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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Johnston, Re An Order for Rectification of the Register of Members of Wind Save Ltd [2004] ScotCS 228 (05 August 2004)
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Cite as: [2004] ScotCS 228
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Johnston, Re An Order for Rectification of the Register of Members of Wind Save Ltd [2004] ScotCS 228 (05 August 2004)
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OUTER HOUSE, COURT OF SESSION |
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P1094/04
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OPINION OF R F MACDONALD Q C (Sitting as a Temporary Judge) in Petition of JAMES BROWNLEE JOHNSTON for An Order for rectification of the Register of Members of Wind Save Limited in terms of Section 359 of the Companies Act 1985, and for interdict and interdict ad interim ________________ |
Petitioner: Davies; Harper MacLeod
Respondents: S.A. Bell; Drummond Miller, W.S.
5 August 2004
Introduction
[1] The petitioner is James Brownlee Johnston. He has brought the present petition in which he asks the court to order that the register of members of Wind Save Limited ("the company") be rectified by entering his name as the holder of 13,152 ordinary shares of £1 each in the company and by reducing the number of shares held by David Hyman Gordon by 13,152, and to direct notice of such rectification to be given to the Registrar of Companies in Scotland, all in terms of the Companies Act 1985, section 359(4). He also seeks interdict and interim interdict against both Mr Gordon and the company from carrying out certain acts which are specified in the prayer of the petition. A motion for interim interdict in terms of the prayer of the petition against both Mr Gordon and the company called before me in the Recess Court on Thursday 5 August 2004.The relevant statutory provision
[2] Section 359 of the Companies Act 1985 provides as follows:"(1) If -
(a) the name of any person is, without sufficient cause, entered in or omitted from a company's register of members, or
(b) default is made or unnecessary delay takes place in entering on the register the fact of any person having ceased to be a member,
the person aggrieved, or any member of the company, or the company, may apply to the court for rectification of the register.
(2) The court may either refuse the application or may order rectification of the register and payment by the company of any damages sustained by any party aggrieved.
(3) On such an application the court may decide any question relating to the title of a person who is a party to the application to have his name entered in or omitted from the register, whether the question arises between members or alleged members, or between members or alleged members on the one hand or the company on the other hand, and generally may decide any question necessary or expedient to be decided for rectification of the register.
(4) In the case of a company required by this Act to send a list of its members to the registrar of companies, the court, when making an order for rectification of the register, shall by its order direct notice of the rectification to be given to the registrar."
The pleadings
[3] In statement 4 it is averred that in or about 2001 David Hyman Gordon (the second respondent) approached the petitioner in connection with a proposal to develop a domestic sized wind turbine. The petitioner has extensive experience working in the electricity generating industry, and particular expertise in connections and extensions to electrical distribution networks, interfaces to generators and customers, automatic meter reading and renewable energy. The petitioner had previously worked with Mr Gordon on the development of an automatic meter reading facility on a home security product. On or about 17 December 2001 the petitioner and Mr Gordon met to discuss the prospects of developing a domestic sized wind turbine and the petitioner agreed to prepare a feasibility report. On or about 19 March 2002 the petitioner and Mr Gordon met again at the Hilton Hotel, East Kilbride to discuss the terms on which the petitioner would undertake further work. By this time Mr Gordon had formed the company to undertake the development of the turbine. The petitioner was asked by Mr Gordon if he would prefer to work as a consultant to the company or take an equity stake in the company. The petitioner preferred an equity stake and it was agreed that the petitioner would receive a 10% equity stake in the company as consideration for his services. Following upon the agreement the petitioner undertook work for the company, in particular, research into renewal energy and payments for renewable energy, and prepared several reports relative thereto. He attended a number of meetings with Mr Gordon and others working for the company and with potential customers of the company. At a number of the meetings the petitioner was introduced by Mr Gordon to others as a shareholder in the company. The petitioner received no payment for undertaking the said work. In answer 4 the first and second respondents aver that in about 2001 Mr Gordon was engaged in setting up a project to develop a domestic wind turbine and required information in relation to the renewal energy market, which was newly emerging. The petitioner had previously been employed as a marketing consultant by Homelink Technologies Limited, of which Mr Gordon was then a director. Mr Gordon approached the petitioner to ascertain whether he was in a position to undertake consultancy work in relation to marketing of the product and the petitioner agreed to do so. In March 2002 the petitioner and Mr Gordon met at the Hilton Hotel for the purpose of the petitioner providing Mr Gordon with information in relation to the framework of the Government's Renewal Obligations Certificates. At the material time Mr Gordon was neither a director nor a shareholder of the company. [4] In statement 5 it is averred that in or about June 2002 the petitioner asked Mr Gordon to confirm the issued share capital in the company and in response received a letter dated 8 July 2002 from Colin Botfield, a director and secretary of the company. The terms of the letter were as follows:"David Gordon has asked me to confirm that the issued share capital and the shareholders will be
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Name |
£1 Shares |
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David Gordon |
75 |
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[the petitioner] |
10 |
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Colin R Botfield |
5 |
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Bill Blaney/Other |
10 |
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Total |
100 |
No other shares will be issued without the consent of all the shareholders.
