This judgment concerns certain preliminary questions which are directed to the validity of bonus shares issued, paid up by appropriating a sum in the share premium account, by EIC Services Limited (“the Company”) on 15^th December 1999. The argument that the bonus issue was wholly or partly invalid is based on the propositions that:

I shall begin by setting out the basic facts. Then, I shall turn to explain a little more fully the nature of the three issues, and how they arise. I shall then discuss issue 1(a), which primarily turns on findings of fact, and issue 1(b), which turns on findings of fact, although it additionally involves the determination of an application to amend. Issue 2 involves questions of fact and law (principally relating to the applicability of the so-called Duomatic principle). Issue 3 only involves questions of law, namely the interrelationship of the law of mistake and the unauthorised decisions by directors, and the ambit of section 35A of the Companies Act 1985 (“section 35A”).

The topics are dealt with in the following paragraphs:

The facts: paragraphs 4-20;

The issues: paragraphs 21-35;

Issue 1(a): Payment for the 200 shares: paragraphs 36-52;

Issue 1(b): Payment for the 110,320 shares:

Issue 2: Approval of the bonus issue: paragraphs 120-147;

Issue 3: The status of the bonus shares:

Conclusion: paragraph 226.

On 8^th April 1999, the Company was incorporated in England and Wales under the name of Miltentone Limited with an authorised share capital of 1,000 shares of £1 each, two of which were issued to the original subscribers, who did not pay for them.

On 20^th May 1999, Mr James Spickernell and Mr Julian Bryson were appointed directors of the Company in place of its first director. They were already directors of a number of other companies, including Enterprise Technology Development Ltd (“ETD”). The shareholders in that company were members of the family, or friends, of Mr Spickernell or Mr Bryson. ETD was intended to focus on healthcare technology investments. However, at the beginning of 1999, Mr Spickernell and Mr Bryson became interested in investments in internet-related businesses, and investigated such opportunities, especially in the United States. They acquired the Company for the purpose of investing in that type of business.

On 21^st July 1999, the two nil paid £1 shares in the Company were transferred, one to Mr Spickernell and the other to Mr Bryson. On the same day, the authorised share capital of the Company was divided into 100,000 ordinary shares of 1p each, so that Mr Spickernell and Mr Bryson each had 100 1p shares (“the subscriber shares”). Mr Spickernell and Mr Bryson each subsequently transferred his 100 shares to a company owned by him, namely Berdino International Limited (“Berdino”) and Okimax International Limited (“Okimax”) respectively.

On 12^th November 1999, there was a board meeting, which Mr Bryson attended by telephone. As a result of that meeting (which was interrupted by an EGM necessary for that purpose), the authorised capital of the Company was increased from £1,000 to £300,000 by the creation of an additional 29,900,000 1p shares. At the Board Meeting, Mr Spickernell and Mr Bryson appointed Mr Simon Reid as a third director of the Company. (Mr Reid actually started working for the Company in January 2000).

Also on 12^th November 1999, Mr Spickernell and Mr Bryson decided to allot to Berdino, Okimax, Mr Reid, and 13 other parties a total of 110,320 new 1p shares (“the November shares”). These 13 other parties (“the 13 shareholders”) were all shareholders in ETD; they included the second defendant Mr Jonathan Paul. Accordingly, as at close of business on 12^th November 1999, there were 110,520 issued 1p shares in the Company, owned by 16 shareholders, i.e. the 13 shareholders, Okimax, Berdino and Mr Reid (“the 16 shareholders”). It was recorded in the minutes of the Board Meeting that each of the 16 shareholders “had already paid the Company a total of 1p in respect of each share to be allotted to them”.

At a board meeting held on 15^th December 1999, the directors of the Company resolved to allot a further 27,035 1p shares in the Company, at a price of £29 each, to a total of 33 shareholders, of whom five were among the 16 shareholders. Accordingly, with effect from 15^th December 1999, there were 28 new shareholders (“the 28 shareholders”), including the first defendant, Mr Stephen Phipps. This meant that the total number of issued shares in the Company was 137,555. At the same meeting on 15^th December 1999, the directors resolved to make a 99 for 1 bonus issue. That share issue (“the bonus issue”) increased the number of shares in issue by 13,617,945. This bonus issue involved capitalising £136,179.45 (representing the value of the 13,617,945 bonus 1p shares) of the amount standing to the credit of the share premium account.

The decision to issue the bonus shares arose from the fact that Mr Spickernell and Mr Bryson were well on the way with implementing proposals to float the public on the Alternative Investment Market (“AIM”). The market for shares in internet-related shares such as the Company was very strong; indeed, one could fairly describe it as a bubble. The advice received by the Company was that the shares might be worth around £250 each, and that such a high price might render them less marketable. Accordingly, a bonus issue of 99 for 1 would result in a more attractive projected share price of £2.50.

The resolution of the directors passed at the Board Meeting of 15^th December 1999 began by noting “that there were now 137,555 ordinary shares in issue”. The resolution then went on to state that:

On 22^nd December 1999, the third defendant, Mr Jeremy Lee Barber, agreed to subscribe for 2,500,000 1p shares at a price of £1.25 each, and, shortly thereafter, he paid £3,125,000 for those shares. On 20^th January 2000, the Company issued these shares to Mr Lee Barber, and a further 220,000 shares to other persons who had also subscribed £1.25 per share. Subsequently, a further 5,542,000 1p shares were issued by the Company at a price of £2.50 each between 4^th February and 23^rd March 2000.

On 22^nd March 2000, Mr Spickernell drew a cheque in favour of the Company in the sum of £1,105.20. This sum represented the nominal value of the subscriber shares plus the November shares (“the disputed shares”). The reason he wrote out this cheque was because Mr Gop Menon of PricewaterhouseCoopers, the Company’s auditors, had said that there was no record of any payment having been made for the subscriber shares or the November shares, in the Company’s books and records, as far as he could see.

On 24^th March 2000, European Internet Capital Ltd, a Guernsey company (“the Guernsey Company”), then named Vesuvius Limited, made an offer to acquire all of the issued shares in the Company, in exchange for shares in the Guernsey Company. That offer was accepted, and it was completed on 9^th April 2000. Accordingly, the Company is, and has been since 9^th April 2000, a wholly owned subsidiary of the Guernsey Company. Shortly thereafter, Mr Spickernell, Mr Bryson and Mr Reid ceased to be directors of the Company.

The Company’s name changed from time to time. On 30^th July 1999, it was changed to ETD Infotech Limited, and on 22^nd October 1999 to European Internet Capital Limited. Finally, on 17^th May 2000, after the take over of the Company in April 2000, it acquired its current name, EIC Services Limited.

The second half of 1999 and the first three months of 2000 was, as the evidence in this case vividly showed, the height of the internet bubble. Since that time, shares in almost all companies concerned with internet activities have fallen in value, mostly very substantially. As I understand it, the value of the shares in the Company and the Guernsey Company are no exception.

It appears that Mr Lee Barber sought legal advice during the first half of 2001; in or shortly before September 2001, he and some other shareholders started to suggest that the bonus issue effected on 15^th December 1999 was wholly or partially invalid. This point was formally taken on behalf of Mr Lee Barber in a letter from his solicitors dated 21^st September 2001. The present proceedings were brought by the Company and the Guernsey Company on 18^th December 2001. They seek a determination as to the validity of the bonus issue.

On 26^th June 2002, Master Moncaster directed the determination of three preliminary issues. The first part of the first issue is whether the subscriber shares were fully paid up at the time of the bonus issue, namely on 15^th December 1999. The second part of the first issue is whether the November shares were fully paid at the time of the bonus issue. The second issue is whether the capitalisation of reserves and the issue and allotment of the bonus shares were effectively authorised by the members of the Company. The third issue, which Master Moncaster directed should only be determined “if the trial judge thinks fit”, is whether, in light of the determination on the other issues, the bonus shares were themselves validly issued or allotted. The Master also ordered that the first and second defendants, Mr Phipps and Mr Paul, should contend that the issues be answered in the affirmative, on behalf of all those interested in so arguing, and that the third defendant, Mr Lee Barber, should argue that the issues be answered in the negative, on behalf of those interested in so arguing.

The Company and the Guernsey Company (“the claimants”) say that they are simply seeking guidance as to the correct answer or approach in relation to the preliminary issues. Accordingly, although appearing by counsel, Mr Philip Gillyon, they take no position on the issues in these proceedings with one exception. The contention that the disputed shares were not fully paid, and the contention that the capitalisation of reserves and bonus issues were not properly authorised, are therefore advanced by Mr David Mabb QC, who appears (with Mr Leon Kuschke) for Mr Lee Barber; Mr Mabb also argues that the bonus shares were not validly issued or allotted. The contrary argument in relation to each of the preliminary issues, is raised by Mr David Chivers QC, who appears on behalf of Mr Phipps and Mr Paul. However, Mr Chivers also argues that I should not determine the third issue. The claimants want the third issue determined. It is also right to record that the costs of Mr Phipps and Mr Paul on this preliminary issue have been underwritten by Mr Spickernell, Mr Bryson and Mr Reid.

It should also be mentioned that there have been proceedings in Guernsey which have gone to the Guernsey Court of Appeal. Those proceedings have little, albeit some, relevance to the determination of the issues which I have to determine.

The importance of the first issue (namely whether the disputed shares were fully paid up by 15^th December 1999), and of the second issue (whether there has been a valid approval of the bonus issue) arises from the provisions of Regulations 110 and 104 of the 1985 version of Table A, in the Schedule to the Companies (Tables A to F) Regulations 1985(S.I. 1985/85), which were incorporated into the Articles of the Company (“the Articles”).

Regulation 110 provides, so far as relevant, that:

The relevant part of Regulation 104 is to this effect:

Accordingly, Regulations 110 and 104 require that, in relation to any bonus issue, (a) the amounts appropriated to members in paying up bonus shares must be in proportion to the amount paid up on the shares in respect of which the bonus shares are to be allotted, and (b) the appropriation of any sum in the share premium account in paying up bonus shares must be authorised by an ordinary resolution of the company.

On the first issue, the cheque made out by Mr Spickernell on 23^rd March 2000 would have rendered the disputed shares fully paid with effect from the date of the cheque (or, possibly, the date of encashment of the cheque). However, that, of course, would not do from the point of view of the first and second defendants, because they seek to establish that the disputed shares were fully paid by 15^th December 1999, the date of the bonus issue.

On their behalf, Mr Chivers contends that the subscriber shares were paid for by setting off £2’s worth of expenses which Mr Spickernell and Mr Bryson had incurred on behalf of the Company. As to the November shares, the pleaded case advanced on behalf of the first and second defendants was, until a very late application to amend, that they were issued fully paid up in consideration of a debt owing by the Company to ETD as a result of ETD agreeing to assign to the Company all rights it enjoyed to a business plan which it had commissioned.

However, after the conclusion of the evidence, but before closing speeches, Mr Chivers applied to amend the case advanced by the first and second defendants, so as to plead that, in the alternative, the November shares were issued fully paid in consideration of Mr Spickernell and Mr Bryson waiving claims against the Company in respect of expenses they had incurred. In other words, the same method of payment as was alleged to have been effected in relation to the subscriber shares.

As to whether or not the subscriber shares and/or the November shares were fully paid by 15^th December 1999, the primary question is one of fact, namely whether the basis of payment alleged by the first and second defendants was in fact agreed. However, there is also a question of law, or inference from fact, namely, whether the extent of the agreement, if any, was sufficient to amount to payment.

In this connection, there is no special way in which shares may be paid up. Where they are said to have been paid up in cash, the only questions which would be at all likely to arise is whether the cash was actually provided. Where the consideration is said to be in another form (e.g. by way of set off or payment in kind) the only question which would normally arise would be similar, namely, whether the consideration was actually provided. However, it will sometimes be appropriate to enquire into the adequacy of the consideration, especially where bad faith is alleged – see for instance Re Bradford Investments plc (No 2) [1991] BCLC 688 at 693h-694c per Hoffmann J.

In the case of the subscriber shares, Mr Mabb for the third defendant argues that there was no agreement in relation to expenses as the first and second defendants contend, and, if there was, it was insufficiently firm to constitute payment. As to the November shares, Mr Mabb argues that the right to the business plan (“the business plan”) was not acquired by the Company from ETD and, if it was, the acquisition was after 15^th December 1999. He opposes the application to amend the first and second defendants’ case.

So far as the second issue is concerned, the issue and allotment of the bonus shares on 15^th December 1999 was approved by the directors at the board meeting on that date. However, they and their legal advisers overlooked the need for an ordinary resolution, by virtue of Regulation 110, approving the capitalisation of the money on the share premium account to pay for the bonus shares.

On behalf of the first and second defendants, Mr Chivers primarily contends that each of the shareholders entitled to vote on the issue, namely the 16 shareholders, assented to the bonus issue and the capitalisation of the share premium account, in conversations with one or more of Mr Spickernell, Mr Bryson and Mr Reid (“the three directors”) during October or November 1999.

Mr Chivers also contends that the issue of the bonus shares and the capitalisation of share premium accounts were subsequently approved or ratified by the 16 shareholders (and, if necessary, by the 28 shareholders), by virtue of their accepting the share certificates for the bonus share and/or transferring their bonus share for value to the Guernsey Company. He further argues that the bonus issue was ratified or approved by the 28 shareholders in documents signed in January or February 2002 and/or by the 16 shareholders in documents signed in January or February 2003.

If the disputed shares were fully paid up on 15^th December 1999, and the bonus issue was properly approved or ratified, then there seems to be no reason for not dealing with the third issue and determining that the bonus issue was valid. However, if some or all of the disputed shares were not fully paid up, and/or the bonus issue was not properly approved or ratified, the question of the validity of the bonus issue raises more difficult questions. In that event, Mr Mabb puts the third defendant’s case on the basis of common mistake and/or breach of the Articles, and contends that the bonus shares, in their entirety, or in so far as they were allotted to the 16 shareholders, were void.

Mr Chivers argues that neither the fact that the bonus issue was made in respect of shares which were not fully paid up, nor the fact that there was no proper approval of the bonus issue, would render the bonus issue void. He further contends that it would be inappropriate to declare the bonus shares void, for a number of reasons, if I reject his argument. Mr Mabb, with the support of Mr Gillyon, contends that the issue of validity, should be determined. He argues that if I conclude that the bonus issue was invalid in whole or in part, then the court should so declare. However, he accepts that the declaration should be expressly made “without prejudice to the right of any person who was previously a member of [the Company] to raise any defence arising out of his own particular circumstances”.

When the subscriber shares, in their original £1 form, were transferred to Mr Spickernell and Mr Bryson, and indeed when they were transferred on to their respective companies, they had not been paid up. In their evidence, both Mr Spickernell and Mr Bryson said that there was a discussion, indeed an oral agreement, that they would use unpaid expenses incurred on behalf of, and recoverable from, the Company, to pay up the subscriber shares, during June or July 1999, at a meeting with Mr Eoin Connolly, of Stringer Saul, the solicitors then acting for the Company. As a result of that meeting, Mr Bryson said that he believed that the subscriber shares were paid up in July 1999, and that thereafter he thought no more about it.

