England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		6/11/2008

Mr Timothy Brennan QC (sitting as a Deputy Judge of the High Court) :

1. There is before the Court the trial of the single issue which remains outstanding in litigation between the Claimant and the First Defendant. The substantive issues concerning the Second to Fifth Defendants were disposed of by His Honour Judge Waksman QC, sitting as a Judge of the High Court, on 14 March 2008 and none of those individuals has taken part in the proceedings before me.
2. The First Defendant, Morshead Mansions Limited (MML), was incorporated on 2 September 1992 specifically to acquire the freehold of Morshead Mansions, a block of 104 flats in Maida Vale, London W9; it has since 11 December 1992 been the freehold owner. Its nominal share capital is £104 divided into 104 £1 shares. The intention of its promoters, reflected in its Memorandum and Articles of Association parts of which I quote below, was that the long lessee(s) of each flat would each subscribe for a single share in MML and that, on assignment of the lease of any given flat, the relevant share would be transferred to the assignee. In the event 100 (not 104) of the lessees duly subscribed for shares.
3. The Claimant, Mactra Properties Limited (Mactra), is a Guernsey property investment company. Since March 1994, when Mr Brian O'Boyle bought out the shares of five individuals including Mr David Wismayer, Mactra has been beneficially owned by Mr O'Boyle; it has at all relevant times owned long leases on a number of flats in the block; until 19 June 2002 it owned as many as 25 such leases. It owned 25 shares, and was registered as their owner.
4. On 19 June 2002 Mactra assigned to the Second and Third Defendants respectively the leases of flats 22 and 29. By letter of 29 August 2002 solicitors acting for those Defendants lodged share transfer requests with MML. In a letter of 5 September 2002 signed by Mr M R Crowther, at that time the sole director of MML, registration of the transfer was refused in the following terms:

"As to the share transfers, we regret to inform that the company is not in a position either to register any transfer of the said share [sic] or to issue new share certificates in favour of your clients. The reason for this is that your clients' predecessor in title, Mactra Properties Limited, remains indebted to the landlord company under the provisions of the company's Articles of Association in the amount of £7,401.67 in respect of each of the two flats. Until the aforesaid debts are discharged, the company will not register a transfer of the relevant share [sic] to your clients."

5. The Second and Third Defendants subsequently assigned their leasehold interests in the flats to the Fourth and Fifth Defendants respectively. Once all sums due to MML from Mactra were paid, as eventually they were, registration of the shares was effected; the Fourth and Fifth Defendants, to whom the leases of the relevant flats had by then been assigned, were registered as members of MML on 28 October 2005. Accordingly, although at one time relief was sought by Mactra under the Companies Act 1985 s 359 (rectification of the register) the need for any such relief has gone.
6. The single issue remaining for determination is whether, in refusing to register the transfers of the shares in September 2002, the Board of MML was acting in bad faith; Mactra contends that I should draw from the circumstances the inference that it was and make a declaration to that effect. No further relief is sought and, as the case was presented to me, such a declaration would if made be relevant only as to costs.
7. The legal principle is not in dispute. Article 8 of MML's Articles of Association empower the directors to refuse to register any transfer of shares. That discretionary power is to be exercised bona fide in the interests of the company. Those interests are to be judged by the directors and not by the court: see the observations of Lord Greene MR in In re Smith and Fawcett, Limited [1942] 1 Ch 304

"[The directors] must exercise their discretion bona fide in what they consider – not what a court may consider – is in the interests of the company, and not for any collateral purpose [at 306] …

The question, therefore, simply is whether on the true construction of the particular article the directors are limited by anything except their bona fide view as to the interests of the company [at 308]"

8. The Memorandum of Association of MML provides:

"3. The Company's objects are:-

(A)(i) To undertake the management and administration of flats… and to provide such services for the tenants and residents thereof and to carry out such reconstruction renewal repairs maintenance or renovations thereto as may be necessary or desirable.

(ii) To manage any land buildings or other property and to collect rents and income and to supply to lessees residents tenants occupiers and others heating lighting cleaning gas water and electricity and other services … "

The Articles of Association then provide, after various definition provisions which refer to Clause 3(A) of the Memorandum, as follows

MEMBERSHIP

…

4. (A) The Shares of the Company shall only be allotted or transferred to a person … who at the time of such allotment or transfer shall be a Dwellingholder [ie, a lessee].