The solicitor will be instructed by David Gordon to issue share certificates and Jim Hamilton, Chartered Accountant instructed to write up the statutory books."
The petitioner was not issued with a share certificate and his name was not entered into the register of members. At the material time the company had issued and paid up share capital of £100, made up of 100 shares of £1 each, all of which had been allotted to Mr Botfield, who took no steps to transfer any of the shares to the petitioner. On or about 13 December 2002 Mr Botfield transferred 93 shares to Mr Gordon and one share to Mairi Brunet. Mr Botfield retained and still retains 6 shares. At the time of the transfer Mr Botfield and Mr Gordon knew that of the shares transferred 10 should have been allotted or transferred to the petitioner in terms of the agreement. In answer 5 the respondents admit that the petitioner was not issued with a share certificate, that his name was not entered on the register of members, that the company had issued and paid up share capital of £100 made up of 100 shares of £1 each, that Mr Botfield took no steps to transfer shares to the petitioner under explanation that he was not bound to do so and that Mr Botfield transferred 93 shares to Mr Gordon and one to Mairi Brunet, under explanation that the transfer took place on 20 December 2002 and their names were duly entered in the register of members. The respondents then go on to aver that there was no contract for the transfer of shares by Mr Botfield to the petitioner and that no stock transfer form was completed or delivered. The company did not begin trading until October 2002. The letter of 8 July 2002 contained the current plan for a redistribution of their issued share capital. The proposal was conditional upon the continued support and involvement of the individuals concerned. In the event the petitioner contributed little or nothing to the company's business. On 25 October he attended at a meeting at the premises of Deans Engineering (Livingston) Ltd. He was argumentative and obstructive throughout and ultimately walked out. He visited the company on only two or three subsequent occasions and made only limited input to the business stock. He then set up his own business and ceased to have any further involvement with the company.
[5] In statement 6 it is averred that in the course of 2003 a further 32 shares of £1 each were allotted. On or about 13 February 2004 the company allotted 173,468 bonus shares of £1 each, issued pro rata to each of the shareholders. The shares were paid for out of the company's capital reserve. Had the pursuer been entered on the register of members he would have been entitled to receive a further 13,142 bonus shares. In fact those shares were registered as belonging to Mr Gordon. In answer 6 the respondents admit that in the course of 2003 a further 32 shares of £1 each were allotted, that on 13 February 2004 the company allotted 173,468 bonus shares of £1 each which were issued pro rata to each of the shareholders and that those shares were paid for out of the company's capital reserve. They go on to aver that the company would not have issued the shares if the petitioner had been a member. [6] In statement 7 it is averred that the petitioner's name should have been entered in the register of members of the company. In or about July 2002 he should have been entered in the register as the holder of 10 shares. In fact those shares were registered in the name of Mr Botfield and later transferred to Mr Gordon. Thereafter the petitioner should have been entered in the register as a holder of a further 13,142 bonus shares. The petitioner's name was wrongfully omitted from the register of members without sufficient cause and he accordingly seeks to have the register of the company rectified to the effect of having his name entered therein as the holder of 13,152 ordinary shares of £1 each and for the shareholding of Mr Gordon to be reduced by the same amount. In answer 7 those averments are denied by the respondents under reference to the preceding answers and it is averred that the petitioner has no entitlement to be entered in the register of members. [7] In statement 8 the petitioner avers that he is reasonably apprehensive that Mr Gordon might sell or otherwise dispose of his shareholding, including the 13,152 shares which ought to have been registered in the name of the petitioner. It is believed that an offer has been made for the purchase of the company as a whole and the petitioner is reasonably apprehensive that Mr Gordon may seek to create a charge or other encumbrance over said shares in order to defeat the petitioner's rights. The petitioner is reasonably apprehensive that in the event of the company allotting further shares to the existing shareholders Mr Gordon may renounce or assign any right to such shares and thereby defeat the rights of the petitioner. Further, the petitioner is reasonably apprehensive that the company make take steps to pass written or elective resolutions to which he as a shareholder could object, or may pass resolutions which were prejudicial to his rights as a shareholder in the company. He is reasonably apprehensive that the company may pay a dividend to Mr Gordon in respect of the 13,152 shares, which ought to be paid to the petitioner and in these circumstances he is under the necessity of seeking interdict and interdict ad interim as prayed for. The balance of convenience favours the petitioner. He may be permanently deprived of his shareholding of a sale of the shares in the company proceeds. The value of his shareholding may be significantly affected if the shares are charged or encumbered or his shareholding in the company is further diluted. The company may take steps, to which as a shareholder he could object, which are prejudicial to his interests. In answer 8 the respondents aver that the petitioner's apprehensions are not known and not admitted and deny his other averments in statement 8.Submissions for the petitioner