Mr Spickernell said that, some time after the meeting, he got together various receipts in respect of expenses he had incurred on behalf of the Company, to a value of about £1,500, and inserted them into an envelope (“the Envelope”) on which he wrote “share capital” or words to that effect. He said that the Envelope was then stapled to a spreadsheet or Excel sheet which was placed into a file relating to expenses (“the Expenses File”).

I also heard evidence from Mrs Jacqueline Thomson, who is, and has been since about 1996, Mr Spickernell’s personal assistant. Until the beginning of 2000, she maintained the books and records of the Company, in Mr Spickernell’s offices (and, I think, his home), Growers Court, Chippenham, Wiltshire. She confirmed the evidence of Mr Spickernell, in relation to the Envelope into which she had understood that he had put receipts in respect of expenses he had incurred on behalf of the Company. She also said that the Envelope had been marked substantially as he had described, and that the Envelope was placed “in the relevant file with the relevant corroborating Excel sheet”. As I understood her evidence, she wrote up the Excel sheet so that it recorded the expenses, in accordance with her normal practice. She did not record this expenditure on the computer records, as she would normally have done. The reason was that she thought that the expenses would be repaid in cash if she took that course, and this was not what was intended, because the expenditure was to be used to pay share capital.

After Mrs Thomson had ceased to be responsible for the Company’s records, and they had been taken over by Mr James Wilkinson, the Expenses File went missing. Mr Wilkinson became the financial controller of the Company in early January 2000, and had all the relevant documents, including the Expenses File, until it was lost in early March 2000, in the Company’s London Office.

I accept the general thrust of the evidence I have summarised. Neither Mr Spickernell nor Mr Bryson had a particularly clear recollection of the relevant events, and they each had a tendency to convince themselves that that which should have happened did happen (as to which more below). However, I do not think either of them intended to mislead the court, save on one issue, which is of relevance to the question of payment for the November shares, and does cast doubt on their reliability. However, looking at the totality of the evidence of Mr Spickernell and Mr Bryson, I have concluded that anything they said in the witness box should be treated with caution, but that I should not simply disregard it.

Mrs Thomson was an honest witness, as Mr Mabb accepts. Accordingly, I have no real hesitation in accepting that receipts for money spent by Mr Spickernell, which could have been recovered from the Company, were placed in the Envelope, and were retained in the Expenses File together with an Excel sheet. It seems to me inherently likely, in those circumstances, that the expenses were being retained for the payment of shares. I also consider that it is more than likely that this would have been done pursuant to advice given at some point by Mr Connolly, because it is clear that he was providing legal advice to the Company on a fairly regular basis, through Mr Spickernell and Mr Bryson. I see no reason to doubt that the advice would have been given at the time that Mr Spickernell and Mr Bryson both suggested, namely June or July 1999.

Further, there is no reason for rejecting Mr Spickernell’s evidence that the value of the receipts in the Envelope amounted in total to about £1,500. It is clear from the documentary and oral evidence that Mr Spickernell and Mr Bryson had incurred significant expenditure on behalf of the Company, substantially more than £1,500, during 1999, not least in the form of the cost of flights to the United States, and the cost of hotels and food when staying there. Further, at least until December 1999, the Company had no significant funds to reimburse expenses.

What is rather more unclear is the date on which the Envelope was filled with the receipts, marked “share capital” or the like, and inserted into the Expenses File. I have no doubt but that this happened before 15^th December 1999. I think that it was in late August, September or early October 1999, which is substantially the date of payment alleged in the pleading of the first and second defendants.

A more troublesome point is whether the receipts were intended to cover the November shares only, and not the subscriber shares. In this connection, Mr Mabb relies on Mrs Thomson’s witness statement and her oral evidence. Her oral evidence did not go much beyond her witness statement in this connection; in her witness statement she said that Mr Spickernell informed here “that the expenses he incurred were to be used to pay for the issue of the shares in the Company”. I accept that the reference to “the shares” was to the November shares, partly in light of the context of that passage, and partly because Mrs Thomson said so. However, it did not appear to me that she was saying that the setting off of expenses was positively not intended to extend to the subscriber shares. Given that she was simply carrying out Mr Spickernell’s instructions, it would be scarcely surprising if, after the passage of three years or more, she had simply forgotten about the subscriber shares, or had elided the subscriber shares and the November shares in her mind.

Mr Mabb claims that, in cross-examination, Mr Spickernell accepted that the set off of expenses was only intended to apply to the November shares. I do not think that that is a fair reading of the passage Mr Mabb relies on. Indeed, in the passage concerned, Mr Spickernell referred to the fact that the expenses were not used to pay up the November shares because “it was decided… that we would use the [ETD] agreement to pay for… the November shares, not the July [i.e. the subscriber] shares”. If anything, it seems to me that that statement, particularly when read in the context of the other evidence of Mr Spickernell, and indeed of Mr Bryson, in relation to the payment of the subscriber shares, appears to confirm that the expenses were to be used to pay for the subscriber shares.

Nonetheless, I accept that it is plainly possible that the payment of the subscriber shares, particularly bearing in mind that between them they only had a par value of £2, could have been overlooked at the time, just as much as they could have been overlooked by Mrs Thomson in her evidence more than three years later. Indeed, that possibility is reinforced by the fact that Mr Spickernell was a man who was not particularly interested in, indeed rather careless of, detail; that characteristic would have been especially marked in the hectic second half of 1999. However, I do not think that that is what happened. Although Mr Connolly appears to have made mistakes, such as overlooking the need for the approval of a general meeting to the bonus issue, it seems clear that he was alive to the need to pay up shares, and I accept that he gave advice in that connection to Mr Spickernell and Mr Bryson at the meeting in June or July 1999. Indeed, I think there was agreement in principle on that course at that meeting. Bearing in mind that the subscriber shares would have been about to be transferred, or may be just have been transferred, to Mr Spickernell and Mr Bryson, and that the issue of further shares would merely have been under discussion, it seems to me unlikely that Mr Connolly would have overlooked the need to pay up for the subscriber shares, as well as for any future shares that might be issued.

To find otherwise would involve rejecting the evidence of Mr Spickernell and Mr Bryson. As I have said, they were not by any means wholly reliable witnesses, and I thought that they did not tell the truth on one issue. However, I did not regard either of them as generally dishonest, or as witnesses whose evidence should be ignored unless it was corroborated by another witness or a contemporaneous document. In those circumstances, I consider that it is more likely than not that, when Mr Spickernell placed the receipts in the Envelope, and handed it to Mrs Thomson, he intended the receipts to be applied to the subscriber shares as well as to other shares which were shortly to be issued.

I should mention the cheque drawn by Mr Spickernell of £1,105.20 on 22^nd March 2000 (“the March cheque”). There is no doubt that that cheque was made out in respect of the disputed shares, because the Company’s accountant was concerned that there was no record of the subscriber shares, or the November shares, having been paid for. At least so far as the subscriber shares are concerned, I consider that, particularly in light of the hectic activity which was going on, the very substantial sums of money which were being paid for shares in the Company, and the very large profits which the Company hoped to make, Mr Spickernell took the easy way out on 22^nd March 2000. While he considered that the subscriber shares had been paid (or were to be paid) for by the expenses, he knew that the Expenses File had been lost. He may well have thought that justifying the payment by reference to expenses, when the receipts had been lost, and when there was nothing in writing to show what had been agreed or decided, was more trouble than it was worth, when a cheque for a comparatively small amount of money could deal with the matter. After all, he did not then know of the importance of the November shares having been paid up by December 1999.

It is right to add that the case advanced on behalf of the first and second defendants has not been assisted by some of the documentation. Thus, the records of the Company suggest that the subscriber shares were fully paid by way of cash, and, in a number of letters written on behalf of Mr Spickernell and Mr Bryson, it was stated that the subscriber shares were paid for by cash. However, the notion that the subscriber shares were paid for by cash is consistent with neither party’s case (save for the subsequent payment by the March cheque). In any event, consistent with my view that neither Mr Spickernell nor Mr Bryson had a particularly clear recollection of the events with which I am concerned, they, or at least Mr Spickernell, may well have remembered the payment of the March cheque, and have forgotten the arrangement which I am satisfied was agreed the previous year in relation to payment by expenses. Further, payment by way of set off against expenses is precious close to payment by cash.

Mr Mabb argues that, even if there was some sort of arrangement whereby the subscriber shares were to be paid for through expenses, matters had not sufficiently progressed for the subscriber shares actually to have been paid for. I reject that contention. It appears to me that, at the latest, the subscriber shares were paid up when Mrs Thomson placed the Envelope and the Excel sheet into the Expenses File. At that point, there had been what was, at least, an agreement in principle, reached at the June or July 1999 meeting, that the subscriber shares would be paid up by means of expenses, there had been incurring of expenses by Mr Spickernell, and easily sufficient receipts in respect of such expenses had been recorded in what Mr Chivers rightly says should be treated as part of “the books of the Company”, namely in the Expenses File. Expenses were normally recorded in the Expenses File by means of Excel sheets and the only reason for not taking the final step normally taken in respect of expenses, namely entry onto the computer, was because of the use of the receipts for payment of the shares.

The artificiality of Mr Mabb’s reliance on the point, that more remained to be done before the subscriber shares were paid up, can be illustrated by the fact that he accepts that, if a receipt for £2 (all that was necessary to render the subscriber shares paid up) had been placed in the Envelope, and entered up onto the Excel sheet which recorded the expenses, the subscriber shares would have been paid up. I find it hard to see why, as a matter of logic, common sense or principle, a different result should obtain simply because substantially more than £2 worth of receipts was included in the Envelope.

Mr Mabb also contends that, even if Mr Spickernell’s subscriber shares were paid up, those of Mr Bryson were not. This contention is advanced on the basis that Mr Bryson believed that everything was sorted out with regard to the payment of the subscriber shares after the meeting in June or July 1999 with Mr Connolly, and he did nothing to sort out the receipts, and also because it appears that it was Mr Spickernell, and not Mr Bryson, who incurred the expenses, as Mr Spickernell paid for Mr Bryson. I do not consider that argument to be well founded. It is unnecessary to decide Mr Chivers’s (unpleaded) point that Mr Bryson’s belief was right, and the agreement at the meeting with Mr Connolly was sufficient to render the shares paid up, at least once the expenses were incurred. It seems to me that the answer to Mr Mabb’s contention is that Mr Bryson left the mechanics, both of payment of expenses, and of the use of the receipts to pay up the subscriber shares, to Mr Spickernell. Accepting that Mr Spickernell paid Mr Bryson’s expenses as well as his own, Mr Bryson can fairly be treated as having left it to Mr Spickernell not merely to pay the expenses, but also to ensure that the expenses were used to pay for the shares. On the facts of this case, I think it would be contrary to commercial common sense if, having concluded that Mr Spickernell’s subscriber shares were fully paid up, one concluded that Mr Bryson’s subscriber shares were not.

It is common ground that none of the 16 shareholders paid for their November shares themselves. It seems that, because of the comparatively small amount of money and the difficulty in collecting that money from some of the 13 shareholders, it was decided by Mr Spickernell and Mr Bryson that the 16 shareholders would not be asked to pay for the shares directly themselves. It also appears clear from the evidence, including that of Mr Paul, that one of the three directors specifically told most of the 13 shareholders (i.e. the 16 shareholders excluding Berdino, Okimax and Mr Reid) that their November shares would be paid for by Mr Spickernell, or at least that he would arrange for the payment of their shares. Indeed, I think that all the 13 shareholders were so informed. Accordingly, the question is whether he did so, and whether he paid for the November shares allotted to Berdino and Okimax.

In light of the conclusion I have reached in relation to the subscriber shares, it might be thought that the same outcome, namely that they had been paid for by a set off in respect of expenses, would apply to the November shares. Indeed, the evidence of Mr Spickernell and Mr Bryson was that, although it was the original intention that the November shares would be paid for by Mr Spickernell, it was subsequently decided thereafter that they would be paid for in the same way as the subscriber shares, namely by way of set-off of expenses. At the time that the receipts were put in the Envelope and recorded on the Excel sheet, and the Envelope stapled on the Excel sheet was placed in the Expenses File by Mrs Thomson, there was sufficient in the way of receipts to pay, not merely for the subscriber shares, but also for all the November shares. If anything, it might appear that the argument that payment was to be by way of the receipts, would be stronger than in relation to the subscriber shares, given that Mrs Thomson was clear in her evidence that the receipts were to be used to pay for what became the November shares, whereas she did not recall that this arrangement was to extend to the subscriber shares.

However, as I have mentioned, the pleaded case on behalf of the first and second defendants is that the November shares were not, in the event, paid for by setting off the expenses incurred by Mr Spickernell and Mr Bryson, but in consideration of the Company acquiring such rights to a business plan (“the business plan”) as were enjoyed by ETD. Such a way of paying for the November shares would have been somewhat irregular, in the sense that any rights in the business plan would have been vested in ETD, and not in the 16 shareholders (even in their capacity as shareholders in ETD), and the November shares in the Company were issued to those shareholders, and not to ETD. Nonetheless, Mr Mabb accepts, in my view rightly, that this point would not result in the November shares not being fully paid up, if I were to accept the first and second defendants’ pleaded case on the facts.

In their pleadings, in Mr Chivers’s opening skeleton argument on their behalf, and through their witnesses (in particular, Mr Spickernell and Mr Bryson) the first and second defendants consistently maintained that the only method of payment for the November shares was the consideration for the assignment of the rights to the business plan, and there was no suggestion of any alternative method of payment. However, after all the evidence had been given, and very shortly before closing speeches, Mr Chivers asked for permission to amend the first and second defendants’ pleaded case, with a view to advancing an alternative argument. That argument is that, if I reject the contention that the November shares were paid up by 15^th December 1999 on the basis of the agreement to transfer any rights in the business plan (“the ETD agreement”), then they were paid up through the medium of setting off the claims for expenses which could be maintained on the basis of the receipts (less £2) contained in the Envelope.

On behalf of the third defendant, Mr Mabb opposed this application for permission to amend. Because his opposition was, to a very substantial extent, based on the contention that allowing such an amendment would cause unfair prejudice to the third defendant, I took the view that it was sensible to consider the application for permission to amend in this judgment, and, if I concluded that granting the application would justify or necessitate further argument, to permit such further argument (ideally in writing).

I propose, first, to consider whether the November shares were indeed paid for according to the presently pleaded case of the first and second defendants, which would remain their primary case even if I give permission to amend. I will then turn to consider whether (if I reject their primary case) the first and second defendants should be given permission to amend, or (if I accept their primary case) they would have been given permission to amend if they had needed it.

The business plan was commissioned from consultants during 1999 after ETD had been acquired, but before the Company had been acquired, by Mr Spickernell and Mr Bryson. They both said that it was decided, probably in October 1999, that the shares which were shortly to be issued, namely the November shares, would be paid up by way of the ETD agreement because it would be the Company, rather than ETD, who would be using the business plan. They said that, so far as they remembered, this was agreed between them, following advice from Osborne Clarke (who by then were in the process of replacing Stringer Saul as the Company’s solicitors) at a meeting at the Hilton Hotel in Park Lane, London, on 13^th October 1999, and that this was confirmed by a letter dated 16^th February 2000 (“the disputed letter”).

