Royal Courts of Justice
Strand, London, WC2A 2LL
Before :
MR PHILIP SALES (SITTING AS A DEPUTY JUDGE OF THE HIGH COURT)
Between :
(1) GEOFFREY STUART KINLAN (2) ANTHONY SANDERSON | Petitioners |
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(1) PETER ALBERT CRIMMIN (2) ANGELA CRIMMIN | Respondent |
John Bryant (instructed by Hamilton Davis) for the Respondents
Hugo Groves (instructed by Machins) for the Applicants
Hearing dates : 1st – 2nd February 2006
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Judgment
Mr Philip Sales :
This is an application under s. 212 of the Insolvency Act 1986 by the liquidators of a company called Styleprint Ltd (“Styleprint”) for various declarations and orders against the Respondents, Mr and Mrs Crimmin. Mr Crimmin was previously a shareholder in and director of Styleprint. Mrs Crimmin was previously a director of Styleprint. In summary, it is claimed that Mr and Mrs Crimmin contravened provisions of the Companies Act 1985 (“the Companies Act”) and were guilty of misfeasance and breach of trust in relation to a share sale agreement made in 2001 between Mr Crimmin and Styleprint (acting by his then fellow shareholder and director, Alan Smith) for the sale of Mr Crimmin’s shares in Styleprint to the company itself, and the payment of sums totalling £122,500 by Styleprint to Mr Crimmins under that agreement.
The Facts
Styleprint was incorporated on 1 May 1986, to carry on a printing business. It had a fully paid up share capital of 10,000 shares at £1 each. Mr Crimmin and Mr Smith were the sole shareholders, owning 50% of the shares each. They, together with their wives, were the directors.
Mr Crimmin and Mr Smith were both closely involved in the business. They began as the only employees of Styleprint, with a single old press. Over time, Styleprint bought new presses and other employees were taken on. For some years at the outset Mrs Crimmin did the books and invoicing, but later the company employed a book-keeper.
In about 1999 Mr Smith proposed that Styleprint should invest in some expensive pre-press equipment, and persuaded Mr Crimmin to accept this. But the acquisition of this equipment precipitated dissension in terms of the distribution of physical work in the business between the two men. Contrary to Mr Crimmin’s expectations, Mr Smith used the new equipment and as a result did not do so much of the physical work required with the printing presses. Mr Crimmin became disillusioned and lost his enthusiasm for the business. He also felt that Mr Smith was taking decisions in relation to the business without consulting him fully about them.
From the early 1990s, Styleprint’s accountant and auditor was Mr Suckling. In September 2000, Mr Crimmin and Mr Smith were due to have their annual meeting with Mr Suckling. While they were waiting for Mr Suckling, Mr Smith observed to Mr Crimmin that he (Mr Crimmin) was not happy in the business and asked whether he would consider selling his shares to Mr Smith. Mr Crimmin asked him to make an offer, which he would consider. Mr Smith said that all he could raise was £140,000. Mr Crimmin indicated that was too little, but it was agreed that Mr Suckling should be asked to value the company so that they could consider the matter further. In fact, when Mr Suckling arrived for the meeting, it became clear that Mr Smith had already spoken to him about the possibility of buying out Mr Crimmin’s shareholding. Mr Crimmin again indicated that he would be interested in selling, if the price was right. Mr Suckling agreed to provide a valuation of the company, to facilitate the negotiation of a sale between Mr Crimmin and Mr Smith.
A couple of weeks later there was another meeting between the three men, at which Mr Suckling said that he valued Styleprint at about £450,000. Mr Smith again said that all he could raise was £140,000, and Mr Crimmin again said that he would not accept that. Mr Suckling then proposed that there might be another way forward, by arranging for the company to buy back Mr Crimmin’s shares. Mr Suckling said that this would be possible, provided that the company had sufficient distributable profits. Mr Crimmin indicated he wanted half the value of the company; Mr Smith was not happy with that; Mr Crimmin said he would not accept less than £200,000; and it was left for Mr Smith to think this over.
About a week after this, there was another meeting between the three men. At this meeting, Mr Smith said he could not pay £200,000. Mr Suckling suggested that Mr Crimmin might be paid a smaller lump sum of £140,000, with the balance of the price being spread over six years by means of payments of £10,000 pa under a consultancy agreement between Mr Crimmin and Styleprint. Mr Suckling said that the company had sufficient money to fund this. (It is common ground that Styleprint did have substantial distributable profits: Styleprint’s balance sheet as at 31 March 2000 showed that the profit and loss account stood in credit in the sum of £437,564; and even as at 31 March 2001, after Styleprint had paid out sums to Mr Crimmin as set out below, the credit on that account was still £234,603). Mr Crimmin said that this proposal was acceptable to him. Mr Suckling suggested that solicitors be instructed to draw up the necessary agreement, but Mr Smith did not wish to involve lawyers. Mr Suckling said that he could draw up the necessary agreement.
Shortly before Christmas 2000, Mr Suckling, Mr Crimmin and Mr Smith met again. Mr Suckling produced a draft share sale agreement, including provision for payment of £140,000 by Styleprint to Mr Crimmin with a further £60,000 payable over 6 years by way of consultancy fees. But Mr Smith sought to bargain further on the price, to substitute a lump sum payment of £130,000 (to include repayment of £5,000 then owed to Mr Crimmin on his director’s loan account), plus £9,500 pa payable over 8 years. Mr Crimmin indicated that he would agree to that, although he thought the price was low. Mr Suckling was left to draw up a new version of the agreement for the directors of Styleprint to consider.
