Faulkner & Anor v Bennett & Ors [2011] EWHC 3702 (Ch) (20 December 2011)

Neutral Citation Number: [2011] EWHC 3702 (Ch) Claim No. 0MA30266 IN THE HIGH COURT OF JUSTICE CHANCERY DIVISION MANCHESTER DISTRICT REGISTRY Manchester Civil Justice Centre 1 Bridge Street West Manchester M60 9DJ 20th December 2011 B e f o r e : HIS HONOUR JUDGE HODGE QC Sitting as a Judge of the High Court ____________________ Between: (1) HERBERT GORDON FAULKNER (2) JAMES ALBERT TURNER (On behalf of themselves and other members of the WARRINGTON CLUB as at the date of its dissolution) Claimants -v- (1) HARRY BENNETT (2) JONATHAN MILLS (Discontinued) (3) THE WARRINGTON CLUB (1906) LIMITED (4) DORIS SOWERBUTTS Defendants ____________________ Transcribed from the Official Tape Recording by Apple Transcription Limited Suite 104, Kingfisher Business Centre, Burnley Road, Rawtenstall, Lancashire BB4 8ES Telephone: 0845 604 5642 – Fax: 01706 870838 ____________________ Counsel for the Claimants MR SEAN KELLY Instructed by Bromleys Solicitors LLP, Ashton-under-Lyne The First and Third Defendants did not attend and were not represented Counsel for the Fourth Defendant MR JONATHAN SMITH Instructed by Cooper Sons Hartley & Williams, Chapel-en-le-Frith ____________________ HTML VERSION OF JUDGMENT ____________________ Crown Copyright © JUDGE HODGE QC: This is my extemporary judgment in the case of Herbert Gordon Faulkner and another (as claimants) and Harry Bennett and two others (as defendants), claim number 0MA30266. This case raises the interesting and apparently novel question of whether the principle of equity set out by the Court of Appeal in the case of Allen v Gold Reefs of West Africa Limited [1900] 1 Ch 656 operates to constrain the ability of a body of shareholders in a limited company which was formed to promote the interests of a social club to vary the company's articles of association so as to permit what was, effectively, the expropriation, at par value, of the shares of former members of the social club. The background to this case is as follows: By a claim form issued under Part 8 of the Civil Procedure Rules on 25 th March 2010, and reissued on amendment on 17 th August 2011, the claimants, Mr Herbert Gordon Faulkner and Mr James Albert Turner, suing on behalf of themselves and the other members of the Warrington Club as at the date of its dissolution on 19 th September 2006, seek declarations as to the legal and beneficial ownership of the 810 issued shares in the company which was originally named as the third defendant, The Warrington Club (1906) Limited. Consequential relief and directions are also sought. The principal evidence in support of the claim is contained in a written statement of the second claimant, Mr Turner, dated 23 rd March 2010. Mr Turner had been a member of the club since 8 th December 1980. He was a committee member from 9 th February 1989, and he was appointed a trustee of the club on 11 th April 1990. He served as President of the club from 10 th October 1996 to 25 th February 1999. He acted as the Company Secretary of the company from 5 th February 1996, and he served as a director of the company from 19 th January 1998. He is still one of the trustees of the club's property. He remains a director of the company, and he is the Secretary of the dissolution committee formed to wind up the affairs of The Warrington Club. I shall return to his evidence in due course. Mr Turner's witness statement is endorsed by a witness statement, also dated 23 rd March 2010, from the first-named claimant, Mr Herbert Gordon Faulkner. He has been a member of the club since 1962. He acted as its auditor from 1985 and as Treasurer of the club from 25 th April 1996. He became a director of the company from 19 th January 1998 and he remains such. He is one of the trustees of the club's property, and he is the Chairman and Treasurer of the dissolution committee formed to wind up the club's affairs. Both Mr Turner and Mr Faulkner were cross-examined before me on their witness statements, Mr Turner for about an hour and a half before the luncheon adjournment yesterday, and Mr Faulkner for about half an hour after lunch. I find both gentlemen to have been entirely honest witnesses who were doing their best to assist the court, although they were hindered by a lack of original company and club documentation, and by the passage of time. I am satisfied, as I say, that they were doing all they could to assist the court; and I should record that there was no challenge to their good faith in the decision that was taken to pass the resolution of the company which features prominently in this litigation. There were also witness statements from two designated members of the solicitors' practice of Bromleys Solicitors LLP, who act as the solicitors for the claimants. The first was that of Mr Paul Westwell, dated 28 th June 2011. He essentially addresses two matters: first, the position of the fourth defendant, Mrs Sowerbutts, and, secondly, the efforts that had been made to try to find, and retain, an appropriate person to represent the affected shareholders in the company, whose position is now represented by Mrs Sowerbutts. The final witness statement for the claimants is also dated 28 th June 2011 and comes from Mr John Miles Longworth, also a designated member of Bromleys Solicitors LLP. He has acted for Mrs Sowerbutts for many years; and he explains why she was selected to represent the interests of the persons potentially adversely affected by the 1997 resolution, even though Mr Longworth, a member of the limited liability partnership acting for the claimants, has acted as Mrs Sowerbutts's solicitor over many years. The final witness statement is that of Mrs Sowerbutts, who is the only defendant who has taken an active part in this litigation. Her witness statement is dated 4 th October 2011. She is the widow of Mr William Edmond Sowerbutts, who died as long ago as 28 th May 1990. He left a will, dated 11 th April 1984, under which Mrs Sowerbutts was appointed as her late husband's sole executrix, and also the sole beneficiary of his estate. A grant of probate was made to her on 29 th October 1990. She is now 88 years of age. She has agreed to represent the interests of those shareholders whose shareholding in The Warrington Club (1906) Limited was effectively expropriated by the resolution of 16 th September 1997. Mr Sowerbutts had owned 20 shares in the company at the time of his death. In paragraph 4 of her witness statement, Mrs Sowerbutts explains that she has never been to The Warrington Club, although she was aware that the deceased had been a member. She believes that he was already a member at the time she married her husband, as his second wife, in 1958. Her recollection is that Mr Sowerbutts only went to the club very occasionally. Until Mr Longworth, her solicitor, mentioned that Mr Sowerbutts owned shares in the company, Mrs Sowerbutts said that she had had no knowledge of this, nor does she have any knowledge as to how he acquired his shares in the company. She says that she has no documentation in relation to The Warrington Club. She moved to her present address in 1995, having previously lived at one address from the time she married the deceased in 1958 until her move in 1995. She says that she has been advised that there are arguments that the resolution, which effectively expropriated the shares belonging to her late husband's estate without compensation, was not a valid resolution, and was void, as it was not made bona fide for the benefit of the company as a whole. It is on that basis that she resists the relief sought by the claimants. Mrs Sowerbutts was represented before me at the hearing by Mr Jonathan Smith of counsel, instructed by Cooper Sons Hartley & Williams of Chapel-en-le-Frith. The claimants are represented by Mr Sean Kelly of counsel, instructed by Bromleys Solicitors LLP. They were the only active parties to this litigation. The first defendant, Mr Harry Bennett, is, with Mr Faulkner and Mr Turner, one of the three trustees of The Warrington Social Club. They were appointed