The disputed letter is headed with the name of the Company and is addressed to ETD. It is signed by Mr Bryson on behalf of the Company and Mr Spickernell on behalf of ETD. It is headed “Subscriptions for Shares in [the Company]”, and the first sentence refers to:

The letter then states that, in consideration of the Company paying £1,103.20 (i.e. the nominal value of the November shares), ETD “agree to assign any and all rights [it] had in the business plan to [the Company]”. The disputed letter then goes on to say that “to satisfy [that] debt” the “101,320 ordinary shares of one pence each in [the Company]”, i.e. the November shares, “were issued to”, and there then follows a list containing the names of each of the 16 shareholders, and the precise number of shares allotted to the each such shareholder.

As Mr Chivers says, even if I reject the suggestion that the agreement was reached on 13^th October 1999, the essential question is whether it was reached by 15^th December 1999, because it is as at that date that the November shares must have been fully paid up, if the bonus shares could properly have been issued in respect of them, in light of Regulation 110.

On behalf of the third defendant, Mr Mabb challenges the contention that there was an effective agreement that the November shares would be paid up by means of the ETD agreement by 15^th December 1999, let alone by the date of the issue of the November shares. He also challenges the contention that the disputed letter, purportedly confirming that arrangement, was actually executed on 16^th February: he argues that it was executed at a later date. The question whether the disputed letter was executed on 16^th February 2000 or some later date is not a central issue for the purpose of determining this case. Its terms are such that it merely purports to confirm that the November shares were paid for by means of the ETD agreement. It could have been signed on 16^th February 2000, contrary to the case of the third defendant, who could still succeed on the central point, on the basis that the agreement which the disputed letter purported to record, while made before 16^th February 2000, was nonetheless made after 15^th December 1999. Equally, the third defendant could be right in saying that the disputed letter was signed sometime after 16^th February 2000, but, given that it was purporting to record an agreement that had been made earlier, that agreement could have been made before 15^th December 1999.

In light of all the evidence, I have reached the conclusion that there was no agreement or decision before 15^th December 1999, to the effect that the November shares would be paid up by means of the ETD agreement. First, while, as I have said, Mr Spickernell and Mr Bryson both said that this was agreed on 13^th October 1999, I have come to the conclusion that their evidence, even taken on its own, was weak and unconvincing. Mr Spickernell and Mr Bryson each appeared to have little, if any, recollection of many important aspects, and to have reconstructed a great deal of their evidence, partly by reference to contemporaneous documents, and partly by reference to what they hoped might have happened. Further, it seems pretty clear that Mr Spickernell was not a person who paid much attention to detail, and Mr Bryson did not strike me as a “details man” either.

There is nothing to suggest that they would have appreciated the importance of the November shares being fully paid up by 15^th December 1999. Although the terms of the resolution passed in respect of the issue and allotment of bonus shares referred to the shares already issued being fully paid up, I am satisfied that neither Mr Spickernell nor Mr Bryson considered the details of the resolution. Indeed, it appears clear that the minutes recording what transpired at the board meeting on 15^th December 1999 (and that of 12^th November 1999) were prepared in advance, very probably by Mr Connolly. Additionally, very little money was actually involved in paying up the November shares, and, therefore, unless the importance of those shares being paid up by 15^th December 1999 had been drawn to the attention of Mr Spickernell and Mr Bryson, one can well understand why they would not have thought it was vital to have the matter sorted out by 15^th December 1999. This point is reinforced by the fact that, during the last few months of 1999, Mr Spickernell and Mr Bryson were clearly very busy indeed.

It is fair to put a little flesh, by way of examples, on the bones of the views expressed in the previous two paragraphs. Mr Spickernell and Mr Bryson said that a firm decision was made to pay for the November shares by means of the ETD agreement on 13^th October 1999, over drinks at Trader Vic’s Bar at the Hilton Hotel. This appeared to be supported by a bill which referred prominently to Trader Vic’s. However, on closer analysis, it was clear that the bill was in respect of drinks bought in a different bar at the Hilton Hotel, namely Windows on the World. Secondly, despite their evidence to the contrary, the documentary evidence relating to the discussions with Mr Reid as to the number and type of shares that he would be receiving, do not appear to have been concluded by 13^th October 1999. It seems to me that it would not have been possible to arrive at a firm view as to whether the value of the business plan was such as to justify payment for a certain number of shares without knowing how many shares were to be issued.

More generally, Mr Bryson’s recollection as to where he was on certain occasions, particularly on 13^th and 14^th September 1999, and between 10^th and 16^th February 2000, while expressed in confident terms, turned out, in cross-examination, to be wrong, and to have been clearly based, not on his recollection, but on making false deductions from documents he had available to him.

As to Mr Spickernell, the crucial evidence to support the case that the subscriber shares were paid for by receipts placed in the marked Envelope, was not even mentioned in his witness statement, although he must have known that this was an important point. Indeed, it was only after he gave this evidence that it occurred to the first and second defendants to call Mrs Thomson. Mr Paul said that Mr Spickernell was not “necessarily a completer/finisher”, and Mr Reid said of both Mr Spickernell and Mr Bryson that they were “the front end engines of the companies that they established” and that “it was everything that the professional advisers could do to keep up with the activity level that [they] were trying to achieve”.

In various documents for which Mr Spickernell and Mr Bryson were responsible, there were statements to the effect that things had happened, when they were often some way away from happening. These documents include a letter of 18^th August 1999, from Mr Bryson to shareholders in ETD which anticipated the issue of shares in the Company by almost three months, and a statement in a private placing memorandum of 13^th December 1999 stating that a round of fundraising had been oversubscribed by October 1999, whereas it was clearly by no means fully subscribed by 8^th November 1999. Similarly a so called “pathfinder admission document” of 10^th April 2000 suggested that £780,000 had been raised by September 1999, which was also incorrect.

Quite apart from this, there are various further factors which cast doubt on the evidence of Mr Spickernell and Mr Bryson as to the notion that there was a firm decision or agreement on 13^th October 1999 or, indeed, at any time in 1999, that they would be paid through the medium of the ETD agreement, rather than by way of a set off in respect of expenses incurred by Mr Spickernell and Mr Bryson.

First, it seems to me, both as a matter of commercial common sense, and in light of the way in which Mr Spickernell and Mr Bryson conducted business, that, if there had been such a decision or agreement, they would have informed their solicitors of it. Indeed, Mr Spickernell said that he told Stringer Saul of the agreement allegedly reached on 13^th October 1999. If that were so, one would have expected a document, at least in draft, to have been prepared in this connection, before the November shares were issued. That point is reinforced if, as is said by the three directors, the reason for changing from using expenses to using the ETD agreement to pay for these shares was because of concern that, at some point in the future, the directors or shareholders of ETD might seek to claim substantial damages from the Company in light of the Company using the business plan, which ETD would have claimed. In those circumstances, one would have expected the solicitors virtually to insist on a document recording the agreement between the Company and ETD. That view is supported by the fact that, in March 2000, by which time Osborne Clarke had been approached about the issue, they appeared to give advice on such a document (of which more below). Yet there is no record of any such document until well into 2000.

Secondly, the relevant returns of allotment in relation to the November shares recorded that they had been paid for in cash. It can be said that a similar mistake was made in relation to the return for the subscriber shares, but it seems to me much easier to describe a set-off in relation to expenses as “cash”, than it is to describe the assignment of the benefit of an agreement as “cash”. On its own, this would still not be a weighty point, were it not for the fact that the return was, I am told, compiled by Mr Connolly, and given that Mr Spickernell said that he informed Stringer Saul about the agreed method of payment, it seems to me to be a point of some significance.

Thirdly, in (probably on 22^nd) March 2000, at a meeting (also attended by Mr Wilkinson and Mr Menon of PricewaterhouseCoopers), Mr Spickernell, according to Mr Paul, said that he had paid up the November shares by setting off expenses. I thought Mr Paul a reliable witness.

Furthermore, Mr Price said in his evidence that, on 12^th November 1999, just before the November shares were issued, he understood from Mr Spickernell “that he was covering the payment for all the shares issued… on behalf of the investors”. That understanding would have been consistent with Mr Spickernell using his right to claim expenses which he had incurred to pay for the shares; it would not be consistent with his organising ETD to pay for the issue of the November shares by assigning its rights under the business plan. Mr Price appeared to me to be an honest witness.

Fourthly, the evidence relating to the ETD agreement, and indeed to the value of, and even the ownership of the rights to, the business plan was flimsy. The documents indicated that, if anything, the business plan was prepared for the Company, not ETD. The evidence that it was paid for was thin. There was no suggestion that there was any attempt to value the business plan to ensure that it represented reasonable value for the price of the November shares.

Fifthly, it seems to me that, if it had been firmly decided and agreed before 12^th November, or even 15^th December, 1999, the business plan, rather than the expenses, was to be used to pay up the shares, it is likely that Mr Spickernell would have acted differently to Mrs Thomson towards the end of 1999, and to Mr Menon in March 2000. So far as Mrs Thomson is concerned, Mr Spickernell had given her the Envelope containing receipts for over £1,500, on the basis that he wanted to be able to use almost all of those receipts to justify the expenses which were to pay up the shares which were to be issued in November. If he had decided that the expenses were not to be used for that purpose, one would have expected him to tell her, to enable her to amend her records. If, on the other hand, the firm decision to use the ETD agreement to pay for the shares had not been made or had only been made after 1999, he would not have discussed the matter with Mrs Thomson, because she would have ceased to be responsible for the Expenses File.

As to Mr Menon, one can understand why, even if the pleaded case is correct, Mr Spickernell made out the cheque to pay for the subscriber shares in March 2000, when Mr Menon pointed out that there was no record of their having being paid up. First, only a nominal amount was involved; secondly, the basis for justifying the payment, namely the receipts, had been lost. The position was different in relation to the payment in respect of the November shares. First, a significant, albeit not an enormous, sum was involved. Secondly, and more importantly, if the payment for the shares was by way of the ETD agreement, there was no question of any relevant document having been lost: indeed, on the case put forward by the first and second defendants, a document recording the arrangement had been created only some five weeks ago, namely the disputed letter.

Sixthly, there is an e-mail to Mr Wilkinson from a Mr Fielder of Osborne Clarke, on 15^th March 2000, enclosing a draft of the disputed letter. The e-mail of 15^th March 2000 (“the March e-mail”) was in these terms:

I consider that the March e-mail suggests that the question as to how the November shares were to be paid up remained open as at 15^th March 2000, at least so far as Mr Fielder understood it. Unless Mr Fielder had misunderstood the situation or was expressing himself badly, it seems to me that this suggests that the notion that there had been a firm decision or agreement as to how the November shares were to be paid for by that date is unlikely to be correct.

Seventhly, letters written by solicitors on behalf of Mr Spickernell (and indeed Mr Bryson and Mr Reid) in October and December 2001, in which they were dealing with the argument that the November shares had not been paid up, at any rate by the date of the bonus issue, made no mention of the business plan as the basis upon which those shares were paid for. On the contrary, their Guernsey solicitors referred to the November shares being paid for in “the form of expenses incurred by our clients” and “the form of unclaimed salaries owed to [them]”, and that appears to have been confirmed by their English solicitors, in a letter of 21^st December 2001.

Eighthly, as I shall discuss in greater detail when dealing with the question of the approval of the bonus issue, the three directors wrote, on 17^th January 2002, to the 16 shareholders (and to the 28 shareholders) seeking their retrospective approval or ratification for the issue and allotment of the bonus shares. The letter explained that the November shares:

Ninthly, I have considerable difficulties with the notion that the disputed letter was signed on 16^th February 2000 in light of the March e-mail. The disputed letter appears to me plainly to have been drafted by solicitors, and the fact that the draft attached to the March e-mail is effectively identical in all respects to the disputed letter means that either the disputed letter has been back dated, or that it was sent under a misapprehension by Mr Fielder, who had not appreciated that the draft letter had been sent to Mr Wilkinson, or to someone else at the Company, a month or more earlier. The former explanation seems inherently more likely, partly because of the nine factors I have mentioned, but also because of the following points.

First, Mr Wilkinson said in his evidence that he did not recall having seen the disputed letter before it was produced in these proceedings. I believe him. Given that he was the financial controller of the Company from January 2000, and that he appears to have been enquiring, during March 2000, how and whether the November shares were paid up, one would have expected him to have been shown the disputed letter, if it then existed. That is particularly true, given that, as is clear from the oral evidence and, indeed, from the March e-mail, it was apparent to Mr Spickernell and Mr Bryson that there should be a written record of the way in which the shares were to be paid for.

Secondly, as I have already mentioned, Mr Paul, a generally reliable witness, said that, in March 2000, Mr Spickernell said that the November shares were paid by a set off of his expenses. Given that that appears to have been said at the meeting of 22^nd March 2000 with Mr Menon, it seems to me that it is entirely consistent with the suggestion in the March e-mail that Mr Spickernell had not yet firmly decided which way to pay for the November shares.

Thirdly, Mr Bryson said that he was telephoned by Mr Spickernell to explain that he had had to write a cheque to establish that the disputed shares had been paid up, because the evidence was lacking as a result of the Expenses File going missing. Such a conversation could only have taken place after the March cheque was written, namely on or after 22^nd March 2000, and it is hard to reconcile with the notion that the disputed letter had already been executed. The loss of the Expenses File would not have impinged on the evidence to establish that the November shares were paid up. I do not think it likely that Mr Spickernell or Mr Bryson would have forgotten the disputed letter if it had been signed some five weeks earlier; the notion that they both would have forgotten about it appears to me to be very unlikely.

Fourthly, there are one or two other roughly contemporaneous documents which suggest that the disputed letter had not been executed by 16^th February 2000. I have in mind in particular a fax message of 15^th March from Freshfields to Cazenove (both of whom were involved in the projected initial public offering of shares in the Company) relating to “the proposed EDT [sic] share issue”, and the absence of any reference to the disputed letter or its contents in a so-called “Project Guernsey” document e-mailed by Mr Menon on 21^st March 2000. Additionally, there are the letters, to which I have already referred, written by solicitors on behalf of the three directors, towards the end of 2001.

I turn to the evidence of Mr Reid, Mr Wilkinson and Mrs Thomson, which Mr Chivers relies on to support his contention that the decision had been made to pay for the November shares through the ETD agreement before December 1999, and that the disputed letter had indeed been executed on or about 16^th February 2000. None of them would have been directly involved in the decision as to how to pay for the November shares, and neither Mr Reid nor Mr Wilkinson was involved in the disputed letter. It seems to me that all that Mr Reid’s evidence on this issue amounted to, was that he “supported the strategy of signing off a letter of agreement between [the Company] and ETD…, particularly with [the Company] moving rapidly towards an AIM floatation”. That evidence does not throw much, if any, light on whether there was effectively a binding arrangement that the November shares would be paid in this way by 15^th December 1999, and it only gives the most indirect support for the notion that the disputed letter would have been signed in 2000. Even in the latter connection, it is not inconsistent with the disputed letter having been signed after the date of the March e-mail.