[8] Mr Davies, counsel for the petitioner, began his submission in support of the motion for interim interdict by referring to the terms of section 359. He submitted that the power conferred upon the court by that section was a broad one. In particular, he emphasised the words "without sufficient cause" in sub-section (1)(a) and the concluding phrase of sub-section (3), "and generally may decide any question necessary or expedient to be decided for rectification of the register". [9] Mr Davies argued, principally under reference to statement 4 of the petition, that it was agreed that the petitioner was to have a 10% stake in the company. He thereafter undertook work, although this was disputed in answer 4. No.6/17 of process was a list of the meetings and events which he had attended up to 11 April 2003. The work in question involved the connection of wind turbines into the general grid. He had not received payment for that work, and it was not suggested by the respondents that he had done so. This was because of the 10% share agreement. That agreement was set out in the letter of 8 July 2002, No.6/12 of process. He was to be allotted 10 shares out of 100. The validity of that letter was not disputed by the respondents. The petitioner should therefore have been allotted 10 shares in July 2002. The shares were not allotted to the petitioner. All shares were allotted to Botfield. The letter of 8 July 2002 was a contract or undertaking by the company to allot 10 shares to the petitioner. All shares had gone to Mr Botfield, and then in December 2002 93 shares had been transferred from him to Mr Gordon for a nil consideration. The transfer fell to be reduced as being both gratuitous and in bad faith. In effect, therefore, the petitioner's 10 shares had gone to Mr Botfield and later been transferred to Mr Gordon. That was the sort of subsidiary question which the court was entitled to consider in a petition under section 359. Over the next few months there had been an allotment of new shares to new shareholders. There was no suggestion for saying that this was done in bad faith, but the petitioner's shareholding had thereby been diluted from 10% to 8%. In February 2004 the company had allotted out of its capital reserve 173,468 bonus shares of £1 each, issued pro rata to each of the shareholders. Had the petitioner been properly allotted his 10 initial shares, he would have received his proportion of the bonus shares, but these had gone to Mr Gordon. There was nothing in that allotment which would prevent the court exercising its power under section 359. In all the circumstances there was plainly a prima facie case that the petitioner should be entered on the register. [10] So far as the balance of convenience was concerned, it was overwhelmingly in favour of the petitioner. What he was seeking to do was to freeze the position. He sought to maintain the status quo pending the determination of his petition. There was nothing averred in the answers to the effect that the business of the company would be impeded, or that any prejudice would be suffered, if the remedy of interim interdict were to be granted.Submissions for the respondents
[11] Mr Bell opposed the motion for interim interdict on three grounds. These were: (1) The petitioner had no prima facie case, or his case was at best a weak one. (2) The balance of convenience favoured the refusal of interim interdict. (3) The interim interdict sought was too wide in its terms, and, so far as interim interdict against the holding of a general meeting without notice to the petitioner was concerned, it amounted to a positive order to give notice of the meeting to the petitioner and therefore constituted a positive interdict. [12] Mr Bell then turned to consider the nature of the procedure involved in a petition under section 359. He referred to Palmer's Company Law, Vol.2, p.7040, para.7.118, which is headed "Procedure in Scotland". That paragraph states as follows:"Section 359 is regarded as a summary procedure available as an alternative to the ordinary jurisdiction of the courts. It is normally invoked by petition at the instance of the company, a registered member or a person claiming to be registered. It is always a matter for the court to determine, in the exercise of its discretion, whether it would be more convenient to dispose of the issues raised in the petition process or by ordinary action. A petition under section 359 is, however, appropriate where the issues raised are simple and do not require complex investigation of the facts. A finding that the petitioner never was a member is retrospective."