…

6. (A) If any Dwellingholder parts with his interest in the dwelling held by him … he … shall transfer his Share in the Company to the person or person becoming Dwellingholder of the said dwelling in his place.

…

8. The Directors may refuse to register any transfer of Shares and shall so refuse in the case of any transfer made in contravention of the foregoing provisions..

…

EXPENSES

16. The Directors may establish and maintain capital reserves, management funds and any form of sinking fund in order to pay or contribute towards all fees, costs and other expenses incurred in the implementation of the Company's objects, may require the Members to contribute towards such reserves or funds at such time, in such amounts and in such manner as the Members shall approve by ordinary resolution passed in general meeting and may invest and deal in and with such monies not immediately required in such manner as they shall from time to time determine.

9. So the scheme is that only lessees will be shareholders, that on a transfer of a lease the share will be transferred to the new lessee (unless the Directors refuse to register any transfer) and that the Company may resolve in general meeting to require its shareholders to contribute funds for the purposes of the Company's objects, which include the management of flats.
10. There was, of course, another means by which MML could recover the costs of maintenance. In the usual way, the leases on which each of the flats are held contain covenants to contribute to costs and sinking funds by way of service charge. I was not referred to the terms of any particular leases (which were in fact not all in precisely the same terms, some having been granted later than others) and it was not suggested that anything turns on the details. No doubt each lease contained obligations on the part of the lessee to contribute proportions of the various maintenance and insurance costs attributable to the building, and those contributions were reserved as rent, non-payment of which would give rise to forfeiture of the lease.
11. The issue which is before me arises against a lengthy and unfortunate background of dispute and litigation concerning the finances of running the mansion block. There has been County Court litigation before His Honour Judge Collins CBE and Mr Recorder Bowdery QC, in the High Court before the Registrar of the Companies Court, before Mr Robert Englehart QC (as a Deputy High Court Judge), before Evans-Lombe J and before the Court of Appeal. Most recently, the matter was before HHJ Waksman QC (as a Judge of the High Court). It is unnecessary for the purposes of the present case to go through that history, described in one of the written submissions of counsel for Mactra as "too horrific to record in detail". It was described by Mr O'Boyle in one of the witness statements before me as follows:

"The whole MML scenario has been a nightmare from the very beginning.

In addition to the small fortune in private legal fees, and wasted company money, vast amounts of public money have been spent in almost non-stop court appearances, including the Leasehold Valuation Tribunal which has been deliberating on MML matters since 1998. It amazes me that the legal system has allowed it to go on."

12. Mactra acquired leases of 25 flats as long ago as 1993; there were forfeiture proceedings in 1995; judgments in substantial sums were obtained by MML against Mactra in 1998; forfeiture proceedings were disposed of by a consent order in July 1999.
13. On 15 January 2000, by order of the Leasehold Valuation Tribunal (LVT), an important event occurred. Pursuant to powers contained in the Landlord and Tenant Act 1987 s 24 the LVT appointed Mr Bruce Maunder Taylor, a surveyor, as manager of the block of flats at Morshead Mansions. He remained in post from that date until 3 February 2003, when his appointment as manager was suspended.
14. It is not in dispute that this appointment, while it lasted, had the effect of splitting the responsibility for financial management of the block. Mr Maunder Taylor was responsible for the service charge aspects - the sums payable under the leases. He was not responsible for, and had no control over, any demands made on shareholders by MML pursuant to a resolution of the company in general meeting under Article 16 of the Articles. I accept the unchallenged evidence of Mr David Lewis Wismayer on behalf of MML that, correspondingly, from 15 January 2000 until 3 February 2003, MML had no control over the funds collected by, and books controlled by, Mr Maunder Taylor. (No argument was addressed to me as to the nature and significance, if any, of the legal relationship between Mr Maunder Taylor as manager and MML as landlord.)
15. Quite separately from the activities of Mr Maunder Taylor as manager appointed by the LVT, various levies were made by MML under Article 16 of the Articles. I can ignore an irrelevant earlier levy. On 10 October 2000 (during the period in which Mr Maunder Taylor was manager) a levy of £740,167 was made under Article 16; this was passed by resolution of the company, with Mactra voting against. This amount, levied in respect of the 100 shares in issue, is directly reflected in the two amounts of £7,401.67 said in the letter of 5 September 2002 to have been outstanding in respect of each of the shares relevant to Flats 22 and 29.
16. In the Notes to the Financial Statements of MML for the year ended 31 December 1999 the levy of £740,167 was explained as follows.