Mr Wilkinson’s evidence is more helpful to the case of the first and second defendants. It is clear both from his evidence and from an e-mail he sent on 12^th March, that he became aware that the issue of the November shares “was not made for cash consideration [but for] the spinout from ETD”, the latter expression being a reference to the ETD agreement. However, it is clear from that e-mail that Mr Wilkinson had not been told about, and had seen no document dealing with, the details of this arrangement: he was not even clear how many shares were involved or when they were issued. The e-mail of 12^th March, coupled with Mr Wilkinson’s oral evidence, is consistent with his having been told, in the first 12 days of March, that the ETD agreement had been determined as being the basis upon which certain shares in the Company were to be paid up, and that he was told this by Mr Spickernell or Mr Bryson. Looked at on its own, while this evidence is consistent with there having been some sort of agreement to this effect before 7^th March 2000, it does not establish that the agreement was reached before the November shares were issued, or even before the bonus shares were issued and allocated. More than that, Mr Wilkinson’s ignorance, as at mid-March 2000, of all the details of this arrangement, is very difficult to reconcile with the disputed letter having been executed by that time. Given that Mr Spickernell or Mr Bryson told Mr Wilkinson that the ETD agreement had been used to pay shares, at a time when it appears that Mr Wilkinson was trying to obtain details, it seems to me very unlikely that, if it had by then existed, the disputed letter would not have been produced to Mr Wilkinson.

When one looks at Mr Wilkinson’s evidence together with the other evidence to which I have referred, I do not consider that, even by 14^th March 2000, Mr Spickernell and Mr Bryson had conclusively decided how the November shares were to be paid up. So far as contemporaneous evidence is concerned, there is not only the March e-mail, but also Mr Paul’s credible evidence to the effect that, as at the 22^nd March 2000 meeting with Mr Menon, Mr Spickernell made it clear that the November shares were to be paid up by way of a set off of expenses.

Viewed in its totality, the evidence indicates the following. At some point after the receipts had been put into the Envelope, and the Envelope put into the Expenses File, Mr Spickernell and Mr Bryson appreciated that there could be a difficulty about the Company taking the benefit of the business plan without paying something to ETD for the right to use it. It then occurred to them that one way of dealing with the problem might be to use the acquisition by the Company of the right to use the business plan as the consideration for the issue of the November shares. Quite when it occurred to Mr Spickernell and Mr Bryson that this might be a sensible alternative to using the expenses for the purpose of paying for the shares is impossible to determine, but I see no reason to reject the notion that, in accordance with the pleaded case of the first and second defendants, it would have been sometime in October 1999. However, not surprisingly, in view of the hectic, even frenetic, activity involving very much larger sums of money and much more important-seeming issues, over the last few months of 1999 and the first few months of 2000, and the lack of any apparent urgency to decide the point conclusively, Mr Spickernell and Mr Bryson did not reach a concluded view as to how the November shares were to be paid for. Even in March 2000, they appear to have been sending different messages to different people, telling Mr Wilkinson the ETD agreement was to be used, and telling Mr Paul that the setting off of expenses was to be used. While the former route apparently had been indicated to Osborne Clarke, it seems clear that both options were still under review, in light of the terms of the March e-mail.

The strongest point in favour of the disputed letter having been signed on 16^th February 2000 is the evidence of Mrs Thomson, a witness whose honesty Mr Mabb does not challenge, as I have mentioned. She said that she would have typed the disputed letter, and that she did not type letters with a false date. I accept that, if Mrs Thomson typed the disputed letter, she did not type it with a false date.

However, despite her evidence on the point, I think it is quite conceivable that she did not type the final version of the disputed letter which was ultimately signed. It is not as if she remembered specifically typing the disputed letter, let alone the date on which she may have typed it. One of two possibilities is, in light of the evidence as a whole, in my view, likely. The first is that Mrs Thomson typed the letter shortly after 15^th March 2000, and that at some point thereafter, without her knowledge, it was retrieved from the word processor by Mr Spickernell, or by someone acting on his behalf, and was altered by being back-dated to 16^th February. The second possibility is that the disputed letter was not typed till after (possibly long after) March 2000, when it was typed by Mr Spickernell (or someone on his behalf other than Mrs Thomson), after seeing a copy of the March e-mail possibly in 2002.

I accept that this is a strong finding to make, particularly in light of the evidence of Mr Spickernell, Mr Bryson, and, above all Mrs Thomson. Mrs Thomson said in her witness statement:

It is quite possible that Mrs Thomson either did not type up the disputed letter at all, or that she typed it up shortly after 15^th March 2000, but it was taken no further. This is because it was overtaken by events, namely the shares becoming paid up by Mr Spickernell’s cheque of 22^nd March 2000. From that date, it would have been unnecessary to decide whether the shares should be paid up by the ETD agreement or by set off of expenses, because they had been paid by cash. The importance of their having been paid up by 15^th December 1999 was not apparent to Mr Spickernell or Mr Bryson at that time. Although it is true that Mrs Thomson said that she had typed the letter, she did not, as I have mentioned, specifically remember doing so, and her reasons for thinking that she (rather than, say, Mr Spickernell) must have done so, were not particularly convincing, bearing in mind that the word processor and records were at Mr Spickernell’s premises, and that she was only there during working hours on weekdays.

As I understand it, the word processor (with the draft disputed letter as typed, if it had been typed) would have been at Mr Spickernell’s premises in Wiltshire, to which Mr Spickernell had access the whole time, and which Mrs Thomson visited every day as Mr Spickernell’s assistant. Mrs Thomson’s evidence that she typed the letter, which was then on the word processor, may well be right, but that does not mean that Mr Spickernell did not subsequently retrieve the letter on the word processor, change the date, print it off, and then have it executed by himself and Mr Bryson. Alternatively, he may have typed up the disputed letter after these proceedings had been threatened or started.

Mr Chivers understandably makes much of the fact that Mrs Thomson described herself as “confident…, yes, very confident” that she “typed the letter on 16^th February”, but this does not cause me to change my view. First, it is quite clear that she does not remember specifically typing that letter at all, and it would be surprising if she could do so, unless there was some special facts about it which would have caused her to recollect it, which does not appear to be the case. Accordingly, she was “confident”, indeed “very confident”, that she had typed the letter on 16^th February, simply because that is the date it bore, that she did not back-date letters, and that it appeared to have been typed on the word processor and in the font, she used.

It is understandable that it was not specifically put to Mr Spickernell that he may have retrieved the letter some time after Mr Thomson had typed it, and re-dated it. Mr Mabb did not receive a copy of Mrs Thomson’s proof, until he had almost finished cross-examining Mr Spickernell, and he did not have the opportunity to read her witness statement carefully until after Mr Spickernell’s cross-examination had finished. It is true that he could have asked Mr Spickernell to be recalled, particularly as that option had been left open. However, Mr Mabb put it to Mr Spickernell and Mr Bryson that the disputed letter had been signed significantly after 16^th February 2000, and I think that that will do. It was not put to Mrs Thomson in terms that she typed the letter after 16^th February 2000 (a proposition which is particularly easy to accept given that it may well have been typed shortly after receipt of the March e-mail), and that Mr Spickernell could have subsequently recalled the disputed letter on the word processor when she was not there, changed the date of the letter on the computer, and then printed it out. However, it seems to me that it can be said that putting that to Mrs Thomson would not have helped much, because it would simply have involved asking her about matters which would have happened while she was not present.

Accordingly, I am of the view that, as at 12^th November 1999, when the November shares were issued, and as at 15^th December 1999, when the bonus shares were issued and allotted, and, indeed, until the payment of the cheque on 22^nd March 2000, matters were in a state of uncertainty. Having initially thought that the November shares, when issued, would be paid for by Mr Spickernell in cash, it was decided that they would be paid for by means of setting off expenses, which was then sought to be carried into effect by placing receipts for expenses in the Envelope, and placing the Envelope into the Expenses File, but that was then reconsidered, probably during October 1999, when the possibility of paying for the shares through the ETD agreement was raised. Between that time, namely at some point in October 1999, and 22^nd March 2000, the method of payment for the November 1999 shares remained unresolved, not surprisingly because its importance was not appreciated, and there were so many other, apparently much more urgent and much more financially significant, issues to be dealt with.

The issue was still open on 15^th March 2000, although, at that date, the use of the ETD agreement seemed more likely, and it was on that date that a disputed letter was prepared and e-mailed by Osborne Clarke, which letter would have confirmed the use of the ETD agreement. Matters were not, however, taken further on this aspect, either by pursuing the ETD agreement route or by pursuing the set off of expenses route, because of what happened on 22^nd March 2000. In effect, because of the loss of the Expenses File, and the absence of any clear records at that time, Mr Spickernell, somewhat ironically, reverted to the original intention, which had been long since abandoned, of paying for the November shares himself.

In all these circumstances, I do not accept that, by 15^th December 1999, the November shares were paid up through the medium of the ETD agreement. The ETD agreement had, by that date, been mooted as a possible way for paying for the shares, but it had not been agreed, even if one gives the word “agreed” a very loose meaning, and it had certainly not been firmly decided, let alone agreed in a contractually enforceable way. It had been put forward as a possibility, which had obvious attractions, but, because of other apparently more important and apparently more pressing matters, it had been left to be considered at a later stage, when the pressures were less great.

After the evidence had been completed, the first and second defendants applied to amend their pleaded case to contend that:

It seems to me that the proper approach to this application is as follows. First, as was stated in Cobbold –v- London Borough of Greenwich (unreported, 9^th August 1999) by Peter Gibson LJ:

Secondly, a party should not normally be allowed to amend if it would cause uncompensatable prejudice to another party to the litigation. As Peter Gibson LJ emphasised in words I have omitted from the passage just quoted, amendments should be normally allowed:

However, an amendment might be allowed, even where some uncompensatable prejudice is caused to the other party. An obvious example would be where the other party was in some way responsible for the need to amend, or for the absence of an earlier application to amend. Even without such factors, where uncompensatable prejudice would be caused by the amendment, it might exceptionally be allowed if such prejudice was slight, compared with the prejudice which would be suffered if the amendment were not allowed.

Thirdly, the court should be particularly careful before allowing an amendment which is only first sought to be made at trial, or, even more, where the amendment is sought to be made after the evidence has concluded. In Ketteman –v- Hansel Properties Limited [1987] AC 189 at 220, Lord Griffiths emphasised “the strain the litigation imposes on litigants” and “the anxieties occasioned by facing new issues”, and he observed that:

In World Wide Corporation Limited –v- GPT Limited (unreported, 7^th December 1998), the Court of Appeal upheld a decision to refuse permission to amend at the opening of the trial, as this would have led to a substantial adjournment which was not an acceptable course. The court took into account the interests of justice generally, and the interests of other litigants. In particular, at least on the facts of that case, the court concluded that an order that the applicant pay all the extra costs incurred as a result of the adjournment by the other party would not have represented full compensation for that other party.

As is apparent from the first passage I have quoted from Peter Gibson LJ, the natural instinct of most judges is to allow an amendment, essentially for the reasons he gave. If the point is bad and it fails, the party who has raised it will not be left with the unsatisfactory feeling that it has been prevented from raising what may have turned out to be a good point. If the point sought to be raised is good, then, unless there is a valid reason for doing so, excluding it would normally seem to represent a penalty to the party seeking to amend, and a concomitant windfall for the other party, disproportionate to the culpability of the former party, or the damage suffered by the latter party, as a result of the point not having been raised earlier.

The way in which the new point would be argued, according to Mr Chivers, is as follows:

By September or October 1999 (when the receipts had been put into the Envelope and the Envelope put into the Expenses File), there was effectively a binding arrangement to pay for what became the November shares by way of set off against the receipts;

Unless and until that arrangement was replaced by another binding arrangement, it would have remained in force;

On my view that the payment for the shares by virtue of the ETD agreement was considered, but not finalised, by 12^th November 1999, when the shares were issued, the arrangement effectively finalised in September or October 1999 was never replaced;

Accordingly, the November shares became fully paid up on their issue, when the payment by way of the expenses took effect.

That is an attractive argument, but on the basis of the evidence and limited argument on the point, I tend to the view that it is wrong. Any arrangement entered into for the payment of the November shares through the medium of the receipts was entered into between (a) Mr Spickernell and/or Mr Bryson as the persons who could claim the expenses and, probably, as putative agents for future subscribers for the shares, namely the 16 shareholders, and (b) Mr Spickernell and Mr Bryson in their capacity as directors of the Company. By the time the receipts were put in the Envelope and the Envelope was put in the Expenses File, the November shares, unlike the subscriber shares, had yet to be issued. Therefore the arrangement for payment for the November shares was executory, whereas the arrangement for the payment of the subscriber shares was effectively executed.

It seems to me that, by reconsidering whether the November shares should be paid for by means of the ETD agreement rather than by expenses, the executory arrangement, to the effect that the expenses represented by the receipts in the Envelope would be used to pay for the November shares, was effectively revoked. It is not easy to analyse the position, partly because there is nothing in writing, partly because the factual situation is rather murky, partly because the issue was not investigated in the evidence because the point had not been pleaded, partly because the individuals who may have been involved in reaching, abandoning, or placing in abeyance, any arrangement, were the same on each side, namely Mr Spickernell and Mr Bryson, and partly because these two witnesses were not particularly reliable. Nonetheless, on the basis of the material currently available to me, it seems to me that that correct analysis is that at some time before 12^th November 1999, Mr Spickernell and Mr Bryson had moved from the position when the Envelope was put into the Expenses File, which was that the shares would be paid for by setting off expenses, to a position where they had not yet decided how the shares were to be paid for, on the basis that they would decide in due course. To my mind, that would abrogate the conclusion that the executory arrangement, embodied in the receipts in the Envelope in the Expenses File, was still effective.

Even though that is my view on the merits of the alternative case which is sought to be pleaded, it would not be enough for me to refuse permission to amend. My view is provisional, and may be wrong. It would therefore be unjust to refuse permission to amend on this ground: the merits have not been fully developed in argument before me, and, in any event, the Court of Appeal might reach a different conclusion from my provisional view.

Nonetheless, I shall refuse permission to amend, because if I allowed the amendment, it would cause irremediable and unfair prejudice to the third defendant, and it would risk an unfair result if it succeeded. As I have already indicated, it appears to me that one of the difficulties of arriving at a conclusion as to whether, on the facts I have found, the November shares should be treated as having been paid for by expenses, is the absence of any evidence or cross-examination directed to the point. In order to decide the point satisfactorily and fairly, it may very well have been important to hear what Mr Spickernell and Mr Bryson would have said about their intentions and understanding and discussions, so far as paying for the November shares by way of expenses, during the two months either side of 12^th November 1999, when they were issued. There would also have been questions about what they, especially Mr Spickernell, had said to others about the intention to use expenses as a means of payment for the November shares. Despite the very lengthy cross-examination they each underwent, there was no detailed investigation of such issues, because, when they were giving evidence, the point was not a live one. On the contrary, the unequivocal evidence of Mr Spickernell and Mr Bryson was, in accordance with the pleading of the first and second defendants, that the November shares had been paid for through the ETD agreement.

Accordingly, if the point had been pleaded earlier, I am confident that Mr Mabb would have asked Mr Spickernell and Mr Bryson questions, which he now has no opportunity to ask them. Secondly, on the currently pleaded case of the first and second defendants, issues relating to the set off by way of expenses and the receipts in the Envelope only really affected the subscriber shares, of which there were merely 200, whereas, on the amended case, these issues would apply to the November shares, of which there were over 110,000. The implications of those issues would be far more substantial on the amended case, and it is quite conceivable that a more thorough cross-examination on aspects of those issues would have been appropriate. While this point has some force, it is blunted by the fact that Mr Mabb submitted Mr Spickernell and Mr Bryson to lengthy and detailed cross-examinations.