Mr Bell submitted that the present case could scarcely be said to be a simple and straightforward one. The petitioner was seeking reduction of transfers to Mr Botfield and to Mr Gordon and specific implement in some form or another. These matters would require to be the subject of a detailed enquiry. The premise of the current petition was misconceived because it assumed an entitlement to registration on the part of the petitioner. It was not clear what was contended for by the petitioner. If the contention was that there ought to have been a transfer from Mr Botfield to the petitioner, there was no suggestion that any stock transfer form had been completed or delivered. That being so, no entitlement to registration ever arose. On the contrary, it would not have been lawful for the company to register a transfer in favour of the petitioner unless a proper instrument of transfer had been delivered to it: section 183(1) of the Companies Act 1985. The company had adopted Table A and Regulation 23 applied. No instrument of transfer had ever been executed or delivered. If, on the other hand, what was being said was that there was a breach of an agreement to allot shares to the petitioner, that did not "get to a section 359 position". The petitioner was claiming that he was entitled to an allotment but it was not suggested that any allotment took place. If there was no allotment to him, it followed that he had no entitlement to be registered. Any remedy he had was for breach of contract. The remedy under section 359 was for someone who was the owner of shares and had the right to be registered.
[13] Turning to consider the pleadings, Mr Bell submitted that statement 4 of the petition was vague about the nature of the contract which the petitioner sought to enforce. There was no agreement to allot or transfer. In March 2002 there were only two issued shares which were held by the agents who formed the company, which had been incorporated in January of that year. It was not until October 2002 that any premises were obtained. In early 2002 there was only a project and the situation was fluid, with people coming on board and leaving. What was stated in the letter of 8 July 2002 was conditional upon the continued involvement of the petitioner. The letter was all in the future tense and was nothing more than an indication of the then current plans, subsequently illustrated by the fact that none of the proposed allotments was strictly adhered to. For example, no allotmet was made to Mr Blaney. 93 shares were allotted to Mr Gordon, one to Mairi Brunet and 6 were retained by Mr Botfield. On 5 July 2002 100 ordinary shares were issued and allotted to Mr Botfield (No.6/4 of process). There were no relevant averments of the formation of any contract for the allotment or transfer of any shares to the petitioner. No steps had been taken to transfer ownership of any shares to the petitioner. The confusion in the petitioner's pleadings was encapsulated in the last sentence of statement 5, which averred that at the time of the transfer on 13 December 2002 by Mr Botfield of 93 shares to Mr Gordon and one share to Mairi Brunet, Mr Botfield and Mr Gordon knew that of the shares transferred 10 should have been allotted or transferred to the petitioner in terms of the agreement. If the petitioner could not say what the nature of the contract was, it was wholly incapable of enforcement by the court. The petitioner had no right to registration. At most his right was a right to a transfer of shares. The company was entitled to refuse to register a transfer under Article 9 of its articles of association. The directors were entitled to decline to register any transfer without assigning any reason therefor. The petitioner's case was even weaker when the question of the subsequent issue of the bonus shares was concerned as there was then no question of any agreement to allotted shares to the petitioner. So far as that transfer was concerned, his