Also in December 2000, Mr Smith and Mr Crimmin negotiated terms on which Mr Crimmin should buy a Jaguar car that Styleprint held under a hire purchase agreement, which was valued at £22,000. It was agreed that, in return for the car, Mr Crimmin should settle the hire-purchase debt (which then stood at £17,923.97) and forgive the £5,000 loan he had made to Styleprint.
There was then a final meeting with Mr Suckling on 26 January 2001. On that occasion, all the directors of Styleprint attended (ie Mr and Mrs Smith and Mr and Mrs Crimmin). Mr Suckling had drawn up a new draft of the share sale agreement, copies of which were made available to all the directors to read. Mr Suckling took some time taking them through it. They all indicated they were happy with it. He gave Mr Smith a draft resolution to sign on behalf of Styleprint, and Mr Smith signed it. Then all the directors signed the share sale agreement (“the Agreement”).
The resolution signed by Mr Smith (as “Director”) was in these terms:
“ORDINARY RESOLUTION OF STYLEPRINT LIMITED
Passed 26th January 2001
AT an EXTRAORDINARY GENERAL MEETING of the above-mentioned Company, duly convened and held … on 26th January 2001 the subjoined ORDINARY RESOLUTION was duly passed, viz:-
RESOLUTION
That the issued share capital of the Company be decreased to Five Thousand Ordinary Shares of £1 by the redemption of Five Thousand Ordinary Shares of £1.”
The Agreement was expressed to be between Styleprint, Mr Smith and Mr Crimmin (the vendor). Clause A3 recorded that David Suckling & Co did not hold themselves out as experts in the area of share sale agreements, and had warned the company and the vendor that they should seek independent legal advice. The Agreement included the following terms:
Clause B1: Consideration.
The vendor agrees to sell his entire shareholding in the company to the company for a consideration of £130,000. The consideration is to be paid by the company to the vendor in the following manner at the following dates:
£100,000 by bankers draft on completion of this agreement.
£30,000 by a cheque from the company to be paid after 6 April 2001 but before 30 April 2001.
Clause B2: Other sums due to vendor.
The company will repay the entire balance of the directors loan account due to vendor as shown in the company’s books and records by 30 April 2001.
Clause B3: Consultancy Agreement.
The company wishes to use the vendor as a self-employed consultant after completion of this agreement. The vendor agrees to be a self-employed consultant to the company after completion of this agreement. The company and vendor agree that the consultancy agreement will provide the company with access to a maximum of 95 hours per annum of the consultant’s or his substitute’s time. The company and the vendor will agree a separate self-employed consultancy agreement which will be signed on completion of this contract. The consultancy agreement will commence on 6 April 2001. The self-employed consultancy contract will run for eight years and the company will pay the vendor £9,500 per annum. The company must pay the vendor his entire annual consultancy fee by 31 March of each year.
Clause B4: Resignations.
The vendor will resign as a Director and Company Secretary on completion of this agreement. Mrs Angela Crimmin will resign as a Director on completion of this agreement. The vendor and Mrs Angela Crimmin agree that no claim for unfair dismissal or compensation for loss of office will be brought at any time against the company.
Clause B5: Voting Rights.
On completion of this agreement the vendor will have no further voting rights or have any influence in the business or activities of the company. On completion of this agreement the vendor may offer advice as requested by the company in his capacity as consultant. …
Clause B7: Changes in the Company’s Shareholders.
After completion of this agreement Mr Smith will become the sole remaining shareholder. Mr Alan Smith may transfer up to 25% of his shares without affecting this agreement. After completion of this agreement should Mr Smith transfer or otherwise dispose of more than 50% of his shares to his wife or should Mr Alan Smith or his wife transfer or otherwise dispose of more than 25% of their shares to any other party company or individual the company will be bound to pay the vendor £76,000 less any monies already paid by the company to the vendor under the terms of the consultancy agreement. This sum must be paid immediately any such transfer is completed. The vendor must agree to cancel the consultancy agreement upon receipt of this sum and would not be due any more monies under the terms of the consultancy agreement. …
The basic object of the Agreement was that Mr Crimmin’s interest in Styleprint should be bought out, leaving Mr Smith (with Mrs Smith as co-director) in sole control of the company and its business. The mechanism to achieve this was by the company purchasing back its shares from Mr Crimmin and Mr Crimmin and his wife resigning as directors, leaving Mr Smith as sole proprietor of Styleprint and (with his wife) with sole effective control over its business. The economic substance of the transaction was that Mr Smith arranged for Styleprint to transfer part of its value (somewhat less than half) in the form of distributable reserves to Mr Crimmin in return for the surrender of his shares in the company and resignation as director. Part of the transfer of value was to take the form of payments under the consultancy arrangement referred to. Under clause B7, if Mr Smith sold a certain proportion of his interest in the company, the remaining payments due to Mr Crimmin over time under the consultancy arrangement (8 x £9,500 = £76,000) would be crystallised and payable at once.
On the same day that the Agreement was entered into, Styleprint paid Mr Crimmin £100,000, as required by Clause B1; and Mr Crimmin and Mrs Crimmin resigned as directors as required by Clause B4. Therefore, it is clear that the Agreement was regarded between the parties as “completed” in accordance with its terms on 26 January 2001.
In November 2001, Mr Smith (in his capacity as director of Styleprint) filed a notice of cancellation of Mr Crimmin’s 5000 shares in Styleprint with the Registrar of Companies, in these terms: “The issued share capital of the company be decreased to five thousand ordinary shares of £1 by the redemption of five thousand ordinary shares of £1.” Technically, the reduction in the company’s capital was by way of a re-purchase of the shares rather than their redemption, since they were not redeemable shares. The notice did not refer to a purchase contract, but I do not consider that anything of substance turns on the form of the notice.
