BUSHELL V FAITH[1][1]

 BUSHELL V FAITH[1][1]

[1970] 1 ALL ER 53

HOUSE OF LORDS

LORD(S):          LORD REID, LORD MORRIS OF BORTH-Y-GEST, LORD GUEST, LORD UPJOHN AND LORD DONOVAN

16 DECEMBER 1969

 

Company – Articles of association – Directors – Article providing director with special voting rights on resolution to remove him from office – Validity – Companies Act 1948, s 184(1).

The articles of association of a company incorporated Table A excluding art 96 (empowering a company to remove a director by ordinary resolution). They included a special article: ‘In the event of a Resolution being proposed at any General Meeting of the Company for the removal from office of any Director, any shares held by that Director shall on a poll in respect of such Resolution carry the right to three votes per share … ’

Held – (Lord Morris of Borth-y-Gest dissenting) The special article effectively gave a director on the occasion of a poll on a resolution for his removal from office three votes for every share which he held notwithstanding s 184(1)a of the Companies Act 1948

Decision of the Court of Appeal [1969] 1 All ER 1002 affirmed.

G B H Dillon QC and D J Nicholls for the appellant.

M M Wheeler QC and G T Hesketh for the respondent.

Their Lordships took time for consideration

16 December 1969. The following opinions were delivered.

LORD REID: My Lords, with some reluctance I agree with the majority of your Lordships that this appeal must be dismissed. Special art 9 of the articles of association of this company is obviously designed to evade s 184(1) of the Companies Act 1948, which provides that a company may by ordinary resolution remove a director notwithstanding anything in its articles. The extra voting power given by that article to a director whose removal from office is proposed makes it impossible in the circumstances of this case for any resolution for the removal of any director to be passed if that director votes against it.

We were informed that this device for giving extra votes to a particular share or a particular shareholder did not appear in any textbook or any reported case until

 

1956. In Palmer’s Company Precedents  published in that year, form no 256 (c) in effect would give to the named shareholder power to prevent any alteration of the particular article, thereby preventing the application of s 10 of the Act, and form no 259 is similar to special art 9 in the present case. Form no 254 confers on the holder of a particular share what is in effect a veto by which he can prevent any resolution of any kind from being passed without his consent.

But the practice of giving special voting rights or special lack of voting rights to a particular class of shares is old and is recognised in art 2 of Table A in Sch 1 to the 1948 Act. The novel use of this practice in the forms set out in Palmer may not have been contemplated in 1948, and it may be that the whole practice will be reviewed when amendments to the Companies Act 1948 are being proposed. But we must take the law as we find it.

Counsel for the appellant found it impossible to deny that an article like that in form no 254 would be effective to prevent the removal of a director without the consent of the shareholder having the veto thereby given to him, and I cannot find any sufficient reason for holding that a veto in that form would be effective but that what amounts to a veto in special art 9 in the present case is ineffective to prevent evasion of s 184.

LORD MORRIS OF BORTH-Y-GEST: My Lords, it is provided by s 184(1) of the Companies Act 1948 that a company may by ordinary resolution remove a director before the expiration of his period of office. The company may do so notwithstanding anything to the contrary in its articles. So if an article provided that a director was irremovable he could nevertheless be removed if an ordinary resolution to that effect was passed. So also if an article provided that a director could only be removed by a resolution carried by a majority greater than a simple majority he would nevertheless be removed if a resolution was passed by a simple majority.

Some shares may, however, carry greater voting power than others. On a resolution to remove a director shares will therefore carry the voting power that they possess. But this does not, in my view, warrant a device such as special art 9 introduces. Its unconcealed effect is to make a director irremovable. If the question is posed whether the shares of the respondent possess any added voting weight the answer must be that they possess none whatsoever beyond, if valid, an ad hoc weight for the special purpose of circumventing s 184. If special art 9 were writ large it would set out that a director is not to be removed against his will and that in order to achieve this and to thwart the express provision of s 184 the voting power of any director threatened with removal is to be deemed to be greater than it actually is. The learned judge thought that to sanction this would be to make a mockery of the law. I think so also.

I would allow the appeal.

LORD GUEST: My Lords, I have had the advantage of reading the opinion of my noble and learned friend, Lord Donovan, with which I agree.

I would dismiss the appeal.

LORD UPJOHN: My Lords, this appeal raises a question of some importance to those concerned with the niceties of company law, and the relevant facts, which are not in dispute, can be very shortly stated. The respondent company Bush Court (Southgate) Ltd (a formal party to the proceedings) was incorporated on 19 September 1960, and at all material times had an issued capital of 300 fully paid-up shares of £1 each held as to 100 shares each by a brother and his two sisters namely the appellant Mrs Bushell, the respondent Mr Faith and their sister Dr Kathleen Bayne.

 

The respondent was a director but his conduct as such displeased his sisters who requisitioned a general meeting of the company which was held on 22 November 1968, when a resolution was proposed as an ordinary resolution to remove him from his office as director. On a show of hands the resolution was passed, as the sisters voted for the resolution; so the brother demanded a poll and the whole issue is how votes should be counted on the poll having regard to special art 9 of the company’s articles of association.

