Blomqvist v Zavarco Plc & Ors

A company whose shares are listed on an exchange, or traded through a system requiring fully paid securities, represents to potential acquirers that its shares are fully paid. A purchaser or transferee acquiring shares with knowledge of that status may rely on the representation unless the company proves both that the shares were unpaid and that the acquirer knew that fact.

An allotment made without the authority required by the Companies Act 2006 may nevertheless remain valid. Rectification will not follow where the allotment was made to discharge an unchallenged contractual obligation and no bad faith or relevant knowledge is pleaded or proved.

Mr Blomqvist brought a petition under section 994 of the Companies Act 2006 concerning his request for a general meeting of Zavarco plc, and a Part 8 claim seeking rectification of the register. The company alleged that the shares held by him were unpaid and therefore did not confer the relevant rights.

After Mr Blomqvist’s request, the company allotted approximately 7 billion shares to Open Fibre Sdn Bhd pursuant to a Malaysian consent order settling litigation. He challenged the allotment for want of authority, lack of shareholder approval and failure to comply with pre-emption requirements. The central issues were whether his shares were paid up or treated as paid up, and whether the allotment to Open Fibre was legally effective.

1. Shares held by Mr Blomqvist. The company’s listing on the Frankfurt Stock Exchange and trading through Crest, together with its statutory returns, accounts and share certificates, represented that the shares were fully paid. In modern market conditions, that representation is treated as relied upon by purchasers or transferees acquiring shares with knowledge that they were listed or traded through such a system. The company bore the burden of proving both that the shares were unpaid and that the acquirer knew that fact. The principle reflected in Burkinshaw v Nicolls (1878) 3 App.Cas. 1004 required adaptation to uncertificated market dealings.
2. The company failed to prove that the shares were unpaid. The contemporary documents suggested that the shares issued on incorporation formed part of the consideration arrangement for the acquisition of Zavarco Bhd. The evidence did not discharge the company’s burden. Mr Blomqvist was therefore entitled to rely on estoppel, and alternatively the shares were shown to be fully paid.
3. Allotment to Open Fibre. Article 57.1 was not a freestanding authority to allot shares without the statutory authorisation required by the Companies Act 2006. Article 56 was expressly subject to the Companies Acts, and section 551 required an authority stating the maximum amount and expiry date. No valid shareholder authority was shown. The directors therefore acted in breach of section 549.
4. Section 549(6) preserved the validity of an allotment despite that breach. The Malaysian consent order was to be treated in these proceedings as a binding contractual obligation because it embodied a consensual settlement and its validity and propriety had not been challenged on the pleadings. Compliance with it was therefore a proper purpose. In any event, there was no pleaded or proved bad faith or knowledge by Open Fibre. The allotment was valid and the entry in the register was not made without sufficient cause under section 125.
5. A late and unpleaded argument concerning an alleged discount under section 580 could not found relief. The judge observed, obiter, that the argument appeared to have considerable force and that discount was measured against par value, not market value.

The petition and Part 8 claim consequently failed.

Mr David Donaldson QC dismissed Zavarco plc’s applications to stay the English proceedings on forum grounds on 2 July 2015. Sales LJ refused permission to appeal, describing the application as totally without merit.