Blomqvist v Zavarco plc and Another

The court decided two related first‑instance claims arising out of a post‑listing dispute over a large allotment of shares (the "7Bn shares") said to be held by Open Fibre Sdn Bhd pursuant to a Malaysian consent order. The key legal principles applied were:

• Estoppel by representation and market listing: a company that lists its shares (or permits them to be traded through a system such as CREST) represents to potential acquirers that the listed shares are fully paid; purchasers who acquire with knowledge of that listing are entitled to rely on that representation unless the company proves the contrary.
• Directors' power to allot and statutory authorisation: directors may only allot shares in accordance with Companies Act 2006 s.551 (authority in articles or by shareholder resolution); an allotment without such authority breaches s.549 but s.549(6) preserves the validity of the allotment in specified circumstances.
• Limits of pleaded case: the claimant was not permitted to raise unpleaded allegations as to the validity or impropriety of the Malaysian consent order or as to wider breaches of duty by the directors.

Applying those principles, the judge held that the claimant was estopped from having the company deny that his shares were fully paid or, alternatively, the company had failed to prove they were unpaid. However, the allotment of the 7Bn shares to OFSB was treated as a valid allotment for the purposes of these proceedings: although the directors acted without the shareholder authorisation required by s.551 (a breach of s.549), the allotment could not be set aside in the present claims because the claimant did not challenge the validity of the Malaysian consent order and there was no pleaded or proven knowledge/bad faith on OFSB's part. As a result the claimant's Part 8 claim for rectification of the register failed and the petition seeking directions for a meeting (contingent on rectification) did not succeed.

Background and parties: Zavarco Plc is an English company with shares listed on the Frankfurt Stock Exchange whose principal asset was an indirect Malaysian subsidiary (V Telecoms). The claimant, Mr Blomqvist, held a substantial block of shares (directly and beneficially) and sought to convene a general meeting under Companies Act 2006 s.303 and s.305 to remove and replace the board. After a Malaysian settlement between Zavarco and OFSB resulted in a consent order requiring, among other things, transfer of the VTel asset and the issue of shares in Zavarco to OFSB, the Zavarco board resolved to allot some 7,052,159,653 new shares to OFSB, drastically diluting earlier holdings.

Nature of the claims: (i) a petition under s.994 Companies Act 2006 seeking a declaration that the claimant's s.305 meeting notice was valid and a direction that the meeting be held; and (ii) a Part 8 claim seeking rectification of the register of members to remove OFSB's 7Bn share entry.

Issues framed by the court:

• whether the claimant's shares were fully paid or were unpaid and therefore incapable of voting;
• whether the allotment and registration of 7Bn shares to OFSB was lawfully made and whether it was capable of being set aside or rectified;
• whether, on the pleaded case, the court could investigate or make findings about the circumstances of the Malaysian consent order or the directors' motives in entering it;
• consequences of any statutory contravention of Companies Act 2006 provisions (notably s.549, s.551 and s.580).

Reasoning and findings:

• The court held that an issuer which lists its shares or permits trading through CREST represents that those shares are fully paid and that market participants are entitled to rely on that representation. The claimant had, before acquiring shares, seen and relied on company filings (SH01), audited accounts, listing information and share certificates. He had provided valuable consideration. The company therefore bore the burden of proving the shares were unpaid and that the claimant knew that to be so.
• The company failed to discharge that burden. The judge accepted contemporaneous documentation and evidence indicating complex arrangements surrounding the original share exchange and subsequent transfers, and concluded the company had not proved the shares were unpaid. The claimant was entitled to rely on estoppel; alternatively the balance of evidence established payment.
• As to the allotment of the 7Bn shares, the board resolved to allot to comply with the Malaysian consent order. The court accepted that the directors lacked the shareholder authority that s.551 requires and therefore breached s.549. But s.549(6) preserves the validity of allotments in the relevant respects and, crucially, the claimant had deliberately not pleaded or put in issue the validity, propriety or circumstances of the Malaysian consent order or the directors' entry into it. In the absence of such pleaded attack and without a pleaded case that OFSB had knowledge of any breach or acted in bad faith, the allotment could not be set aside in these proceedings (Rolled Steel Products authority considered).
• The claimant therefore failed to establish that OFSB's entry on the register was "without sufficient cause" for rectification under s.125, and the rectification claim failed. Because the petition relief was contingent on rectification, that relief did not succeed either.
• The court also noted, without deciding the point on the pleadings, that an unpleaded argument raised orally had force: the allotment pursuant to the consent order appeared to involve an issue at a discount vis‑à‑vis par value which might raise liabilities under Companies Act 2006 s.580, but that issue was not pleaded and was left for later resolution.

Procedural posture and wider context: These are first instance Chancery Division Companies Court hearings; the judgment records prior procedural steps (a dismissed stay application in England, Donaldson QC 2 July 2015, and a refused application for permission to appeal). The judge emphasised the limits imposed by the pleadings and that further questions about the background to the Malaysian settlement are matters for the Malaysian proceedings. He also criticised non‑disclosure to the market of the consent order and related matters as contrary to listing obligations.

First instance: The Part 8 claim for rectification of the register is dismissed and the petition under Companies Act 2006 s.994 does not obtain the relief sought. The court held that Mr Blomqvist is estopped (or alternatively on the evidence the shares were paid up) from being deprived of voting rights by a claim that his shares were unpaid, but that the allotment and registration of the 7,052,159,653 shares to OFSB was valid for the purposes of these proceedings. Although the directors acted without the shareholder authorisation required by s.551 (a breach of s.549), that allotment cannot be set aside here because the claimant did not plead or contest the validity or propriety of the Malaysian consent order and there is no pleaded or proved knowledge or bad faith on OFSB's part; accordingly rectification under s.125 is not made.

The judgment records that an application by Zavarco plc to stay the English proceedings on forum grounds was dismissed by Mr David Donaldson QC on 2 July 2015; an application for permission to appeal that order was refused by Sales LJ as totally without merit (referenced in the judgment).