pursuant to rule 19 of the current club rules. That rule provides that: "The committee shall have the power to appoint three trustees. Any freehold or leasehold lands, rentcharges or other hereditaments acquired by the club shall be vested in the names of the trustees, to be held by the trustees of the club". Mr Bennett, although a trustee of the club, is a nominal party, and he has been joined to the claim solely on the basis that he will be protected by any order made by the court. He was not involved in the dissolution of the social club. On 3 rd May 2010 he filed an acknowledgment of service indicating that he was not contesting the claim. A Mr Jonathan Mills was originally joined as second defendant in order to represent the shareholders affected by the resolution of 16 th September 1997, but he indicated that he was not content to continue in that capacity; and the proceedings against him were, therefore, discontinued on 10 th June 2010. He, therefore, effectively disappears from the picture. He was replaced by Mrs Doris Sowerbutts. The original third defendant was The Warrington Club (1906) Limited, which has also been joined as a nominal defendant and has taken no active part in the litigation. Because of her age, and her lack of knowledge of any relevant matters, by agreement Mrs Sowerbutts did not attend the hearing, and she was not cross-examined. The Warrington Club was originally founded as a social club in 1873. Despite its name, the club premises were in fact situated at Queen Street in Ashton-under-Lyne in the County of Lancaster. The original club premises were vested in a company called The Warrington Club Limited, but, as appears from article 3(a) of the articles of association of the new company, The Warrington Club (1906) Limited, the original company appears to have entered into liquidation. On 20 th November 1906 a new company called The Warrington Club (1906) Limited, and the third defendant named in the original claim form, was incorporated. It had a share capital of £1,000, divided into 1,000 shares of £1 each. The evidence is that only 810 of those shares have been issued. The company was originally governed by the provisions of the Companies Act 1862 to 1900. The articles of association appropriate to such a company, which were substituted with effect from 1 st October 1906, were placed before the court. Article 23 provides that: "A person becoming entitled to a share by reason of the death of the holder shall be entitled to the same dividends and other advantages to which he would be entitled if he were the registered holder of the share, except that he shall not, before being registered as a member in respect of the share, be entitled in respect of it to exercise any right conferred by membership in relation to meetings of the company". That provision is to the same effect as article 31 in Table A as set out in the Companies (Tables A to F) Regulations 1985. The principal objects of the new company, as set out in article 3(a) of its memorandum of association, provided as follows. "To purchase the existing Warrington clubhouse and bowling green and other conveniences for the use of the members of The Warrington Club, now in the course of formation, and of any club established in succession thereto, and to furnish and maintain the same and to permit the same to be used by the members of the said club and their friends, either gratuitously or upon such terms as should be agreed upon, and, if thought fit, to manage the affairs of the club, or any of them, and generally to do whatever may seem best calculated to promote the interests of the club and, in particular, to lend money to or subsidise the club, and for the above purposes to enter into an agreement with the liquidator of The Warrington Club Limited to acquire and take over as a going concern the undertaking and all, or any, of the assets and liabilities of The Warrington Club Limited". On 19 th September 2006 the members of The Warrington Club voted in favour of a resolution to dissolve the club in accordance with article 40 of the club's current rules. That rule is headed "Dissolution of the Club" and provides as follows: "If at any general meeting a resolution for the dissolution of the club shall be passed by a majority of the members present, the resolution shall be confirmed at a special general meeting held not less than one month later and at which not less than one quarter of the members shall be present. This should then be confirmed by a resolution passed by majority of two thirds of voting members. The committee then at a future date will proceed to realise the property of the club and, after the discharge of all liabilities, shall share equally between those members who have shown to be fully paid up for a minimum of five years, and upon completion of such division the club shall be dissolved". Those club rules appear to date from the 1990s, and from the reference in article 3 to "full female members", and by reference to club minutes, they were probably enacted after 1997 and, thus, after the resolution of the company which features prominently in this litigation. At the date of the dissolution of the club there were 51 members with five years' fully paid up membership, of whom three or four have since passed away. The club premises were in due course sold on 7 th February 2008 for £520,000. After allowing for capital gains tax, and the costs of sale, the net sale proceeds are in the order of some £470,000. These are now held by the claimants' solicitors. The title to the club was vested in the company, The Warrington Club (1906) Limited. The 810 issued shares in that club are held, and have since, at the latest, 8 th December 1997 all been held, by the trustees of The Warrington Club. They form an asset of that social club, now dissolved, and, therefore, would fall to be distributed to the members of the club at the date of dissolution with five years' fully paid up membership in accordance with the provisions of article 40 of the club rules. However, a question has arisen as to the circumstances in which the 810 shares came to be vested in the trustees in The Warrington Club. The circumstances in which those doubts have arisen are set out in the witness statement of Mr Turner. In his witness statement, Mr Turner begins by describing his involvement in the club, and also the company, at paragraph 1. He then refers to various documents which he exhibits as exhibit "JAT1". He then addresses the position of himself, Mr Faulkner (his co-claimant), and Mr Bennett (the first defendant) at paragraphs 3 through to 5. He explains that the club's affairs have now been wound up, subject to the winding up of the company and the payment out of a dividend. He explains that, on 24 th April 2008, the dissolution committee resolved that he and Mr Faulkner should bring this claim on behalf of the club's last members. He then addresses the records of the club, and the company, at paragraphs 6 and 7. He there refers to the difficulties which he has experienced in obtaining all the minutes of meetings and similar records. This is because of the death on 30 th January 1996 of a Mr Robert Kay. He had held the dual position of the Secretaries of both the club and the company for many years. He had also prepared all the club accounts. It was Mr Turner's understanding that Mr Kay had kept all, or the the majority, of the records of both the club and the company at his home; but, as recorded in the minutes of a meeting of the company's directors held on 14 th August 1996, when Mr Kay's house was searched in order to locate the club and the company records, they could not be located, and they have not come to light since. Mr Turner then goes on to address, at paragraphs 8 and 9, the formation of both the club and, later, the company. He exhibits the memorandum of association, to which I have already made reference; but he says that he has not been able to find the articles of association; nor has he been able to find any documents dealing with the reasons for the incorporation of the company, how it acquired the club