18 March 2020

Shareholders and directors: where basic procedures can trip you up

Sprout Land Holdings Ltd (In Administration), Re [2019] EWHC 806 (Ch)

In February 2019, the UK’s High Court was asked to consider the effects of an invalid appointment of a director, via written resolution, on the subsequent appointment of administrators.  

This case highlights just how easy it is to overlook the basic (but strict) statutory requirements under the Companies Act 2006 (the “2006 Act”) when conducting corporate decisions via written resolutions.  Despite their usefulness in fostering business efficacy and expediency, UK Courts have demonstrated time and again that failure to comply with the relevant statutory procedures will see them render such resolutions invalid.  

Given the inability to have an open forum to raise concerns using a written resolution procedure (unlike a general meeting), these statutory requirements act as a safeguard to ensure the process cannot be abused.  This equally applies to any decision-making processes governed by statute.

Facts

On 19 November 2017, two of the three shareholders of Sprout Land Holdings Ltd (“SLH”) (Mr. Fraser-Peters and Mrs. Morris who represented 55.5% of SHL’s share capital) passed an ordinary resolution by way of a written resolution appointing Mrs. Morris as a director.  One hour’s notice of a board meeting to approve the circulation of the written resolution was provided to the other director (Ms. Tighe), who declined attendance to the meeting due to the short notice.  

Mr. Fraser-Peters and Mrs. Morris subsequently signed the written resolution which was never circulated to Ms. Tighe to review or sign.  Shortly afterwards, Mr. Fraser-Peters and Mrs. Morris appointed joint administrators.  Ms. Tighe claimed that Mrs. Morris had not been validly appointed a director of SHL.  

Judgment

As the resolution had not been properly circulated by SLH to all of the shareholders of SLH, the UK High Court found that it failed to comply with the requirements of section 293 of the 2006 Act, meaning that Mrs. Morris had not been validly appointed as a director (as per Minmar (929) Ltd v Khalatschi [2011] EWHC 1159 (Ch)).  This meant that the subsequent appointment of the administrators (which would not have been possible without Mrs. Morris’ appointment) was invalid as SHL had failed to act in complete accordance with the 2006 Act.  

The Court considered whether section 161 of the 2006 Act applied, where the Courts can uphold the acts of a director even if their appointment was invalid (as in this case), or otherwise if they have been disqualified, ceased to hold office or were not entitled to vote on the matter in question.  

The  Court held that the purpose of section 161 was not to validate the acts of a director who was subsequently found to have been appointed improperly, but rather to protect third parties against the effects of any defect in a director’s appointment, of which they are unaware, and ensure their dealings with that company are valid.  It then held that as an administrator is both an officer of the Court and an agent of the company, they cannot be considered a third party for section 161 of the 2006 Act to have effect.  

Section 161 can apply internally to a company, but as the only other director involved in appointing the administrators (besides Mrs. Morris) had again failed to both ask the company to circulate the resolution and to circulate it himself, he missed an essential stage in the written resolution process, further proving that section 161 could not be of assistance (as per Sherlock Homes International Society, Re [2016] EWHC 1392 (Ch)).  

The Court was asked to consider the findings in another case (Bentley Stevens v Jones [1974] 1 W.L.R. 638) but found that where there was a statutory scheme to place a company into administration, as was the case here, common law would not be considered in such instance.

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