Thereafter, and in accordance with Clauses B1 and B5, Mr Crimmin had no further role in the company, whether by way of exercise of voting rights in relation to his shares or in terms of exercising any influence in the business or activities of the company. Mr Smith did not cause Styleprint to seek to take up its rights to call on Mr Crimmin’s services under the consultancy arrangement. Mr Smith proceeded to run the company and take business decisions on its behalf by himself, and without consulting Mr Crimmin.
After Mr Smith had acquired sole control of Styleprint, he took major decisions in the conduct of its business in which Mr Crimmin had no say. In particular, he sold one of Styleprint’s older presses and purchased an expensive new printing press. He also arranged for Styleprint to factor its debts, in return for a charge. Mr Smith’s decisions proved not to be advantageous for the health and viability of the company’s business.
Mr Crimmin received some further payments from Styleprint referable to the Agreement, in small tranches over time: £3,500 on 3 May 2001, £3,000 on 23 October 2001, £3,000 on 4 December 2001, £3,000 on 15 February 2002, £3,000 on 5 March 2002, £2,000 on 25 October 2002, £1,000 on 3 February 2003 and 1,000 on 4 April 2003 and so on. Mr Crimmin pressed Mr Smith from time to time to ensure that Styleprint honoured the full payment terms under the Agreement, but Mr Smith would put him off by saying that Styleprint had begun to experience financial difficulties. In the event, Styleprint did not discharge the full additional part of the purchase sum due under Clause B1 of the Agreement, and did not pay Mr Crimmin anything under the consultancy arrangement set out in the Agreement. Taken together, in the end Mr Crimmin received a total of only £122,500 from Styleprint in payment for the surrender of his shares and his say in the management of the business.
On 29 May 2003, Styleprint went into creditors’ voluntary liquidation. The liquidators now seek to set aside the Agreement and to recover the sums paid to Mr Crimmin under it.
In my judgment, looking at the Agreement as a commercial transaction and aside from the intricacies of company law to which I turn below, there was nothing unfair or untoward in the arrangements set out in it. Mr Smith and Mr Crimmin both had a major part of their wealth locked up in their respective investments in Styleprint; they had reached a point at which they wished no longer to continue in the quasi-partnership which the company represented; it was fair, in those circumstances, that the two owners of Styleprint should agree that Mr Crimmin’s share in the company should be bought out by the company using its money, rather than by Mr Smith having to find money from outside the company; the consideration set out in composite form in the Agreement was negotiated at arm’s length between the two men (Mr Smith representing Styleprint in this regard), and with the benefit of financial advice from the company’s auditor and accountant, and was in my view a perfectly fair price.
There was some debate at trial and in the evidence as to whether Mr Crimmin acted, in entering into the Agreement, having regard to the best interests of Styleprint. I found this debate slightly unreal, since in my view it was legitimate in the circumstances which had arisen for Mr Crimmin to seek to negotiate the best price he could for his shares, and in the negotiation it was clearly Mr Smith who had assumed the sole responsibility for acting for the benefit of Styleprint. Styleprint’s interest was, of course, coincident with his own interest, since the object of the exercise was to leave him as sole shareholder in and controller of the company. There was no question of Mr Crimmin acting to oppress a minority shareholder, or to remove assets or value from the company other than by means of an agreement reached after fair and arm’s length negotiations between the parties. However, I should record that I accept Mr and Mrs Crimmin’s evidence that they considered that overall the transaction would be in the best interests of Styleprint, in the sense that it would free the company from the internal dissension which had arisen between Mr Crimmin and Mr Smith; would free up the management of the company (in the person of Mr Smith) to decide how its business should be run; would leave the company free of its financial obligations to Mr Crimmin as an employee and shareholder (replacing them with the limited and defined financial obligations in the Agreement); and involved payment by Styleprint of a price which Mr and Mrs Crimmin thought was a very good one from Styleprint’s (and Mr Smith’s) point of view.
The position of the liquidators, however, is that the Agreement should be set aside and the monies paid to Mr Crimmin repaid by him, on the grounds that various formal requirements in relation to transactions whereby a company re-purchases its own shares set out in the Companies Act were not complied with.
The relevant provisions of the Companies Act
Section 143 of the Companies Act contains a general prohibition against companies acquiring their own shares. This reflects the old rule in Trevor v Whitworth (1887) 12 App Cas 409. However, this prohibition is subject to exceptions. The purchase by a company of its own shares is now governed by Chapter VII of the Companies Act, which comprises a code originally introduced by the Companies Act 1981.
Section 143, so far as is material, provides:
143 General rule against company acquiring own shares
Subject to the following provisions, a company limited by shares or limited by guarantee and having a share capital shall not acquire its own shares, whether by purchase, subscription or otherwise.
If a company purports to act in contravention of this section, the company is liable to a fine, and every officer of the company who is in default is liable to imprisonment or a fine, or both; and … the purported acquisition is void. …
A company limited by shares may acquire any of its own fully paid shares otherwise than for valuable consideration; and subsection (1) does not apply in relation to—
the redemption or purchase of shares in accordance with Chapter VII of this Part, …
The Agreement was for an “off-market” purchase by Styleprint of its own shares, as defined in s. 163 of the Companies Act.
Section 160(1)(a) provides that redeemable shares may only be redeemed out of distributable profits of the company. Section 160(4) provides that where shares are redeemed, they “shall be treated as cancelled on redemption and the amount of the company’s issued share capital shall be diminished by the nominal value of those shares accordingly”. These provisions also apply to the re-purchase by a company of its own shares, by virtue of s. 162, which (so far as relevant) provides:
“Power of company to purchase own shares
(1) Subject to the following provisions of this Chapter, a company limited by shares or limited by guarantee and having a share capital may, if authorised to do so by its articles, purchase its own shares (including any redeemable shares).