Thirdly, it is also quite possible, indeed likely, that parts of the whole approach to significant parts of the cross-examination of Mr Spickernell and Mr Bryson would have changed, if the first and second defendants had timeously put forward an alternative basis for the payment of the November shares. It accords with common sense and experience that the cross-examination of a witness, who is supporting a single method of payment, would be likely to involve a different approach from that of a witness who puts forward an alternative method of payment, if his evidence is effectively not accepted on the first method.

Fourthly, Mr Paul and Mr Price each said that they were led to believe that the November shares had been paid for by set off of expenses. Their cross-examinations would have been very different, if that had been put forward as the alternative method of payment. As witnesses for the first and second defendants, it would have turned their evidence on this issue from being rather helpful to Mr Mabb’s case into being unhelpful to him. Fifthly, it is also quite conceivable, as Mr Mabb says, that, if this alternative case had been put forward earlier, he would have called Mr Connolly of Stringer Saul and/or Mr Fielder of Osborne Clarke as witnesses.

Thus, if the amended case had been pleaded, Mr Mabb would have wanted to establish that the raising of the ETD agreement as a possible method of payment for the November shares, during October 1999, resulted in the proposed payment by means of set off of expenses being abrogated. It was wholly unnecessary for any thought to be given, before or during the hearing, to establishing such a proposition through the evidence, because payment for the November shares through had been no part of the first and second defendants’ case.

Quite apart from this, no explanation has been given as to why the alternative case now sought to be pleaded was not raised at any time in the past. That is particularly striking as the hearing lasted over some eight or nine days, indeed, the evidence took up some seven days.

Mistakes get made in litigation, and it is by no means uncommon for points to be overlooked. Where possible, the fact that a point is raised late should not prevent it from being pursued. In this case, however, it would simply be unfair on the third defendant if the amendment were allowed. His case has been prepared and run, his witnesses have been called, and, perhaps most importantly, the way in which cross-examination has been conducted, and the questions which have been asked in cross-examination, on his behalf, have been predicated on the pleaded case he is meeting.

Mr Chivers suggests that a different approach to an amendment in the present case is appropriate, on the basis that the first and second defendants and the third defendant were each representative parties and, in any event, the preliminary issues ordered by Master Moncaster did not limit the parties to their pleaded case. I do not agree. The fact that each of the parties is proceeding in a representative capacity cannot alter the principles upon which permission to amend is given. One only has to consider the two fundamental propositions, namely that an amendment should normally be allowed so that all the issues can be determined, but that an amendment should normally not be allowed if it will cause unfair prejudice to another party to the litigation, to appreciate that the principles are equally applicable where the parties to the litigation are representatives. Nor can I accept the argument that that the pleaded case of each party is irrelevant to the preliminary issues. The mere fact that the preliminary issues ordered by the Master do not expressly refer to the pleadings cannot mean that the normal rule relating to pleadings, namely that they define each party’s case, does not apply. In any event, the order of 26^th June 2002, which identified, and directed a hearing of, the preliminary issues, also contained a direction that the first and second defendants file their defence. Further, as Mr Mabb points out, if the first and second defendants are not bound by their pleaded case, their application to amend is rather difficult to understand.

It is common ground between the parties that:

Before the three directors could properly have approved the issue and allotment of the bonus shares, there should have been authorisation, under Regulation 110, by an ordinary resolution, of the 16 shareholders, of the capitalisation of the relevant sum in the share premium account and of the appropriation of that sum to pay for the bonus shares.

Owing, it appears, to the failure of Mr Connolly to advise as to the need for such authorisation, no general meeting of the 16 shareholders took place with a view to the passing of an ordinary resolution giving such authorisation.

It is nonetheless possible, in principle, for the issue and allotment of the bonus shares to have been authorised other than through approval at a general meeting, by virtue of the so-called Duomatic principle.

This principle, on which the first and second defendants rely, is named after In re Duomatic Ltd [1969] 2 Ch. 365, and it has been expressed in slightly different ways in different cases. In Duomatic itself, Buckley J said at 373:

Although the principle has been characterised in somewhat different ways in different cases, I do not consider that that is because its nature or extent is in doubt or the subject of debate. The difference in language is attributable to the fact that the principle will have been expressed by reference to the particular facts of the case. The essence of the Duomatic principle, as I see it, is that, where the articles of a company require a course to be approved by a group of shareholders at a general meeting, that requirement can be avoided if all members of the group, being aware of the relevant facts, either give their approval to that course, or so conduct themselves as to make it inequitable for them to deny that they have given their approval. Whether the approval is given in advance or after the event, whether it is characterised as agreement, ratification, waiver, or estoppel, and whether members of the group give their consent in different ways at different times, does not matter.

The first way in which the first and second defendants put their case is that each of the 13 shareholders (i.e. the 16 shareholders other than Mr Reid and Berdino and Okimax, whose consent was self-evident as they were alter ego’s of Mr Spickernell and Mr Bryson) consented. Mr Chivers contends that each of the 13 shareholders was contacted by one of the three directors before the 15^th December 1999, and was told about the proposed bonus issue, and each of those shareholders effectively consented to it. In this connection, I accept the evidence of the three directors, that at least one of them was in fairly frequent contact with each of the 13 shareholders, and that each of these shareholders was told in advance about the bonus issue.

First, although the evidence of the three directors on this issue varied to some extent in relation to specific details, it was substantially consistent in relation to there having been regular contact by at least one of them with each of the 13 shareholders. Mr Mabb was able to identify inconsistencies as to which of them was in contact with some of the 28 shareholders, but there was consistency as to which of them was in contact with each of the 13 shareholders. Secondly, given the small number of shareholders, and the fact that they were relatives or friends of at least one of the three directors, and the business of the Company was developing in a very fast growing market, it seems likely that there would have been fairly frequent contact between the three directors and the 13 shareholders. Thirdly, I think it more likely than not that the three directors would have informed the 13 shareholders that they would be getting certificates for 100 times as many shares as they expected, albeit that the total value of the shares allotted would be the same.

I accept that it is possible that one, or even more than one, of the 13 shareholders was not informed of the issue of the bonus shares, but, on the balance of probabilities, I consider that it is more likely than not that each of them was so informed before 15^th December 1999.

Not surprisingly, none of the three directors could remember precisely what was said in the telephone conversations with each of the 13 shareholders about the bonus shares during the month or so before the decision to issue them on 15^th December 1999. On the basis of the evidence of each of the three directors, and, indeed, on the basis of what one would expect to have happened, I think that each of the 13 shareholders was informed that there was to be a bonus issue, and was told sufficient to enable him to understand that he would be receiving 100 times as many shares as he may have been expecting, but that this made no difference to the value of the interest in the Company he was acquiring. For more sophisticated shareholders, this could be explained very shortly, simply by saying that there was to be a issue of 99 bonus shares for every 1 ordinary share held; to less sophisticated shareholders, the effect of the proposed bonus issue would presumably have had to be spelt out a little more fully.

Given the fact that, at the time of each of the telephone conversations the three directors were wholly unaware of the need for shareholder approval, it seems to me unlikely that there was any question of the conversations involving a request for the consent to the bonus issue of any of the 13 shareholders. The projected issue of the bonus shares was relayed to each of the 13 shareholders as one of the many developments which was due to happen in relation to the Company.

That conclusion is in line with the evidence of the three directors in their respective witness statements. Mr Bryson referred to “explaining” matters to the 13 shareholders, Mr Spickernell said he “explained” matters to, and “updated”, the 13 shareholders, and Mr Reid stated that he “inform[ed]” the shareholders. The conclusion is further supported by the evidence of Mr Paul, who said, in his evidence, that he did not think his approval was being sought when Mr Spickernell telephoned him in December 1999. Although Mr Price “presumed” his consent was being sought, it would appear from his evidence that it was in his capacity as a reasonably significant shareholder in the Company, and not as a constitutional matter.

The first and second defendants rely upon documents signed by 12 of the 13 shareholders during January and February 2003, pursuant to a written invitation from the three directors (“the invitation”) asking them to give their recollection, on a standard form of answer, as to whether they were informed of the bonus issue. All but one of those who replied to the invitation agreed with the proposition (a), “I can confirm from my own recollection that I was informed of the proposed bonus issue and agreed to the same”. One of the 13 shareholders subscribed to proposition (b), “I cannot specifically remember the events referred to but I have no reason to doubt the truth of the statements”. Those “statements” accompanied the invitation, and were extracts from the witness statements of Mr Spickernell and Mr Bryson in these proceedings, to the effect that the 13 shareholders were informed of the bonus issue.

These forms signed by 12 of the 13 shareholders in early 2003 appear to me to be of little weight. The invitation, especially with the included extracts of evidence and the accompanying form, meant that the questioning was very leading. The forms were signed more than three years after the relevant events took place, and were not sworn. With the exception of Mr Paul, none of the 13 shareholders was available to be cross-examined. The concept of “agree[ing]” to the bonus issue would have justified fairly detailed cross-examination, particularly in light of the evidence of the three directors. Further, although Mr Paul chose proposition (a) on his form, it was clear from his evidence that he did not regard himself as having agreed to the bonus issue. There is also the oddity that another of the 13 shareholders appears to have signed two forms, one selecting proposition (a) and the other left blank. Further, two of the 13 shareholders, namely Mr Chinoy, who chose proposition (b), and Mr Cunningham-Reid, who had died by 2003, were unable to say whether their consent had been given.

The furthest that I am prepared to go in relying upon these forms is to say that they tend to support my conclusion that each of the 13 shareholders was, on the balance of probabilities, informed about the bonus issue. However, in light of the oral evidence from each of the three directors, and indeed from Mr Paul, in this connection, I would have been very reluctant to reach even that conclusion, simply on the basis of the invitation and the form.

Accordingly, I am of the opinion that each of the 13 shareholders was told, on the telephone, of the projected bonus issue, and its general effect, before 15^th December 1999, but that there was no question of their consent being sought or given in those telephone conversations.

If a director of a company informs shareholders of an intended action (or a past action) on the part of the directors, in circumstances in which neither the directors nor the shareholders are aware that the consent of the shareholders is required to that action, I do not think it is right, at least without more, to conclude that the shareholders have assented to that action for Duomatic purposes. As a matter of both ordinary language and legal concept, it does not seem to me that, in such circumstances, it could be said that the shareholders have “assent[ed]” to that action. The shareholders have simply been told about the action or intended action, on the basis that it is something which can be, and has been or will be, left to the directors to decide on, and no question of “assent” arises.

The word “assent” is to be found in the passages I have cited from Duomatic and Parker and Cooper; the word used in the passage I have quoted from Herman is “waiver”: Waiver classically requires the person who waives to have knowledge of the legal right which he is waiving: see Peyman –v- Lanjani [1985] Ch. 457. Indeed, in Herman itself, just before the passage I have quoted, also at 8 ACLC 1096, Meagher JA described the Duomatic principle in these terms:

The words I have emphasised were added by Meagher JA to what is otherwise almost a word-for-word repetition of the principle as defined in Duomatic itself. Before the Duomatic principle can be satisfied, the shareholders who are said to have assented or waived must have the appropriate or “full” knowledge. If a shareholder is not even aware that his “assent” is being sought to the matter, let alone that the obtaining of his consent is at least a significant factor in relation to the matter, he cannot, in my view, have the necessary “full knowledge” to enable him to “assent”, quite apart from the fact that I do not think he can be said to “assent” to the matter if he is merely told of it.

Additionally, while the information communicated to the 13 shareholders would have been sufficient to enable them to know that bonus shares were being issued, in the sense that they were receiving 99 bonus shares for every 1 ordinary share they thought they already owned, I am confident that some of the 13 shareholders, and quite possibly all of the 13 shareholders, were not told that the bonus issue would involve the capitalisation of part of the sum standing to the credit of the Company’s share premium account. While that may have meant nothing to many of the 13 shareholders, it was something to which their assent at general meeting was required pursuant to Article 110, and there is a difference (albeit a pretty small one) between a company’s share premium account and it share capital account – see section 130 of the Companies Act 1985. Further, as Mr Mabb says, it does not seem likely that any of the 13 shareholders were told the number of shares already in issue before the issue of the bonus shares (and hence the total number of bonus shares), or the amount currently in, or to be transferred from, the share premium account. The notion that the 13 shareholders should have had that sort of information before they could have agreed the bonus issue, is supported by the requirements of Regulation 38 of Table A (also incorporated in the Articles). This requires a notice of general meeting to “specify… the general nature of the business to be transacted” at such a meeting.

I do not believe that the conclusion that there was no sufficient assent is called into question by the decision in In re Bailey, Hay & Co. Ltd [1971] 1 WLR 1357. In that case, it was unsuccessfully argued that the appointment of a liquidator at a general meeting was invalid, because the general meeting was called on notice which was one day short. All five corporators attended the meeting; only two of them voted in favour of the resolution, and the other three did not vote. However, they did nothing to object to the appointment of the liquidator, and took no objection to his staying in office and carrying on his duties for four years. They then took the point that his appointment was void, because the short notice rendered the meeting invalid. At 1366H to 1367C, Brightman J said this:

That case appears to me distinguishable from the present. Each of the shareholders in Bailey, Hay knew that the decision to appoint a liquidator was to be voted on by the shareholders at a general meeting, and each of them attended the meeting personally or through a representative. By attending the meeting and not raising the point that the notice was one day short, and by standing by while the liquidator was appointed, the three non-voting shareholders probably lost their right to take the point – see In re British Sugar Refining Co. (1857) 3 K&J 408. Further, if a shareholder attends a meeting at which he knows that shareholders’ assent is being sought, and the assent is then apparently obtained at that meeting, and matters then proceed on the basis that such assent has been given, without any objection on his part, it is easy to see how it could be concluded that he cannot challenge the view that the assent has been given. It is quite another matter where the shareholder is wholly unaware that his, or any other shareholder’s, assent is necessary, and, indeed, that such assent is not even being sought.

Indeed, at 1096 to 1097 in Herman, this very point was made by Meagher JA. Having stated that “the Duomatic principle, however formulated, is really only a principle of waiver”, he went on to say that “it would be a very odd result if one could waive the destruction of rights of whose destruction one was ignorant”. Accordingly, I do not consider that the Duomatic principle was satisfied by the telephone discussions between the three directors and the 13 shareholders prior to 15^th December 1999.

It is next necessary to consider whether this conclusion should be reconsidered as a result of the 16 shareholders accepting the certificates for their respective bonus shares (probably in early January 2000), and subsequently exchanging their bonus shares for shares in the Guernsey Company (in about April 2000). In my judgment, those facts cannot alter my conclusion, in so far as it is based on contract or waiver. I do not see how it can be said that there was “assent” sufficient to satisfy the Duomatic principle, given that such assent requires “knowledge”. At the time of the acceptance of the bonus shares and their exchange for shares in the Guernsey Company, it would appear that none of the 16 shareholders, and indeed none of the three directors, was aware of the need for the Company to seek assent, or for the shareholders to give their assent, or as to the irregularity of the issue of the bonus shares because of the absence of any resolution at a general meeting. Estoppel was touched on by Mr Chivers, but it was not pleaded or developed in argument. Such an allegation would have to be carefully pleaded and considered, before it could be relied on.