"By a resolution of the company passed on 10 October 2000, the Directors were authorised to establish a further such fund designated as The 2000 Recovery Fund in the amount of £740,167. The purpose of the fund is to make up any deficit in the service charge and reserve funds resulting from the wasted expenditure incurred in the three years 1994, 1995, and 1996. Subject to being satisfied that the Manager appointed by the Leasehold Valuation Tribunal on 13 January 2000 will apply the funds in the proper discharge of his repairing obligations and his obligations under the Management Order, the monies recovered from Members will be passed to the Manager.

On 30 November 2000, the Manager published his decision to write off in the service charge fund the debts represented by the 'Discretionary Allowance' which in aggregate equate to the value of The 2000 Recovery Fund. As a consequence of the Manager's decision, as at the balance sheet date, the net indebtedness of the service charge fund to the company was increased by £14,001.

17. On 29 January 2003 there was a further levy of £1,000,000 and on 30 October 2003 a yet further levy of £350,000 was made. It is to be remembered that on the date of each of the resolutions of MML which resulted in those levies Mactra remained registered as the legal owner of 25 shares, including shares referable to flats 22 and 29, notwithstanding that Mactra had assigned the leases of those flats on 19 June 2002.
18. Mactra's contention that the letter of 5 September 2002 evidenced a decision taken in bad faith depends critically on its assertion that, by that date, it had paid the sums of £7,401.67 attributable to the 10 October 2000 levy under Article 16. The argument proceeds as follows.
19. What is alleged by Mactra to have been mismanagement of MML had by 15 May 2001 given rise to what was described as a financial 'black hole'. In order to fill it, service charge sums and particularly a sum described as a 'discretionary allowance' of £7,117.00 were claimed by Mr Maunder Taylor, as manager. In invoices of 15 May 2001 the outstanding sum was said to be £8,811.67 per flat. Mactra asserts that a sum identified in those invoices (namely, alleged arrears brought forward of £8,672.92) included the sums of £7,401.67 claimed under the levy of 10 October 2000. This involves the proposition that sums claimed by Mr Maunder Taylor as 'discretionary allowance' were in all respects the same as sums claimed by MML under the levy (the 'recovery fund' as it has been called) of 10 October 2000.
20. By 7 September 2001 (as shown in invoices of that date) arrears in respect of each flat totalled £9,755.90. Certain modest and undisputed sums referable to rent and repairs were paid, and, by 20 December 2001, the invoiced sum was £9,257.22 (again, in respect of each flat). By 30 May 2002 the sums recorded as outstanding in the Maunder Taylor books were, respectively £8,478.02 (for flat 22) and £8,818.02 (for flat 29). The total of those sums was indeed paid to Mr Maunder Taylor by Mactra, as it was expressed in a letter of 30 May 2002, "under protest and economic duress". The effect of that payment was to obtain for Mactra clear rent accounts in respect of Flats 22 and 29 so that it could assign the leases of the flats to the Second and Third Defendants, as it duly did on completion on 19 June 2002. However no payment directly to MML of sums claimed under Article 16 was then made.
21. In the letter of 30 November 2000 referred to in the notes to the accounts quoted above Mr Maunder Taylor had indicated his intention that there would be a set-off between payments due or paid to him by way of the 'discretionary allowance' and payments due or paid to MML by way of levy under Article 16 in respect of the 2000 Recovery Fund. Similarly, it appears from the notes to the accounts that the Board of MML envisaged that the proceeds of the October 2000 levy (the 2000 Recovery Fund) would, subject to the Board's satisfaction with Mr Maunder Taylor's intended use of the money, be passed to him. No set off was then effected and it did not happen until 15 November 2003 (as I record below). Importantly, such a set off had not been effected in September 2002.
22. Mactra submits that, by paying sums to Mr Maunder Taylor pursuant to the service charge obligations in the leases, it succeeded in discharging its obligations as shareholder to make payments pursuant to the resolution under Article 16. It is argued that any accounting difficulty is simply a product of the manner in which MML chose to deal with the core figure; Mactra says it ought not to be prejudiced by the nuances of accounting which have been adopted in the running of MML; it submits that it is completely irrelevant that a sum which was paid was paid under a different legal regime to a different person in satisfaction of a different liability. I do not agree; I accept the contention on behalf of MML that the essence of Mactra's case confuses payments by shareholders to MML under the Articles with payments by lessees to MML under the leases.
