England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM MR JUSTICE MANN

		Royal Courts of Justice Strand, London, WC2A 2LL
		19/01/2006

Sir Martin Nourse:

1. On 22^nd April 2005 Mr Justice Mann made an order in proceedings brought under section 359 of the Companies Act 1985 for the rectification of the register of members of the first defendant, Charles Building Services Ltd ("CBS"). The order contained three declarations, of which the first was to the effect that, on the incorporation of CBS in 1994 and at all material times thereafter, the claimant, Steven Leslie Smith ("Steve") and his brother, the second defendant Terence Smith ("Terry"):

"intended that [Steve] should have a shareholding in [CBS], and [Steve] was legally entitled to the shareholding registered in his name."

The third declaration was to the effect that Steve was entitled to such orders as were appropriate in the circumstances to rectify the register of CBS, so as to restore his shareholding to the register. With the leave of this court, Terry appeals against those declarations and other relief granted by the judge's order.

2. Judgment was reserved after a six day trial in March 2005. The judgment is reported at [2005] BCC 513, to which reference should be made for the judge's full and careful statement of the background and facts (paragraphs 2 to 35) and his comments on the evidence and the credibility of the witnesses he had heard (paragraphs 37 to 47). It is unnecessary to revisit these matters in any detail. It is enough to restate the bare facts that are necessary for an understanding of the narrow point we have to decide.
3. Prior to the incorporation of CBS in 1994 Steve and Terry were the registered holders of 20% and 80% respectively of the shares in another company called Charles Contractors Ltd ("CCL"), a company which specialised in painting and decorating services. The day to day management of CCL was in the hands of Terry. Steve's role was that of supervising the financial side of the company's affairs. The formation of CBS in 1994 came about because Terry wished to expand the business into general building work. All relevant aspects of the formation of CBS were dealt with by Steve. He instructed agents to incorporate it. It was incorporated on 14^th November 1994, when Steve and Terry were each registered as the holder of one of the two subscribers' shares.
4. CBS did not start to trade until about February 1996. Again, the day to day management of the company was conducted by Terry and the supervision of its financial affairs by Steve. Unfortunately, as the judge said (paragraph 15), the relationship between the two brothers deteriorated. On 7^th October 1997 there was a meeting at which Terry presented Steve with a transfer of Steve's share to Terry, the transfer being thereupon signed by Steve. It was undated and no consideration appeared in it. It was common ground that later in the meeting Steve tore up the transfer. There was an acute conflict of evidence as to whether it had been signed unconditionally or not. Terry said that it had been. Steve said that he signed the transfer "in anticipation of discussing the level of dividend and discussing business generally." At the end of the meeting Terry took the torn pieces of paper away, and they were subsequently stuck together. The reconstructed transfer was then dated and presented for stamping and registration. It was registered accordingly.
5. The judge introduced his consideration of the status of the share transfer as follows (paragraph 61):

"It is common ground that if Terry is right about what happened at the meeting, so that Steve signed the transfer and handed it to him before turning to other business, then the transfer was complete and the claim for rectification fails. It is also common ground that if it was signed with words and/or conduct indicating that its final effect was to await some further discussion, then it was not complete and could not be treated as effective."

The judge, having then considered this question and the evidence relating to it at some length, concluded (paragraph 71) that the transfer of Steve's share was not completed and should not have been registered. There has been no appeal by Terry against that finding.

6. The question at issue in this court has been whether the judge's declaration (paragraph 1 above) that Steve and Terry intended that Steve should have a shareholding in CBS and that Steve was legally entitled to the shareholding registered in his name can be maintained. If it cannot, it is again common ground that the claim for rectification must fail.
7. The judge considered this question before he considered the status of the transfer; see paragraphs 55 to 60 of his judgment under the heading: "Was Steve supposed to have an interest in CBS?". In paragraph 55 he stated the question to be:

"whether Steve was intended by Terry (and himself) to have any shareholding in CBS at all."

At the end of that paragraph the judge observed that, if Steve should not have had the share in the first place, then it could be said that he should not make an order rectifying the register to restore it to him.

8. The passage in the judge's judgment which has been subjected to the closest scrutiny in argument is the first sentence of paragraph 56:

"On this issue I am satisfied that Steve was intended to have a shareholding, and he was entitled to the share that he had."