premises, or how shares in the company were to be allotted. He explains that, since its incorporation, the company has acted as a vehicle for the holding of the premises. As I have already mentioned, it is apparent from the terms of article 3(a) of the memorandum of association of the new company that it was apparently formed to acquire the assets of a former company, known as The Warrington Club Limited, which was then in liquidation. Mr Turner addresses the acquisition of shares in the company by the trustees of the club at paragraphs 10 through to 12. He says that his personal knowledge of the club's affairs dates from December 1980, when he became a member. He says he remembers being told, at or about that time, that any member of the club who held shares in the company was required to transfer the same to the trustees of the club for nothing when he ceased to be a member of the club. He says that this point was often made by officers of the club. As far as he was aware, this was what normally occurred when members left the club. He says that, in addition, the club would also purchase shares from current members whenever the opportunity arose. Such shares would be held by the trustees of the club. He explains that the minutes of the club for the period between February 1979 and July 1999 contain very few references to shares in the company. Mr Turner then refers to the minutes of the committee meeting on 10 th October 1990, which he attended, where it was reported by the Secretary that a further 60 shares had been bought in for cash by the club on behalf of the trustees of the company's shares. He says that he believes that this was a purchase from current members, with money being donated to the club. He also refers to the minutes of a committee meeting of 14 th April 1997, which he attended as President, where reference was made to the fact that various members had given up their shares. He says that he believes that such shares were given up to the club, and transferred to its trustees. In the course of his evidence, Mr Turner related that he had never been allocated any shares in the company, nor did he know anyone who had been allocated any shares. At paragraphs 13 through to 18 of his witness statement, Mr Turner relates the genesis of, and the reasons for, the 1997 resolution. He explains that the sudden death of Mr Kay, coupled with the loss of the club and company records, caused difficulties for the running of both. He says that, although there are no records relating to the transfer of shares in the company predating 16 th September 1997, he has no reason to believe that any shares in the company were transferred to the club's trustees without the consent of their holders. He says that by 16 th September 1997, the club trustees held 380 of the 810 issued shares in the company. The vast majority of the remainder were held, he says, by the personal representatives of deceased members. As his understanding of the custom and practice of the club had been that such shares ought to have been transferred to the club's trustees, he considered that the failure to do so was an oversight. Certainly, he was not aware of any former member of the club who had refused to transfer his shares in the company to the trustees of the club. Mr Turner explains that during 1997, he discussed the absence of any articles of association with the directors of the company, a Mr Whitehurst and a Mr Shelmerdine, on a number of occasions. He recalls that advice was obtained from the company accountants, although he does not recall whether solicitors were also involved. The gist of the advice was that new articles of association had to be adopted; and that it would be appropriate for such articles to include provision for the automatic transfer of shares in the company by members of the club upon ceasing membership, as that, he says, merely recorded what had been the previous custom and practice. On 16 th September 1997, the directors of the company placed on record the notice of an extraordinary general meeting for the purpose of adopting new articles of association, incorporating a provision to that effect, which had been posted on 13 th August 1997. He confirms that all the members of the company were served with notice of the meeting, which was scheduled to take place on 16 th September 1997. Their names are said to appear next to the resolution itself. The list of names can be found at page 67 of the application bundle, volume 2. The names and addresses of various members are set out. The number of shares against each name varies from 10, to 15, to 20, and, in one case, 25. In the case of 350 of the shares, the holders are said to be the executors of named individuals, against whom addresses appear. In the case of 80 shares, the holders are stated to be named individuals, and, again, their addresses are given. The trustees of The Warrington Club are said to be the holders of 380 shares. Looking at the original typescript, and the manuscript amendments, the trustees would appear originally to have held 340 shares, but to have acquired two lots of 20 shares from each of Mr C W Whitehurst and Mr J Shelmerdine, officers of the club who feature in Mr Turner's evidence. It would appear from investigations undertaken by Mr Westwell that one of the named members, J Hamer, had died as long ago as 1964; and that the holding recorded in the name of the executors of H C Shaw related to a Mr H C Shaw who had died in 1973. In evidence, Mr Turner says that he was aware of J Hamer, although he never met him, and that 1964 would be about right for his death. He also recalled that H C Shaw had died in about 1973. Mr Turner said that there were quite a few names on the list which he had never met, although he was aware of them. He also said that he had never met much more than half the names on the list. He accepted that the list was very much out of date. He did not recall asking the accountants to prepare the list, and he could not remember the records from which the list was compiled. Mr Turner described Mr Kay as having been a very diligent man, who had been company secretary for well over 20 years; but he could not explain why Mr Kay had never asked for the shares of deceased members to be returned, either to the company or to the trustees of the club. He had never questioned the practice, which he said had existed, of such shares being returned. At paragraph 16 of his witness statement, Mr Turner says that on 16 th September 1997 he attended the meeting of the members of the company at which the resolution was proposed. Unfortunately, the minutes of the meeting do not record who attended. As company secretary, he had produced such minutes. As far as Mr Turner can remember, only the officers of the company and the trustees of the club attended the meeting. The adoption of new articles of association was not seen as being controversial, and he was not surprised that the members of the company whose names appear on the list to which I have referred at page 67 of volume 2 of the application bundle did not attend. As he recalls, the resolution was passed unanimously. He had not received, and he did not receive, any complaints from persons whose shares in the company would be affected, or from anyone representing the estates of deceased members. He says that as the trustees of the club had held only 380 out of the 810 issued shares in the company, the 1997 resolution would have been defeated if a significant number of the members had objected to the same. The resolution that was passed was to the following effect. First, that the company formally adopted table A as its articles of association, subject to the provisions of the memorandum of association and the following. Secondly: "Shares in the company may only be held by members of The Warrington Club. Any shareholder ceasing to be a member of the club must, within 30 days of ceasing to be a member, return their shares to the trustees of the club at par value. Any shares not returned within 30 days are forfeited and revert automatically to the trustees". Those resolutions were explained in a note that had formed part of the notice of the extraordinary general meeting that was sent out on 13 th August 1997. The purpose of the meeting was said to be to vote on that special resolution, amending the company's memorandum of association. The note recorded as follows: "1. It has always been accepted by members of the company since its formation that they would return their shares in the company upon ceasing to be a member of The Warrington Club. This has never been formally minuted, however, or specifically included in the company's memorandum and articles of association. In the interests of clarity and to ensure the continued smooth running of the company, it is considered appropriate by the trustees that this should be included as a clause within the memorandum and articles of association. 