Zavarco Plc v Ranjeet Singh Sidhu

This is an appeal by Mr. Ranjeet Singh Sidhu (“Mr. Sidhu”) against a decision of Upper Tribunal Judge Jonathan Richards, sitting as a High Court Judge (“the Judge”) ordering Mr. Sidhu to pay €84 million and interest of about €17.5 million to Zavarco plc (“Z plc” or “the Company”).

The case concerns the provisions of the Companies Act 2006 (the “2006 Act”) which relate to the payment for shares of a public company. In particular, it raises issues in relation to section 584 (which requires shares taken by a subscriber pursuant to an undertaking in a public company’s memorandum of association to be paid up in cash); sections 593 and 594 (which prohibit a public company from allotting shares other than for cash unless certain exemptions apply); and section 606 (which gives the court a discretion to exempt a person who is liable to pay for shares from such liability).

The relevant statutory framework is to be found in Chapters 5 and 6 of Part 17 of the 2006 Act. The general rule is that shares allotted by a company, and any premium on them, can be paid up in money or money’s worth (section 582(1)). That general rule is, however, subject to particular additional rules for public companies (section 582(3)). Those additional rules include sections 584, 593-594 and 606 of the 2006 Act.

Section 584 appears in Chapter 5 and provides,

Section 593 appears in Chapter 6 and provides,

Section 594 provides,

Section 606 appears in Chapter 6 and provides,

The factual background is set out in some detail in the judgment: [2021] EWHC 1526 (Ch) (“the Judgment”). For the purposes of the appeal, the relevant facts can be more shortly stated.

The underlying commercial background concerned three Malaysian companies which the Judge referred to as Zavarco Berhad (previously known as Vasseti Berhad) (“ZB”), V Telecoms Berhad (“VTEL”), and a company known as Open Fibre Sdn Berhad (“OFSB”).

VTEL was a telecommunications company that had, by the mid-2000s, obtained licences to build and operate telecommunications infrastructure in Malaysia. It was controlled by Mr. Sidhu and a Mr. Shailen Gajera (also known as Shailen Popatlal) (“Mr. Gajera”). Mr. Gajera is a financial adviser in Malaysia who, as the Judge found, had sought to conceal his interests in VTEL by the use of nominee shareholdings.

Until late 2010, 91% of the shares in VTEL were owned by OFSB. The Judgment contains a detailed review of the evidence as to the true beneficial ownership of OFSB. Ultimately, the Judge found that both Mr. Sidhu and Mr. Gajera had a beneficial interest in shares in OFSB, together with some other unidentified third party stakeholders.

In late 2010, OFSB transferred its shareholding in VTEL to ZB in return for the issue of A Ordinary Shares of Malaysian Ringgit (“RM”) 100 each in ZB, which became the holding company of VTEL. The Judge found that at the time of the subsequent incorporation of the Company on 29 June 2011, the registered holders of the ordinary shares of RM 1 each and A ordinary shares of RM 100 each in ZB were as follows,

Mr. Sidhu held 9,999,999 ordinary shares;

Tan Sri Syed Mohd Yusof Bin Tun Syed Nasir (“Mr. Nasir”), a Malaysian businessman, held 4 million ordinary shares;

Dato M Harisharan Pal Singh (“Mr. Singh”), a friend of Mr. Sidhu, held 1 million ordinary shares as nominee for Mr. Sidhu;

A retired army general held a single ordinary share as nominee for Mr. Sidhu; and

OFSB held 3,960,000 A ordinary shares.

There were, in addition, an unknown number (but thought to be about 40 million) of preference shares of ZB in issue. The Judge was unable to make any findings as to the precise nature or rights attaching to such shares.

The Judge found that when the efforts on behalf of ZB to raise money to finance the telecommunications business of VTEL proved less successful than planned, Mr. Sidhu and Mr. Gajera decided to take a different approach. The plan was to form a new English public company which would acquire the shares of ZB and thus become the holding company of ZB (and the indirect holding company of VTEL). That new English public company would then be listed on the Frankfurt Stock Exchange and offer shares to the public to be traded on the exchange. Mr. Sidhu and Mr. Gajera were attracted to this plan because the Frankfurt Stock Exchange would permit the underlying telecommunications business to be valued on the basis of VTEL’s predicted future cash flows, rather than just current revenues.

As the Judge recorded in the judgment, both parties accepted that this plan was implemented too quickly and without proper care. In particular, and extraordinarily, no-one took any English legal advice even though the formation of an English public company was at the heart of the plan. Instead, the formation of the Company was attended to by a Mr. Nasir Mogul (“Mr. Mogul”) who the Judge described as an American businessman and corporate adviser, who did not have the necessary expertise.

In the ordinary course of events (and especially given the terms of the Share Sale Agreement for the acquisition of ZB to which I shall refer below), it might have been expected that the Company would simply be incorporated with the minimum number of subscriber shares, and would then allot and issue a much larger number of shares to the shareholders of ZB as consideration for the acquisition of their shares in ZB. However, for reasons that the Judge was unable specifically to identify, but which he surmised might have been due to Mr. Mogul’s lack of expertise and “some crossed wires” between those involved in the planning, the Company was in fact incorporated with a very substantial initial share capital of €120 million comprising 1.2 billion shares of €0.10 each.