Mr Collings, for Terry, while accepting that he cannot complain of the first part of that sentence, submits that the judge's finding (in the second part) that Steve was entitled to 50% of the issued share capital of CBS cannot be sustained on the evidence and was wrong. Mr Collings says that the onus was on Steve to establish his entitlement and that he simply failed to do so, there having been no agreement or understanding that Steve should be the beneficial owner of 50% of CBS.

9. In my judgment Mr Collings' submission as to the second part of the first sentence of paragraph 56 is misconceived. If the judge's judgment is read as a whole, it is clear that he did not find that Steve was intended to be the beneficial owner of 50% of CBS. In paragraph 60 he said:

"I therefore find that Terry's case that Steve was not intended to be a shareholder in CBS is wrong and that Steve was intended to have such an interest. He did not act dishonestly in arranging for the initial shares to be held as to one each"

More significantly still, in paragraph 71 the judge referred to an acknowledgment by Steve in evidence:

"that while from a legal standpoint he had 50% of the company, from a moral standpoint he thought perhaps he should have 20% (a figure that he arrived at after a little thought in the witness box) ……

There are two possibilities. Either Steve is entitled, as a matter of law (and equity) to his share absolutely; or the facts are such that, at least in equity, he should only have 20% of the company at most (or perhaps some different percentage, less than 50%). If the former, then Mr Collings' suggestion fails. If it is the latter, then that has to be determined by someone. I cannot determine it on the material before me in this action and as this action is formulated. It can, if necessary and appropriate, be decided after rectification of the share register in the same way as it could have been decided had there never been any purported transfer of the share."

10. In my judgment the correct analysis of the position is as follows:

(1) Before the meeting on 7^th October 1997 the registration of Steve as the holder of one share in CBS was an existing state of affairs.

(2) The alleged transfer by Steve of his share to Terry having been found to have been invalid, the registration of that share in the name of Terry was equally invalid.

(3) In the circumstances, under section 359(1)(a) of the Act Steve had a prima facie right to have the register rectified by the restoration of the status quo, and the onus was squarely on Terry to show why that right should not be enforced.

(4) The judge no doubt had a discretion to refuse rectification if, for example, Terry could have shown that the original registration of Steve as the holder of a share had been procured by fraud or in some other improper manner.

(5) But nothing of that kind was found. On the contrary, it was found that the parties had at all material times intended that Steve should have a shareholding in the company and that was a sufficient basis for the judge to order, in the exercise of his discretion under section 359, that the register should be rectified so as to restore the status quo. Indeed, it is difficult to know what other order the judge could reasonably have made once he had made his finding as to the common intention. The rectification was necessary as the only means of implementing the intention that Steve should have a shareholding in CBS.

11. Mr Collings has submitted that the onus was on Steve to make out a case for rectification under section 359. That was perfectly correct. But once the judge had found that the transfer was invalid the onus shifted to Terry to establish some ground on which Steve's prima facie right to rectification ought not to be enforced. That he was unable to do.
12. It is plain that the judge recognised that he had a discretion under section 359 (see paragraph 71). It therefore seems clear that what he meant when he said that Steve "was entitled to the share that he had" was that he ought to exercise his discretion so as to restore the original registration, that being the only means of implementing the common intention. It is equally clear from paragraph 71 that he did not make any decision as to either party's share of the beneficial ownership of CBS.
13. There being no ground on which the judge's exercise of his discretion can be impeached in this court, I would dismiss this appeal.

Lady Justice Arden :

14. I gratefully adopt the succinct exposition of the facts and submissions set out in the judgment of Sir Martin Nourse. Like him, I will call the principal protagonists, Terry and Steve, and the company, CBS. Although I have come to the same conclusion as Sir Martin Nourse I do so, with respect, for different reasons. This is because I read the first sentence of paragraph 56 of the judge's judgment set out by Sir Martin Nourse at paragraph 8 of his judgment as containing two separate findings which are, in fact, interdependent. The first finding was that Steve should have a shareholding. The second finding was that the shareholding should be one share. Both these issues are within the issue described by the judge in paragraph 55 of his judgment as the first issue, namely whether Steve should have a shareholding. (The second issue is not formulated but by implication was whether Steve executed an unconditional transfer of his share). The opening sentence of paragraph 56 of the judge's judgment shows that the judge considered that both findings were required to enable him to answer the first issue. This means that it is not in my judgment a sufficient basis for upholding the judge that he came to the first finding if the second can indeed be challenged. It is therefore that question that I need to consider.
15. The name of Steve was entered as a holder of one share in the register of members of the Company in 1994. His name was improperly removed from that register in 1997 and, accordingly, as Sir Martin Nourse holds, Steve had a prima facie right to have the register of members rectified in order to restore the status quo ante.
16. The judge summed up the dispute between the parties in the fourth sentence of his judgment: "Terry says Steve should not have had a share."

