Cottrell v King & Anor

JUDGMENT

Mr Kevin Garnett QC:

1. In this action the Claimant, Mrs Cottrell, seeks declarations in relation to the ownership of certain shares in the Second Defendant company (“the Company”). The First Defendant, Mr King, counterclaims for mirror-image relief.

2. The Company was established by Mr King’s grandfather many years ago as a building company. For nearly twenty years Mr King ran it with Mrs Cottrell’s late husband, Mr Mervyn Cottrell, whom Mr King described as his partner. Mr Cottrell owned 4965, or 75%, of the issued shares and Mr King owned the remaining 25%. Both were directors and Mr Cottrell was also the company secretary. Mr Cottrell handled the business side of things while Mr King handled the day to day contract side.

3. The articles of the Company contain pre-emption provisions, which are in fairly common form.

a. Article 12(a) provides that no share or beneficial ownership of a share shall be transferred unless and until the rights of pre-emption contained in the articles have been exhausted.

b. Article 12(b) provides that any member proposing to transfer any share or beneficial ownership of a share (referred to as the ‘vendor’) shall give notice in writing (a ‘transfer notice’) to the Company. The transfer notice is to specify the sum which in the vendor’s opinion constitutes a fair price for the shares, and will constitute the Company the vendor’s agent for the sale of the shares to other members of the Company at that price.

c. Where the directors do not consider that the price specified is the fair price, provision is made for the fixing of a price by the Company’s auditors and for the Company to offer the other members the shares at that price.

d. By whatever mechanism the price is fixed, the Company is then to inform the other members and invite such members to apply for the shares within 21 days.

e. If members apply for the shares, the directors are to allocate them in accordance with their existing shareholdings. The Company is then to give notice to those members and the vendor, and fix a date and place for completion, when the vendor is bound to complete by executing an instrument of transfer.

f Regulations 29 and 30 of Table A set out in the Schedule to the Companies (Tables A to F) Regulations also apply to the Company.

g. Regulation 29 provides that if a member dies, his personal representatives shall be the only persons recognised as having any title to his interest. Regulation 30 provides as follows:

“A person becoming entitled to a share in consequence of the death .. of a member may ... elect either to become the holder of the share or to have some person nominated by him registered as the transferee. If he elects to become the holder he shall give notice to the company to that effect. If he elects to have another person registered he shall execute an instrument of transfer of the share to that person. All the articles relating to the transfer of shares shall apply to the notice or instrument of transfer as if it were an instrument of transfer executed by the member and the death ... of the member had not occurred.”

4. Under the company’s articles, the directors may in their discretion decline to register any transfer.

5. Mr Cottrell died of cancer on 17th March 2000 after what I take to be a short illness. Mr King carried on running the Company together with a sister company, T A King (St Albans) Ltd, which he clearly found to be a struggle.

6. During his lifetime, Mr Cottrell had told Mr King that his shares would go to Mrs Cottrell. So far as he was concerned, Mr King did not consider at the time that he had any right to or interest in these shares. Mr Cottrell obviously regarded the income that they would produce to be in the nature of a pension for his wife. By his will, Mr Cottrell appointed Mrs Cottrell and their two daughters as the executrices and trustees of his will, and a grant was made to them on 28th September 2000. Mrs Cottrell is the residuary beneficiary under Mr Cottrell’s will.

7. In the autumn of 2000, Mrs Cottrell asked Mr King to arrange for the transfer of Mr Cottrell’s shares into her name, which Mr King agreed to do. He asked the Company’s accountant, Mr Martin, to do what was necessary. Following Mr Cottrell’s death, the Company had no company secretary. Mr Martin therefore arranged a meeting of the company for the 20th November 2000, at which the following business was transacted:

a. Mr Martin was appointed company secretary;

b. It was resolved that Mr Martin cancel the share certificate in the name of Mr Cottrell and issue a new certificate in the name of Mrs Cottrell for the 4,965 shares.

8. The minute of the meeting was signed by Mr King and Mr Martin. Mrs Cottrell was issued with a share certificate signed by Mr King and Mr Martin and she was entered in the Company’s share register as the owner of the 4,965 shares.