(2) Sections 159 and 160 apply to the purchase by a company under this section of its own shares as they apply to the redemption of redeemable shares. …
(2A) The terms and manner of a purchase under this section need not be determined by the articles as required by section 160(3). …”
Section 159 provides:
“Power to issue redeemable shares
(1) Subject to the provisions of this Chapter, a company limited by shares or limited by guarantee and having a share capital may, if authorised to do so by its articles, issue shares which are to be redeemed or are liable to be redeemed at the option of the company or the shareholder.
(2) No redeemable shares may be issued at a time when there are no issued shares of the company which are not redeemable.
(3) Redeemable shares may not be redeemed unless they are fully paid; and the terms of redemption must provide for payment on redemption.”
“Distributable profits” are defined in s. 181(a) to mean those profits out of which the company could lawfully make a distribution (as determined in accordance with s. 263) equal in value to the payment. I find that at the time of the Agreement Styleprint had sufficient distributable profits, as set out in its balance sheet for its accounts for the year ended 31 March 2000, to fund the whole of the purchase consideration (and indeed, all payments) under the Agreement.
Article 1 of Styleprint’s Articles of Association provided that the regulations in Table A in the Schedule to the Companies (Tables A to F) Regulations 1985 should apply to the company. Article 35 in Table A provided for a power for Styleprint to purchase its own shares.
Section 164 provides, so far as relevant, as follows:
“Authority for off-market purchase
(1) A company may only make an off-market purchase of its own shares in pursuance of a contract approved in advance in accordance with this section or under section 165 below.
(2) The terms of the proposed contract must be authorised by a special resolution of the company before the contract is entered into; and the following subsections apply with respect to that authority and to resolutions conferring it. …
(5) A special resolution to confer, vary, revoke or renew authority is not effective if any member of the company holding shares to which the resolution relates exercises the voting rights carried by any of those shares in voting on the resolution and the resolution would not have been passed if he had not done so.
For this purpose—
(a) a member who holds shares to which the resolution relates is regarded as exercising the voting rights carried by those shares not only if he votes in respect of them on a poll on the question whether the resolution shall be passed, but also if he votes on the resolution otherwise than on a poll;
(b) notwithstanding anything in the company’s articles, any member of the company may demand a poll on that question; and
(c) a vote and a demand for a poll by a person as proxy for a member are the same respectively as a vote and a demand by the member.
(6) Such a resolution is not effective for the purposes of this section unless (if the proposed contract is in writing) a copy of the contract or (if not) a written memorandum of its terms is available for inspection by members of the company both—
(a) at the company’s registered office for not less than 15 days ending with the date of the meeting at which the resolution is passed, and
(b) at the meeting itself.
A memorandum of contract terms so made available must include the names of any members holding shares to which the contract relates; and a copy of the contract so made available must have annexed to it a written memorandum specifying any such names which do not appear in the contract itself. …”
Section 317 provides:
“Directors to disclose interest in contracts
(1) It is the duty of a director of a company who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the company to declare the nature of his interest at a meeting of the directors of the company.
(2) In the case of a proposed contract, the declaration shall be made—
(a) at the meeting of the directors at which the question of entering into the contract is first taken into consideration; or
(b) if the director was not at the date of that meeting interested in the proposed contract, at the next meeting of the directors held after he became so interested;
and, in a case where the director becomes interested in a contract after it is made, the declaration shall be made at the first meeting of the directors held after he becomes so interested. …
(5) A reference in this section to a contract includes any transaction or arrangement (whether or not constituting a contract) made or entered into on or after 22nd December 1980. …
A director who fails to comply with this section is liable to a fine. …
Nothing in this section prejudices the operation of any rule of law restricting directors of a company from having an interest in contracts with the company.”
Section 378 provides:
“Extraordinary and special resolutions
(1) A resolution is an extraordinary resolution when it has been passed by a majority of not less than three-fourths of such members as (being entitled to do so) vote in person or, where proxies are allowed, by proxy, at a general meeting of which notice specifying the intention to propose the resolution as an extraordinary resolution has been duly given.
(2) A resolution is a special resolution when it has been passed by such a majority as is required for the passing of an extraordinary resolution and at a general meeting of which not less than 21 days’ notice, specifying the intention to propose the resolution as a special resolution, has been duly given.
(3) If it is so agreed by a majority in number of the members having the right to attend and vote at such a meeting, being a majority—
(a) together holding not less than 95 per cent in nominal value of the shares giving that right …;…
a resolution may be proposed and passed as a special resolution at a meeting of which less than 21 days’ notice has been given. …”
Section 381A provides:
“Written resolutions of private companies
Anything which in the case of a private company may be done—
by resolution of the company in general meeting, or
by resolution of a meeting of any class of members of the company,
may be done, without a meeting and without any previous notice being required, by resolution in writing signed by or on behalf of all the members of the company who at the date of the resolution would be entitled to attend and vote at such meeting.
The signatures need not be on a single document provided each is on a document which accurately states the terms of the resolution.
The date of the resolution means when the resolution is signed by or on behalf of the last member to sign.
A resolution agreed to in accordance with this section has effect as if passed—
by the company in general meeting, or
by a meeting of the relevant class of members of the company,
as the case may be; and any reference in any enactment to a meeting at which a resolution is passed or to members voting in favour of a resolution shall be construed accordingly.
Any reference in any enactment to the date of passing of a resolution is, in relation to a resolution agreed to in accordance with this section, a reference to the date of the resolution, . . .
A resolution may be agreed to in accordance with this section which would otherwise be required to be passed as a special, extraordinary or elective resolution; and any reference in any enactment to a special, extraordinary or
elective resolution includes such a resolution.