At the end of paragraph 55 of his judgment, he held:

"It could also be said that if [Steve] should not have had the share in the first case, I should not make an order rectifying the register to restore it to him."

17. In my judgment, that would be a correct statement of the way in which the discretion under section 359 of the Companies Act of the Companies Act 1985 should in general be exercised. However, it does not follow that simply because it is Steve who brings these proceedings that he should have the onus of proving that he was entitled to be on the register before his name was removed. If Terry, having taken the law into his own hands, presents for registration a transfer of Steve's share without Steve's authority, and subsequently contends that Steve should not have had a share in the first place, then, contrary to the submission of Mr Collings, he has the burden of making good that contention.
18. Steve's case was that it was always intended that he should have a shareholding in CBS but Terry's case is that it was never agreed between them what that shareholding should be and that accordingly Steve cannot show that he was entitled to be the holder of one share as the judge held. Terry's case is further that Steve's name had been entered into the register by the unilateral act of Steve, that is without the authority of himself as the sole director of CBS. Mr Collings submits on his behalf that there was no agreement as to the precise number of shares that each should hold. Until that number was fixed, there was no agreement that was sufficiently certain to be enforced.
19. Mr Collings seeks to make good his argument that the agreement between Terry and Steve as to the allocation of shares was too uncertain to be given legal effect by posing the following example. He submits that, if Terry had organised the incorporation of CBS and caused the registration of both shares into his own name, Steve would not have been able successfully to claim that one of those shares should be registered in his name because there was no enforceable agreement that this should happen. In my judgment, this example does not prove the validity of his submission. If Terry had registered both shares in his own name without the authority of Steve, and Steve was the sole director, Steve would be able to bring a claim for the rectification of the register of members, unless, that is, he ratified Terry's acts.
20. However, in this case the judge found that after Steve entered the names of Terry and himself in the register of members as the holder of one share each, Terry learned about that registration and took no steps to object: see, for example, paragraph 56(vi) of his judgment. In those circumstances, in my judgment, the judge in effect found that Terry had ratified the entry of the names on the register. Accordingly, the mere fact that there had been no antecedent enforceable agreement ceased to be of any operative effect.
21. Accordingly, like Sir Martin Nourse, I conclude that the judge was right to hold that the register of members should be rectified by the restoration of Steve's name as the legal owner of one share.
22. The judge went on to make a declaration as to the legal ownership of the disputed share with retrospective effect. The court is entitled to make an order for rectification of the register with effect from a past date either under section 359 of the Companies Act 1948 or in other rectification proceedings but in general it would not do so if the rights of third parties were prejudiced (Re Sussex Brick Co Ltd [1904] 1 Ch.598). The rights of third parties could be prejudiced if a resolution had been passed at a general meeting of CBS of which notice had been given to members whose names were then on the register and the register were rectified with effect from a date prior to that notice. In these circumstances, the court has to take care that the order is in suitable terms. Here rectification has not yet taken place pending any submissions made by Mr Paxton who had, in fact, acquired shares in the meantime.
23. I accept that the position is unsatisfactory. Even if Steve is registered again as the holder of one share in CBS, the beneficial ownership of that share is unresolved. It is Terry's case that there was no agreement as to what that beneficial ownership should be and on that basis the beneficial ownership will remain in limbo until an agreement is reached or some other step is taken. Difficulties may arise with respect to the exercise of the rights attached to the share. Nonetheless I agree that this appeal must be dismissed.

Lord Justice Waller:

24. For the reasons given by Sir Martin Nourse I would dismiss the appeal. Mr Collings (as I understand it) accepted in argument that if the onus was on his client Terry to establish that Steve had no right to be on the register, he could not succeed on the appeal. In agreement with both judgments my view is that once the judge held the transfer was invalid, the onus was on Terry. In those circumstances the appeal cannot succeed and I do not find it necessary to express any view on ratification.