2. Table A already forms the company's articles of association. This is because the Companies Act states that in the absence of any formal articles, Table A is deemed to apply. The formal adoption of table A, therefore, makes no changes to the current position of the company, except to facilitate adoption of the extra clause included in the attached resolution". I interpose to say that it seems to me that, since the company had been incorporated in 1906, it is the articles of association which took effect from 1 st October 1906 which, in fact, properly governed the affairs of the company until the resolution was passed to adopt Table A of the 1985 articles. At paragraph 17 of his witness statement, Mr Turner relates that, as a trustee of the club, he was a party to the passing of the 1997 resolution. He voted in favour of it because he believed that the same accorded with the custom and practice of the club as he explained them. He also believed that the 1997 resolution was for the benefit of both the club and the company. He did not see the two as having different interests. Indeed, he was both President of the club and Company Secretary of the company at the time. To his mind, the company existed for the purposes of providing premises for the club. He did not consider, at that time, the possibility that the premises would be sold, and that the proceeds of sale would need to be distributed. To his mind, there seemed little benefit to the company in having shareholders with no link with the club. At paragraph 18 he relates that, as can be seen from the list of members at the time of the 1997 resolution, the vast majority of the shares in the company were held by the personal representatives of former members of the club. Following the passing of the 1997 resolution, such shares were transferred to the trustees of the club. Other shares were transferred in due course when the relevant shareholder ceased to be a member of the club. Since 8 th December 1997, the trustees of the club are said to have held all of the 810 issued shares in the company. A copy of the share register is not available, but a copy of a summary of information from the company's annual returns is exhibited, and appears at pages 86 and 87 of the application bundle. The document at page 86 is a letter from the company's accountants recording the results of their examination of the annual returns obtained from Companies House. The summary of that information records that both at 24 th September 1986, and at 8 th December 1989, the trustees of The Warrington Club held 190 shares. During the year ended 8 th December 1990, a further 60 shares were transferred. During the year ending 8 th December 1996, a further 70 shares were transferred. Thus, it would appear that, as of 8 th December 1996, according to the annual returns, the trustees held 320 shares, although the schedule of members which accompanied the special resolution records the trustees of The Warrington Club as holding 380 shares. It may be that 40 of the unidentified shares are represented by the shareholdings of Mr Whitehurst and Mr Shelmerdine; but that still leaves a further 20 shares unaccounted for. However, by the year ending 8 th December 1997, all 810 shares were apparently held by the trustees of The Warrington Club. In the course of his cross-examination, Mr Turner indicated that it would be fair to say that the club's prospects had been less than rosy in 1997. He said that among the members generally it was known that the club was not as successful as the members would have hoped. In the course of his cross-examination, Mr Turner was asked whether, if the custom and practice had not been as Mr Turner had thought, he would still have supported the resolution. His answer was that he would have thought it appropriate to discuss the matter further, and he would presumably have taken advice from the company's accountants. The thrust of Mr Turner's evidence in cross-examination was that no one, other than members of the club, had ever wanted the shares. His support for the resolution was based upon his understanding and belief as to the custom and practice, and he could not say whether or not he would have supported the resolution if there had been no such custom and practice. In answer to questions from the bench, Mr Turner indicated that Mr Sowerbutts had been about 70 at the time of his death in 1990. In 1997, Mr Shelmerdine would have been 77, and Mr Charles Whitehurst perhaps 80 years of age. Mr Turner accepted that they would not have been born when the new company had come into existence in 1906. Mr Turner also clarified that the price that had been paid for the shares of Mr Shelmerdine, Mr Whitehurst and others, which had been acquired by the trustees, had been their par value of £1 per share, making £20 for each group of 20 shares. In his evidence, Mr Faulkner accepted Mr Turner's evidence that the prospects for the club were far from rosy in 1997. He indicated that if any member ever asked about the limited company, they were told that it was nothing to do with them. Mr Faulkner had first heard about the custom and practice when he had been a member of the club for some time. He had been told about it either by Mr Shelmerdine or by Mr Robert Kay. They told him that it had always been like that, and he had never questioned it. He did not think that that had necessarily been understood by all the members of the club. He said that he had always seen the point of the custom and practice; that was that shares should not end up in the ownership of someone who was not a member of the club. The club committee had been very keen to see that outsiders had no influence on the club. He did not think that anyone who was not a member of the club would have been interested in what was going on in the limited company. He reiterated that if one left the club, one was expected to give up one's shares in the company because they were only available to members of the club. He, too, could not explain why Mr Kay had not recorded or compelled transfers of the shares to the club trustees from the personal representatives of deceased members. Mr Turner deals with the dissolution of the club, and the sale of its premises, at paragraphs 19 to 21 of his witness statement. He then addresses the issues raised in the claim at paragraphs 22 through to 25. Finally, he addresses the identity of the original defendants at paragraphs 26 to 28. As I have indicated, there was no challenge in cross-examination of either Mr Turner, or Mr Faulkner, to their good faith in participating in the passage of the 1997 resolution. Against that factual and evidential background, I turn to the submissions. Both counsel produced written skeleton arguments. In the case of Mr Kelly, his is dated 7 th December 2011; and that of Mr Smith is dated 8 th December 2011. Mr Smith addressed me for just over an hour on the afternoon of the first day of the hearing, Monday, 19 th December 2011; and Mr Kelly addressed me for a little over half an hour this morning, Tuesday, 20 th December 2011. According to Mr Kelly, the first issue to be determined is whether the 1997 resolution is rendered invalid under the principles set out in the Allen v Gold Reefs of West Africa Limited case. He says that that