Counting de facto directors for the purpose of quorum? Beneficiaries consenting for the purpose of Re Duomatic? The curious case of BW Estates Ltd (No 2) [2016] BCC 814

Edit: an extended version of this blog post has been published as ‘Re-writing the laws of company law and equity’ (2017) 38(7) Company Lawyer 219-24.

Occasionally, one reads a judgment and is struck by the peculiarity of it. The recent judgment of Judge Purle in Re BW Estates Ltd (No 2) [2016] BCC 814, [2016] EWHC 2156 (Ch) (BW Estates) is one such case both for the questions asked and the answers given.

BW Estates throws up three interesting questions:

1. whether a de facto director may be a director for the purpose of quorum requirements under a company’s Articles of Association?

2. whether a beneficiary under a trust, rather than the trustee, is able to acquiesce in an amendment of the Articles of Association for the purposes of the unanimous consent rule in Re Duomatic Ltd [1969] 2 Ch 365 (Re Duomatic)?

3. whether the beneficiary under a trust is able to consent for the purpose of Re Duomatic where the corporate trustee has been dissolved and there is, in fact, no trustee, or whether the shares held by a dissolved corporate trustee may be discounted for the purpose of the rule in Re Duomatic?

These questions are interesting, in part, because (with respect) I disagree with the answers and/or the reasoning of Purle J. After briefly setting out the background, I explore each of these questions in turn.

Background

The facts may be shortly stated. The company, BW Estates Ltd, had two shareholders:

1. Mr David Williams (DW), holding 75% of the shares, as trustee for Mr Robert Williams (RW) (DW is the adult son of RW); and

2. Belvedere Investment Co Ltd (a Manx company that was dissolved on 23 October 1996), holding 25% of the shares, (it was found) as trustee for Mr Robert Williams.

DW was the sole de jure director of the company. RW was disqualified from acting as a director, but was nonetheless found to be acting as a de facto director.[1] The Articles stipulated that quorum for both a directors’ meeting and a shareholders’ meeting was two. The issues set out above arose in the context of a resolution to appoint administrators passed by DW as the sole director at an inquorate directors’ meeting.

Question 1 – De Facto Directors and Quorum

The first question prompted by Judge Purle’s judgment is whether a de facto director may be a director for the purpose of quorum requirements under the Articles of Association. De facto directors are persons who have “assumed the status and functions of a company director” despite not being appointed as such.[2] Judge Purle considered that a de facto director was able to be counted for the purpose of a quorum requirement under the Articles. Judge Purle observed that:

“It may also be said that as a de facto director, [Mr Robert Williams’] approval cured any deficiency in the process, there being in reality two directors, as required by the articles, not one.”[3]

However, Purle J went on to hold that RW’s disqualification rendered him unable to be counted for the purpose of quorum in this case, because:

“The quorum requirement of two directors cannot in my judgment include as a matter of construction of the articles a director who is disqualified from acting as such.”[4]

Despite not being so in this case, the suggestion that de facto directors may count for the purpose of quorum at a directors’ meeting is novel. However, Purle J did not explain the basis on which he considered that de facto directors could be counted for the purpose of quorum. In my view, it must be wrong in the absence of express provision in the Articles.

One argument in support of Purle J’s conclusion should be flagged but discounted. The quorum requirement is found in the company’s Articles and, therefore, subject to any provision in the Articles guiding their interpretation. Subject to the terms of the relevant Articles, one might therefore argue that the definition of a “director” in the Articles matches the definition in the Companies Act 2006 (UK) (Companies Act).  Section 250 of the Companies Act defines a director as “any person occupying the position of director, by whatever name called”. Even if, the definition in the Companies Act is adopted by the articles, however, it does not necessarily follow that the definition applies to a quorum requirement. As Sir Nicholas Browne-Wilkinson VC observed in Re Lo-Line Electric Motors Ltd:

“[I]t is not possible to treat a de facto director as a ‘director’ for all the purposes in the [Companies] Act of 1985.”[5]

Put another way, some references to a “director” in the Act must be read as referring, by implication from its context, to “de jure directors”. The argument that the Companies Act and the Articles adopt the same definition of a “director” was not, however, explored in the course of the judgment and, one must presume, was not open on the terms of the Articles.

The key difficulties with Purle J’s suggestion that de facto directors count for quorum purposes are difficulties of practice and logic. If the directors were able to circumvent restrictions on their power to act by a person acting as a de facto director, a quorum requirement could be rendered ineffective at the initiative of the directors—indeed, at the initiative of some only of the directors who are able to procure another to act as a de facto director. Such an interpretation would also be likely to prompt a great deal of litigation about who could act as a de facto director for the purposes of quorum.