It is that fact that has given rise to the issues in this case, because, as the Judge found, it was common ground among everyone involved that no-one was expected to pay cash for the initial shares in the company, there was no indication that anyone turned their mind to the question of how those shares would be paid up, and there was no independent valuation of the shares in ZB that were acquired by the Company.

The Company was incorporated as a public limited company in England and Wales on 29 June 2011 under the 2006 Act. The application to the Registrar of Companies to register the Company was made electronically. The statement of capital stated that the share capital of the Company was 1.2 billion ordinary shares of €0.10 nominal value each, all of which shares were stated to be paid up in full, giving an aggregate nominal capital of €120 million. The statement of initial shareholdings identified Mr. Sidhu as the holder of 840 million ordinary shares with a nominal value of €84 million, and Mr. Nasir as the holder of 360 million ordinary shares with a nominal value of €36 million. The statement of compliance confirming that the requirements of the 2006 Act as to registration had been complied with was authenticated by Mr. Sidhu and Mr. Nasir.

The memorandum of association of the Company was in the form prescribed by Regulation 2 and Schedule 1 of the Companies (Registration) Regulations 2008 (SI 2008/3014). It stated,

The Judge found that after its incorporation, on or about 25 July 2011, the Company acquired all of the ordinary and A ordinary shares in ZB (the “ZB Sale Shares”). After the acquisition had occurred, a document purporting to set out the terms of such acquisition (the “Share Sale Agreement”) was executed on or about 8 August 2011 and backdated to 29 June 2011.

The Share Sale Agreement provided for the purchase by the Company (defined as “VUK or the Purchaser”) of the ZB Sale Shares from the registered holders of those shares (defined as the “Vendors”). The purchase was said to be in return for what was referred to as the “Consideration”, which was in turn defined as “the issuance [sic] of 1.5 billion ordinary shares of the Purchaser i.e. VUK”.

Clause 4.2 of the Share Sale Agreement provided,

As the Judge also observed, the reference in clause 4.2 of the Share Sale Agreement to the VUK Shares to be issued ranking pari passu with the existing ordinary shares of the Purchaser raised the question of whether the 1.5 billion ordinary shares in the Company which were expressed to form the “Consideration” for the acquisition of the ZB Sale Shares were intended to be in addition to the initial 1.2 billion ordinary shares held by Mr. Sidhu and Mr. Nasir, or whether those 1.2 billion ordinary shares were to form part of the 1.5 billion Consideration shares.

As the Judge explained in paragraph [37] of the Judgment, the Company did not contend that it was expected that it would ever have 2.7 billion ordinary shares in issue. Accordingly, the Company accepted that the 1.5 billion ordinary shares forming the Consideration referred to in the Share Sale Agreement included the initial 1.2 billion ordinary shares held by Mr. Sidhu and Mr. Nasir on incorporation.

The Judge also recorded that it was common ground that the Company issued a further 300 million ordinary shares at some point, although neither side sought to establish the identity of the shareholders to whom those additional shares were issued, or on what terms.

The Company’s listing on the Frankfurt Stock Exchange became effective on 23 August 2011. The Judge found that it was supported or procured by the use of three false or misleading documents. The first was a valuation of ZB as at 29 June 2011 at €2.38 billion by Ari & Co.. The Judge concluded that neither Mr. Gajera nor Mr. Sidhu had any belief that this was a realistic valuation of ZB. The second was a letter from Crilly & Co., a firm of UK chartered accountants which was dated 26 July 2011 and purported to confirm that the Company had an equity capital of €120 million which had been paid up in cash. That was untrue. The third was a letter dated 14 July 2011 bearing Mr. Sidhu’s electronic signature which purported to confirm that as at that date the Company had at least 35 shareholders. At that date it would in fact appear that it only had Mr. Sidhu and Mr. Nasir as shareholders.

Following the listing on the Frankfurt exchange, there was a moratorium on dealings in the Company’s shares by the majority shareholders, during which time its share price was stable. However, after that moratorium expired in January 2013, the share price collapsed. The detail and consequences of how the Company came to be listed on the Frankfurt exchange and the subsequent collapse of its share price are not relevant to the issues before us.

The Company has brought claims against both Mr. Nasir and Mr. Sidhu in relation to the process by which it was incorporated and acquired the shares in ZB. Although the identity of those now controlling the affairs of the Company is unclear, it appears likely that the commencement of that litigation was at the instigation of Mr. Gajera who was a director of the Company at the relevant times until October 2021.

In particular, following a trial in October 2017 before Martin Griffiths QC (as he then was) sitting as a Deputy High Court Judge, the Company succeeded in obtaining declarations that the 360 million ordinary shares registered in Mr. Nasir’s name were unpaid, and were liable to be forfeited: see Zavarco plc v Nasir [2017] EWHC 2877 (Ch).