This section has effect subject to the exceptions specified in Part I of Schedule 15A; and in relation to certain descriptions of resolution under this section the procedural requirements of this Act have effect with the adaptations specified in Part II of that Schedule.”
Paragraph 5 of Schedule 15A provides as follows:
“(1) The following adaptations have effect in relation to a written resolution—
(a) conferring authority to make an off-market purchase of the company’s own shares under section 164(2) …
(2) Section 164(5) (resolution ineffective if passed by exercise of voting rights by member holding shares to which the resolution relates) does not apply; but for the purposes of section 381A(1) a member holding shares to which the resolution relates shall not be regarded as a member who would be entitled to attend and vote.
(3) Section 164(6) (documents to be available at company’s registered office and at meeting) does not apply, but the documents referred to in that provision and, where that provision applies by virtue of section 164(7), the further documents referred to in that provision must be supplied to each relevant member at or before the time at which the resolution is supplied to him for signature….”
Section 727 provides:
“Power of court to grant relief in certain cases
(1) If in any proceedings for negligence, default, breach of duty or breach of trust against an officer of a company or a person employed by a company as auditor (whether he is or is not an officer of the company) it appears to the court hearing the case that that officer or person is or may be liable in respect of the negligence, default, breach of duty or breach of trust, but that he has acted honestly and reasonably, and that having regard to all the circumstances of the case (including those connected with his appointment) he ought fairly to be excused for the negligence, default, breach of duty or breach of trust, that court may relieve him, either wholly or partly, from his liability on such terms as it thinks fit.
(2) If any such officer or person as above-mentioned has reason to apprehend that any claim will or might be made against him in respect of any negligence, default, breach of duty or breach of trust, he may apply to the court for relief; and the court on the application has the same power to relieve him as under this section it would have had if it had been a court before which proceedings against that person for negligence, default, breach of duty or breach of trust had been brought.
(3) Where a case to which subsection (1) applies is being tried by a judge with a jury, the judge, after hearing the evidence, may, if he is satisfied that the defendant or defender ought in pursuance of that subsection to be relieved either in whole or in part from the liability sought to be enforced against him, withdraw the case in whole or in part from the jury and forthwith direct judgment to be entered for the defendant or defender on such terms as to costs or otherwise as the judge may think proper.”
The issues in the case
The following are the main issues which arise for determination:
Is the Agreement void for failure to comply with s. 164 of the Companies Act?
Is the Agreement void for failure to comply with s. 159(3) of the Companies Act?
Should the Agreement be set aside for failure to comply with s. 317 of the Companies Act?
Does the company have a good claim against Mr and Mrs Crimmin for misfeasance or breach of trust in relation to the company?
If the liquidators’ case is made out under any of (1) to (4) above, does Mr Crimmin have a defence to the claim to recover from him the sums paid to him by Styleprint by reason of change of position on his part?
If the liquidators’ case is made out under any of (1) to (4) above, should Mr and Mrs Crimmin be relieved from liability under s. 727 of the Companies Act?
I address these issues in turn below.
Is the Agreement void for failure to comply with s. 164 of the Companies Act?
Under s. 164(2) of the Companies Act, there was a requirement that the terms of the Agreement should have been authorised before it was entered into by a special resolution. By virtue of s. 164(5), it was not open to Mr Crimmin to exercise the voting rights in respect of his shares in relation to any such resolution. Section 164(6) required that a resolution would not be effective for the purposes of s. 164 unless a copy of the Agreement were available for inspection at Styleprint’s registered office for 15 days before the meeting at which such a resolution would be passed as well as at the meeting itself.
Clearly no formal notice for a general meeting of the company on 26 January 2001 was issued. This was in line with the generally informal way in which Styleprint had been run by Mr Smith and Mr Crimmin. Also, no copy of the Agreement had been made available for inspection at Styleprint’s registered office before that meeting took place.
However, everyone who attended the meeting on 26 January 2001 understood very well what the object of that meeting was (namely, to agree finally the terms of and enter into an agreement for Styleprint to purchase Mr Crimmin’s shares). The four directors were carefully taken through the terms of the Agreement by Mr Suckling at the meeting, and each indicated that they were happy with it. Mr Smith was the only shareholder entitled to vote on the question whether the company should purchase Mr Crimmin’s shares, and at the meeting he signed the document headed “Ordinary Resolution” set out above to approve the transaction.
In my judgment, on these facts (and subject to what is said below in relation to s. 159), the liquidators’ complaint based on s. 164 must be dismissed. The first submission made by Mr Bryant for Mr and Mrs Crimmin, which I accept, is that (i) the resolution signed by Mr Smith at the meeting was in substance a special resolution because it was passed by the requisite majority of members entitled to vote (s. 378(2)) and Mr Smith (as the sole shareholder having the right to vote on the resolution) had validly waived the usual notice requirement under s. 378 (see s. 378(3)) (and, in any event, if all relevant shareholders are in agreement, as here, notice requirements may be waived in accordance with the principle derived from Re Duomatic Ltd [1969] 2 Ch 365, esp. at 373A-C); (ii) the resolution authorised the terms of the proposed contract (even though the resolution itself was stated to be to decrease the issued share capital “by the redemption of” 5000 ordinary shares, it was presented for signature by Mr Smith alongside the Agreement and clearly was intended to refer, and would have been understood by all present as referring, to the repurchase transaction as set out in the Agreement); (iii) the resolution was signed by Mr Smith and passed before the Agreement was entered into (this was clearly established on the facts, but I should add that since the events at the meeting on 26 January 2001 really amounted to a composite transaction to review and approve the Agreement, I would not have regarded it as fatal to this analysis even if the resolution had been signed immediately after the Agreement was signed, rather than the other way round); (iv) Mr Crimmin did not vote upon the resolution; and (v) the requirement under s. 164(6)(a) that a draft of the Agreement should have been available for inspection at Styleprint’s registered office for a period before the meeting on 26 January 2001 could be and was waived in accordance with the Duomatic principle. The provision in s. 164(6)(a) is, in my view, clearly one for the protection of the members of the company rather than third parties, and hence is capable of being waived by the relevant members entitled to vote if they are unanimously in agreement that adherence to its terms is not required: see BDG Roof-Bond Ltd v Douglas [2000] 1 BCLC 401, 416c-417g per Park J, citing Atlas Wright (Europe) Ltd v Wright [1999] 2 BCLC 301; also Re Torvale Group Ltd [1999] 2 BCLC 605, 613d-618c per Neuberger J.
