Introduction
Disputes between directors and shareholders disrupt the running of otherwise successful businesses. New businesses and start-ups naturally involve the directors and shareholders shared enthusiasm for the project and willingness to take a risk. It is later, when disagreements occur about the direction that a company should follow, that problems arise.
A powerful remedy for shareholders is a section 994 petition. This allows a minority shareholder to petition the court if the affairs of the company are being run in a way which is ‘unfairly prejudicial’ to their interests. The court has a wide range of remedies, but the normal order is for a sale or purchase of shares at a fixed price.
Five recent cases have provided important lessons and guidance for shareholders and directors about what to do when a company is being run against your interests. In this series, Alex Pritchard-Jones and Harrison Burroughs explain the key points of each case.
Correct the Register ASAP: Andrew Bland & Janet Francis Mayo v Jeanette Keegan [2024] EWCA Civ 934. (Case)
This recent case shows the vital importance of correcting the Register of Members immediately if a shareholder has been wrongly or fraudulently removed from the Register.
In this case, the Company was owned 50/50 by a mother and daughter in law who shared the same first initial and surname. Following marital disharmony, the daughter-in-law transferred the mother’s entire shareholding to herself, signing the Stock Transfer Form J Keegan. The signature on the Form purported to be on behalf of the transferor, Janet, but was not. Not content with having fraudulently transferred the shares to herself, the daughter-in-law, purporting to be the sole member of the Company, passed a written resolution to wind up the Company and appoint liquidators. When Janet found out, her solicitors wrote to Jeanette in September 2021 and asserted that the Stock Transfer was fraudulent and therefore the appointment of the liquidators was invalid. However, at that stage no application was made to rectify the register.
Because the validity of the appointment of the liquidators was in dispute, in October 2022 the liquidators applied to court for a declaration of validity. At that hearing, the mother’s counsel said that an application to rectify the Register would be issued. The liquidators claim for a declaration was stayed and the rectification Claim was issued in November 2022. The Part 7 Claim sought a declaration that the Stock Transfer Form was a forgery and void, a declaration that Jeanette’s name had been removed from the Company’s register of members without cause and that Jeanette held 50 of the 100 issued ordinary shares in the Company, and an order pursuant to section 125(1) of the Companies Act 2006 (the “Companies Act”) rectifying the register of members accordingly.
The mother and daughter-in-law settled the rectification claim by Tomlin Order, in which it was agreed that Jean did own 50% of the shares in the Company, and that Jeanette would transfer her 50 shares to Jean. However, the Liquidator was not party to the rectification claim, and section 88 of the Insolvency Act makes void any transfers post winding up.
When the liquidators found out about the resolution of the Rectification Claim they applied to reinstate the Validity Claim. This was heard in October 2023. The judge ruled:
Notwithstanding the provisions of section 127 of the Companies Act, it does seem to me that the register is conclusive as to those who were members of the [Company] at the time of the special resolution. Section 112(2) is, in my judgment, clear that every person whose name is entered in the [Company’s] register of members is a member of the [Company]. That is reinforced by the power under section 125 that is conferred upon the court to rectify the register.
When one looks at the scheme of the Companies Act as a whole, it seems to me that the register is conclusive as to those who are members of the [Company] at any particular point in time. On that basis, even if the register of members were liable to be rectified, following a decision that the share transfer form was a forgery and of no effect, since Jeanette’s name was not on the register at the time of the passing of the special resolution to wind-up the [Company], it seems to me that the [Company] was validly placed into voluntary winding-up.”
Therefore, the judge ruled that the Appointment of the Liquidators was valid.
In the Court of Appeal, Lord Justice Snowdon reaffirmed the principle that the Register of the Members of the Company are presumptively valid unless and until the register is rectified. Snowdon LJ went on to say:
- it is necessary for a person who contends that their name has wrongly been taken off the register to apply to the court for an order that the register be rectified, putting them back onto the register in place of the person whose name wrongly appears on the register. The application to the court can be made under section 125 of the Companies Act (which provides a summary jurisdiction for simple cases) or in an ordinary CPR Part 7 claim (for other cases): see Nilon v Royal Westminster Investments SA [2015] UKPC 2 at [37].
The lessons from this case are these:
- A shareholder fraudulently or unlawfully removed from the Register must act quickly to remedy the situation. Without being on the Register, they run the risk of the remaining shareholders and directors taking action which will unfairly prejudice them.
- If actions are taken which would unfairly prejudice them, and it is difficult to think of something more unfairly prejudicial than winding up a successful company, then not being on the register may validate those decisions.
- It may be that an injunction or other interim relief can be sought while the Register is being rectified.
- Once the shareholder is restored to the Register, they may bring their unfair prejudice petition.