However, as the Judge in the instant case noted in paragraph [37] of his Judgment, the Company’s case against Mr. Nasir proceeded on a very different factual footing from the instant case. In contrast to the instant case, Martin Griffiths QC found that the 360 million ordinary shares registered in the name of Mr. Nasir stood apart from the 1.5 billion ordinary shares which formed the consideration for the Company’s acquisition of the ZB Sale Shares. For that and other reasons, although some of the same issues that were decided by Martin Griffiths QC also arise in this case, the parties before us were agreed that his decision was not binding upon the Judge in the instant case.

Permission to appeal the decision of Martin Griffiths QC was refused in May 2018. The Company then issued a second set of proceedings against Mr. Nasir for €36 million plus interest, being the nominal value of the initial 360 million ordinary shares in the Company which were held by him. Mr. Nasir sought to have the second claim struck out on the basis that the Company’s cause of action had merged in the first declaratory judgment, or that it was an abuse of process on Henderson v Henderson grounds. The Company’s claim was initially struck out by Chief Master Marsh, but reinstated on appeal by Birss J (as he then was), whose decision was upheld by this Court last year: see Zavarco v Nasir [2021] EWCA Civ 1217. None of the issues arising on that appeal are relevant to the decision in the instant case.

As indicated above, in the instant proceedings brought against Mr. Sidhu, the Company claims the €84 million nominal value of the 840 million shares held by him on incorporation, together with interest.

In his Judgment, the Judge first conducted a detailed review of the evidence and made some factual findings as to the beneficial interests of the various persons involved in the shares in ZB. The Judge found on the evidence that each of Mr. Sidhu, Mr. Gajera and Mr. Nasir had a beneficial interest in the ordinary shares in ZB, and that it had been agreed that the interests of Mr. Sidhu and Mr. Gajera were to be broadly equal. He could not, however, more precisely quantify the extent of those beneficial interests.

The Judge then addressed the arrangements in existence on or prior to the incorporation of the Company on 29 June 2011. Both sides accepted that this was the relevant date upon which to test whether sections 584 and 593-594 of the 2006 Act applied to the 840 million shares held by Mr. Sidhu on incorporation.

In that latter respect, the Judge held as follows,

The Judge elaborated the point about the lack of clarity as to who was to have a beneficial interest in the shares which were to be issued as the consideration for the acquisition of the ZB Sale Shares in paragraphs [80]-[83] of his Judgment as follows,

In his legal analysis, the Judge first noted that he had raised the question at the outset of whether the 840 million shares taken by Mr. Sidhu on incorporation had been “allotted” to him within the meaning of section 593 of the 2006 Act. The Judge simply recorded that the parties had agreed that this was so, and stated that he was content to proceed on the basis of that common approach. For reasons that I shall explain below, I consider that this is an incorrect reading of the 2006 Act and that the parties were incorrect to invite the Judge to proceed on that basis.

The Judge then addressed the question of what was required to take advantage of the exemption for share-for-share exchanges in section 594. He held in paragraph [95] that although there could be an “arrangement” within the meaning of section 594 where no contractually binding agreement has been entered into,

The Judge then held that this test was not satisfied on the facts. He stated, at paragraphs [97]-[101],

The Judge thus concluded,

The Judge then dismissed an argument by Mr. Sidhu that the Company was estopped by convention from asserting that he was liable to pay €84 million for the shares held by him. There is no appeal against that decision.

The Judge then moved to consider whether to grant Mr. Sidhu relief from his liability to pay €84 million pursuant to section 606 of the 2006 Act. The Judge held that if Mr. Sidhu’s liability arose under section 593, section 606(1)(a) would apply. That is plainly correct. However, the Judge also stated (without giving any further explanation) that if Mr. Sidhu’s liability arose under a contractual undertaking or by virtue of any obligation imposed by section 584 of the 2006 Act, that would be within the scope of section 606(1)(b). I shall return to consider that assumption as to the application of section 606(1)(b) below.

The Judge held that the overriding principles to be applied in exercising a discretion under section 606 were those set out in section 606(4), which he summarised as follows in paragraph [114(v)] of his Judgment,

The Judge first relied on the primacy of the “overriding principle” to reject a submission on behalf of Mr. Sidhu that it would be unjust not to grant relief because Mr. Gajera would be the main beneficiary of such an order (via the Company).

The Judge then assessed the evidence before him as to the value of the ZB Sale Shares. In that exercise, the Judge was hampered by the fact that in spite of Mr. Sidhu having been given permission at an earlier stage in the proceedings to adduce expert evidence as to the valuation of ZB, no such expert evidence had been put forward. Instead, Mr. Sidhu argued that the value of the ZB Sale Shares could simply be ascertained from the audited accounts for the group headed by ZB for the year ending 31 December 2011, which, on a consolidated basis, showed total assets of the group of about RM753 million and total liabilities of about RM98 million. At an exchange rate of about €1: RM4.8, that equated to net assets of more than €130 million, which Mr. Sidhu contended exceeded the nominal value of the 840 million ordinary shares issued to him.