remedy could only be in damages. [14] Mr Bell further submitted that, as the interim interdict which was being sought was a discretionary remedy, there arose sharply issues of delay and prejudice. The petitioner had failed entirely to address the reason for his having delayed for two years in bringing the petition. On his averments the last contact from him had been in April 2003. The averments in statement 8 provided no reason for the bringing of the petition at this time. The company was not being sold. Over the last couple of years a considerable amount of time and money had been expended on the company. There was an unexplained delay of over two years in the bringing of the petition. In Re ISIS Factors plc, Dulai and another v ISIS Factors plc and another [2003] 2 BCLC 411 Blackburne J, in a section 359 petition, exercised his discretion by refusing to grant relief to the petitioner, who had sat back and done nothing for seven years until it suited him to enforce his rights. At p.437c, para.91, his Lordship stated:"As regards delay, it was accepted by Mr Davidson (counsel for the claimants) that until February 1999, which was just over seven years after the December meeting, Mr Dulai did nothing to assert ownership of the 10,000 shares which he claims to have bought. During that time he neither received nor asked for a share certificate, any annual accounts or any notices of any shareholders' or directors' meetings. Aware that he could obtain information from Companies House in relation to the financial and other affairs of ISIS Factors, he took no steps to obtain any from that source. He received the letters of August 1992 making a call on him but chose to ignore them."
At p.438a, para.96, his Lordship further stated:
"By sitting back and doing nothing for seven years until the day arrived, if it ever should, when it suited him to enforce his rights, Mr Dulai was failing to display the need for promptitude which is ordinarily a requirement of someone seeking the grant in his favour of the court's discretion. That is certainly the case where specific performance is claimed. It is difficult to see why the position should be different merely because the claim is for relief under section 359. Delay of this length would, without more, have led me to refuse relief."
"Delay of the complainer in taking action is a strong ground for refusing interim interdict."
Mr Bell submitted that in the present case there had been what he described as "so much water under the bridge" at a critical time in the life of the company. Various prototypes of equipment had been manufactured and production was planned for October 2004. Considerable outlay would be incurred with consequential requirement for funding. The company would have to disclose the existence of an interim interdict to any potential lender, who would be unlikely to be enthusiastic about lending a large sum of money to a company beset by this sort of internal division.
[17] Mr Bell also made certain submissions about the terms of the interim interdict sought. His contention was that the interdict should be against Mr Gordon reducing his shareholding below 13,152 shares. The interdict sought against the company involved making a positive order against it and, so far as head (iv) was concerned, there was an alternative remedy in damages. [18] Before he concluded his submission Mr Bell reverted to the question of the nature of the process in an application under section 359 and referred to a decision which had come to his attention over the lunch adjournment, namely, Re Hoicrest Ltd, Keene v Martin and another [2000] 1 BCLC 194, in which the Court of Appeal held that section 359(3) conferred on the court a general discretionary power to decide a dispute about entitlement to shares before deciding whether or not to make an order for rectification and had directed the trial of a preliminary issue on a disputed question of fact in the section 359 proceedings.