9. This transaction was carried into effect without any reference to the pre-emption provisions contained in the Company’s articles. It is accepted that Mrs Cottrell was unaware of them but there is an issue as to whether Mr King knew. As to this, his evidence was that he had never looked at the articles, there never having been any need for him to do so, and he was not aware of the provisions until almost a year after the transfer of the shares. Ms Meyer, who appeared for Mrs Cottrell, challenged this account and said that he must have given a copy of the articles, which were in the Company’s safe, to Mr Martin at the time of the transfer and learnt of their provisions then. She also asserted that he was obviously aware of their provisions when, as he admitted, he looked at the front of the articles in July 2001, on an occasion when he got out the articles for T A King (St Albans) Ltd to send to the Company’s solicitor. She also pointed out that although in November 2001 his solicitors had asserted a right to have the shares offered to him, it was not until much later that he positively said that he was unaware of his right under the articles. Apart from various criticisms of his evidence, the thrust of her submissions was that Mr King was perfectly content to abide by Mr Cottrell’s wishes at the time of the transfer and it was only after the parties fell out that he came up with the idea of relying on the technical breach of the articles.

10. I accept that Mr King was not a wholly satisfactory witness. Many of his answers were rather vague. I also think it would have been better if I had been able to hear Mr Martin’s account of what had happened on the transfer and whether he had taken any steps to familiarise himself with the articles. In the end, however, I have to make do with the evidence that was called.

11. I do not accept that Mr King was not telling the truth. I think it highly unlikely that if he had been aware of the pre-emption provisions he would not have asserted the right to be offered Mr Cottrell’s shares despite Mr Cottrell’s wishes. Mr King had been involved with the Company for nearly 20 years and, after all, Mrs Cottrell would have received a fair price for them. In any event, having heard Mr King, I believe him.

12. To pick up the story again, various disagreements arose between the parties and Mr King resigned as director in 2001. In late October 2001 he went to see solicitors. His evidence was that his solicitors asked to see a copy of the articles of the Company. It was following this that Mr King says that for the first time he became aware of the pre-emption provisions.

13. On 6th November 2001, Mrs Cottrell offered to buy Mr King’s shares for £6,000. Mr King’s solicitors’ riposte was to reject the offer and instead require the shares held by her late husband to be offered to Mr King. Mrs Cottrell’s solicitors pointed out that Mr King had been involved in the transfer of the shares into Mrs Cottrell’s name and alleged that Mr King had waived his right of pre-emption.

14. It was against this background that proceedings were issued by Mrs Cottrell. Her claim form, issued under CPR Part 8, sought declarations that Mr King had waived his right of pre-emption that existed under the articles and that Mrs Cottrell owned the 4,965 shares. Proceedings were ordered to continue as if it were a Part 7 claim and the Particulars, having set out the bare facts of the case, alleged that Mr King either knew or ought by reason of his office as director to have known of the pre-emption provisions and had in the circumstances waived his rights under them, and sought a single declaration to this effect.

15. By Mr King’s defence he denied that he either knew or ought to have known of the pre-emption provisions, and so could not as a matter of law have waived his rights. By way of counterclaim, he alleged that the transfer was the result of either a common or a unilateral mistake and was either ineffective or should be set aside. A declaration to this effect was sought.

16. Perhaps unfortunately from the point of view of preparation for trial, both sides rather altered their positions in the skeleton arguments and in the course of the trial. as I understood the final positions, the arguments broke down as follows:

a. For Mr King, Mr Hood argued that the registration was of no effect since the pre-emption provisions had not been complied with, in particular because Mrs Cottrell was not a purchaser for value. He sought an amendment to counterclaim for rectification of the register under section 359 of the Companies Act 1985 by the removal of Mrs Cottrell as the holder of the 4695 shares and the reinstatement of Mr Cottrell as the registered shareholder. This amendment was not opposed and I gave permission on the usual terms.

b. For Mrs Cottrell, Ms Meyer accepted that the pre-emption provisions had applied in relation to the registration of the shares in Mrs Cottrell’s name. She argued, however, that if Mrs Cottrell’s request triggered the pre-emption provisions, it was for the Company to operate them and it had not done so. Mrs Cottrell was now the registered shareholder and Mr King’s only remedy was a claim against the Company for breach of contract.

c. As a further gloss on this argument, Ms Meyer relied on section 35A of the Companies Act 1985. She argued that Mrs Cottrell was a person dealing with the Company in good faith and took the shares free of any limitation in the articles.

d. If these arguments failed, Ms Meyer argued that Mr King had waived his right to rely on the pre-emption provisions.

17. No separate case of estoppel was put forward, no doubt quite correctly.

18. In the course of Ms Meyer’s opening, it appeared to me that any reliance on section 35A should have been pleaded. Since any amendment might have raised issues about further evidence and a possible adjournment, and since the trial was only listed for one day and the witnesses were present, I said I would hear the evidence on the only issue of fact on the pleadings, namely waiver, and hear argument about the possible application of section 35A, and a possible amendment and adjournment, in the course of closing submissions on the issues on the pleadings. In the course of argument Mr Hood subsequently indicated that Mr King would not wish to put forward any case of bad faith under section 35A. In those circumstances, and having heard argument on the effect of section 35A, it seems to me right to get the point onto the pleadings, and I will give permission to amend if permission is still sought.