The Judge rejected those submissions, holding that he could not be satisfied on the balance of probabilities that the shares in ZB acquired by the Company were worth at least €84 million. He stated, at paragraphs [120]-[121],

The Judge then also rejected a submission that Mr. Sidhu should be relieved of his liability in part. He explained, at paragraph [124],

At the end of his Judgment, the Judge also addressed an issue which he indicated he did not need to decide in light of his decision in relation to sections 593 and 594, namely the question of whether Mr. Sidhu was liable under section 584 of the 2006 Act. The Judge identified that the issue arose because section 584 required shares taken by a subscriber “in pursuance of an undertaking of his in the memorandum” to be paid up in cash. Mr. Sidhu argued that the undertaking which he gave in the memorandum to subscribe for “at least one share” could be fulfilled by taking only one share and hence he was not liable under section 584 in respect of more than one ordinary share.

The Judge did not accept that argument but also did not consider that Mr. Sidhu’s undertaking could be construed as an undertaking to take however many shares the Company chose to allot to him. The Judge stated, at paragraph [133],

The Judge then concluded, at paragraph [134],

At the hearing of the appeal, the parties argued the case on the same basis as before the Judge at trial. Mr. Sidhu contended that the Judge was wrong to reject his argument that the 840 million ordinary shares in the Company were allotted to him in connection with an arrangement falling within the exception in section 594(2)(a) of the 2006 Act. He contended that the arrangement was one under which the consideration for the allotment of those shares was to be provided by the transfer to the Company of the ZB Sale Shares – i.e. the ordinary and A ordinary shares in ZB, and that this arrangement was sufficiently certain to satisfy the requirements for the exception in section 594(2)(a). In the alternative, he contended that the Judge was wrong to refuse to grant him relief under section 606 of the 2006 Act. He argued that the Judge should have found, on the strength of ZB’s audited accounts for 2011, that the Company received consideration for the allotment of the ordinary shares at least equal to €84 million.

The Company resisted the appeal and, by a respondent’s notice, contended that the Judge’s decision should be upheld on the alternative grounds that Mr. Sidhu was in any event liable as a subscriber pursuant to his undertaking in the memorandum and section 584 of the 2006 Act to take and pay cash for 840 million shares.

Mr. Sidhu responded that his undertaking in the memorandum could be fulfilled by only taking and paying for one share in cash, that the remaining 839,999,999 shares which he held on incorporation were not taken in pursuance of his undertaking in the memorandum so that there was no obligation for them to be paid in cash, and that section 584 in any event imposes no civil liability on a subscriber.

After hearing oral argument, reserving judgment, and having had the opportunity to consider the matter further, we provided the parties with a note which set out an analysis of the statutory provisions which differed in some respects from that which either of them had advanced. We asked for, and in due course received their written submissions on the points that we had raised.

For reasons that follow, I consider that, regrettably, the parties agreed that the Judge should determine the case on an incorrect legal basis. In my judgment,

the Judge was right initially to question whether section 593 of the 2006 Act had any application to this case, and he was wrongly invited by the parties to deal with the case on the basis that it applied. Section 593 had no application because the subscriber shares were not allotted by the Company within the meaning of that section;

on the true construction of Mr. Sidhu’s undertaking in the memorandum and the terms of section 584 of the 2006 Act, Mr. Sidhu had an obligation to the Company to pay cash for the 840 million shares that he took on incorporation; and

section 606 of the 2006 Act did not apply and the court had no power to relieve Mr. Sidhu from such liability.

It is convenient to begin by analysing the nature of a subscriber’s undertaking in the memorandum to take shares on incorporation of a public company prior to 2006.

When the distinction between “private companies” and “public limited companies” was first introduced in the Companies Act 1980 (the “1980 Act”), section 2(4) of the 1980 Act required the memorandum of a public company to be in a prescribed form that closely reflected the conventional form of memorandum that had been in use by private companies for decades under earlier Companies Acts. That form of memorandum included a statement of the initial authorised share capital of the company, and the concept of a “subscriber” was, quite literally, a person who signed his name underneath an agreement to take a specified number of those shares in the company.

Accordingly, the prescribed form for a public limited company in the 1980 Act included the following paragraph 6,

Sections 2(5) and (6) of the Companies Act 1985 followed the same structure as the 1980 Act, by providing that,

Table F of the Companies (Tables A to F) Regulations 1985 (SI 1985/805) was also in a similar form to the prescribed memorandum for a public company in the 1980 Act. The standard form memorandum under the 1985 legislation included an agreement by the subscribers as follows,

In this way, under the 1980 and 1985 Acts, the extent of an undertaking given by a subscriber in the memorandum of association of a public limited company was very clear. The undertaking was to take the number of shares set out against each subscriber’s name in the memorandum. Under the 1985 Act, by reason of section 2(5)(b), this could not be less than one.