Response for the petitioner
[19] In reply Mr Davies sought to amend the terms of the interdict sought against Mr Gordon by deleting in part (i) "of 13,152" and by adding after the word "Limited" the words "so as to reduce his shareholding to fewer than 13,152 ordinary shares". In relation to the interdict sought against the company, he did not seek to make any amendment. His submission was that the premise of the interdict sought against the company was that the petitioner ought to be a shareholder. It was therefore unlawful for the company to do any of the things mentioned in the interdict sought without the consent of the petitioner. Rectification of the register would be retrospective and any company resolutions would be invalid without the consent of the petitioner. [20] In relation to the balance of convenience, Mr Davies stated that the petitioner's agents had been asked for an undertaking. In July 2002 the petitioner had been made a director of the company and thought he was a shareholder. He was actively involved with the company until 2003. There was nothing significant in the delay, which he described as being about twelve months. The petitioner was seeking to ensure that matters remained as they were until he obtained his remedy. His principal remedy was entitlement to the shares and it was only if he was not entitled to the shares that the court should refuse the order sought. It was inaccurate to state that he had set up his own business. If Mr Gordon sold his shares that would prevent the petitioner obtaining his remedy and interim interdict was therefore necessary so that the petitioner could obtain his remedy at the end of the day. [21] In relation to the question of a prima facie case, Mr Davies submitted that I must proceed on the assumption that the petitioner had set out a relevant case. The delay (which, according to him, amounted to twelve months) did not prevent rectification of the register. There was here a clear prima facie case that the petitioner would ultimately be restored to the register. Prejudice would be suffered by the respondents only if they intended to do what the interim interdict would prevent. If there was a prima facie case, then the court ought to grant the interim interdict sought and thus preserve the position meantime. So far as section 183 of the Companies Act 1985 was concerned, it did not arise. The company ought to have allotted the shares to the petitioner and the question was one of allotment.Decision
[22] Having heard the above submissions in the Recess Court, I rose in order to consider them. On my return to court a short time later I intimated that I had decided to refuse the motion for interim interdict and announced brief reasons for my decision.
[23] I indicated that, in the first place, having considered the terms of the petition and the answers, and the submissions made, I was not satisfied that the petitioner had a prima facie case. I was entitled to measure the averments in the petition against those in the answers, without treating either as fully established (Burn-Murdoch on Interdict, pps.134-5). It seemed to me, particularly from statements and answers 4 and 5, that there was a substantial factual question to be determined and I was not satisfied that the petitioner had at that stage demonstrated on a prima facie basis his right to rectification of the register, which was the principal remedy sought by him in the petition. [24] Secondly, I stated that I was in no doubt that the delay on the part of the petitioner in seeking the remedy of interim interdict had been such as to provide a strong ground for refusing interim interdict (Burn-Murdoch on Interdict at p.132). According to the petitioner's averments, he should have been allotted 10 shares following upon Mr Botfield's letter of 8 July 2002, but this had not happened. The petitioner took no action then or shortly thereafter to seek to enforce his right to those shares. Nor did he take any action when bonus shares were allotted in the course of 2003. No explanation had been provided for his failure to take action at those times. Further, no reason had been given, despite my requests for one, for the seeking of interim interdict at this particular time. There seemed to me to be no reason why interim interdict, which is an urgent remedy to prevent imminent or threatened harm, should be granted now after such a lengthy delay by the petitioner. The case quoted in Burn-Murdoch on Interdict at p.132 in support of the statement that delay of the complainer in taking action is a strong ground for refusing interim interdict was Ayala & Co v Dowell (1893) 1 SLT 374, in which an interim interdict was refused to prevent a sale on the morning of the sale after it had been advertised for two months. [25] I further indicated that, had it been necessary for me to consider the balance of convenience, I would have held that it favoured the petitioner, but for the two reasons given I was refusing the interim interdict sought. [26] It is appropriate that I should now provide some elaboration of my reasons for refusing interim interdict. In giving brief reasons for my decision I made no mention of the submissions made by Mr Bell about the competency or otherwise of resolving the factual dispute between the petitioner and the respondents in this petition for rectification of the register under section 359. When Mr Bell referred, towards the close of his submission, to the decision of the Court of Appeal in the case of Re Hoicrest Ltd I understood him to be retreating from his earlier submission that the remedy under section 359 was for a person who was the owner of shares and had the right to be registered. I did not understand his final position to be that it was not competent to grant interim interdict in the present process. My principal reason for refusing interim interdict was that of delay, allied with potential prejudice to the company. I do not think that it matters whether the question of delay is considered as a separate ground of refusal or as a sub-head of either prima facie case or balance of convenience. My view was that the delay in this case was inordinate and unexplained. Moreover, it was never made clear to me why it was necessary that an interim interdict should be granted in August 2004, the petitioner having taken no formal legal steps before then to protect the rights which he was now seeking to assert. Even if I had been of the view that the petitioner had shown a prima facie case, I would nevertheless have decided that his delay in taking action was a strong ground for refusing interim interdict.