involves three issues. First, whether the trustees of the club, being minority shareholders in the company, were under an obligation to exercise their voting rights in accordance with the Allen v Gold Reefs of West Africa Limited principle. Secondly, if this were the case, whether they did exercise their voting rights in accordance with that principle. Thirdly, whether the effect of any breach would have been to render the 1997 resolution void, or voidable, at the instance of the members affected. The claimants' case is that the trustees were not obliged to exercise their voting rights in accordance with the Allen v Gold Reefs of West Africa Limited principle for two reasons. First, that they held a minority of the issued shares in the company, and the Allen v Gold Reefs of West Africa Limited principle only applies to the majority using a power to amend articles to its advantage, and to the disadvantage of the minority. Secondly, that the 1997 resolution was not, in substance, one to amend the articles, but merely one to clarify what the provisions of the articles in fact were. In any event, it is said that the trustees did exercise their voting rights in accordance with the Allen v Gold Reefs of West Africa Limited principle. The second and subsidiary issue to be determined is to whom payment of the net sale proceeds of the club property ought to be made. It is said that if the 810 shares in the company were held by the trustees of the club, then they form an asset of the club members. Rule 40 requires the club assets to be divided between the last members with five years of paid-up subscriptions. Mr Kelly developed those submissions in his written and oral submissions. I should, however, mention that Mr Kelly also has a fallback position: that even if the 1997 resolution were liable to be set aside under the Allen v Gold Reefs of West Africa Limited principle when it was passed in 1997, he submits that it would now be too late for the members affected to apply to the court for that resolution to be set aside. He makes the point that no complaint was made at the time when the 1997 resolution was passed, and that the trustees of the club have held all of the shares in the company since 1997. For all of those reasons, therefore, the claimants seek orders and directions as follows: First, a declaration that the 1997 resolution was valid. Secondly, a declaration that the 810 issued shares in the company are held for the benefit of the club members at the time of its dissolution in equal shares. I interpose to say that that must be a reference to those members who had been fully paid-up members for five years prior to the date of dissolution. Thirdly, a direction that the shares are to be vested in the claimants as trustees of the club. Fourthly, a direction that the claimants should procure the voluntary winding-up of the company. Fifthly, a direction that the dividend payable upon the company's winding-up should be paid as follows: First, that the claimants should be entitled to their costs, and the costs of such persons as they have agreed to indemnify, including Mrs Sowerbutts, on an indemnity basis; and, secondly, that the balance should be divided between the members of the club at the time of its dissolution, or their estates, as the case may be, equally. If the court were, however, to determine that the 1997 resolution was invalid, then the club trustees would be minority shareholders in the company. They would then seek an order for its winding up under section 122(1)(g) of the Insolvency Act 1986. In that event, 380 over 810 of the dividend payable upon the winding up of the company would be payable to the club trustees; and the liquidator would probably require a direction from the court as to what to do with the remainder. Mr Smith, for Mrs Sowerbutts, says that before addressing the central issue of the validity of the 1997 resolution, one has, first, to address two preliminary matters. The first is whether the 1997 resolution affects Mrs Sowerbutts, or the class of members, or former members, whom she represents; and, secondly, in the context of the resolution, who are 'the majority' and who are 'the minority' for the purposes of the alteration of the company's articles. As to the first of these issues, Mr Smith submits that the resolution is divided into three parts. The first sentence is a restriction that shares in the company may only be held by members of the club. Mr Smith, in the course of his oral submissions, described that part of the resolution as, effectively, aspirational, providing no mechanism for its achievement. It does not purport to link membership of the club to ownership of the shares. The second sentence applies to persons who are members of the club only. That is said to be because it states that a shareholder 'ceasing' to be a member must return their shares at par value within 30 days. Mr Smith points to the fact that that sentence does not address all of the matters needed to effect the object stated in the first sentence. It does not achieve a situation whereby shares in the company are only held by members of The Warrington Club. The third sentence, Mr Smith says, is a declaration that, where a person 'ceases' to be a member of the club, then any shares not returned by him will be forfeited, and revert automatically to the trustees. Mr Smith says that, on the date of the resolution, Mrs Sowerbutts, and those in a position similar to her, were not members of the club. The club rules do not provide for the automatic transmission of membership on death to a member's spouse. Indeed, it would appear that, at the time the resolution was passed, the club did not permit ladies to be full members; that appears only to have come later. Therefore, Mr Smith says, since she was not a member of the club, Mrs Sowerbutts, and those in a position similar to her, could not 'cease' to be members of the club. Therefore, he submits, the resolution does not bite upon her, or upon those in a position similar to her, and represented by her. Mr Smith acknowledges that it might be argued on behalf of the claimants that the first part of the resolution is sufficiently clear; but he submits that the effect of it, when read as a whole, is to permit a person in the position of Mrs Sowerbutts to become a member of the club. The lacuna is that no mechanism for this is provided. He says that the forfeiture provision in the latter part of the resolution only applies to persons who are members of the club as at the date of the resolution itself. It is prospective. That, he says, is confirmed by the note, where 'previous problems' are alluded to. He also says that the note that formed part of the notice of extraordinary general meeting was misleading or confusing, because it failed to explain fully the position of those persons in the position of Mrs Sowerbutts, and the class she represents. A shareholder receiving the notice might not appreciate, if his primary submission is wrong, that the notice was intended to operate retrospectively, as well as prospectively. In the course of his oral submissions, Mr Smith emphasised that the second sentence only addresses the position of a person who 'ceases' to be a member of the club; and the third sentence follows on from the second. It does not, in terms, require anyone who has already ceased to be a member of the club, or the personal representatives of a member who has already passed away, to do anything. Therefore, the resolution does not bite. On that footing, there would be no question of any expropriation of the shares of a person in the position of Mrs Sowerbutts, and those whose interests she represents; but the consequence would be that the trustees had wrongly appropriated their shares to themselves. The second of Mr Smith's preliminary issues was to identify who is 'the majority' for the purposes of the Allen v Gold Reefs of West Africa Limited principle. Mr Smith relies upon the provisions of regulation 23 of the 1906 articles, and the corresponding regulation 31 of the Table A articles. He says that no personal representatives of