There is a further difficulty with the argument that the 16 shareholders waived their right to take the point that there had been no resolution, by accepting the share certificates and/or accepting the Guernsey Company shares in exchange. By the time the share certificates were provided there were new shareholders, namely the 28 shareholders. As I see it, if the issue of the bonus shares, without the approval at a general meeting, was subsequently to be validated by the members of the Company in accordance with the Duomatic principle, the assent of all the shareholders at the time of the assent would be required; i.e. not merely the 16 shareholders, but also the 28 shareholders.

I am not satisfied that all of the 28 shareholders were even informed about the bonus issue. On the evidence of the three directors, at least one of the 28 shareholders, Mr Fairbanks Smith, was not contacted by any of them. I am also not satisfied that another of the 28 shareholders, Bath Street Nominees Ltd, was contacted by any of the three directors. The same applies to another three of the 28 shareholders, namely Messrs. Kaplan, Martyn, and Marlock, who were colleagues of Mr Price, and who Mr Spickernell said were not contacted directly by any of the three directors. Although Mr Reid said that he spoke to them, I do not think that is likely in light of the evidence of Mr Spickernell and Mr Price. In any event, as with the 16 shareholders, I do not consider that the 28 shareholders would have been asked for their consent: those that were contacted in connection with the bonus issue were simply told about it. To establish consent by the 28 shareholders, the first and second defendants also rely upon the invitation which was sent to the 28 shareholders as well as the 16 shareholders. However, of the 28 shareholders, only 21 appear to have filled in the form, which renders it even more difficult for the first and second defendants to rely on the forms in relation to the 28 shareholders than in relation to the 16 shareholders.

Finally, the first and second defendants rely upon ratification. In addition to dealing with what happened before 15^th November 1999, the forms filled in by 15 of the 16 shareholders (excluding the deceased Mr Cunningham-Reid) in January and February 2003, also purported to ratify the issue of the bonus shares, “in so far as [they were] still able to do so”. The three directors also sent out to each of the 33 shareholders – i.e. those who acquired shares on 15^th December 1999, a “Ratification and Deed of Release” executed in January and February 2002 (“the Ratification”), the 33 persons being the 28 shareholders plus 5 of the original 16 shareholders. There is a question mark over whether two of the 33 shareholders actually executed the Ratification, but, on balance, I think they did. These Ratifications purported to ratify the allotment of bonus shares and to waive the right to any relief to which the shareholders may have been entitled as a result of any defect in that allotment.

The ratification in the forms returned by 15 of the 16 shareholders in 2003, and the Ratifications returned by the 33 shareholders in 2002, were executed long after they had ceased to be shareholders in the Company: all their shares had been acquired in April 2000 by the Guernsey Company. Accordingly, as Mr Mabb contends, it appears to me that none of the persons who executed the forms in 2003 or the Ratifications in 2002 had standing to change the constitutional position of the Company. It would be the Guernsey Company, by then the holder of all the shares in the Company, who would have to approve or waive the failure to obtain the approval at a general meeting to the issue of the bonus shares.

Accordingly, I conclude that the capitalisation of reserves and the issue of bonus shares paid up were not authorised by an ordinary resolution of the Company or otherwise effectively authorised by the members of the Company, (following the wording of the second preliminary issue as formulated in Master Moncaster’s order).

This is a conclusion I reach with a degree of reluctance. If the 16 shareholders had all been asked (whether at a general meeting or otherwise) to approve the decision to issue and allot the bonus shares, it is hard to conceive of any reason why any of them would have opposed it. Indeed, it is hard to believe that any of them would not have supported it. Given the anticipated floatation of the Company on AIM, it would have rendered their shares more marketable; the only other consequence would have been the transfer of money standing in the share premium account into the share capital account. It is really only a technical point. Yet, as Hoffmann LJ said in Re D’Jan of London Ltd [1993] BCC 646, for the Duomatic principle to apply, it is not enough to show that assent would have probably have been given if asked: there must be actual assent.

Regulation 110 is clear: the three directors had the power to issue and allocate the bonus shares, but only “with the authority of an ordinary resolution”. They did not have that authority; they did not have the agreement, expressed or implied, of those who could have attended a meeting to approve such a resolution, to dispense with the need for it. They have not established any subsequent effective ratification of the resolutions. They therefore failed to comply with a precondition in connection with the issue and allotment of the bonus shares.

The first submission by Mr Mabb on behalf of the third defendant, is that the bonus issue was void, and that the bonus shares should effectively be treated as never having been issued and allotted, on the ground of common mistake. On the facts I have found, he primarily identifies two mistakes, namely:

The bonus shares issued to the holders of the November shares were allotted to those shareholders contrary to Regulations 104 and 110, because the November shares were not paid up.

All the 13,617,945 bonus shares were issued purportedly paid up to the 16 shareholders and the 28 shareholders (“the 44 shareholders”) in that they were issued and paid up without “the authority of an ordinary resolution” contrary to Regulation 110;

It is right to mention that Mr Mabb has what may be characterised as two variations on the first point, namely, that there are other vitiating mistakes, namely, that in their resolution to issue the bonus shares:

The directors did not purport to appropriate any sum to be capitalised from the share premium account to members holding unpaid shares (i.e. the 16 shareholders); and

The directors did not purport to allot bonus shares to members holding unpaid shares.

Mr Mabb’s second submission is that the issue of the bonus shares was void because, in light of Regulations 104 and 110, the Company, and/or the three directors, had no power to cause the bonus shares to be issued, paid up through the capitalisation of the share premium account, to the 16 shareholders in respect of the unpaid November shares and/or because of the absence of approval by the 16 shareholders. I put this argument second, because Mr Mabb advanced common mistake as his main point (to the extent that Mr Chivers apparently understood it to be his only point).

I shall first consider the third defendant’s case based on common mistake. I shall then deal with the case based on breach of the Articles, which involves consideration of the ambit of section 35A. I shall then turn to the question of the grant of a declaration.

Mr Mabb relies on the decision of Scott J in In re Cleveland Trust PLC [1991] BCLC 424. That case concerned three companies, McInnes, a wholly owned subsidiary of Gunnergate, itself a wholly owned subsidiary of Cleveland; all three companies had common directors. McInnes declared a substantial dividend, which it then paid to Gunnergate, which in turn declared the same sum by way of dividend, which it paid to Cleveland. Cleveland then made a bonus issue of fully paid shares to be capitalised out of its profit and loss account, i.e. out of the sum paid by way of dividend by McInnes and Gunnergate. It then transpired that McInnes had no capacity to declare the dividend. The argument accepted by the judge was that, in these circumstances, the bonus issue was void on grounds of common mistake.

In Cleveland at 434H, Scott J accepted that:

At 436G-H, Scott J said this:

The law relating to the effect of common mistake on a contract is difficult, and has been most recently considered by the Court of Appeal in Great Peace Shipping Limited –v- Tsavliris Salvage (International) Limited [2002] 3 WLR 1617. Lord Phillips of Worth Matravers MR, giving the judgment of the court, considered the effect of a number of cases, most notably Bell –v- Lever Bros. Limited [1932] AC 161, and Associated Japanese Bank (International) Limited –v- Crédit du Nord SA [1989] 1 WLR 255, both of which were cited by Scott J in Cleveland.

The decision in Great Peace represents significant development in the law, not only in so far as it rejected the doctrine of equitable recission in relation to mistake (see paragraphs 95 to 161), but also in relation to the analysis of the common law, and in particular the famous speech of Lord Atkin in Bell.

At 1639 in paragraph 76 in Great Peace, the court indicated that authority suggested that there should be five “elements [which] must be present if common mistake is to avoid a contract”. They are as follows:

These tests are similar to those which can be extracted from the principles identified by Steyn J in Associated Japanese Bank in a passage at 268, which the court in Great Peace quoted in paragraph 90, and approved in paragraph 91. The passage cited from the judgment of Steyn J begins with this sentence:

I respectfully agree with the observations of Scott J in Cleveland, to the effect that the issue and allotment of bonus shares, at least once they have been accepted by the shareholders to whom they have been allotted, is analogous to a contract, albeit that, as he suggested at 435A, it “may not be strictly contractual”. I also am content to proceed on the basis that the law relating to common mistake in contract can be applied by analogy to the completed issued of bonus shares (as both counsel accept). However, because the case proceeds by analogy, it may be that a certain amount of adaptation of the principles is necessary, because they have been developed in relation to contracts, whereas a case such as the present involves something similar and analogous, but not identical, to a contract.

The two grounds (“the defects”) upon which voidness is alleged, namely the fact that the November shares were not paid up at the time of the allotment of the bonus shares, and the absence of an ordinary resolution, can each properly be characterised as common mistakes. Neither the Company nor the 16 shareholders, nor, indeed, the three directors, appreciated that the November shares should have been paid up before the bonus shares could properly be allotted to the 16 shareholders. That was a mistake which was common to all the parties concerned. (The 16 shareholders, or at least 13 of them, believed that the November shares were paid up because they had been told that Mr Spickernell would pay for them, but that was probably a unilateral mistake, as the three directors at least ought to have known that those shares were not paid up). However, the need for an ordinary resolution was not appreciated by any of the parties concerned: they made a common mistake in overlooking this requirement.

In the case of each defect there was therefore “a common assumption as to the existence of a state of affairs”, namely that the issue and allotment of the bonus shares were regular and proper. Although that formulation applies to both defects, they must, I think, be considered separately. Although they are each deficiencies which have arisen in relation to the bonus issue, and which are relied on to support the same or a similar argument, namely that the bonus shares were void in whole or in part, they are, as a matter of fact and law, separate and unrelated points. That is well illustrated by the fact that, if Mr Mabb is correct, the failure to obtain a resolution would render the issue of all the bonus shares void, but the fact that the November shares were not paid up may render only those bonus shares allotted to the 16 shareholders void.

The first defect whose effect I shall consider is the fact that the November shares were not paid up at the date that the bonus shares were issued to the 16 shareholders, and whether this should lead to the conclusion that the allotment of the bonus shares to those shareholders was void.

I accept that, when they decided to issue some of the bonus shares to the 16 shareholders, the three directors had overlooked the fact, indeed were wholly unaware of the fact, that the bonus shares should not have been allotted paid up to the 16 shareholders, unless and until the November shares were paid up. I consider that the three directors, or at least two of them, namely Mr Spickernell and Mr Bryson, were aware of the facts that gave rise to the conclusion that the November shares were not fully paid up. That conclusion is almost inevitable, because, as at 15^th December 1999, it was Mr Spickernell and Mr Bryson who had been solely responsible for deciding on, and arranging for, the way in which the November shares would be paid for (apart from the advice received from Mr Connolly, the solicitor, and the involvement of Mrs Thomson, Mr Spickernell’s secretary).

It also is clear that the 13 shareholders (i.e. the holders of the November shares, with the exception of Berdino, Okimax and Mr Reid) were unaware that their November shares were not fully paid up. I think it substantially more likely than not that they were unaware of the requirement that those shares had to be fully paid up, before any bonus shares could properly be allotted in respect of them. However, I do not consider that, on the facts of this case, this justifies concluding that the issue of the bonus shares to the 13 shareholders on 15^th December 1999 was void. I reach that conclusion on the basis of the combined effect of three factors.

First, it appears to me that this is not a case where it can merely be said that the 13 shareholders were innocent of any responsibility for, or in connection with, the mistake. They were positively misled into believing that the November shares would be fully paid up, because they had been told, before the November shares were issued to them, by one of the three directors, that Mr Spickernell would ensure that their shares were fully paid up. That is the effect of the evidence of Mr Spickernell and Mr Bryson, supported by the evidence of Mr Paul, and it seems inherently probable, especially in light of the documentary evidence, and the evidence of Mrs Thomson.

By contrast, the position of the Company was very different. It was, at best, merely innocent, but it was not misled. However, on one view, its directors had misled the 16 shareholders by telling them that their shares would be paid up by one of the directors, who then failed to pay up the shares. In these circumstances, the observation of Steyn J in Associated Japanese Bank at 268 is close to being in point:

Secondly, the case for rejecting the contention that the allotment of the bonus shares to the 13 shareholders was rendered void by this mistake is heavily reinforced by considering the consequence of that contention. The issue of the bonus shares to the 13 shareholders (and, indeed, to any other shareholders) in no way altered the size of their respective interests in the Company; indeed, save to render their interests a little more marketable if and when the Company was floated on AIM, the issue of the bonus shares did not alter the value of their respective holdings in the Company. Accordingly, were the bonus shares issued to the 16 shareholders void, it would mean that the apparently innocuous, indeed apparently beneficial, issue of the bonus shares reduced the value of their interest in the Company by a very substantial extent, possibly as against the 28 shareholders (whose shares were fully paid up on 15^th December 1999), and certainly as against any subsequent shareholders. The 28 shareholders (if they retain their bonus shares), and any persons who subsequently acquired shares (such as Mr Lee Barber) believing the November shares allotted to the 16 shareholders were valid, would enjoy a concomitant windfall. Particularly as the 16 shareholders were misled into the mistake by the directors, the conclusion that the bonus shares allotted to the 16 shareholders were void cannot, in my view, be the proper analysis.

That commercially common sense factor appears to me to be particularly important given that one is in the area of law relating to contract. The court should be very reluctant to reach a conclusion, which is plainly contrary to that which could conceivably have been intended by the parties. Further, it appears to me that this point is reinforced once one remembers “the first imperative” identified by Steyn J, namely “that the law ought to uphold rather than destroy apparent contracts” – see the passage cited in Great Peace at paragraph 90. To put the point slightly differently, if Mr Mabb is right as to the effect of this defect, the commercial consequences of the mistake bear no relation to the nature of the mistake.

Thirdly, it appears to me that the mistake was one which as at 15^th December 1999, would have been perceived as one which obviously could readily have been put right. Indeed it was put right around three months after that date, by Mr Spickernell making out the March cheque, for a sum which resulted in the November shares being fully paid up. Mr Mabb argues that that is not enough to prevent the allotment of the bonus shares being void at least in so far as they were allotted to the 16 shareholders, because the matter has to be judged as at 15^th December 1999. There is obvious logical force in that argument, because 15^th December 1999 is the date on which the bonus shares were issued and allotted, and it is on the date of allotment that the shares in respect of which the bonus shares were allotted should have been fully paid up.

However, even accepting that point, I do not consider that the allotment of the bonus shares to the 13 shareholders was rendered void by the mistake. In so far as the allotment of bonus shares can be treated as analogous to a contract (as Scott J held in Cleveland), and in so far as voidness on the ground of mutual mistake is to be judged by reference to the question of whether the mistake relates to a “fundamental” or “essential” aspect of the transaction, it appears to me that one must not overlook the commercial common sense of the nature of the mistake or oversight. Standing as at 15^th December 1999, the November shareholders had been told that their shares were paid up, and steps were being taken to ensure that the November shares were paid up, although the matter was not being given the sort of attention which it should have been given, because of the very heavy pressures on Mr Spickernell and Mr Bryson, and because they were unaware of the urgency of the need to make the November shares fully paid up.