23. In due course, in a notice dated 4 January 2003, announcing an Extraordinary General Meeting of MML for 29 January 2003, Mr Crowther announced that, in the event that on 16 January 2003 Mr Maunder Taylor's appointment as Manager was suspended, it was the intention of MML to transfer the credits entered in the service charge ledger for payments made to Mr Maunder Taylor as Manager, to the Company's ledger relating to the Year 2000 Recovery Fund. Those credits were eventually given, and are recorded in a printout produced on 15 November 2003 and circulated by letter of 19 November 2003. In other words, when MML had control over the service charge funds and books previously managed by Mr Maunder Taylor as well as the funds and books which itself it managed pursuant to Article 16, it effected the set-off to which Mactra claims it was entitled, and which it claims should be taken to have been effected, in September 2002.
24. Mactra was therefore, in my judgment, still indebted under the levy of 10 October 2000 on 19 June 2002 (when the leases were assigned) and was still so indebted on 5 September 2002 (when registration of the share transfer was refused).
25. On 6 February 2004 MML commenced proceedings against Mactra in the Central London County Court for payment of all of Mactra's debts under Article 16, being 25% of the total amounts levied. Mr Maunder Taylor's appointment as manager had, in the event, been suspended with effect from 3 February 2003, so MML again had full control of financial matters relating to the mansion block. Those proceedings resulted in summary judgment granted by Mr Recorder Bowdery QC on 15 October 2004 (for an initial sum of £315,419.05) and judgment by HHJ Collins CBE on 13 May 2005 (for a balancing sum of £189,223,67). Once the judgment debts were paid, registration of the share transfers (by now, to the Fourth and Fifth Defendants) was effected on 28 October 2005.
26. I return to Mactra's contention in these proceedings that the failure or refusal, on 5 September 2002, to register the share transfer was made in bad faith. Mactra contends that I may and must draw an inference of bad faith from what it says is the fact that by 5 September 2002 it had already paid its share of the levy of £740,167 raised under Article 16 on 10 October 2000 by making payments to Mr Maunder Taylor.
27. It is quite clear from the material before me that there was a complex background of claims for payments against tenants (in their capacity as tenants) and shareholders (in that capacity). Many such claims remained unpaid; as it was put in evidence by Mr O'Boyle, many people voted with their chequebooks. Against that background it is clear that it was envisaged that, at some point, set-off would be permitted of sums payable in one capacity against sums payable in another capacity. However, at the date of the refusal to register the share transfer, no such set off had been made. Mactra had not paid the Article 16 levy by 5 September 2002.
28. I go on to consider whether, on the basis that the Article 16 sum was due and unpaid on 5 September 2002, MML was acting in bad faith in using its discretion to refuse to register a transfer of the shares as a means of enforcement of payment of that sum.
29. At the material time, the Board of MML consisted of one person, namely its (by then) single director Mr Crowther. He was not called to give evidence. Mactra contends in its supplemental skeleton argument that it is "essential and compulsory" that Mr Crowther be called and that in the absence of his evidence the court cannot conclude that Mr Crowther acted bona fide in the interests of MML and not for some collateral purpose. While Mactra accepts that it bears the burden of proving bad faith, this submission comes close to contending that it is a matter for MML to disprove it. I do not find it helpful to approach the task of resolving an issue of fact by way of assertions as to what is "essential and compulsory"; in my judgment the proper approach is to look at all the material before me, and to consider whether, taken as a whole, it establishes that it is more likely than not that refusal of registration was the product of a decision taken in bad faith.
30. Evidence was given on behalf of MML by Mr David Wismayer. He has been retained by MML as a consultant, advising it generally since June 1997. In 2002 he was acting as a consultant to MML , was a lessee, a shareholder, and had day to day administration of the affairs of the company. Between May and October 2006 he was a director of the company, jointly with Mr Crowther and, since October 2006, he has been the sole director. He did not give evidence that he had drafted the letter of 5 September 2002 which was signed by Mr Crowther, nor that he had discussed with Mr Crowther any decision as to whether MML should refuse to register the transfer of the two shares. Nonetheless, I am satisfied having heard him give evidence that Mr Wismayer had a detailed knowledge of the affairs of MML at all material times and, in particular, that he was an appropriate person to give evidence about any policy of MML concerning registration of the transfer of shares.
31. In his witness statement of 5 February 2008, adopted as his evidence in chief in these proceedings, Mr Wismayer said this:

"It was at that time [ie September 2002], as it still is now, and had been at all times since September 1997 MML's policy to refuse to register share transfers following lease assignments in cases in which money was owed by the outgoing leaseholders to MML. This policy was judged to be in the interests of the company as a means of encouraging payment of debts owed to the company without resort to proceedings. It has been applied indiscriminately in all cases and has proved most effective in achieving its object."

32. Mr Wismayer was not cross-examined on this, or any other, topic and his evidence on the point about the existence of the policy is completely unchallenged. (A point was raised between counsel in passing whether, much more recently, the assignments of shares referable to two other flats may, notwithstanding this policy, have been registered when there were sums outstanding. The point was not explored in detail and I was referred to no documentation. I do not consider that, even if established, some departure from or modification of the policy years later would help me in deciding whether bad faith was established in relation to the actions of Mr Crowther in September 2002.)
33. Mr Wismayer's account of the policy of refusing to register share transfers is amply supported by pages 18 and 19 of a report to the members of MML dated 11 December 2002, and written by Mr Wismayer himself, dealing with the problems which may arise when a sum is owing under the Articles and a shareholder transfers his share:

"A complication has arisen since the appointment of the Manager. In a number of cases, there are ten flats presently affected, at the date of transfer of the respective shares, the outgoing member owed money to the company under the Recovery Funds….. Acting on legal advice, MML has decided that where an outgoing member is indebted to the company, transfers of shares will not be registered until the relevant debt has been paid."

34. Having given evidence that this document was the product of his own authorship, Mr Wismayer was not challenged on behalf of Mactra on its contents. One significant feature of the passage I have quoted above is that the claimed policy of non-registration had been applied in respect of ten flats by December 2002. This renders it less likely, in my judgment, that Mactra was being singled out (in bad faith) by MML for this treatment in respect of its two relevant flats in September 2002.
35. Mactra invites me to conclude that, in the light of a long history of expensive and tiresome litigation, the decision of Mr Crowther to refuse to register the transfer of the shares was not reached bona fide in the interests of what he perceived to be the interests of MML and that it was not the product of the policy the existence of which is (as I find) established by the evidence of Mr Wismayer. Rather, it is said, it was done in bad faith in order to cause inconvenience, expense and difficulty to Mactra, because of a history of antagonism between Mactra (or its alter ego Mr O'Boyle) and those involved with MML. There was, it is contended, a collateral purpose of hostility, and the refusal was a device to extract money from Mactra when it was not properly due. This submission is made notwithstanding the credits which were made in the printout of the account on 15 November 2003.
36. In my judgment, the circumstances in which Mr Crowther refused to permit registration of the shares do not begin to justify a conclusion that he was acting in bad faith and otherwise than in accordance with MML's established policy. There was undoubtedly a degree of complexity in the finances of MML. The present issue arose because the service charges and the amounts due under Article 16 were payable to different persons under different legal obligations. The contemporaneous documentation and the unchallenged evidence of Mr Wismayer make it plain that MML had, and operated, a policy of ensuring that transfers of shares were not registered at a time when the transferor owed money to MML. That was a rational approach for Mr Crowther to take and on the material before me I am satisfied that he took it. Mactra undoubtedly owed the sums due under Article 16 at a time when the service charge funds were payable to and received by Mr Maunder Taylor and were not payable to or received by MML. When MML had control of the service charge funds as well as the funds raised under Article 16, it effected set-off between the relevant sums paid by Mactra in one capacity and those owed in another capacity.
37. Nothing in the material before me leads me to conclude that either or both of MML and Mr Crowther were not acting in good faith in September 2002. Accordingly I refuse the declaration sought.