any deceased member were entitled to vote on the special resolution. Thus, he says, whether or not they realised it, the trustees were, at the time of the resolution, the majority shareholders, numerically and in terms of their ability to vote. Thus, he says, the resolution falls squarely within the Allen v Gold Reefs of West Africa Limited principle. Mr Smith, during the course of his oral submissions, accepted that, if there had been a previous custom or practice as to the transmission of shares to the trustees of the club upon a member ceasing to be such or passing away on death, then it would be difficult to establish that the special resolution altering the articles to give effect to that custom or practice constituted a fraud on the minority, falling within the Allen v Gold Reefs of West Africa Limited principle. However, he disputes that there was sufficient evidence of the existence of any such previous custom or practice. He submits, for the reasons he gives at paragraphs 24 to 26 of his written skeleton submission, that the available evidence on the issue is contradictory, and/or is opaque, at best. He says that it may be the case that in a members' club, a departing member may have been requested to transfer for nil, or par, value, or may have been charitably disposed to do so; but he submits that that is significantly different from a custom that there was a requirement to do so, made clear to all incoming members. He also submits that the majority cannot assert an erroneous belief as a justification for the resolution. He points to the fact that, when you look at the number of members against whom the description "executors of" appears in the list of members, and when one adds to that the fact that certain of the persons whose names alone appear there would already appear to have been dead, then clearly there cannot have been any practice or custom of transferring the shares of a deceased member to the trustees. He says that the existence of such a practice or a custom is squarely contradicted by the terms of the list of members itself. Mr Smith then goes on to criticise the resolution, and to challenge its validity. He submits, in summary, that there was a simple expropriation of shares at nil value; that there was no, or no sufficient, business purpose benefiting the company as a whole; and that the expropriation was disproportionate. He submits that, if there were administrative difficulties, no alternative steps were taken to address them, such as by checking addresses, writing to the personal representatives of deceased members, and so forth. He emphasises that the list of members is comparatively short, and that to have done so would not have constituted an unduly onerous burden. It would have had the effect of flushing out those who might have wished to retain their right to be registered as members, and those who did not. He emphasises that no steps were apparently taken to validate the addresses of any of the recipients of the notice of the meeting. He says that there is no good reason requiring the ownership of the company to be in the hands of members of the club. He submits that, not only were there alternative methods for resolving the issue, but that there was no benefit for the company as a whole from the arrangement created by the special resolution. He says that the company secures no, or no material, benefit from concentrating the ownership of shares in the club trustees. He submits that the only really bona fide justification for the resolution would be where it was clear that there was a custom, explained to all incoming members, that there was a requirement upon them, or their estates, to surrender the shares, at nil (or par) value, upon death or upon otherwise ceasing to be a member. He submits that the claim for this is contradicted by the documentary evidence. Had the custom existed, efforts would have been made to contact those who represented the estates of deceased members, and yet no such efforts were made. Absent proof of the asserted custom, he submits that the test postulated by the Allen v Gold Reefs of West Africa Limited principle is unsatisfied; and the court is entitled to, and should, draw an adverse inference that the exercise of majority power was inconsistent with its exercise in good faith. As members of the club, the trustees had a clear personal interest, and, indeed, subsequently secured collateral benefits from the effect of the resolution, and new shares do not appear to have been allocated to any new members joining the club. Finally, Mr Smith denies that there has been any laches or acquiescence sufficient to deny relief. Any prejudice to the club, or to the company, stemming from the loss of records stemmed from the loss of records prior to the resolution, and not from the delay subsequent to its passage. He points to the failure to identify any specific grounds of acquiescence, or any specific prejudice. At the end of his oral submissions, Mr Smith emphasised that, if there was no custom or practice for the transfer of shares to the trustees of the club upon a member ceasing to be such or passing away, then it would be very difficult to justify the expropriation of the shares of such a person; no reasonable person could say that the expropriation of such shares was justified. The resolution conferred no benefit upon the company itself, as distinct from those represented by the trustees of the club; and it disadvantaged the class of persons represented by Mrs Sowerbutts. At the end of his address, I raised with Mr Smith the provisions of the principal objects clause of the 1906 company's memorandum of association. In answer to that, Mr Smith submitted that, whilst the purpose of the company may have been to acquire, and to hold, a particular property for the club, there was no justification for the attribution of its value to the members of the club, represented by their shares in the company. There was no necessary nexus between the ownership of the company, and the club's occupation and use of the club premises. It did not promote the club as a going concern, or as a venue for social recreation, for the ownership of the shares in the company to be concentrated in the hands of the club trustees, on behalf of its members. The memorandum of association was said to be focused upon the occupation of the premises and the good, orderly management of the club. Those considerations were not necessary, nor were they sufficient, to justify the expropriation of the shares in the company, or the untrammelled and uninhibited use of monies generated by the realisation of the club's premises for the exclusive use of the last members of the club, and to the exclusion of the club's former shareholders. In short, he said, the memorandum of association of the 1906 company should not justify overriding the proprietary rights of the shareholders at the time of the 1997 resolution. Those were the submissions. I agree with Mr Smith that the starting point must be to construe the 1997 resolution. In my judgment, the overarching principle appearing from the resolution is to be found in the first sentence. It is expressed in peremptory terms, and as an imperative. "Shares in the company may only be held by members of The Warrington Club". The second sentence is, in my judgment, subsidiary to that. It is intended to achieve the effect that shares in the company are only held by members of The Warrington Club. It provides that any shareholder ceasing to be a member of the club must, within 30 days of ceasing to be a member, return their shares to the trustees of the club at par value. I agree with Mr Smith that that provides a mechanism which only goes part of the way to achieving the imperative expressed by the first sentence. I agree that, as a matter of language, it is prospective and not retrospective; it only applies to shareholders who cease to be members of the club. It requires such persons within 30 days of ceasing to be a member to return their shares to the trustees of the club at par value. If one disregards the imperative expressed in the first