There is, I think, no common law authority in which it is stated that a de facto director may not be a director for the purpose of a quorum requirement in the Articles. However, it would be inconsistent with the common law rule on the “reserve” or “residual” power of shareholders if a disability at a board level caused by an inquorate board were able to be cured by a person acting as a de facto director.[6] On balance, it cannot be the case that a mere de facto director is able to be counted for the purpose of quorum; only a de jure director can be counted.

Question 2 – The Assent of the Beneficiary

The second and third questions in this blog post address the circumstances of the shareholders holding 75% and 25% of the shares, respectively, in the context of the Duomatic principle of unanimous consent. The Duomatic principle was stated by Buckley J in Re Duomatic Ltd as:

“where it can be shown that the shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be.”[7]

In asking whether the 75% shareholder had consented for the purpose of the Duomatic principle, Purle J reviewed the conduct of both the legal holder of the shares, DW, and the person with the beneficial interest in the shares, RW, both of whom he considered to have acquiesced in the exercise of power by the sole director.[8]  Judge Purle did not, however, express a concluded viewpoint as to whether the beneficiary or the legal holder’s consent mattered for the purpose of the Duomatic principle. Judge Purle observed that:

“As they [(RW and DW)] both acted in agreement with each other, I need not, as between those two, decide whether what matters is beneficial ownership or being on the register as a bare trustee for a sole beneficiary. In a case where there is only one beneficial owner and the registered holder is a bare trustee bound to act in accordance with the beneficial owner’s directions, there is much to be said for the view that the wishes of the beneficial owner are those that count, as the registered holder has no say in the matter.

It may therefore be that the acquiescence or consent of the ultimate beneficial owner is sufficient to trigger the Duomatic principle, as was assumed (without the point being decided) in Rolfe v Rolfe [2010] EWHC 244 (Ch) ….”[9]

Whether the beneficiary may consent for the purpose of the Duomatic principle is, according to the authors of Palmer, “not yet clear”[10] (although Professor Worthington expresses the point rather more conclusively without the suggestion of unclarity).[11] There is one English case in which the court has held that the beneficiary can;[12] two further cases in which the court left the question open;[13] and a line of Australian authority that the beneficiary cannot.

With respect, I think Purle J is wrong to have looked to the conduct of the beneficiary (RW) for the purpose of the Duomatic principle and, to the extent that his reasoning is consistent with Deakin v Faulding, I would similarly cast doubt on that authority. I agree with the view expressed by Leslie Kosmin QC and Catherine Roberts:

“First, it must be borne in mind that the Duomatic principle has been developed from cases involving unanimous consent given by all the registered shareholders. It is also a well-established principle of company law that the company itself will not recognize any person as holding a share on trust, and except where statute or the articles require otherwise, the company is not bound to recognize any interest in any share except the absolute right of ownership in the registered holder. In that context it would appear to be somewhat anomalous if the assent of a beneficial owner of shares were to be regarded as of relevance.”[14]

The acceptance of the consent of the beneficiary as sufficient (or, indeed, relevant) for the purpose of Re Duomatic mischaracterises the power of a beneficiary under a trust and the nature of their interest. Although views differ about the nature of the beneficiary’s interest, the better view is explained by Dr David Fox—unfortunately soon to be lost by Cambridge to the University of Edinburgh—in Snell’s Equity:

“The beneficiary’s interest may be considered from an internal and an external point of view. Its internal aspect refers to the beneficiary’s right to compel the trustee’s duty to administer the trust according to its terms and the general law. … The external aspect of the beneficiary’s interest explains its proprietary character. The beneficiary has his own equitable title to exclude third parties from interfering with the trust property which has been applied in breach of trust.”[15]

The beneficiary’s interest under a trust, therefore, amounts to a right to the due administration of the trust deed in both its internal and external aspects. The beneficiary thus has no power, absent the dissolution of the trust in accordance with the rule in Saunders v Vautier, to exercise the rights, powers and privileges that are an incidence of the trust property (in this case, shares). This remains so even if the beneficiary has a right, under the trust deed, to direct the way in which a trustee exercises voting rights attaching to a share; that is an enforceable right under the trust deed but not one that allows the beneficiary to exercise, himself, the voting rights at a general meeting.[16]

The Companies Act makes no provision for the exercise of voting rights by a beneficiary of a trust, although it does make provision for the exercise of certain rights by a beneficiary (such as the right to requisition a meeting).[17] But, voting rights are exercisable only once. Both the trustee and the beneficiary of a bare trust cannot purport to exercise the same voting right at a meeting; the chairman must determine who is to exercise the voting right and it is no argument for the beneficiary to state that (s)he has a right under the trust deed to direct the trustee how to vote for that right is a mere personal right enforceable against the trustee. Dr Turner advances a similar point in relation to the (non-) right of the equitable assignee of a debt to exercise voting rights at a creditors’ meeting.[18]