Furthermore, the amount of money needed to make the shares fully paid up was just over £1,000, which, in the context of the Company’s then perceived value and potential, was virtually de minimis. On the assumption that the November shares were worth £250 each (before the issue of the bonus shares), their combined value was over £2.5m, whereas the amount needed to make them paid up was just over £1,000. The notion that there would be any difficulty about making those shares paid up would have been nothing short of fanciful, as, indeed, is borne out by the ease with which the cheque was obtained from Mr Spickernell on 22^nd March 2000. That is further reinforced by the fact that, as the three directors would have known, Mr Spickernell was contractually obliged (as against the 13 shareholders) to pay for their shares.

It appears to me therefore that, so far as the common mistake argument is concerned, rather than the allotment of the bonus shares to the 13 shareholders being void, the position as at 15^th December 1999 was that their allotment was irregular, but was capable of being put right by rendering the November shares paid up. This view derives a little indirect support from the decision of the House of Lords in The Ooregum Gold Mining Company of India Limited –v- Roper [1892] AC 125. That case is authority for the proposition that a company cannot allot shares as fully paid unless it receives at least par value for them, i.e. that a company cannot issue shares at a discount (see in this context section 100(1) of the Companies Act 1985). The conclusion reached by the House of Lords was that, although the issue of such shares was beyond the powers of the company, the original allottees of the shares were liable to pay to the company in cash the full amount unpaid on the shares.

As I see it, it would have been open to the allottees of the shares in Ooregum to contend that they were not liable to pay anything in respect of the shares concerned, because the issue, or at least the allotment, of the shares was void, as it was outside the powers of the company to allot shares on the basis that they were allotted. If such an argument had been maintained and had been upheld, then the conclusion reached by the House of Lords would presumably have been different. It would, however, be wrong to place too much weight on that point, partly because at least some of the shares in that case had been transferred to third parties, and partly because the argument that the allotment was void was not raised. However, it does appear to me to be consistent with the conclusion I have reached in the present case.

I do not consider that the decision in Cleveland casts doubt on my conclusion. First, it does not appear to have been a case where any particular group of shareholders would have suffered or benefited by the bonus issue being avoided, because, unlike the present case, there had been no issue of shares equivalent to the issue of new shares to the 33 shareholders on 15^th December 1999, and no increase in the number of shares since the allocation of the bonus shares, equivalent to the issue of new shares to Mr Lee Barber and others. Therefore, in Cleveland, each of the shareholders lost the same number of bonus shares relative to the number of shares he held. Secondly, Cleveland does not appear to have been a case where it could have been said that the company or its directors misled the shareholders in the way in which the three directors in the present case led at least 13 of the 16 shareholders to believe that their shares would be fully paid up. Thirdly, there was no question of Cleveland being able to recover from anyone a sum equal to the amount which had been wrongly paid to it by McInnes via Gunnergate, whereas, in the present case, it was clear, as at 15^th December 1999, that the November shares could and would be fully paid up in due course. Fourthly, the mistake in Cleveland was conceptually, as well as commercially, far more “essential” or “fundamental” to the issue of the bonus shares than the mistake in this case.

I turn to the second defect upon which Mr Mabb rests his case on common mistake, namely the failure of the directors to obtain the approval, whether at an ordinary meeting or otherwise, of the shareholders of the Company to the issue and allotment of the bonus shares. Here too, I take the view that this mistake did not vitiate, so as to render void, the issue of the bonus shares. In the first place, this was, as it were, a procedural defect, rather than a substantive defect. There is no doubt that the Company, through its directors, had power to issue the bonus shares, and that, subject to the first defect which I have considered, the bonus shares could properly have been allotted as they were allotted. The failure to obtain the approval of the shareholders could, I accept, be said to result in the directors having exceeded their powers, because those powers were limited by the Articles.

Once again, it seems to me that the question of whether the issue and allotment of the bonus shares was, as a result, void for mistake must be decided by reference to the principles laid down by Steyn J in Associated Japanese Bank and by the Court of Appeal in Great Peace, effectively by analogy as indicated by Scott J in Cleveland. In connection with this defect, while the mistake can be said to be entirely the fault of the three directors, there is no question, as there was in relation to the first defect, of their having misled the 13 shareholders, or indeed the 28 shareholders (who also received the bonus shares) on this issue.

Applying the approach of Scott J in Cleveland, on which Mr Mabb rests his case, one must consider whether the failure to obtain the consent of the 16 shareholders should be treated as such a fundamental defect as to vitiate the entire issue and allotment of the bonus shares. As Mr Mabb contends, the question has primarily to be determined by reference to how matters stood at the date of the issue and allotment of the bonus shares, i.e. the date that the notional contract came into existence and was performed, namely 15^th December 1999. As at that date, the notional contract in relation to the issue of the bonus shares was between the Company (and, possibly, the three directors) and the relevant shareholders, i.e. probably the 16 shareholders, given that the decision to issue and allot the bonus shares was made before the 28 shareholders became shareholders. Following Great Peace, I consider that the failure to obtain the consent of the 16 shareholders to the issue of the bonus shares to them could not possibly have been regarded, whether subjectively by the parties or objectively, as such a fundamental or essential mistake that it rendered the issue and allotment of the bonus shares void.

The implied term test was rejected by the Court of Appeal in Great Peace as the basis for determining whether a term was “essential” in the context of a mutual mistake (see paragraph 73). However, it is not uninstructive to consider the position if, on 15^th December 1999, the officious bystander had asked the directors and the 16 shareholders whether the issue and allotment of the bonus shares should be treated as vitiated by mistake because there had been a failure to obtain the consent of the 16 shareholders to the issue and allotment of the bonus shares. There could only have been one answer, namely, “Of course, not”.

The mistake concerned was the directors’ failure to obtain the consent of the 16 shareholders to the issue of the bonus shares. The purpose of that issue was to improve the position of the 16 shareholders (and any future shareholders), by rendering their shares in the Company more easily and profitably marketable, if and when the Company was floated on AIM. It would be fanciful to suggest that, in answer to the officious bystander, it is even conceivable that any of the shareholders would have suggested that the failure to obtain their consent, in these circumstances, to the allotment of the bonus shares would vitiate that allotment. Similarly, given that the Company, through the three directors, wished to issue and allot the bonus shares, it is not conceivable that any of the directors would have even attempted to suggest, in answer to the officious bystander, that the failure to obtain the consent of the 16 shareholders should vitiate the issue and allotment of shares. The notion that the effect of £136,000-odd being transferred from the share premium account to the share capital account would have given a moments concern to any shareholder, or indeed to the directors, appears to me to be fanciful.

That view is reinforced when one considers the disastrous commercial consequences for the 16 shareholders if the bonus shares allotted to them had been void, a factor to which I have already referred. Because the bonus shares issued to the 33 shareholders may not be void, and because future allottees of shares (such as Mr Lee Barber) would acquire their shares for a price which assumed that the bonus shares were valid, a subsequent cancellation of the bonus shares would very substantially reduce the value of the shareholding of each of the 16 shareholders.

However, as I have said, the implied term test is not, of itself, appropriate for determining the effect of mutual mistake. But the present instance is a case where the mistake was overlooking the need for the consent to a transaction by one of the parties, namely the 16 shareholders. In such a case, if all the parties involved in the contract, or the analogous arrangement, would have plainly rejected the notion that the mistake would have vitiated the contract or the arrangement, it seems to me (at least in the absence of very unusual facts) wrong to conclude that the mistake could be regarded as “essential” or “fundamental”, so as to vitiate the contract or arrangement.

If the party whose consent was required, but not obtained, is not merely content to dispense with the consent, but is positively disadvantaged by the absence of his consent leading to the result that the contract or arrangement being avoided, it seems almost grotesque that he should be forced to that result. Yet that is the effect of Mr Mabb’s argument, as is illustrated by the fact that Mr Paul, the representative of the 16 shareholders, whose assent was required, is arguing, through Mr Chivers, against the arrangement in question, the issue of the bonus shares, being avoided.

I do not consider that the additional mistakes (identified in paragraph 149 above) take matters further. It is clear from the number of bonus shares, the specific sum to be capitalised, and the fact that the issue was to be 99 for 1, all of which were mentioned in the 15^th December 1999 resolution, that the three directors intended to allot bonus shares to the 16 shareholders. Accordingly, on the basis of commercial common sense, the oral evidence of the three directors, and the contemporaneous facts (e.g. the discussions with each of the 13 shareholders), it is clear that the three directors intended to allot bonus shares to the 16 shareholders.

The argument for avoiding the bonus issue (entirely or in so far as it relates to bonus shares allotted to the 16 shareholders) on the basis of the additional mistakes places unjustifiable weight on the fact that the 15^th December 1999 resolution appropriated the capitalised sum from the share premium account to shareholders “in the same proportion as they would be entitled to that sum were it distributed by way of dividend”. The argument not only overlooks commercial common sense, the oral evidence of the three directors and the contemporaneous evidence. It also overlooks that part of the 15^th December 1999 resolution which specifically allots bonus shares to the holders of “each ordinary share”. Further, if one takes such a blinkered approach to the question of concentrating on the Company’s formal records, one would have to take into account the 12^th November 1999 minutes, which specifically record that the November shares were fully paid up.

Accordingly, I conclude that the contention that the issue of the allotment of the bonus shares was, in whole or in part, void on the grounds of mistake must be rejected, even though, in so far as the bonus shares were allotted to the 16 shareholders, there was a defect in that the November shares had not been paid up at all, and, in relation to the issue and allotment of all the bonus shares, there was a failure to obtain the assent of the 16 shareholders.

If this analysis of the consequences of the common mistakes in this case is not right, then, as at present advised, I would still have rejected the contention that the bonus shares were void. Each of the two defects arises from the fact that the bonus shares (or some of them) should not have been issued paid up through the capitalisation of a sum in the share premium account. In other words, neither the issue nor the allotment of the bonus shares as shares were of themselves irregular owing to the defects: the irregularity lay in the fact that the bonus shares (or some of them) were issued and allotted paid up. In those circumstances, I would have concluded that, if there was a void aspect, it was the payment up of the bonus shares (or at least those allotted to the 16 shareholders) through the capitalisation of a sum in the share premium account, rather than the issue of the bonus shares. Thus the bonus shares would be valid as shares, but (at least those allotted to the 16 shareholders) they would not be treated as paid up (with the consequences which follow from the reasoning in Ooregum). As a matter of principle, it appears to me that where a common mistake results in voidness, the court should, where it accords with principle and is commercially sensible, seek to achieve an outcome which minimises the extent of the voidness. That view seems to me to accord with Steyn J’s “first imperative”, but it is somewhat tentative, as the point was only touched on, but not fully argued, during the hearing.

I suppose one reason that it was not fully argued may be that the point does not strictly arise on the preliminary issues ordered by the Master. Nonetheless, if there is an avoidable aspect of the bonus shares, the conclusion that it only attaches to the payment up of those shares (or some of them), rather than to the shares themselves, appears to me to accord for better with principle and commercial common sense. Such a conclusion, in relation to each of the two defects, does not run into the commercial common sense difficulties which face the conclusion that the bonus shares were themselves void.

Finally, on this aspect, I should make three points. First, it might appear that my conclusion that the issue of the bonus shares was not void, despite the failure to obtain the consent of the 16 shareholders, is precious close to letting in the argument based on the Duomatic principle through the back door, having barred the front door. However, I do not consider that that is a valid point. If the Duomatic principle had applied, then (at least if the November shares had been fully paid up by 15^th December 1999) the issue and allotment of the bonus shares would have been regular and unimpeachable. In light of my decision that the Duomatic principle does not apply, the issue and allotment of the bonus shares was irregular, and would, in light of the reasoning in Cleveland, have been capable of being void. As it is, because of the particular facts I have described, and in light of the reasoning in Great Peace and Associated Japanese Bank, the issue and allotment of the shares, while in breach of the terms of the Articles, is not void, and, indeed, appears to me to be unlikely to be assailable.

Secondly, the voidness argument may be stronger in relation to the bonus shares allotted to Berdino, Okimax and Mr Reid, the three of the 16 shareholders being or owned by the three directors. Their state of knowledge, as to the defects, and, in relation to the first defect, because they were not misled into thinking that the November shares were paid up, puts them in a potentially different category from the 13 shareholders. At present, I doubt these distinctions justify a different result, but I have heard no argument on the point, and, indeed, any such argument may have been inappropriate because neither Berdino, Okimax or Mr Reid are parties to these proceedings.

Thirdly, nobody has suggested that the logically anterior question of allocation of risk played any part in this case - see paragraph 80 and 84 in Great Peace.

The second argument raised by Mr Mabb is that there was simply no power to issue the bonus shares on the facts I have found, because each of the two defects impinged the authority of the three directors, or of the Company itself, to issue the bonus shares, either generally or in respect of the November shares. In answer to this, Mr Chivers does not rely on cases such as Royal British Bank –v- Turquand (1856) 6 E&B 327. His contention is that the three directors have acted beyond their powers but the Company has not acted beyond its powers, and that section 35A accordingly applies.

Section 35A provides, so far as relevant:

Mr Chivers contends that each shareholder who received the bonus shares was a person who “deal[t] with” the Company, on the basis that the issue and allotment of the bonus shares constituted a “transaction or other act”, “to which the company [was] a party”. In this connection, I think it does not matter whether one regards the issue of the bonus shares as a single composite act, or whether one regards the issue of each parcel of bonus shares to particular shareholders as a separate act. That point was not gone into, and I suppose that it is conceivable that the decision to issue the bonus shares should be treated as one act, and each decision to allot a specific parcel of bonus shares to shareholder is a separate act.

In so far as Mr Reid, and Mr Spickernell and Mr Bryson, and their respective companies, are concerned, it is perhaps also relevant to refer to the provisions of section 35A(2)(b) and (c), which are to the following effect:

I have not been specifically addressed on the issue of whether Mr Spickernell, Mr Bryson and Mr Reid acted “in good faith” in connection with the issue and allotment of the bonus shares. In light of the findings I have made during the course of this judgment, my present, reasonably strong, inclination would be to conclude that they did act in good faith. Although I have made criticisms of Mr Spickernell and Mr Bryson as witnesses, and although I have made a fairly damaging finding in relation to the disputed letter, none of the findings impinge directly on their conduct or state of mind as at 15^th December 1999 in relation to the issue of the bonus shares. Further, at least at the moment, I would be very unattracted by any suggestion that any detrimental findings I have made would somehow even indirectly cast doubt on the good faith of Mr Spickernell, Mr Bryson and Mr Reid in relation to the issue and allotment of the bonus shares.

I turn, then, to the central issue, namely whether the 44 shareholders to whom the bonus shares were allotted can, in principle, take advantage section 35A. The words “a person dealing with a company” in section 35A(1) are not expressly fettered in any way. Thus, as a matter of ordinary language, a person (whether or not already a shareholder) receiving shares (whether or not bonus shares) from a company is “a person dealing with a company”. Indeed, the reasoning and approach of Scott J in Cleveland, which represents something of a sheet anchor to Mr Mabb’s case on voidness for mistake, appears to me to be consistent with that view, as Mr Chivers points out. Both “a person” and “dealing with” are wide expressions, which are not expressly limited in section 35A.