sentence, then it might be possible to construe the third sentence as being entirely subsidiary to, and dependent upon, the second sentence. On that basis, any shares not returned within 30 days of a person ceasing to be a member, and only shares not so returned, would be forfeited, and revert automatically to the trustees. But in my judgment, one must read the resolution as a whole. One must have regard to its clear, underlying commercial purpose. In my judgment, the overarching requirement of the special resolution is to ensure that shares in the company may only be held by members of The Warrington Club. On that footing, it seems to me permissible to read the third sentence as being capable of general application. In the case of someone who, in the future, ceases to be a member of the club, they must return their shares within 30 days of ceasing to be a member; and, if they do not do so, then those shares are forfeited, and revert automatically to the trustees. However, in the case of someone who has already, at the date of the resolution, ceased to be a member of the club, then it seems to me possible to construe the third sentence as requiring the return of their shares within 30 days of the date of the resolution; and, if such shares are not returned within 30 days of the date of the resolution, then those shares are forfeited, and revert automatically to the trustees. It seems to me that that is the clear intent of the resolution, when read as a whole, rather than reading it broken down into its constituent sentences. Thus, it seems to me that, contrary to Mr Smith's preliminary submission, the resolution, on its true construction, did extend to shares held by someone as personal representative of a deceased member, whose death occurred prior to the passage of the special resolution. Indeed, there would be no sense in distinguishing between former members who had died before the passage of the special resolution and existing members who died thereafter, particularly given, first, the terms of paragraph 1 of the note, which formed part of the notice of the extraordinary general meeting, and, secondly, the fact that so many of the persons identified in the list of members were expressed to be the executors of named persons. On Mr Smith's construction, none of those executors would be affected by the terms of the resolution itself. That, it seems to me, would fly in the face of the evident purpose of the resolution. Therefore, on that construction, it does seem to me that there is an element of expropriation. Although the trustees of The Warrington Club only held 380 shares out of the 810 issued shares, it does seem to me that, for the potential application of the Allen v Gold Reefs of West Africa Limited principle, they should be treated as a majority. The reality is that, of those who were likely to attend and vote, only the trustees of The Warrington Club, and any then remaining shareholders who were existing members of the club, would be likely to turn up and vote. None of the executors would be in a position to vote in accordance with the terms of the articles of association unless they first secured their entry on the register of members. Therefore, it does seem to me that, in principle, the Allen v Gold Reefs of West Africa Limited principle is engaged. So far as the existence of a practice that any shareholder, who ceased to be a member of the company as a result of death, would have their shares returned by their personal representatives is concerned, it does seem to me that the fact that so many executors of named persons are mentioned in the list of members at page 67 of the application bundle, volume 2, does tend to contradict the existence of such a custom and practice. Mr Kelly submits that the court should infer from the evidence that, on death, share certificates were handed over to the secretary, Mr Kay, but that he simply failed to process the recording of the transfer of those share certificates into the names of the trustees of The Warrington Club. In my judgment, the evidence does not justify such an inference. What, however, the evidence does justify is this finding: that it would appear that executors of deceased members did not take any active steps to secure either their registration as members of the 1906 company, or to procure the transfer of the shares of a deceased member to a beneficiary of that member's estate. Once again, if that were done, one would expect to see it reflected in the list of members at page 67. Therefore, I am left with a situation in which I am not satisfied that there was any custom or practice that the executors of a deceased member would transfer their shares to the trustees of the club at par value; but I am also satisfied that there was no practice that such persons would secure their own registration, or the registration of a nominee or beneficiary, as the holder of the relevant shares in place of a deceased member. Where does that leave the position? Mr Kelly submitted that the real issue is not whether there was a practice as a matter of fact, but whether those who voted for the 1997 resolution genuinely believed that there was such a practice. I accept that submission. I am satisfied, particularly since there was no challenge to the existence of such a belief on the part of either Mr Turner or Mr Faulkner, or those who were associated with them in the passage of the resolution, that they did genuinely believe that there was a practice in the terms set out in paragraph 1 of the notes to the notice of the extraordinary general meeting. I accept that they genuinely believed that it had always been accepted by members of the company, since its formation, that they would return their shares in the company upon ceasing to be a member of The Warrington Club. The law in this area, and for the purposes of the instant case, which does possess novel features, seems to me to be clear. As explained at paragraphs 5.25 and following of the sixth edition of Hollington's Shareholders' Rights , in exercising their votes in a general meeting shareholders are exercising a right of property, which they are free to do in their own personal interests, regardless of whether it is in the interests of the other shareholders. As Mr Justice Jonathan Parker said in the case of Re Astec (BSR) Plc [1998] 2 BCLC 556 at 584 C-D: "The starting point is the proposition that in general the right of a shareholder to vote his shares is a right of property which the shareholder is free to exercise in what he regards as his own best interests. He is not obliged to cast his vote in what others may regard as the best interests of the general body of shareholders, or in the best interests of the company as an entity in its own right". That general principle, however, is subject to equitable constraints. Equity can grant relief under its doctrine of fraud on the minority where majority shareholders, or those in the position of a majority, as in the present case, abuse their powers in varying the articles of association so as, for example, to enable a minority shareholding to be expropriated by the majority. The test traditionally applied in equity is that the majority must exercise their voting rights to change the articles in good faith for the benefit of the company as a whole. As Mr Hollington points out at paragraph 5.32, by reference to the recent decision of the Privy Council in Citco Banking Corp NV v Pusser's Limited [2007] UK PC 13 , reported at [2007] 2 BCLC 483 , in this context one can distinguish between two different types of case, depending on the form and the effect of the alteration of the articles in question. The first type is the case where the company, as a corporate entity, has an interest in the alteration in the company's articles, so that it is perfectly rational to ask whether the alteration is in the interests of the company as a whole; and the second type of case is where it has no such interest, because the interests affected are those of the shareholders themselves, rather than the company. In the first category, the alteration is justified, if