A difficulty may arise where the conduct of the trustee and the beneficiary differ: if, for example, the trustee takes no action to indicate that it acquiesces or consents but the beneficiary does, or if the trustee does acquiesce or consent but the beneficiary takes no action or is unable to. Whose consent counts? The former circumstance may arise in a case where the beneficiary is engaged in management of the company as a director or employee but the trustee is not. A common example involves management who take shares under an incentive scheme but where those shares may be held in either a blind trust or by a professional trustee vesting only upon his or her departure from the company. The latter circumstance may arise where the beneficiary is a minor or under a disability. If the conduct is inconsistent, the court must select whose conduct counts and, it is submitted, that must always be the legal holder of the shares.

In my opinion, therefore, the consent of the beneficiary is not only insufficient for the purpose of the Duomatic principle but irrelevant. I must, however, concede that the contrary interpretation has a limited degree of support in English law.

Question 3 – Beneficiary Consent in the case of Trustee Dissolution

The third question is similar to the second, but raises a different question due to the dissolution of the (apparently) corporate trustee holding the legal interest in the shares. On this question, Judge Purle strayed surprisingly wide of the mark in his reasoning in applying the bona vacantia rule to trust property.

Judge Purle quoted from the decision of Cooke J in related litigation, where his Lordship commented that “any assets [the Manx company] held would have vested in the Crown as bona vacantia.”[19] That is true insofar as it relates to property beneficially held by the company, but Purle J went on to state that:

“So the probability is, as appeared to be almost common ground before me, that the Isle of Man Belvedere was an alter ego for Mr Robert Williams, who is therefore beneficially entitled to its 25 per cent shares, subject to restoration of the register, which may now of course be far too late.”[20]

In this one paragraph, Purle J declared a trust to exist over the shares, seemingly without evidence to do so. If one accepts that there was a trust in spite of the lack of evidence, there is then a further difficulty: property held by a trustee is not bona vacantia. Section 193(1) of the Companies Act 2006 (Manx) – which is in similar terms to s 1012 of the Companies Act – provides that:

“Where a company is dissolved, all property and rights whatsoever vested in or held on trust for the company immediately before its dissolution (but not including property held by the company on trust for any other person) shall be deemed to be bona vacantia and shall accordingly vest in the Treasury in trust for the Crown and may be dealt with in the same manner as other bona vacantia accruing to the Crown.” (emphasis added)

Section 193(1) clearly excludes trust property. Judge Purle’s finding of a trust, therefore, appears inconsistent with his subsequent comments about vesting orders as against the Crown in right of the Isle of Man.[21]

The approach that the court ought to have taken is to apply Manx trust law or, by convenience, English trust law (there is no mention of a trust deed or the proper law of the trust; one must presume that it is English law although that is unlikely to be material). Section 36(3) of the Trustee Act 1925 (UK) provides for the dissolution of a corporate trustee:

“Where a corporation being a trustee is or has been dissolved, either before or after the commencement of this Act, then, for the purposes of this section … the corporation shall be deemed to be and to have been from the date of the dissolution incapable of acting in the trusts or powers reposed in or conferred on the corporation.”

Beneficiaries’ statutory power to appoint a trustee under s 19(2)(b) of the Companies Act 1996 (UK) requires the participation of the retiring trustee or the personal representative of the last person to be a trustee. Accordingly, in BW Estates, in order to reconstitute the trust through the appointment of a trustee, the beneficiary would be required to apply to the court for an order under s 41(1) of the Trustee Act 1925 (UK) and the vesting of the trust property in that trustee.

On the assumption that no transmission event under the articles of BW Estates Ltd had (yet) occurred, the question then becomes: if the shareholder is not competent to vote, are the votes held by it discounted in determining what constitutes unanimous consent (as the shareholder is not able to attend and vote, even if it has the right to) or is unanimous consent rendered impossible until the shareholder is, again, competent to consent? The former view appears to be correct having regard to the expression of the rule by Buckley J in Re Duomatic as the incompetent shareholder could not attend a general meeting in order to vote. If that reasoning is right, then one must join in Purle J’s conclusion, in spite of the very different ways that we have reached it, that the company “could not … have voted or been entitled to vote those shares” and the “acquiescence of the 75 per cent shareholder alone … [is] sufficient to trigger the Duomatic principle”.[22]

Conclusion

The effect of Purle J’s decisions on these questions was that the resolution to appoint an administrator was valid as the quorum requirements in the articles were amended by way of the Duomatic principle to allow the company to be managed by a sole director. Although this conclusion does, on the facts, appear to be right, Judge Purle’s reasoning leaves much to be desired.

