Smith v Charles Building Services Ltd & Anor

Under the Companies Act 1985, s 359, an invalid share transfer and the resulting registration do not defeat the original registered holder’s prima facie right to rectification. Although the claimant bears the initial burden of establishing a case for rectification, the burden shifts after an invalid transfer to the party resisting restoration. That party must show a reason, such as fraud or other impropriety in the original registration, why the right should not be enforced. Rectification may restore legal registration without determining beneficial ownership. Retrospective rectification requires care where third-party rights may be prejudiced.

Steve and Terry Smith incorporated Charles Building Services Ltd, with each initially registered as the holder of one share. After their relationship deteriorated, Steve signed a share transfer which Terry later presented for registration. Following a six-day trial, Mr Justice Mann found that the transfer was incomplete and invalid and ordered rectification of the register. His judgment is reported at [2005] BCC 513.

Terry appealed the declarations that Steve was intended to have a shareholding and was legally entitled to the share registered in his name. The central issues were the effect of the invalid transfer, the burden of proof under s 359, and whether the court needed to determine beneficial ownership or the precise shareholding before ordering rectification.

1. Disposition. The appeal was dismissed unanimously. The finding that Steve’s transfer was invalid was not challenged.
2. Sir Martin Nourse. Once the transfer was invalid, registration of the share in Terry’s name was equally invalid. Under section 359(1)(a) of the Companies Act 1985, Steve therefore had a prima facie right to restoration of the status quo. Steve bore the initial burden of making out a case for rectification, but that burden shifted to Terry to establish why the right should not be enforced. No fraud or other impropriety in the original registration had been found. The parties’ common intention that Steve should have a shareholding was sufficient to justify restoration. The judge had not determined beneficial ownership, which could be resolved after rectification if necessary.
3. Arden LJ. Arden LJ considered that the judge had made interdependent findings that Steve should have a shareholding and that it should comprise one share. She held that Terry’s knowledge of the registration and failure to object effectively amounted to ratification, so any absence of an antecedent enforceable agreement ceased to have operative effect. She also stated that retrospective rectification requires care where third-party rights may be prejudiced, referring to Re Sussex Brick Co Ltd [1904] 1 Ch.598.
4. Waller LJ. Waller LJ agreed with Sir Martin Nourse that the burden lay on Terry once the transfer was held invalid. He did not express a view on ratification.

• Court of Appeal (Civil Division): Terry’s appeal against the declarations and consequential relief was dismissed. The court upheld restoration of Steve’s registered shareholding, without determining beneficial ownership.
• High Court, Mr Justice Mann: Following a six-day trial, the judge found the transfer invalid and ordered rectification under s 359. The decision is reported at [2005] BCC 513.