It is true that section 35A was enacted to give effect to Article 9 of the First Council Directive on Company Law (68/151/EEC): see Smith –v- Henniker-Major & Co. [2002] 3 WLR 1848, at paragraphs 19 to 20, and that Article 9(2) limits reliance on the powers of the organs of the company “as against third parties”. However, I do not find that of much assistance to the third defendant’s case, essentially for two reasons. First, it is not entirely clear what is meant by “third parties” in Article 9(2). Secondly, even if the Directive required legislation along the lines of section 35A to protect persons dealing with the Company, who were not members of the Company, there is no reason why the legislation subsequently enacted should not have gone further – see what was said by Schiemann LJ at 1879, in paragraph 119, in Smith. Further, I note that neither Carnwath LJ nor Schiemann LJ, who gave section 35A a slightly more restricted effect, at least in relation to a director dealing with the company, than the wholly unqualified meaning which the words might suggest, relied upon the Directive.

Mr Mabb suggests that the words “to bind the company” and “[i]n favour of a person” in section 35A(1) and the wording of section 35A(2)(a) suggest that members of the Company were not intended to be within the ambit of section 35A. I do not see how those words assist that contention.

In my view, there is no reason why section 35A should not apply to members of the Company dealing with the Company, certainly in connection with matters such as receiving shares, whether shares for which they pay, or bonus shares. Apart from the natural meaning of section 35A, it seems to me that this conclusion receives a degree of support from the judgment in Smith.

Robert Walker LJ, who dissented on this issue, accepted that, even the director involved in the unauthorised act, could be a “person” within section 35A: see paragraph 52, in light of the preceding paragraphs. It is fair to say that part of his reasoning could not be directly invoked by Mr Chivers in the present case, in that he relied in part on section 322A, which only applies to directors. However, it seems to me that it would be surprising if section 35A could apply to the very director involved in making the unauthorised decision, but could not apply to a wholly innocent shareholder.

So far as the judgment of Carnwath LJ is concerned, he held that, on the facts of that case, the director concerned could not rely on section 35A, but emphasised, at 1877, in paragraph 110 that he preferred “to express no view about the position of directors in other circumstances”. In the preceding paragraph, he accepted that section 35A:

Schiemann LJ agreed with Carnwath LJ. At 1879, paragraph 118, he asked:

In these circumstances, I am of the view that a shareholder receiving bonus shares from the company is “a person dealing with the company” within the ambit of section 35A(1). First, as a matter of ordinary language, such a shareholder would be within the ambit of those wide words, and, in the absence of a powerful reason to the contrary, it is inappropriate to treat naturally wide words in a statute as subject to an implied limitation. Secondly, the majority view in Smith was that the policy behind section 35A was such that the very director responsible for the mistake, even if an innocent mistake, should not be able to rely upon section 35A, but that does not, to my mind, cast doubt on my conclusion. Thirdly, the reasoning of each member of the Court of Appeal, as summarised above, appears to me, if anything, to support the conclusion I have reached.

Fourthly, I believe that section 322A of the 1985 Act, to which reference was made in all three of the judgments in Smith, tends, albeit indirectly, to support this conclusion. Section 322A sets out the circumstances in which section 35A cannot be relied on: see subsection (7), and it is concerned with the voidability of certain transactions entered into between the Company and either a director or a person connected with a director. As Mr Chivers contends, it would be strange if the benefit of section 35A was removed from one group of individuals, namely directors and persons connected with them, in express terms by the legislature, but the benefit of the section was removed from another group, namely shareholders, merely by implication.

Fifthly, the policy behind section 35A was summarised by Carnwath LJ in Smith at 1877, paragraph 108, in these terms:

If section 35A is in principle capable of being relied on by a shareholder receiving bonus shares, Mr Mabb further contends that Regulation 110 is not so much a “limitation”, the word used in section 35A(1), but an enabling power, and, even if it is to be regarded as a limitation, it is a limitation on the power of the Company, not on the power of the Board. I do not agree. It appears to me that the opening words of Regulation 110 make it clear that the power to issue bonus shares is ultimately given to the directors. I accept that Regulation 110 may be characterised as “an enabling power”, but it is a power subject to limitations, and the defects in this case, namely that the shares in respect of which the bonus shares were issued must be paid up, and that the bonus shares should have been issued with the authority of an ordinary resolution, arise from the fact that the limitations have been effectively ignored in those respects.

Finally, Mr Mabb argues that the question of whether section 35A applies to a particular shareholder will depend upon the facts relating to the particular shareholder, and the point is therefore covered by the limitation already imposed on the declaration as to voidness which he seeks, namely “without prejudice to the right of any person who was previously a member of the Company to raise any defence arising out of his own particular circumstances”. While that point has some force, it is a rather strange submission from a party who is seeking a declaration as to voidness subject to that limitation. If I had concluded that the issue of the bonus shares was void, it would then have been necessary to decide whether or not to grant a declaration to that effect. One of Mr Chivers’s objections to such a declaration (which I shall consider below) would have been that it would be of little use, because it would still be necessary to consider the facts of each case, as the qualification I have quoted indicates. Mr Mabb's answer to that point is that it would nonetheless be useful to have a decision in principle on the issue of voidness. If that is right, then it would also be useful, as I see it, to have a decision in principle as to the applicability of section 35A. In any event, at least on the facts currently known to me, it is hard to see the grounds upon which any shareholder who received bonus shares could be prevented from relying on section 35A.

If I am wrong as to the applicability of section 35A, then I would nonetheless have concluded that the effect of the two defects would not have been to have rendered the bonus shares, or some of them, invalid. It would have been to render their having been paid up invalid. As I have observed in relation to the mistake argument (see paragraphs 186-187 above), it seems right to minimise the effect of the defects, in so far as it is possible to do so consistently with principle and commercial common sense. Again, as with my similar view in relation to mistake, this is a somewhat tentative view, but it would appear to produce a more sensible result than the bonus shares themselves being avoided.

If I had decided that the issue or allotment of the bonus shares was void, that would have raised a further question, namely whether I should have granted a declaration to that effect. The court has a discretion whether or not to grant a declaration. It seems to me that the effect of the observations of Millett LJ in Patten –v- Burke Publishing Co. Ltd [1991] 1 WLR 541 and of Lord Woolf CJ in Messier-Dowty –v- Sabena SA [2003] 1 WLR 2040 is that, when considering whether to grant a declaration, the court should bear in mind justice to the parties, the extent to which a declaration would serve a useful purpose, and whether there are any special reasons, in favour or against granting a declaration. In effect, the discretion is one whose exercise depends very much on the particular facts of the particular case.

The arguments against granting a declaration in such circumstances would have been fairly formidable. First, even if the issue and allotment of the bonus shares had been void initially, it seems to me that the bonus shares could no longer have been treated as void once they had been acquired for value by the Guernsey Company. Whether that would have been on the basis of the Guernsey Company being a bona fide purchaser for value of the shares without notice, or whether it is more properly based on estoppel, matters not. For authority on this point, one need look no further than observations, admittedly obiter, of Scott J in Cleveland at 437B-C to the following effect:

If the bonus shares would now be valid, and indeed would have been valid for nearly three years, it would seem rather strange to declare that they had been void.

Secondly, the person arguing for a declaration that the bonus shares were void is the third defendant, Mr Lee Barber. He would seem to have no locus standi to argue the point, given that he is no longer a shareholder in the Company, having ceased in April 2000 to be a shareholder when the Company was taken over by the Guernsey Company. Further, at least on the evidence I have heard, he would seem to have no basis for complaint in any event. When he acquired his shares in the Company, in January 2000, Mr Lee Barber was not misled in any way in connection with the bonus shares. Thus, he was not led to believe that the bonus shares did not exist: he bought his shares, as I understand it, knowing full well the total number of issued shares in the Company. While I appreciate that he did not understand that the bonus shares had been issued and allotted in breach of the Articles, he in no way suffered as a result.

Had the Guernsey Company not taken over the Company, then, as I have mentioned, it would have represented nothing other than a wholly uncovenanted windfall for Mr Lee Barber, and other persons who had acquired shares in the Company after 15^th December 1999, if some or all of the bonus shares were effectively cancelled. It would have resulted in their owning a substantially greater proportion of the Company than they had previously owned, or than they thought they were acquiring when they purchased their shares. Indeed, in his evidence he acknowledged that he had received the correct number of, and the correct proportion of the total issued shares for which he had negotiated. Even though he is a representative party, Mr Chivers points out that, if I conclude that if he is not entitled to a declaration, then it cannot be contended that any other person whom he represents would be entitled to a declaration: see per Vaughan Williams LJ in Towers –v- African Tug Company [1904] 1 Ch. 558 at 566 to 567.

Thirdly, just as it would have represented an unfair windfall for shareholders such as Mr Lee Barber, if the bonus shares were void, so would it have represented an unfair penalty for shareholders who received bonus shares, such as Mr Phipps and Mr Paul.

Fourthly, the declaration which would have been sought by the third defendant on this issue would have been qualified in any event, because the declaration of voidness would have been expressly subject to the proviso that it was “without prejudice to the right of any person who was previously a member of the Company to raise any defence arising out of his own particular circumstances”.

Despite these arguments, if I had decided that the issue and allotment of the bonus shares was void in whole or in part, I would have thought it right to grant a declaration to that effect. It is not as if Mr Lee Barber is the only party to the litigation who would have been seeking such a declaration if I had made such a finding. The claimants, i.e. the Company and the Guernsey Company, would both have wanted a declaration to that effect. Secondly, the purpose of seeking such a declaration would have been to have a determination by an English court, as to the effect of the breaches of the Articles on the validity of, issue and allotment of, the bonus shares. This would then have assisted the Guernsey court, which, as I have mentioned, is faced with litigation which involves some of the parties alleging that the bonus shares were void.

As I understand it, the argument of some of the shareholders in the Guernsey Company, including Mr Lee Barber, is that many of the shares in the Guernsey Company which were allotted, on the take over of the Company, to shareholders in the Company who had bonus shares, should effectively be reallocated to shareholders who did not have such bonus shares. This would presumably be on the basis that, at the time of the acquisition of the Company, the bonus shares were void, and therefore should have been cancelled, in accordance with the reasoning of Scott J in Cleveland, and that therefore the shares in the Guernsey Company allotted in respect of the bonus shares should not have been so allotted, and should have been allotted instead to the other shareholders in the Company.

I do not propose to comment on the strength or otherwise of this argument (which I may have summarised somewhat ineptly), because it would be for the Guernsey Courts to determine in accordance with Guernsey law, as it relates to a Guernsey company, and in any event it has not been developed before me. However, if I understand it correctly, it is, or may be, a necessary foundation of this argument that the bonus shares were void when issued. I think there is considerable force in Mr Gillyon’s contention that it would be more sensible for the English court to determine whether or not the bonus shares were void, rather than leaving it to the Guernsey Company to determine this point of English law. Observations of the Guernsey Court of Appeal appear to support this conclusion – see the judgment of Sir John Nutting QC at paragraphs 43, 46 and 50.

Furthermore, at the most recent meeting of the shareholders of the Guernsey Company, there was a dispute as to which shareholders were entitled to vote, and in respect of how many shares each shareholder was entitled to vote. That dispute was, as I understand it, essentially based on the arguments I have been rehearsing. As a result, it is said that the meeting could not proceed. It is fair to say that there is some reason for thinking that this dispute may not have been the real reason for the meeting of the Guernsey Company being adjourned, and therefore I prefer not to rest my decision on that aspect.

It is true that the declaration would have had to be qualified so that any individual could raise his particular circumstances to show that, despite my conclusion, the voidness of a particular bonus share, or parcel of bonus shares, was not void, at least as against him. An obvious example would be a purchase of the bonus shares. However, I do not see why that should prevent a declaration of the sort I would have made if satisfied that the issue was void, being of some value to the Company, the Guernsey Company and the Guernsey courts.

In all the circumstances, had I decided that some or all of the bonus shares were void, at least until they were acquired by the Guernsey Company, I would have been prepared so to declare. As it is, the point does not arise.

In view of my decision that the issue of the bonus shares was not void on either ground raised by Mr Mabb, there is no reason why I should not so declare. However, as I have held that the breaches of the Articles are avoided by section 35A, and there could be circumstances in which shareholders who received bonus shares might not be able to rely upon section 35A, the declaration should be framed to reflect this. Nonetheless, even in that event, I do not think any of the bonus shares would have been treated as void: they would merely have been treated as not paid up (see paragraph 208 above).

I should like to add two points with regard to my conclusion that, despite the breaches of the Articles in relation to the issue of the bonus shares, their issue and allotment were not void. First, it is a conclusion which, on the facts of this case, appears to me to be a sensible one. So far as the failure to obtain the approval of the 16 shareholders to the payment of the bonus shares by the capitalisation of monies in the share premium account is concerned, I have already observed that this appears to me to be nothing but a technical defect. To my mind, it would have been a foregone conclusion that a majority of the 16 shareholders, indeed, all of those shareholders who bothered to vote, would have supported the proposal. In those circumstances, it would have been an extraordinary result if what, on the facts of this case, amounted to no more than a technical oversight on the part of the three directors, which was itself attributable to poor legal advice, would have had the extraordinarily far reaching and penal result of the bonus shares being cancelled.

The fact that the November shares, in respect of which bonus shares were issued fully paid, were unpaid at the time, also appears to me to be, at least on the facts of this case, little more than a technical point, which one would not expect to have far reaching and penal consequences. Quite apart from the fact that, at any rate 13 of the 16 shareholders, who would suffer if the bonus shares were cancelled, were misled into thinking that their shares were paid up, the amount involved in paying up the November shares was very small, and it is clear that the November shares were going to be paid up. The only problem was that, as at the crucial date, namely the date of issue and allotment of the bonus shares, no firm decision had been reached as to how they were to be paid up. Even if I am wrong in concluding that the issue of the bonus shares to the 13 shareholders (or, indeed, as it currently appears to me, to the 16 shareholders) was not affected, so far as they were concerned, by the fact that their November shares were not paid up, it appears to me that the furthest the effect of that fact can go, is to result in the bonus shares allotted to them being treated as nil paid.

The second point is that, my conclusion that the two defects did not render the bonus shares void does not mean that no relief could be accorded to anybody as a result of the defects. It may be that, for instance, the issue or allotment of some of the bonus shares could be voidable at the instance of a person with a relevant interest who could establish that he had suffered as a result of the breaches of the Articles. Alternatively, such a person may be entitled to recover damages or some other relief against (in decreasing order of likely liability) the directors, or (possibly) the shareholders to whom the bonus shares were allotted, or the Company. Such a claim is specifically contemplated by section 35A(5). On the facts of this case, at least as at present advised, I find it difficult to see how any such claim could be established. However, there are a number of issues raised by Mr Lee Barber (and possibly other persons who acquired shares in the Company after December 1999) against the three directors, and I do not know much about some of those issues. At the moment, I do not understand how any loss or prejudice alleged in those proceedings could sensibly be said to have been suffered as a result of the failure to comply with the Articles in relation to the issue and allotment of the bonus shares, but it should be emphasised that that is little more than a matter of impression.

In these circumstances, my conclusions are as follows in relation to the issues to be determined at this stage:

The bonus issue and the allotment of the bonus shares were irregular because they were effected in respect of some shares, namely the November shares, which were not paid up, albeit that the subscriber shares were paid up;

The issue of the bonus shares and their allotment was irregular, because it was not approved by a resolution of the shareholders of the Company;

However, in the circumstances of this case, neither of these defects rendered the issue or allotment of the bonus shares void, but if section 35A did not apply to a particular allottee, his bonus shares would have been treated as not paid up.