Mr Bryant submitted, in the alternative, that the resolution signed by Mr Smith on 26 January 2001 constituted a valid written resolution within the meaning of s. 381A of the Companies Act. In my judgment, this submission provides a further answer to the liquidators’ complaint under s. 164. The resolution signed by Mr Smith accurately stated the terms of the resolution and was signed by the only shareholder entitled to vote at a meeting on the issue to which it related. It was not necessary under s. 381A for s. 164(6) to be complied with: see para. 5(3) of Schedule 15A. I do not consider that the fact that the resolution was labelled an “Ordinary Resolution” rather than a special resolution affects this analysis: a resolution which complies with the substantive terms of s. 381A can satisfy the requirement for a special resolution (see s. 381A(6)).
Finally, Mr Bryant made a further alternative submission. If the terms of the resolution signed by Mr Smith could not be regarded as complying sufficiently with the requirements of s. 164 or s. 381A, Mr Bryant argued that nonetheless the only relevant shareholder (Mr Smith) gave his assent to the Agreement before and when it was entered into, and again by application of the Duomatic principle his assent is as effective as if a meeting had been held and a resolution passed to authorise the Agreement in clear and unambiguous terms. Since, in my view, the resolution was sufficiently clear in the context in which it was passed, it is strictly unnecessary to decide this point. However, if I were wrong in my view about the clarity of the resolution, I would not have accepted this submission.
In relation to this and the other issues under s. 164, there was debate about the effect of the judgment of Lindsay J in Re R.W. Peak (King’s Lynn) Ltd [1998] 1 BCLC 193. That case is clearly distinguishable on its facts, since it involved a situation where there was a purported purchase by a company of its own shares where its articles of association had not been amended to permit such a transaction, and where the contract had not been approved in advance by the relevant shareholder: see pp. 200e-203e. Moreover, there was no purported resolution to authorise or record the purchase. However, Lindsay J went on to consider, obiter, the extent to which the Duomatic principle might permit departure from strict adherence to the terms of s. 164 or s. 381A: see pp. 203f-205f. He considered that the scope for operation of that principle would be limited in the context of re-purchase by a company of its own shares, because “Any given purchase by a company of its own shares affects the members who remain as members, the members who sell their shares and possibly the creditors” (p. 204f) and “there may well be a public interest served by the machinery of Ch. VII which extends beyond protection of the interest of the current registered holders of shares” and may be regarded as being of concern to the creditors (p. 205a-c).
In my judgment, and in line with the general approach adopted by Lindsay J, the extent to which the Duomatic principle may apply in relation to adherence to the specific requirements of s. 164 and s. 381A turns on the question whether any particular requirement of those sections which is sought to be waived is properly to be regarded as a provision for the protection of the current members of the company or as a provision to confer protection on a wider class of persons (in particular, in relation to the creditors of the company): see also Re Torvale Group Ltd [1999] 2 BCLC 605, 613d-618c. If it is a provision of the former kind, it would be open to the relevant members of the company acting informally but unanimously to waive compliance with it. If it is a provision of the latter kind, compliance with it could not be waived by the members, even if they act unanimously. It is by application of that test that I have reached the conclusions set out above that there is scope for application of the Duomatic principle in the respects I have indicated in paragraph 40 above. In my view, in relation to the particular provisions referred to, the impact (if any) upon persons other than the current members of Styleprint would have been so marginal and indirect that waiver of the provisions which I have referred to by operation of the Duomatic principle would in each case have been legitimate. In particular, so far as concerns creditors or future members, they would have been on notice from inspection of the resolution and the notice given to the Companies Registrar that the paid up share capital of Styleprint had been reduced by £5,000 (in the context of Styleprint’s financial position at the time, this was a small and relatively insignificant sum), and would have been in a position to assess Styleprint’s general financial position in the usual way by reference to its audited accounts filed from time to time.
However, I do not consider that this reasoning would apply in relation to Mr Bryant’s wider submission in relation to application of the Duomatic principle, set out in paragraph 42 above. Whilst the requirement that the terms of a resolution clearly indicate that there is to be reduction of a company’s capital is primarily for the protection of the current members of a company who are to vote upon it, this particular requirement is not solely for their protection. The resolution has to be kept as part of the company’s books and records which may be inspected by others in the future, and notice of it has to be given to the Companies Registrar. In my view, the importance that an accurate record be kept of the true capitalisation of a company by its shares is such that it is not open to the members to waive compliance with this aspect of the requirements of s. 164 and s. 381A in reliance on the Duomatic principle.
Is the Agreement void for failure to comply with s. 159(3) of the Companies Act?
This was a provision referred to by Mr Groves for the liquidators for the first time on the first day of the hearing. The application of s. 159(3) is a matter of law, and Mr Bryant did not object to its being raised.
The liquidators’ submission based upon s. 159(3) is this. Section 159(3) provides that where shares are redeemed, the terms of redemption must provide for payment on redemption. By s. 162(2), s. 159 applies to the purchase by a company of its own shares as it applies to the redemption of redeemable shares. This means that the terms of purchase must provide for payment upon acquisition (and cancellation) of the shares.