The company adopted Table A in Sch 1 to the Companies Act 1948, with variations which are immaterial for present purposes. The relevant articles of Table A are:

‘2. Without prejudice to any special rights previously conferred on the holders of any existing shares or class of shares, any share in the company may be issued with such preferred, deferred or other special rights or such restrictiOns, whether in regard to dividend, voting, return of capital or otherwise as the company may from time to time by ordinary resolution determine.

‘62. Subject to any rights or restrictions for the time being attached to any class or classes of shares, on a show of hands every member present in person shall have one vote, and on a poll every member shall have one vote for each share of which he is the holder.’

Special art 9 is as follows:

‘In the event of a Resolution being proposed at any General Meeting of the Company for the removal from office of any Director, any shares held by that Director shall on a poll in respect of such Resolution carry the right to three votes per share and regulation 62 of Part 1 of Table A shall be construed accordingly.’

Article 96 of Table A, which empowers a company to remove a director by ordinary resolution is excluded by the articles of the company so that the appellant relies on the mandatory terms of s 184(1) of the Companies Act 1948, which so far as relevant is in these terms:

‘A company may by ordinary resolution remove a director before the expiration of his period of office, notwithstanding anything in its articles or in any agreement between it and him … ’

It is not in doubt that the requirements of sub-s (2) have been satisfied. So the whole question is whether special art 9 is valid and applicable, in which case the resolution was rejected by 300 votes to 200, or whether that article must be treated as overridden by s 184 and therefore void, in which case the resolution was passed by 200 votes to 100. So to test this matter the appellant began an action for a declaration that the respondent was removed from office as a director by the resolution of 22 November 1968, and moved the court for an interlocutory injunction restraining him from acting as a director. This motion comes by way of appeal before your Lordships.

The appellant argues that special art 9 is directed to frustrating the whole object and purpose of s 184 so that it can never operate where there is such a special article and the director in fact becomes irremovable. So she argues that, having regard to the clear words ‘notwithstanding anything in its articles’ in s 184, special art 9 must be rejected and treated as void. The learned judge, Ungoed Thomas J, so held. He said: ‘It would make a mockery of the law if the courts were to hold that in such a case a director was to be irremovable’, and later he concluded his judgment by saying: ‘A resolution under art 9 is therefore not in my view an ordinary resolution within s 184. The [appellant] succeeds in the application.’

The respondent appealed, and the Court of Appeal ([1969] 1 All ER 1002, [1969] 2 WLR 1067) (Harman, Russell and

 

Karminski LJJ) allowed the appeal. Harman LJ ([1969] 1 All ER at 1004, [1969] 2 WLR at 1070) did so on the simple ground that the 1948 Act did not prevent certain shares or classes of shares having special voting rights attached to them and on certain occasions. He could find nothing in the 1948 Act which prohibited the giving of special voting rights to the shares of a director who finds his position attacked. Russell LJ ([1969] 1 All ER at 1005, [1969] 2 WLR at 1072) in his judgment gave substantially the same reasons for allowing the appeal and he supported his judgment by reference to a number of recent precedents particularly those to be found in Palmer’s Company Precedentsc but, with all respect to the learned Lord Justice, I do not think these precedents which, so far as relevant, are comparatively new can be said to have the settled assent and approbation of the profession, so as to render them any real guide for the purposes of a judgment; especially when I note the much more cautious approach by the learned editors of 5 Ency Forms & Precedents (4th Edn) 1966, p 428, where in reference to a form somewhat similar to special art 9 they state in footnote 14:

‘The validity of such a provision as this in relation to a resolution to remove a director from office remains to be tested in the courts.’

My Lords, when construing an Act of Parliament it is a canon of construction that its provisions must be construed in the light of the mischief which the Act was designed to meet. In this case the mischief was well known; it was a common practice, especially in the case of private companies, to provide in the articles that a director should be irremovable or only removable by an extraordinary resolution; in the former case the articles would have to be altered by special resolution before the director could be removed and of course in either case a three-quarters majority would be required. In many cases this would be impossible, so the Act provided that notwithstanding anything in the articles an ordinary resolution would suffice to remove a director. That was the mischief which the section set out to remedy; to make a director removable by virtue of an ordinary resolution instead of an extraordinary resolution or making it necessary to alter the articles.

An ordinary resolution is not defined nor used in the body of the 1948 Act although the phrase occurs in some of the articles of Table A in Sch 1 to the Act. But its meaning is, in my opinion, clear. An ordinary resolution is in the first place passed by a bare majority on a show of hands by the members entitled to vote who are present personally or by proxy and on such a vote each member has one vote regardless of his shareholding. If a poll is demanded then for an ordinary resolution still only a bare majority of votes is required. But whether a share or class of shares has any vote on the matter and, if so, what is its voting power on the resolution in question depends entirely on the voting rights attached to that share or class of shares by the articles of association.

