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 to
8
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 such by the company and
9
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.
________________________________________
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.’
¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯
a
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
management (see Fraser v Walley, Punt v Symons & Co, Piercy v S Mills & Co Ltd,
15
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:
________________________________________
Hindle v John Cotton Ltd (1919) 56 SLR 625 at 630, 631, per Viscount Finlay
¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯
a
‘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 reelection, 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
(i)
Nature / Procedure
17
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.
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
18
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
directors is to be altered, it can only be under the machinery of the memorandum and
articles themselves.
19
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.
LORD REID
The points which are now before the House are, no doubt, difficult, but they are short
21
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
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
22
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 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.
23
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 pleain-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 coplaintiffs. 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 subcommittees 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.
________________________________________
Section 141(2), so far as material, is set out at p 44 c, post
¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯¯
a
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 reelection. 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
45
in every 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
46
47