But in the present case, the consideration to be provided for the shares under Clause B1 of the Agreement was stated to be £100,000 on completion of the Agreement and £30,000 at a point in the future. The completion took place on 26 January 2001, and Mr Crimmin’s shares (and rights in relation to them) were treated as cancelled as from that date. Thus, the Agreement did not provide for full payment to be made on the acquisition of the shares. It is not suggested that the two limbs of Clause B1 are severable.
In my judgment, although the operation of s. 162(2) and s. 159(3) in the present context is rather crude and is capable of producing unfairness by disrupting an apparently sensible and appropriate transaction (and, moreover, one in which the offending aspect of the transaction – the payment of part of the price after Mr Crimmin’s shares were given up – was included very much at the request of Mr Smith on behalf of the company, presumably as being of benefit to the company in order to ease its cashflow), the terms of these provisions are clear in their effect. I was also referred to the relevant paragraphs in the 1980 report by Professor Gower, The Purchase by a Company of its Own Shares (Cmnd 7944), which lay behind the introduction in 1981 of the code now contained in Chapter VII of the Companies Act: see especially paragraph 35. There is nothing in that report which would suggest that these provisions should bear any other, narrower meaning. Moreover, the proper interpretation which I consider should be given to these provisions corresponds with the view of Judge Behrens in Pena v Dale [2004] 2 BCLC 508, at 532c-533g. Accordingly, I accept Mr Groves’ submission that the Agreement does not comply with s. 162(2) read with s. 159(3), because £30,000 of the payment of £130,000 for Mr Crimmin’s shares was to be made after the shares were surrendered by him.
The effect of this on the Agreement is dramatic. By virtue of s. 143(2), Clause B1 of the Agreement (and any provisions, such as those in Clause B5, which cannot sensibly be regarded as severable from Clause B1) must be treated as void. Where this analysis leaves the parties falls for consideration under headings (5) and (6) below.
Should the Agreement be set aside for failure to comply with s. 317 of the Companies Act?
Mr Groves also submitted that the Agreement should be set aside for another reason, namely that it had been entered into in contravention of s. 317. I do not accept this submission. It was obvious to all four directors of Styleprint who met on 26 January 2001 from the face of the Agreement and from the explanation of its given to them by Mr Suckling at the meeting that the Agreement provided for the purchase by the company of Mr Crimmin’s shares, and also provided for a consultancy arrangement between him and the company. The draft Agreement declared on its face that Mr Crimmin was to be a party to it, and was for the purposes of s. 317 in effect tendered at the meeting by Mr Suckling on Mr Crimmin’s behalf and in his presence for consideration by the directors. In my judgment, on the facts of this case there was substantive compliance with the requirements of s. 317.
Even if there had been a technical breach of s. 317, that would only render the Agreement voidable not void: MacPherson v European Strategic Bureau Ltd [1999] 2 BCLC 203, 216f-220b. In the event, the company treated the Agreement as binding and valid (both by treating Mr Crimmin as no longer a member or director, and by making various payments after January 2001 referable to the Agreement), and it would not be equitable to permit it now to set the Agreement aside on this ground.
Does the company have a good claim against Mr and Mrs Crimmin for misfeasance or breach of trust in relation to the company?
In my judgment, the company has no good claim against Mr and Mrs Crimmin for misfeasance or breach of trust which is separate from its claim based upon non-compliance with s. 162(2) read with s. 159(3) of the Companies Act. In my view, subject to that claim, both of them acted properly in relation to the company. They did not seek to obtain any improper or unfair advantage from Styleprint. They have simply been caught out by a very technical provision of the Companies Act, in relation to a transaction which appeared to them to be a perfectly fair and appropriate bargain for Mr Crimmin and the company to make.
Mr Groves sought to criticise Mr and Mrs Crimmin for proceeding with the transaction, relying only on the advice of Mr Suckling and not going to lawyers to have it checked. I do not think that this criticism carries weight; and I certainly do not regard it as so serious as to justify a conclusion that Mr and Mrs Crimmin acted unreasonably or failed to have due regard to the interests of the company by not seeking legal advice on the transaction. Mr Suckling was the company’s accountant and auditor, well known to them and who understood the company’s business and situation very well. For all that he included Clause A3 in the Agreement for his own protection, he appeared to know what he was doing. The transaction appeared a fair and proper one. There was nothing to put them on notice of any point which arose on s. 159(3) of the Companies Act. Styleprint was a small two-man company with a relatively modest business, and it is unsurprising that both Mr Smith and Mr Crimmin should wish to keep the transaction costs to a minimum if there did not appear to be any problem. In fact, it was very much at the insistence of Mr Smith that the company did not incur the cost of seeking further advice in relation to the transaction.
Therefore, in my view, the only misfeasance which has occurred in this case is the result of the unwitting contravention of s. 162(2) read with s. 159(3), which has the result that the agreement under which the payments were made to Mr Crimmin was void. He therefore has received monies for which there was, in fact, no valid contractual justification, but in circumstances where he has acted in complete good faith.
If the liquidators’ case is made out under any of (1) to (4) above, does Mr Crimmin have a defence to the claim to recover from him the sums paid to him by Styleprint by reason of change of position on his part?
Having concluded under heading (2) above that Clause B1 and associated provisions of the Agreement are void, the question arises whether the company, represented by the liquidators, should be entitled to recover the monies paid by it to Mr Crimmin. At the hearing, Mr Bryant advanced a short argument by reference to the law of restitution, but was hampered in that regard by the lateness with which the argument under s. 159(3) was raised by the liquidators. I consider that the proper analysis is as follows.