The legal nature of a subscriber’s undertaking in the memorandum had also long been settled by a series of decisions under the early Companies Acts. The undertaking in the memorandum amounted to a contract by the subscriber with the company to take and pay for the number and type of shares specified in the memorandum. That contract took effect when the company was incorporated and the subscriber had an immediate obligation to pay without any further action being required by the company.

The subscriber’s obligation to pay cash for the shares was either the result of interpretation of the memorandum or was the result of the application of section 25 of the Companies Act 1867. That section provided,

Although section 25 of the 1867 Act contained a statutory exception where a contract had been filed prior to issue of the shares, that exception was held to be incapable of applying to the shares taken on incorporation by a subscriber.

These principles were established in re Pen’Allt Silver Lead Mining Company, Fothergill’s Case (1872-1873) LR 8 Ch. App. 270. The defendant, Mr. Fothergill, had subscribed for 1,000 ordinary shares in the company at £2 per share. The question was whether he was to be treated as having paid £2,000 to the company by a contract for sale to the company of an interest which he had in a mine in exchange for fully paid shares. The contract for sale had been entered into between the defendant (and two others) and a trustee for the intended company prior to its formation; and it was expressed to be contingent on being adopted by the directors after the formation of the company.

The Court of Appeal held that the defendant’s undertaking in the memorandum to take 1,000 shares of £2 each was separate from and independent of the agreement for sale of the mine to the company, and that the defendant could not escape his liability to pay for the shares in cash. The judgments in the Court of Appeal were based on the interpretation of the memorandum and the agreement for sale of the mine, supplemented by the provisions of section 25 of the Companies Act 1867.

As to the first basis for the decision, Lord Selborne stated,

The analysis in relation to the second basis for the decision appears most clearly from the judgment of Mellish LJ, who stated,

The decision and reasoning in Fothergill’s Case was applied in a series of later decisions, most notably by the Court of Appeal in The Dalton Time Lock Company v Dalton (1892) 66 LT 704 and by Buckley J in re Ebenezer Timmins & Sons Limited [1902] 1 Ch 238. (Footnote: ¹)

Fothergill’s Case was also referred to by Romer J in Re F.W. Jarvis & Co Limited [1899] 1 Ch 193, the facts of which have some parallels with the instant case. Mr. Jarvis was a businessman who decided to incorporate his business. He registered his new company on 4 October 1897 and signed the memorandum agreeing to subscribe for 6,500 shares of £1 each. Four days later, on 8 October 1897, he executed an agreement to sell his business and buildings to the company for £6,500 to be satisfied by the allotment to him of 6,500 shares of £1 each. He filed the sale agreement with the Registrar of Companies, transferred the business and property to the company and was issued with a share certificate for 6,500 shares.

The company subsequently applied for a declaration under section 1 of the Companies Act 1898 that Mr. Jarvis was not liable to pay cash for his shares pursuant to his undertaking in the memorandum. That statute had been enacted to enable the court to grant relief in relation to any inadvertent non-compliance with the requirements for filing a contract under section 25 of the 1867 Act. Mr. Jarvis supported the application and filed evidence that he did not intend, by signing the memorandum, to become liable to take any shares in the company other than the 6,500 referred to in the sale agreement.

Romer J held that the scope of section 1 of the 1898 Act did not give him the power to grant the relief sought and that in any event Mr. Jarvis’s liability to pay cash pursuant to his undertaking in the memorandum could not have been satisfied by the subsequent agreement to sell the property to the company,

The 2006 Act made material changes to the method of formation of a company and the content and importance of a company’s memorandum of association. These followed recommendations made by the Company Law Review (the “CLR”).

Section 7 of the 2006 Act provides that a company is formed under the 2006 Act by one or more persons subscribing their names to a memorandum of association (see section 8), and complying with the requirements as to registration (see sections 9-13).

Section 8 of the 2006 Act provides for a more limited form of memorandum of association than in the earlier Companies Acts,

Consistent with the new limited content, the prescribed form for the memorandum of a public company after 2006 is much reduced. It is now to be found in the Companies (Registration) Regulations 2008 (SI 2008/3014). It simply follows the same wording as section 8(1) of the 2006 Act, namely,

The changes to the form and scope of a memorandum under the 2006 Act are reflected in consequential changes in the 2006 Act in respect of the documents to be delivered to the Registrar when an application is made for registration of a company. In particular, as paragraph 37 of the Explanatory Notes to the 2006 Act explained,

Thus, section 10 of the 2006 Act sets out the requirements for the statement of capital and initial shareholdings to be delivered to the Registrar. Section 10(2) provides,

Further, by section 10(4) of the 2006 Act,

Paragraphs 42-45 of the Explanatory Notes to the 2006 Act explain section 10 as follows,

The effect of registration of a company upon the subscribers to the memorandum is set out in section 112(1) of the 2006 Act,

In similar vein, and importantly, sections 16(1) and (5) of the 2006 Act are new provisions which state as follows,

As I see it, this new legislative framework under the 2006 Act envisages that a subscriber will automatically become a member of the company as and when it is registered, and will from that time be the holder of the number of shares specified in the statement of capital and initial shareholdings. Under the 2006 Act, the only agreement under which the subscriber gives consent to take shares in the company is that contained in his undertaking in the memorandum. The 2006 Act also does not envisage that any subsequent allotment or issue of shares by the company should take place after registration in order to constitute the subscriber the holder of the number of shares specified in the statement of capital and initial shareholdings.

