EIC Services Ltd & Anor v Phipps & Ors

A bonus issue may be irregular where the shares in respect of which bonus shares are allotted are not fully paid, or where required shareholder authority is absent. Those defects do not automatically make the bonus shares void. The Duomatic principle requires actual assent, or conduct making denial inequitable, by all shareholders entitled to approve, with knowledge of the relevant facts. Being informed of a proposed act is insufficient. Applying common-mistake principles by analogy, the court should consider whether the defect is fundamental and prefer a commercially sensible result. A shareholder receiving bonus shares can in principle be a person dealing with the company under section 35A of the Companies Act 1985. Without that protection, the shares may be treated as unpaid.

The claimants sought determination of preliminary issues concerning a 99-for-1 bonus issue by the Company. The issue capitalised part of the share premium account and allotted bonus shares to existing shareholders. The questions were whether the subscriber shares and the November 1999 shares were fully paid when the bonus issue was made; whether the capitalisation and allotment had been authorised by the members; and, if not, whether the bonus shares were void.

The proceedings were conducted on a representative basis for shareholders advancing opposing positions. The central issues were the effect of the Companies Act 1985 and the Articles, the Duomatic principle, common mistake, and section 35A.

1. Payment and amendment. The subscriber shares were fully paid through an agreed set-off of expenses. The November 1999 shares were not paid up by 15 December 1999. Payment for shares is not confined to cash, but the relevant consideration must have been agreed and provided. The application to amend the defence after the evidence had concluded was refused because it would cause irremediable and unfair prejudice.
2. Articles and approval. Regulations 104 and 110 of the Companies (Tables A to F) Regulations 1985 required the bonus allocation to reflect amounts paid up and required authority by ordinary resolution. No such resolution was passed.
3. Duomatic principle. The principle in In re Duomatic Ltd [1969] 2 Ch. 365 requires all shareholders entitled to attend and vote to assent with full knowledge of the relevant facts, or to act so that it would be inequitable to deny assent. The shareholders were informed of the proposed bonus issue, but were not asked to consent and were unaware that consent was required. Later acceptance of certificates and transfers did not cure the defect, particularly after the original shareholders had ceased to be members.
4. Voidness. Applying common-mistake principles by analogy, the failure to pay up the November shares and the absence of a resolution were irregularities, but neither was a fundamental mistake making the bonus issue void. The commercial consequences, the small amount required to pay up the shares, and the fact that shareholders had been told their shares would be paid up all militated against voidness. The reasoning in In re Cleveland Trust PLC [1991] BCLC 424 was distinguished on its materially different facts. If necessary, the lesser consequence would be to treat the relevant bonus shares as unpaid.
5. Section 35A. A shareholder receiving bonus shares is capable of being a person dealing with the company under section 35A of the Companies Act 1985. Its broad language removes constitutional limitations on the board’s power in favour of a good-faith dealing person, without impliedly excluding members. The protection does not remove liability arising from directors exceeding their powers.
6. Disposition. The bonus issue and allotments were irregular, but neither defect rendered them void. If section 35A did not protect a particular allottee, the relevant bonus shares would be treated as unpaid.

Master Moncaster directed the determination of the preliminary issues on 26 June 2002. The judgment records related proceedings in Guernsey but does not describe an appeal from this decision.