at all, as a way of ensuring the long term financial stability of the company. In the second category, the case involves alterations affecting matters such as the power to dispose of shares. The instant case, in my judgment, straddles both of these limbs. First, it seems to me, that the proposed alteration is one that was effected in the interests of the company as a whole; but, secondly, it was one that also affected the power of former members of the club, and their personal representatives, to dispose of their shares in the company. In my judgment, the applicable test, as Mr Smith submitted, is that recorded in the third paragraph at paragraph 6.16 of Gore-Browne on Companies : "The critical test is whether it is possible for reasonable men in good faith to come to the conclusion that a measure which necessarily discriminates against the minority is nonetheless for the benefit of the company as a whole. As it was put in Sidebottom v Kershaw, Leese & Company Limited [1920] 1 Ch 154, the majority may not sacrifice the interests of the minority without any reasonable prospect of advantage to the company as a whole". The special feature of the present case is that, as Mr Smith recognised in his submissions, this company is not a trading company, nor even a property holding company, which operated with a view to profit. In my judgment, the application of the Allen v Gold Reefs of West Africa Limited principle has to be governed by, and subordinated to, the objects for which the company was established, and which it exists to fulfil and promote. I have already recited the principal objects clause in the memorandum of association of the 1906 company. It was, effectively, to promote the interests of The Warrington Club and its members. The Allen v Gold Reefs of West Africa Limited principle has to be applied with that very much in mind. It is in that context that one must seek to apply the observations of Lord Justice Scrutton at pages 23 to 24 of Shuttleworth v Cox Brothers and Company (Maidenhead) Limited [1927] 2 KB 9. "Now when persons, honestly endeavouring to decide what will be for the benefit of the company and to act accordingly, decide upon a particular course, then, provided there are grounds on which reasonable men could come to the same decision, it does not matter whether the Court would or would not come to the same decision or a different decision. It is not the business of the Court to manage the affairs of the company. That is for the shareholders and directors. The absence of any reasonable ground for deciding that a certain course of action is conducive to the benefit of the company may be a ground for finding lack of good faith or for finding that the shareholders, with the best motives, have not considered the matters which they ought to have considered. On either of these findings their decision might be set aside. But I should be sorry to see the Court go beyond this and take upon itself the management of concerns which others may understand far better than the Court does". Then skipping over a few words: "I can only say, if Peterson J [in Dafen Tinplate Company Limited v Lianelly Steel Company (1907) Limited [1920] 2 Ch 124] means that, whatever the honest decision of the shareholders may be, it is the opinion of the Court, and not that of the shareholders, which is to prevail, I disagree with that interpretation of the words of Sir Nathaniel Lindley MR in Allen's case. If the learned judge merely means that the Court will interfere where the decision of the shareholders, though honest, is such that no reasonable men could have come to it upon proper materials, I do not object to that explanation, and I should be prepared to act accordingly…" I have to ask whether it has been demonstrated by Mrs Sowerbutts that no reasonable men could have concluded that the special resolution was conducive to the benefit of the company, bearing in mind the purposes for which that company was established, and which it existed to fulfil and promote. In my judgment, this is a case in which the shareholders who voted for the 1997 resolution were clearly entitled to take the view that it was for the benefit of the company. There was a clear interest in ensuring that those who were not members of the club had no influence upon the club's affairs. As Mr Faulkner recognised in the course of his evidence, if there were no restriction upon membership of the company, which owned the club's premises, to members of the club, then there would be a risk that, in the course of time, control of those premises would pass out of the hands of those who were members of the club, and into the hands of "outsiders". There might well come a point when the company, under the control of such outsiders, might seek to terminate the terms upon which the members of the club might continue to occupy the property, or to impose disadvantageous terms upon such continuing occupation. So far as those who were still members of the club were concerned, there was a clear interest in ensuring that, should any of them cease to be members, then that would not endure to the detriment of those who continued to be members. It seems to me also that those who represented deceased members at the time of the passage of the resolution could not properly complain if their shares were effectively expropriated at par value, given the express objects of the company in which those shares existed. Therefore, in summary, I find that the Allen v Gold Reefs of West Africa Limited principle is engaged; but that it was not infringed on the facts of the present case, bearing in mind the peculiar nature of the company in which the shares existed. For those reasons, I accede to the claimants' application; and I shall grant the relief sought by Mr Kelly, although in terms of references to "final members", it must be restricted to those who had been fully paid-up members for five years prior to the dissolution of the social club. THE JUDGE: Yes, Mr Kelly? MR KELLY: They all were, all of the 51 final members. THE JUDGE: Well, yes, but I do not know if there are any others outside the 51 who are not so— MR KELLY: All right. Well, I can alter the order, but I think that the 51 members who were there at the end had all paid their five years' subscriptions. THE JUDGE: Yes. Yes, certainly that is the evidence, but what I do not know is whether there were other members who had not been there for five years. MR KELLY: No, I think that was the problem with the club— THE JUDGE: Yes. MR KELLY: —there were no people— THE JUDGE: No. MR KELLY: —who joined at the end. THE JUDGE: No. Yes, I do not actually have a draft order…. [Handed up.] Thank you. Yes, well, apart from the insertion of my name, I think that the only amendment should be that after the definition of the club should be inserted the words "who were fully paid-up for a minimum of five years" before the words "at the time of its dissolution on 19 th September…" etc; but other than that it seems to me that the order is appropriate. Mr Smith, do you have any observations? MR SMITH: No, my lord. THE JUDGE: Are there any further applications? You have dealt with the costs in paragraph 3 of the order, are there any other applications? MR SMITH: No, my lord. THE JUDGE: Well, can I thank both of you for what have been helpful submissions in an interesting case. Can I return, I think, everything to Mr Kelly, although I will retain the skeleton arguments in the court file. Could I ask you, Mr Kelly, just to lodge a clean copy of the order? MR KELLY: Yes, my lord. [The lights dim.] THE JUDGE: It looks as though they have decided that our time is up anyway. MR KELLY: I have got some change for the meter. THE JUDGE: It probably takes Euros these days. All right, that is the court file. I have put the order at the front and Mr Kelly will lodge a revised copy— THE COURT CLERK: Thank you. THE JUDGE: —and those can go back to Mr Kelly's solicitors. As I say, I do thank you both for your submissions in the matter. [Court adjourns] BAILII: Copyright Policy | Disclaimers | Privacy Policy | Feedback | Donate to BAILII