In my judgment, a subscriber’s undertaking in the memorandum to take “at least one share” cannot mean that he agrees to take only one share. If that had been the legislative intention, section 8(1)(b) and the memorandum would simply have omitted the words “at least”. It would also mean that, as a matter of law, every subscriber of every company formed under the 2006 Act would only have an obligation to take one share. Whilst in practice most companies are formed with a minimal share capital, there is nothing in the 2006 Act or the Explanatory Notes to suggest that such a change in the law was intended.

I also accept that the wording of section 8 and the memorandum does not expressly refer to an agreement by the subscribers to take the number of shares shown against their name in the statement of capital and initial shareholdings. Nonetheless I consider that this is the clear implication to be derived from the words used, construed in the context of the structure of the 2006 Act.

Specifically, the reference to the subscribers agreeing in the memorandum “to take at least one share each” plainly envisages that the undertaking in the memorandum could extend to taking more than just one share; there is no mechanism provided under the 2006 Act other than the undertaking in the memorandum for a subscriber to consent to take any additional shares on formation; and the only place to find the information about the number of shares which the subscriber will automatically become the holder of on incorporation is in the statement of capital and initial shareholdings.

In that regard, although Mr. Temmink submitted that Mr. Sidhu’s undertaking only extended to one share, and that “any further shares that he took were not pursuant to any undertaking in the memorandum to do so”, he did not explain how, if it were not pursuant to that undertaking, Mr. Sidhu otherwise consented to take the remaining 839,999,999 shares which were undoubtedly held by him in the Company.

The analysis that I have set out is, in my view, also supported by paragraph 44 of the Explanatory Notes. As set out above, that explains that the legislative intention was that the,

For completeness, I should add that I consider that the Judge was wrong to look to the dealings between Mr. Sidhu and the Company after the incorporation of the Company for the answer to the question of the number of shares that had been taken pursuant to Mr. Sidhu’s undertaking in the memorandum. For reasons that I have explained, the subscriber’s undertaking in the memorandum is a contractual promise, and on conventional principles of interpretation, the meaning of the contract is to be ascertained when the contract comes into existence, rather than being gleaned from subsequent events.

Moreover, the memorandum of association is a public document which is required to be registered and available to anyone who wishes to inspect it, so the admissible background for the purposes of construing the undertaking in it must therefore be limited to what any reader of the memorandum would reasonably be supposed to know. That admissible background accordingly cannot include extrinsic facts known only to some of the people involved in the formation of the company. See generally Bratton Seymour Service v Oxborough [1992] BCLC 693 and Attorney General of Belize v Belize Telecom [2009] 1 WLR 1988 (PC) at [35]-[37]. The admissible background could plainly include the statement of capital and initial shareholdings filed with the Registrar together with the memorandum and placed on the public register: but it could not include whether in private dealings with the company the subscriber had or had not “rejected” the number of shares which he had “received” as a matter of fact.

Section 584 contains an express requirement that shares taken by a subscriber in pursuance of his undertaking in the memorandum must be paid up in cash. Mr. Temmink submitted that section 584 did not create any civil liability at all and contrasted its wording with the provisions of section 585(2), 587(2) and 587(4) which create an express liability for contravention of sections 585(1), 587(1) and 587(3) to pay the nominal value of the shares, plus any share premium and interest. He suggested that if Parliament had wished to impose a civil liability upon the subscriber in section 584, it would have chosen to use the same formula as in those other sections.

I do not agree. Section 584 prescribes how a subscriber who has undertaken a contractual obligation to pay for shares in a public company must discharge that contractual obligation. Section 584 thereby operates directly on an existing contractual obligation and there is simply no need to create a separate civil liability over and above the existing contractual one. That is different from the other sections to which Mr. Temmink referred, which contain prohibitions on the allotment of shares in return for various types of consideration. In those cases it is necessary for the legislation to impose a civil liability on the allottee to pay an amount calculated in the appropriate amount and form which will be different from the prohibited consideration that had been agreed.

Mr. Temmink also submitted that since the vast majority of companies these days are incorporated with only a minimal share capital, section 584 is normally rendered “all but nugatory”, so that there is no policy reason to interpret it broadly. I accept that in practice, most companies are incorporated with a minimal share capital so that section 584 will rarely require payment of more than a very small amount in cash by a subscriber. That is not, however, a reason to give section 584 an artificially narrow meaning. The same statutory wording has been in use since 1980 when it was perfectly obvious that if a subscriber undertook in the memorandum to take more than one share of £1, he would be liable to pay the larger amount in cash.

