Sharma & Anor v Farlam Ltd & Ors

A person may hold shares as nominee or trustee even where the trust property is subject to a right of reimbursement, lien or indemnity. A later declaration of trust may acknowledge an existing beneficial ownership rather than create a new one. Contractual pre-emption provisions are construed according to their wording and do not apply to a transfer where the beneficial owner remains unchanged, unless the relevant agreement clearly provides otherwise. A company has no power to refuse registration of a fully paid share transfer where the only purported source of that power has been excluded. An arbitration award should be enforced where the proposed transaction is conditional on obtaining any certificate required to prevent illegality.

The judgment determined two related actions arising from the dissolution of a medical partnership and the parties’ ownership of premises and a pharmacy business. In the first action, Dr and Mrs Sharma claimed that 20 of the shares in Farlam Ltd, registered in Mrs Bhalla’s name, had been held for Dr Sharma from their issue and that Mrs Bhalla had breached trust by withholding dividends and obstructing transfers. The defendants relied on pre-emption provisions in a shareholders’ agreement.

In the second action, Dr Bhalla sought enforcement under Arbitration Act 1996 of an interim arbitration award directing the sale of the former partnership premises. The central issues were the beneficial ownership of the shares, the effect of the pre-emption provisions, the directors’ power to refuse registration, the remedies for breach of trust, and whether the proposed sale was prohibited by the National Health Service Act 2006.

1. Shares and trust. Mrs Bhalla subscribed for 20 shares as nominee and trustee for Dr Sharma from the outset. The unsettled financial accounts and her entitlement to reimbursement did not make Dr Sharma’s interest conditional or prevent a nominee relationship. The July 2001 declaration acknowledged an existing trust. Mrs Sharma subsequently held the legal interest as nominee for Dr Sharma, so beneficial ownership remained unchanged.
2. Dividends. Mrs Bhalla was accountable for dividends and other benefits attributable to the 20 shares. The June 2001 minutes were not contractually binding, Mrs Bhalla was not a party to them, and there was no consensus that she could retain the whole of the first dividend. She was therefore accountable for half of the first £40,000 dividend, subject to credit for the £20,000 paid to Mrs Sharma, and for later dividends and benefits. The account was to proceed on the footing of wilful default. The court noted that payments made before lawful dividend declarations were technically unlawful payments by the company, but became directly accountable under the trust once dividends were declared.
3. Pre-emption and registration. The July 2001 declaration did not trigger a sale notice because there was no transfer of beneficial ownership. A later proposed transfer of legal title could amount to a transfer, but Mr Uppal had waived or abandoned any enforceable pre-emption rights through delay, conduct and failure to seek relief. Mrs Bhalla had no independent pre-emption rights. The contractual provisions applied to a transfer of all shares, while the relevant Articles dealt with partial transfers. In any event, there was no power to refuse registration: Table A regulation 24 had been excluded, and the shares were fully paid.
4. Relief and arbitration. Mrs Bhalla was ordered to execute a stock transfer form, account for dividends, pay compensation for losses caused by her obstructive breaches of trust, and withdraw the ineffective sale notice. The Sharmas succeeded on their claims except for immediate rectification of the register. The interim arbitration award directing sale of the premises was enforced. The proposed sale was conditional on a certificate under the statutory scheme, so any future illegality was insufficient reason to refuse enforcement.

This was a first-instance decision. The judgment also determined an application under section 66 of the Arbitration Act 1996 to enforce a consent interim arbitration award dated 13 November 2006.