The payments which Mr Crimmin received were not in fact authorised by the Agreement, although they appeared to be. Everyone (Mr and Mrs Crimmin, Mr and Mrs Smith, Mr Suckling and Styleprint) acted on the mistaken assumption that the Agreement was valid. In my view, the relevant principles to be applied to determine whether Mr Crimmin has a liability to repay the monies paid to him by the company under the Agreement are the usual principles which apply where recovery is sought of sums paid to someone as a result of a mistake of fact or mistake of law on the part of the payor: see in particular Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 and Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349.
There are, however, two important and unusual features of this case, which are relevant both under this heading and under heading (6) below. First, I find on the facts of this case that if the parties had been aware of the point which arose under s. 162(2) and s. 159(3), they would have changed the terms of Clause B1 of the Agreement to provide for full payment of the consideration of £130,000 for Mr Crimmin’s shares upon completion of the Agreement; the transaction would have proceeded as a perfectly valid bargain; and the monies which Mr Crimmin received from the company would have validly paid to him.
Second, Styleprint was a quasi-partnership, in relation to which the interests of Mr Crimmin were protected by a combination of his rights as shareholder and by his position as director of and employee in the company, by virtue of which he had a significant degree of control over the way in which its business was carried on. The essence of the bargain contained in the Agreement was that he should give up all his interest and his protection in relation to the business, in return for the payments he would receive. He honoured his side of the bargain, and Mr Smith (for the company) treated him from 26 January 2001 onwards as having no interest in the company and excluded him from having any say in the management of the business. Although in theory, since the Agreement was void, Mr Crimmin remained a shareholder in the company, in fact (because of the mistaken assumption on all sides that the Agreement was valid) Mr Smith proceeded to make business decisions in relation to which Mr Crimmin was not consulted and had no means of protecting his interest in the company, and Mr Crimmin accepted that state of affairs without any protest or effort to influence Mr Smith. The decisions made by Mr Smith in relation to the company’s business were not ones in relation to which Mr Crimmin indicated any agreement, and have in fact resulted in the company foundering and going into liquidation.
It therefore seems to me that, even though he may still in fact have in his hands the monies paid to him or assets representing those monies (this point was not explored at trial), Mr Crimmin changed his position in a fundamental respect in good faith in reliance on his assumption (shared with Mr Smith and the company) that the Agreement was valid and that the sums he received under it were validly paid to him. Had he realised that the Agreement was invalid and the payments made under it were made by mistake, Mr Crimmin would obviously have wished to consider how his continuing interest in the company should be protected, either by his resuming his rights to protect himself as a quasi-partner in the business or by seeking the reformulation of the Agreement so as to ensure that it and the payments to him were valid. These opportunities which were denied him cannot be restored to him. In my judgment, in these unusual circumstances, this was a change of position on the part of Mr Crimmin such as to fall within the scope of the defence of good faith change of position articulated by the House of Lords in Lipkin Gorman. Accordingly, whilst I hold that Clause B1 and associated provisions of the Agreement were in fact void, I also hold that Mr Crimmin has a good defence to the claim for repayment of monies which is now made against him.
I would add that I think that, on an alternative analysis, Mr Crimmin might very possibly have a good defence by way of a set off against the claim now made against him of sums by way of a quantum meruit arguably due from the company to him. He was a quasi-partner in the company’s business, but gave up all his rights of involvement in the business as required by the bargain sought to be made by the company. In my view, although Clause B1 and associated provisions of the Agreement were void, Mr Crimmin still provided a major part of the valuable consideration in return (namely, stepping down from involvement in the business) which Mr Smith and the company had been seeking. In those circumstances, I consider that there might well be scope for application of the principle in Craven-Ellis v Canons Ltd [1936] 2 KB 403, in which a quantum meruit was awarded in respect of services rendered to a company under a void contract. Although Mr Crimmin did not render personal services under the Agreement, he did provide the company (represented by Mr Smith) with an important part of what it sought (Mr Crimmin’s stepping aside from involvement in its business). It seems to me that there might well be scope to value what Mr Crimmin did in fact provide by reference to what the company (acting by Mr Smith) had shown itself willing to pay for it: cf Way v Latilla [1937] 3 All ER 759. However, in view of the conclusions I have come to in relation to the defence of change of position (above) and on application of s. 727 of the Companies Act (below), and since no quantum meruit claim was pleaded (partly, I think, because of the lateness with which the point based on s. 159(3) was raised by the liquidators), I do not develop this analysis any further and do not base my judgment upon it.
If the liquidators’ case is made out under any of (1) to (4) above, should Mr and Mrs Crimmin be relieved from liability under s. 727 of the Companies Act?
Finally, I turn to consider whether Mr and Mrs Crimmin should be granted relief from any liability under s. 727(1). The question of application of s. 727 would only arise if I were wrong in my conclusion above that the claims against Mr and Mrs Crimmin should be dismissed. However, since I have heard the evidence given by Mr and Mrs Crimmin in these proceedings, it is right that I should express my view upon this point, in case the matter goes further.
In my judgment, if (contrary to the conclusions I have reached above on the law) Mr and Mrs Crimmin or either of them are to be regarded as having acted in breach of duty or trust, or as being in default in any way, by virtue of their part in causing the company to enter into the Agreement, or by their playing a part in procuring the payment of the £122,500 to Mr Crimmin, or by Mr Crimmin receiving those monies and keeping them for his own benefit, this is a case in which it would be appropriate for the court to exercise its power under s. 727 to relieve each of them from any resulting liability in respect of those monies. In my judgment, each of them has acted honestly and reasonably in all the circumstances, and ought fairly to be excused from liability in respect of the whole sum actually received by Mr Crimmin.
Conclusion
For the reasons given above, the liquidators’ claim in these proceedings is dismissed.