It follows from the analysis that I have set out above, that section 593 does not apply to the shares taken by a subscriber on incorporation for the simple reason that there is no “allotment” of such shares to the subscribers under the 2006 Act. Section 16(5) simply provides that the shares are held by the subscriber as a result of registration of the company.

That conclusion is consistent with the provisions of section 559 of the 2006 Act. That section appears in Chapter 2 of Part 1 which is entitled “Allotment of shares: general provisions” and contains detailed provisions in sections 549 to 558 as to how the directors of a company can exercise the power of the company to allot shares. It also sets out the time at which shares are taken to have been allotted for the purposes of the Companies Acts. Section 559 is entitled “Provisions about allotment not applicable to shares taken on formation”, and states,

Paragraph 864 of the Explanatory Notes to the 2006 Act explains why this should be so. It states,

In response to this point, Mr. Temmink drew attention to section 546(2) of the 2006 Act. Section 546 is a new provision which states,

Mr. Temmink submitted that section 546(2) deems subscriber shares to have been allotted and thus that section 593 applies to them. I reject that submission. In my view, section 546(2) performs a limited function which is purely interpretative. Section 546(1) first explains what references to “issued share capital” and “allotted share capital” mean in the remainder of the 2006 Act. Section 546(2) then simply says that the references elsewhere in the Act to issued or allotted shares, or to issued or allotted share capital include the subscriber shares. Section 546(2) is needed precisely because, unlike other shares issued during the life of a company, the shares that are taken on incorporation by the subscribers are, for reasons that I have explained, not actually issued nor allotted, but are, without more, held by the subscribers by reason of the automatic operation of section 16(5). The purpose of section 546(2) is to ensure that where provisions of the 2006 Act are stated to apply to issued or allotted shares, all shares of the same class are treated in the same way, irrespective of whether they were the subscriber shares, or shares actually allotted or issued by the directors.

To take two examples, section 630 of the 2006 Act deals with the variation of class rights, and provides (inter alia) that consent in writing is required from “the holders of at least three-quarters in nominal value of the issued shares of that class”. Without section 546(2), the subscriber shares would not be included in the computation because they are not issued in the same way as other shares.

Likewise, sections 761 and 763 contain the requirement for a public company to have a minimum share capital before it can do business. Section 761 provides,

Although Mr. Temmink submitted that the effect of section 546(2) was that section 593 applied to subscriber shares taken on formation, it is notable that section 593 does not contain either of the descriptive expressions “allotted shares” or “allotted share capital” that are the subject of section 546(2). Rather, section 593 contains a prohibition that focuses on the action of a public company of allotting shares which are paid up otherwise than in cash.

Nor did Mr. Temmink explain how the mechanics of section 593 could apply to the subscriber shares, and I cannot see how they could. Specifically, section 593(1)(b) requires a valuer’s report to be made “to the company during the six months immediately preceding the allotment of the shares”. For much the same reason as prevented the exception in section 25 of the 1867 Act applying in the F.W. Jarvis case, I do not see how the requirements of section 593(1)(b) of the 2006 Act that a valuer’s report be made available to the company before the shares are allotted could be fulfilled before the company is incorporated and section 16(5) operates.

The consequence is that I consider that the Judge was right initially to raise with the parties whether section 593 had any application to this case, and the parties were wrong to invite the Judge to proceed on the basis that what had occurred was an allotment of the 840 million shares by the Company within the meaning of that section. In my view, the Judge should simply have determined that Mr. Sidhu was liable pursuant to his undertaking in the memorandum to pay €84 million in cash for the 840 million shares that he took on incorporation as shown in the statement of capital and initial shareholdings filed in accordance with section 10 of the 2006 Act.

That being so, I do not propose to consider whether the Judge was right or wrong in his assessment of the requirements for an “arrangement” within the meaning of section 594 or the application of those requirements to the (highly unusual) facts of the instant case. That issue should await determination in a case in which the issue properly arises.

As indicated above, the Judge was of the view that because he had found that Mr. Sidhu’s liability arose under section 593, the relevant section under which Mr. Sidhu could apply for relief was section 606(1)(a) of the 2006 Act, and the factors to which the court was to have regard in determining that application were those set out in section 606(2) together with the overriding principles in section 606(4).

In fact, for the reasons that I have indicated, I consider that Mr. Sidhu’s liability arose under the undertaking which he had given in the memorandum of association, interpreted by reference to the statement of initial capital and shareholdings and the terms of section 584. This is an important distinction, because I do not consider that section 606 enables the court to grant relief to a subscriber in respect of his duty to pay cash for shares taken pursuant to his undertaking in the memorandum of association.

I say that, first, because it is clear on its terms that the ability to apply for relief under section 606(1)(a) is only available to a person who is liable under any provision of Chapter 6 of Part 17 of the 2006 Act. That does not include a person who is liable pursuant to his undertaking in the memorandum of association, not least because the requirement to pay cash for the relevant shares is imposed by section 584 which appears in Chapter 5 rather than Chapter 6.