19. Ms Meyer also sought by amendment to reinstate relief which had originally been sought in the claim form, namely a declaration that Mrs Cottrell owns the 4,965 shares. This is purely technical, and again I will give permission.

20. I turn to deal with the effect of the pre-emption provisions.

21. In Hunter v. Hunter [1936] AC 222, the articles of the company provided that no member should be entitled to transfer any shares otherwise than in accordance with provisions of the articles, which required the member to give a notice to the company secretary amounting to an offer to sell to the other shareholders. One shareholder had charged his shares to a bank and then, pursuant to the charge, had transferred the shares to nominees who in turn had sold the shares on, each transferee in turn being registered as shareholder. The bank had been clearly warned by the shareholder that any transfer would be of no effect because of the articles of the company. Another shareholder brought proceedings to have the register rectified and the name of the original shareholder restored. This claim succeeded at trial on the basis that the articles prohibited a transfer otherwise than in accordance with the articles. This decision was upheld by the. Court of Appeal, the transfer and registrations being treated as inoperative. There was no appeal to the House of Lords on this point (the appeal was concerned with a second action in which different issues arose) but the House of Lords seem to have regarded the decisions as correct (see, e.g., the speech of Viscount Hailsham L.C. at p. 248). Mr Hood cited to me a passage from the speech of Lord Atkin, at p.261, where he said:

“The effect of [the article] in my opinion is to provide the means and the only means by which a member of the company can form an agreement for the sale of shares, which can only be constituted by the act of the secretary as agent for the seller and purchaser declaring a contract to be concluded at the price fixed by the auditor. This was not done in this case, and in my opinion no rights arose between the bank and [the ultimate transferee] under any contract of sale either equitable or legal.”

22. In Tett v. Phoenix Property and Investments Co Ltd [1984] BCLC 599, Vinelott J. was concerned with a provision in the articles of a company which provided that no shares were to be transferred by a member of the company to a person not already a member if any member or a relation of his was willing to purchase them. A shareholder had died and her executors sold the shares to the plaintiff, who was not a member of the company, without the pre-emotion provisions being observed. The directors refused to register the transfer. It was argued, in the basis of Hunter v. Hunter that the transfer of the shares was wholly void. Vinelott J considered the speeches in Hunter including the above statement of Lord Atkin, and concluded, at p.618a, that:

“Lord Atkin took the view that the effect of [the pre-emption provision] was that no member could enter into a binding contract for the sale of his shares capable of conferring any interest legal or equitable on the purchaser unless and until he had given notice to the secretary, the secretary had offered the shares to the other members and none had accepted the offer within the time stipulated. However, the majority did not accept Lord Atkin’s view that the transfer ... was a nullity.”

23. At page 619e, Vinelott J analysed the legal effect of what had happened in the case before him as follows:

“... the other members’ rights to require [the deceased’s] executors to offer the shares to them before transferring them to the plaintiff matured into an option to purchase the shares at the fair value to be determined by the auditors when the transfers were executed and that ... option created an equitable interest prior in time to the interest taken by the other plaintiff under the transfer. Until registration the equitable interest of the other members in the shares would prevail over the subsequent interest of the plaintiff whether the members had notice of his interest or not (see Roots v. Williamson (1888 38 Ch D 485). After the registration of the plaintiff as holder of the shares in question the priority of the option would depend on whether the plaintiff had notice actual or constructive that the pre-emption provisions had not been complied with at the time when the transfer was executed (see Dodds v Hills (1865) 2 Hem & M 424).”

In that case, of course, the plaintiff was. a purchaser for value. The decision was reversed on appeal, reported at [1986] BCLC 149, but not on this point.

24. In the present case, and applying the analysis of Vinelott J in Tett v. Phoenix Property to the facts of this case, the position in my judgment is as follows. It is accepted by Ms Meyer that the pre-emption provisions applied in the case of the proposed transfer of the shares to Mrs Cottrell. In the terms of Regulation 30, Mrs Cottrell had become a person entitled to shares in consequence of the death of Mr Cottrell. She elected to become a holder of the shares rather than have them registered in the name of a nominee and she gave the Company notice of her election to this effect. Although under Regulation 111 of Table A the notice should have been in writing, the Company did not take any point about that. Article 12 then applied to Mrs Cottrell’s notice as if it were “an instrument of transfer” executed by Mr Cottrell and his death had not occurred. At this point, the provisions of Regulation 30 of Table A do not mesh particularly well with those of Article 12. An instrument of transfer is not something that is referred to in Article 12 as part of the pre-emption machinery and I think Regulation 30 must be read as if the notice referred to there is to be regarded as a transfer notice for the purposes of Article 12. Even so, the notice in this case did not specify a fair price. Presumably the Company could have rejected it for that reason, or knowing as it did that the transfer was for a nil consideration could have waived the defect and implemented the certification procedure, but it did neither and of course it did not go on to offer the shares to Mr King in his capacity as the other shareholder. I do not have to explore the extent to which the Company was thereby in breach of its contractual obligations owed to Mr King or to Mr Cottrell or his personal representatives.