I venture to think that Ungoed Thomas J overlooked the importance of art 2 of Table A which gives to the company a completely unfettered right to attach to any share or class of shares special voting rights on a poll or to restrict those rights as the company may think fit. Thus, it is commonplace that a company may and frequently does preclude preference shareholders from voting unless their dividends are in arrear or their class rights are directly affected. It is equally commonplace that particular shares may be issued with specially loaded voting rights which ensure that in all resolutions put before the shareholders in general meeting the holder of those particular shares can always be sure of carrying the day, aye or no, as the holder pleases.

Counsel for the appellant felt, quite rightly, constrained to admit that if an article

 

provided that the respondent’s shares should, on every occasion when a resolution was for consideration by a general meeting of the company, carry three votes such a provision would be valid on all such occasions including any occasion when the general meeting was considering a resolution for his removal under s 184.

My Lords, I cannot see any difference between that case and the present case where special voting rights are conferred only when there is a resolution for the removal of a director under s 184. Each case is an exercise of the unfettered right of the company under art 2 whereby:

‘… any share in the company may be issued with such … special rights … in regard to … voting … as the company may from time to time by ordinary resolution determine.’

Parliament has never sought to fetter the right of the company to issue a share with such rights or restrictions as it may think fit. There is no fetter which compels the company to make the voting rights or restrictions of general application and it seems to me clear that such rights or restrictions can be attached to special circumstances and to particular types of resolution. This makes no mockery of s 184; all that Parliament was seeking to do thereby was to make an ordinary resolution sufficient to remove a director. Had Parliament desired to go further and enact that every share entitled to vote should be deprived of its special rights under the articles it should have said so in plain terms by making the vote on a poll one vote one share. Then, what about shares which had no voting rights under the articles? Should not Parliament give them a vote when considering this completely artificial form of ordinary resolution? Suppose there had here been some preference shares in the name of the respondent’s wife, which under the articles had in the circumstances no vote; why in justice should her voice be excluded from consideration in this artificial vote? I only raise this purely hypothetical case to show the great difficulty of trying to do justice by legislation in a matter which has always been left to the corporators themselves to decide.

I agree entirely with the judgment of the Court of Appeal ([1969] 1 All ER 1002, [1969] 2 WLR 1067), and would dismiss this appeal.

LORD DONOVAN: My Lords, the issue here is the true construction of s 184 of the Companies Act 1948; and I approach it with no conception of what the legislature wanted to achieve by the section other than such as can reasonably be deduced from its language.

Clearly it was intended to alter the method by which a director of a company could be removed while still in office. It enacts that this can be done by the company by ordinary resolution. Furthermore, it may be achieved notwithstanding anything in the company’s articles, or in any agreement between the company and the director.

Accordingly any case (and one knows there were many) where the articles prescribed that a director should be removable during his period office only by a special resolution or an extraordinary resolution, each of which necessitated, inter alia, a three to one majority of those present and voting at the meeting, is overridden by s 184. A simple majority of the votes will now suffice; an ordinary resolution being, in my opinion, a resolution capable of being carried by such a majority. Similarly any agreement, whether evidenced by the articles or otherwise, that a director shall be a director for life or for some fixed period is now also overreached.

The field over which s 184 operates is thus extensive for it includes, admittedly, all companies with a quotation on the Stock Exchange. It is now contended, however, that it does something more; namely, that it provides in effect that when the

 

ordinary resolution proposing the removal of the director is put to the meeting each shareholder present shall have one vote per share and no more; and that any provision in the articles providing that any shareholder shall, in relation to this resolution, have ‘weighted’ votes attached to his shares, is also nullified by s 184. A provision for such ‘weighting’ of votes which applies generally, ie as part of the normal pattern of voting, is accepted by the appellant as unobjectionable; but an article such as the one here under consideration which is special to a resolution seeking the removal of a director falls foul of s 184 and is overridden by it.

Why should this be? The section does not say so, as it easily could. And those who drafted it and enacted it certainly would have included among their numbers many who were familiar with the phenomenon of articles of association carrying ‘weighted votes’. It must therefore have been plain at the outset that unless some special provision were made, the mere direction that an ordinary resolution would do in order to remove a director would leave the section at risk of being made inoperative in the way that has been done here. Yet no such provision was made, and in this Parliament followed its practice of leaving to companies and their shareholders liberty to allocate voting rights as they pleased.

When therefore it is said that a decision in favour of the respondent in this case would defeat the purpose of the section and make a mockery of it, it is being assumed that Parliament intended to cover every possible case and block up every loophole. I see no warrant for any such assumption. A very large part of the relevant field is in fact covered and covered effectively. And there may be good reasons why Parliament should leave some companies with freedom of manoeuvre in this particular matter. There are many small companies which are conducted in practice as though they were little more than partnerships, particularly family companies running a family business; and it is, unfortunately, sometimes necessary to provide some safeguard against family quarrels having their repercussions in the boardroom. I am not, of course, saying that this is such a case; I merely seek to repeal the argument that unless

the section is construed in the way the appellant wants, it has become “inept’ and ‘frustrated’.

I would dismiss the appeal.

Appeal dismissed.

Solicitors: White & Leonard & Corbin Greener (for the appellant); Layzell, Hayes & Morley-Slinn (for the respondent).

S A Hatteea Esq   Barrister.