I also do not consider that section 606(1)(b) was available to Mr. Sidhu. As indicated above, section 584 appears in Chapter 5 of Part 17 of the 2006 Act. That Chapter also contains sections 585 and 587 which prohibit a public company from accepting any undertaking to do work or perform services in payment for its shares or any premium on them, or from accepting any long-term undertaking in respect of any allotment of shares. Those sections expressly impose liabilities for contravention on the holder of shares or the allottee, and section 588 imposes joint and several liability on a subsequent holder of the shares (subject to defences).

Section 589 in Chapter 5 then expressly empowers the court to grant relief to persons liable under those sections 585, 587 and 588. Significantly, however, section 589 does not include a similar power to grant relief in relation to the obligation to pay cash for shares taken pursuant to an undertaking in the memorandum as a result of section 584.

If Parliament had intended the court to be able to grant relief in respect of a subscriber’s obligation to pay cash in accordance with section 584, the natural place to include such power would have been in section 589 in Chapter 5. There is no such reference to section 584 in section 589, giving rise to the clear inference that Parliament did not intend the court to have any such power. I therefore see no reason to strain to interpret the words of section 606 in Chapter 6 to confer any such power.

That conclusion is strongly supported by reference to the equivalent provisions of the 1980 Act. The power to grant relief was contained in section 28 of the 1980 Act in materially the same terms as now appear in sections 589 and 606. By its express terms, section 28(1) of the 1980 Act applied to liabilities arising as a result of contravention of sections 20, 23, 24 or 26 of the 1980 Act. Those sections included prohibitions equating to those now to be found respectively in sections 585, 587, 593 and 598 of the 2006 Act.

By its express terms, the power to grant relief in section 28 of the 1980 Act manifestly did not apply to the requirement in section 29 of the 1980 Act that shares taken pursuant to an undertaking in the memorandum had to be paid up in cash. Indeed, after making the point that the duty to pay cash was imposed by section 29 on the subscriber, the commentary in Buckley on the Companies Acts (14^th ed, 1981) on section 29 of the 1980 Act ended with the emphatic statement,

I therefore conclude that the Judge had no power to relieve Mr. Sidhu from his liability to the Company pursuant to the undertaking which he had given in the memorandum.

That conclusion makes it unnecessary to consider whether, if the power to grant relief had been available, the Judge exercised his discretion correctly in refusing to grant relief. However, since the point was argued, I should briefly indicate my conclusions on it.

Although Mr. Sidhu contended before us that the Judge was wrong not to accept the audited accounts of ZB as sufficient evidence of the value of the ZB shares that had been acquired by the Company, I consider that the Judge’s decision in that regard was entirely correct, essentially for the reasons that he gave. The Judge explained the particular factors affecting the diverse businesses of the companies in the ZB group meant that it could not simply be assumed that the shares in ZB had the value of the consolidated group shown in its audited accounts. He also made the point that it would be procedurally unfair to the Company to permit Mr. Sidhu to rely on those accounts at trial without warning and in circumstances in which there had been provision for expert evidence to be adduced which he had not taken up.

The first point is obviously correct. In general terms, at least under English law, a company’s financial statements are the responsibility of the directors and are prepared on the basis of certain accounting standards to show a “true and fair view” of the financial position and performance of a company; and the purpose of an audit is for the auditors to express an opinion on whether the accounts comply with those standards.

The position would appear to be similar in Malaysia. The auditors’ report in the 2011 accounts of ZB stated as follows,

It is readily apparent from this that the accounts upon which Mr. Sidhu contends that the Judge should have relied were intended only to give a true and fair view of the company’s financial position in accordance with Malaysian law and accounting standards, as to which there was no evidence. Moreover, even on their own terms, neither the accounts nor the auditors’ opinion guaranteed the accuracy of the various figures contained therein. Still less did they certify or even express any opinion on the value of the shares in ZB that were acquired by the Company.

On a point of detail it is also the case that the figures relied upon by Mr. Sidhu and quoted by the Judge in his Judgment were those for the consolidated accounts of the ZB group. The figures for ZB alone show that the vast majority of its total assets of RM 471 million comprised its investment in its subsidiary companies, and taking into account its liabilities of RM 46 million, ZB alone had net assets of about RM 425 million. That equated only to about €88.5 million, which is very close indeed to the nominal value of the shares held by Mr. Sidhu. That further emphasises the importance of the point made by the Judge that he was unable from the audited accounts alone accurately to assess the value of the underlying businesses of the subsidiary companies of the group which went to make up the consolidated figures.

The second point made by the Judge as to the unfairness to the Company of simply allowing Mr. Sidhu to rely upon ZB’s 2011 accounts at trial without the Company having the opportunity to adduce expert evidence was, in my judgment, not only entirely correct, but well within the scope of reasonable case management decisions which were available to a trial judge and with which this court should not interfere.

The result of the analysis above is that in my view, the decision of the Judge to give a judgment of €84 million plus interest in favour of the Company against Mr. Sidhu was correct, albeit arrived at by the wrong route.

I would therefore dismiss this appeal.

I agree.

I also agree.