25. The effect of Mrs Cottrell giving notice to the Company and her notice being treated as a transfer notice was to convert Mr King’s right of pre-emption into an option to purchase the shares at a price certified by the auditors as a fair price. Unlike the position in Tett v. Phoenix Property, the legal title to the shares became vested in Mrs Cottrell once her name was entered in the register of shareholders, but she was not a purchaser for value and thus took the shares subject to Mr King’s equitable interest arising under the option. Questions of section 35A and waiver apart, that equity still subsists and in my judgment Mr King is therefore entitled to an order for rectification of the register, as was ordered in Hunter v. Hunter.

26. Turning to section 35A, this provides:

(1) In favour of a person dealing with a company in good faith, the power of the board of directors to bind the company, or authorise others to do so, shall be deemed to be free of any limitation under the company’s constitution.

(2) For this purpose-

a. a person “deals with” a company if he is a party to any transaction or other act to which the company is a party”.

27. The section was enacted to give effect to Article 9 of the Council Directive 68/151/EEC. The policy of the section was described by Carnwarth LJ in Smith v. Henniker-Major & Co [2003] Ch 182, at para. 108, as follows:

“The general policy seems to be that, if a document is put forward as a decision of the board by someone appearing to act on behalf of the company, in circumstances where there is no reason to doubt its authenticity, a person dealing with the company in good faith should be able to take it at face value ...”

28. Mr Hood accepts, in the light of the decision of Neuberger J in EIC Services Ltd v. Phipps [2003] EWHC 1507 (Ch), [2003] BCC 931, that a person, not being a member of a company, who for example receives shares from the company by way of allotment, is ‘a person dealing with the company’ within the meaning of the section.

29. Nevertheless, in my judgment, the section does not help Mrs Cottrell in this case. First, Mrs Cottrell must establish that she was dealing with the Company, in the sense that the Company was also a party to a transaction or act to which she was a party. Although the Company had a role in the process of receiving the transfer notice, registering the transfer, etc., I doubt very much whether the Company was in any meaningful sense a party to the transaction or act, this having taken place between the notional transferor (Mr Cottrell) and her, and potentially Mr King qua shareholder. I do not, however, base my decision on this point but rather on the second objection. This is that the issue is not whether the Company is bound in relation to any act or transaction but whether Mrs Cottrell is bound by or subject to Mr King’s equitable interest qua shareholder. Section 3 5(A) says nothing about this. Admittedly, Mr King did not use his power qua director under article 12(i) to decline to register the transfer but this is not the point.

30. Turning finally to the issue of waiver, this was not precisely formulated at any stage, but I take it to be an allegation that Mr King, having the right to be offered the shares at a fair price, elected not to exercise that right and cannot now assert it. Pre-emption provisions such as the present ones can certainly be waived in this way by a beneficiary and it will be a question of fact in any case whether or not they were waived. See Macro v. Thompson (No 3) [1997] 2 BCLC 34, at 67.

31. In this case, I had understood the parties to have accepted that this question boiled down to whether Mr King knew of the provisions in the articles which gave him this right. In her closing submissions, however, Ms Meyer, although accepting that constructive knowledge of the provisions of the articles on the part of Mr King would not be sufficient for this purpose, argued that Mr King is nevertheless deemed to have knowledge, relying on Ernest v. Nicholls (1857) 6 HL 410 and the proposition that a person dealing with a company is deemed to have knowledge of its articles. Ignoring for the moment that this seems to cut across her section 35A argument, the distinction which she seeks to make appears to me to an arid one and in any event Ernest v. Nicholls does not support the kind of distinction for which she argues. If constructive knowledge is not good enough, actual knowledge must be proved. She also cited Kammins Ballrooms Co Ltd v. Zenith Investment (Torquay) Ltd [1971] AC 850 for the proposition that the party alleging waiver does not have to prove that the party waiving his right appreciated the legal position. That may be so, but as Kammins Ballrooms makes clear, the issue is whether the party knew of the relevant facts. In this case the relevant fact is the existence of the pre-emption provisions.

32. In the light of the finding of fact which I have already made, I reject the allegation of waiver.

33. I will make an order for rectification of the register as sought.