is that the board would have made a different decision, in particular with regard to SSS. I believe they would have been anxious to preserve unanimity, and Mr Farrier’s desire to avoid forfeiture if possible would therefore have been influential. This inference is also consistent with the directors’ own case as to purpose (which I have accepted), namely that in the case of SSS their purpose was to get the Claimant to pay the nominal or par value for his shares, in order thereby to facilitate the expeditious and efficient completion of the informal winding-up process, as well as (in common with Acquire and EAT too) as a matter of corporate ‘good housekeeping’ (see paragraph (61) above). (183). The ‘might’ test is of course an objective one. Applying this test, I have no hesitation in finding that the directors might have made a different decision, i.e. one other than to proceed to forfeit the Claimant’s shares, had they been conscious of the existence of a genuine discretion as to whether to forfeit, and duly considered the alternative courses of action (beyond mere inactivity) available to them. (184). Thus in the event, on the historical and hypothetical facts of this case as I find them, both the ‘would’ and the ‘might’ test lead to the same, affirmative answer. In these circumstances it is unnecessary for me further to investigate yet another legal issue in order to determine which of these tests should be applied in the present context, and I shall not do so. (185). Before leaving this issue, however, I would add a more general observation. As Palmer’s Company Law, op. cit., at paragraph 6.903 explains, “Forfeiture is treated very strictly by the courts, and directors seeking to enforce it must pursue exactly the course of procedure marked out by the articles. A slight irregularity is as fatal as the greatest.”
“It is necessary, however .. to consider the objections the Defendants make to the cancellation of the forfeiture. On the merits they have said little; indeed there is not much to be said … But many technical reasons are alleged against it … The third objection, that the suit is not in the name of the company is a more serious objection, but it does not apply to the question of forfeiture; it applies to the other branch of relief which the bill seeks.” (underlining added) The words I have underlined directly answer Mr Davies’ point on locus standi. I do not accept his argument that the reasoning is dependent on (as he asserts) the refusal of a tendered payment meaning that the forfeiture had not been carried out validly under the Articles of Association, and that the Master of the Rolls’ ruling on this point was because the shareholder had an action against the company for breach of the contract between them constituted by the Articles of Association (now reflected in s.14, CA85). Were it so, one might have expected those points to be at least mentioned, however briefly, in the judgment (the brevity of the report of the plaintiff’s argument on p328 greatly weakens any similar point made in relation to that). I would also observe that the words underlined appear unsurprising, given that a resolution to forfeit directly expropriates the property of the shareholder(s) affected, in contrast to most resolutions of directors, which directly affect the company’s property or other interests and only indirectly (via the value of their shareholding) those of the shareholders. (194). More recent cases, though not concerning resolutions to forfeit, tend to support the decision on this point in Sweney v Smithsupra. Howard Smith Ltd v Ampol Petroleum Ltd[1974] AC 821 was a decision of the Privy Council, on appeal from Street J (as he then was) sitting in the Equity Division of the Supreme Court of New South Wales. Ampol brought a successful claim in the Supreme Court to set aside an allotment of shares by the directors of RW Miller (Holdings) Ltd (“Miller”) and for consequential rectification of Miller’s share register. Ampol and another company called Bulkships with which it was associated, between them held c.55% of the shares in Miller. The allotment which was challenged had the effect of diluting that combined holding to 36.6%. Street J found that although Miller had needed capital, and although the directors who resolved to make the challenged allotment to Howard Smith (a company which had announced a take-over bid for Millers, which Ampol and Bulkships had rejected) had not been motivated by any purpose of personal gain or advantage, nor by a desire to retain their own positions on the board, their primary purpose was to reduce the proportionate shareholding of Ampol and Bulkships, so as to enable Howard Smith’s take-over bid to proceed. Such a purpose was outside the constitutional role of the directors of a limited company, and therefore the exercise of their power to allot was invalid and set aside. The plaintiff in the suit was Ampol, and the defendants Howard Smith (the allotee), Millers, 11 directors and Millers’ registrar. Having accepted that an allotment of shares was within the directors’ powers under Millers’ Articles of Association (clause 8), Lord Wilberforce giving the opinion of the Privy Council said (at 834 and then 837): “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”…. (continuing at 837) “Just as it is established that directors, within their management powers, may take decisions against the wishes of the majority of shareholders, and indeed that the majority of shareholders cannot control them in the exercise of these powers while they remain in office … so it must be 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. To do so is to interfere with that element of the company’s constitution which is separate from and set against their powers.” (195). For the immediate purposes of this case, the key point is that the successful plaintiff, Ampol, brought the case in its own name and not as a derivative action (the company, Millers, was one of the defendants, though it seems that only Ampol and Howard Smith took an active part in the proceedings before the Privy Council). Lord Wilberforce observed (at 838) that “It was not disputed that an action to set aside the allotment and for rectification of the register was properly brought by Ampol as plaintiff”
“the rule in Foss v Harbottle supra does not apply in the case of a fraud on the powers of directors at any rate where the abuse of power concerns a purported issue of shares, and I am of the opinion that this is so where the fraud consists of no dishonesty but a mere attempt to use the power for purposes other than that for which it is given …” (continuing at 441) “… there is not the slightest doubt that no restriction of the nature of the rule in Foss v Harbottle is placed on a shareholder’s action if he relies on his statutory right to rectify the register … although exactly the same issues will be involved.” (197). Finally on this issue, Mr Griffiths cited dicta of Hoffmann J (as then was) in Re a Company (No 005136 of 1986)[1987] BCLC 82 . I have in mind (as Mr Davies rightly submits) that this was a case brought under s.459 CA85, that the central allegation was that directors had breached their fiduciary duties by the improper exercise of the power to allot shares, just as in Howard Smith v Ampol Petroleumsupra, and that the result of the application before Hoffmann J, namely that the petitioner was not entitled to an indemnity from the company for his costs, was entirely consistent with the orthodox approach to costs in the context of s.459 petitions. Hoffmann J said (at 84d-85a): “Although the alleged breach of fiduciary duty by the board is in theory a breach of its duty to the company, the wrong to the company is not the substance of the complaint. The company is not particularly concerned with who its shareholders are. The true basis of the action is an alleged infringement of the petitioner’s individual rights as a shareholder …. Professor Gower in his Principles of Modern Company Law … distinguishes between the derivative action and the member’s personal action. The former is brought when- “a wrong has been done to the company and action is brought to restrain its continuance, or to recover the company’s property or compensation due to it.”