In answer to the three questions posed at the outset, I would respond:

1. No. A de facto director does not count for the purpose of quorum requirements under r a company’s articles.

2. No. A beneficiary cannot consent for the purpose of the rule in Re Duomatic.

3. As above.

—

[1] Re BW Estates Ltd (No 2) [2016] BCC 814, [24].

[2] Re Kaytech International Plc [1999] BCC 390, 402 (Robert Walker LJ).

[3] Re BW Estates Ltd (No 2) [2016] BCC 814, [24].

[4] Ibid [24].

[5] [1988] Ch 477, 489.

[6] See, eg, Barron v Potter [1914] 1 Ch 895; Massey v Wales [2003] NSWCA 212.

[7] [1969] 2 Ch 365, 373.

[8] Re BW Estates Ltd (No 2) [2016] BCC 814, [25] (“I do see great force in Mr Weaver’s submission that the conduct of Mr Robert Williams from 2009 onwards as a beneficial shareholder operated as an acquiescence by all the relevant shareholders, sufficient to bind the company under the Duomatic principle. There was also acquiescence by Mr David Williams as the registered shareholder of 75 per cent of the shares.”), [28] (“In my judgment, Mr Weaver is correct in submitting that from 2009 onwards there was a consistent course of conduct under which Mr Robert Williams (and Mr David Williams himself) informally sanctioned the exercise of all the directors’ powers by one director alone which thereby operated as an informal amendment to or variation of the articles. On that footing, the appointment of administrators was valid.”).

[9] Ibid [37]-[38].

[10] Palmer’s Company Law (online), [7.439].

[11] Sarah Worthington QC, Sealy & Worthington’s Text, Cases, & Materials in Company Law (11^th edn, OUP 2016) 221; Sarah Worthington QC and Paul L Davies QC, Gower: Principles of Modern Company Law (10^th edn, Sweet & Maxwell 2016) 409 [15-17].

[12] Deakin v Faulding (2001) 98(35) LSG 32 Ch D, [117] (Hart J) (“Mr Kosmin submitted that, as a matter of law, the assent of the shareholder himself must be proved, and that it was not sufficient simply to show that assent had been given by the beneficial owner of a share held by a nominee. … Where a [beneficiary] … has an equity to compel a consent, I see no reason why equity should not have regard to the position of the beneficial as opposed to the legal owner in its application of the rule”).

[13] Shahar v Tsitsekkos [2004] EWHC 2659 (Ch), [67] (Mann J) (expressing his agreement with Deakin but declining to endorse a conclusive view as the judgment concerned an application for summary judgment); Rolfe v Rolfe [2010] EWHC 244 (Ch), [42] (Newey J) (“I am willing to assume, without deciding, that the asset of the beneficial owners of a share will meet Duomatic requirements”).

[14] Leslie Kosmin QC and Catherine Roberts, Company Meetings and Resolutions: Law, Practice, and Procedure (2^nd edn, OUP 2013) [16.29].

[15] David Fox, ‘Equitable Property’ in John A McGhee QC (ed), Snell’s Equity (33^rd edn, Sweet & Maxwell 2015) [2-003].

[16] Even if there were a stipulation in the trust deed that the trustee was to vote its shares as directed by the beneficiary, that stipulation would not bind the company as a third party to the trust deed to take into account the conduct of the beneficiary as the obligation is a personal one. This is so notwithstanding that the beneficiary could seek to specifically enforce that term of the trust or seek an injunction to restrain breach of it.

[17] Companies Act 2006 (UK) s 153.

[18] PG Turner, ‘May the Assignee of Part of a Debt Vote at a Creditors’ Meeting’ (2012) 71(2) Cambridge Law Journal 270, rightly disagreeing with the Court of Appeal in National Westminster Bank plc v Kapoor [2012] 1 All ER 1201. The principal basis of the court’s reasoning in that case was that “the equitable assignee of a debt, and not the equitable assignor, has the substantive legal right to sue for the assigned debt” (at [43]) which does not, by analogy, assist us in resolving the question posed by Duomatic.

[19] Re BW Estates Ltd (No 2) [2016] BCC 814, [31].

[20] Ibid [34].

[21] Ibid [37] (“The Crown in right of the Isle of Man could not have voted the shares, because it was not a registered shareholder, nor could Mr Robert Williams, because he was not a registered shareholder either. He was the ultimate beneficial owner and might conceivably have obtained a vesting order against the Crown in right of the Isle of Man and then taken steps to have himself registered. He did none of those things and as, following Belvedere’s dissolution, there was in fact no registered shareholder in respect of the 25 per cent shareholding, Belvedere could not therefore have voted or been entitled to vote those shares.”).

[22] Ibid [37].