Chong & Ors v Alexander

The claim concerned three principal disputes between long leaseholders of a small block (Willow Court) and the long leaseholder/director who held a majority of shares in the freehold company: (i) a dispute about the transfer and registration of 10 shares allegedly due to the long leaseholder of flat 5; (ii) a claim that four claimants were entitled to be appointed directors under Article 15 of the company’s Articles of Association; and (iii) a claim for access to the company’s Register of Members. The defendant counterclaimed for declarations based on an asserted earlier agreement (the "Acquisition Agreement") and for validation of company meetings.

The judge interpreted the company articles (notably Article 15 and related provisions) by reference to ordinary principles of contractual construction and business efficacy. He held that (a) the stock transfer relied upon by the claimants was ineffective in the circumstances and the claimants had not prosecuted rectification by the proper party, so mandatory relief compelling transfer and registration was inappropriate; (b) Article 15 entitled members to be appointed as directors and, following the defendant's concession at trial, the court could grant declaratory relief on that construction; and (c) demands for inspection or copying of the Register raised procedural defects and the claimant’s pleaded reliance on particular demands was defective. On the counterclaim, the court found that a contemporaneous written record (RA1/1) was authentic and that there had been an agreement that participating purchasers would not have to pay ground rent (so that the defendant had a personal contractual expectation), but that such an arrangement did not give the defendant a proprietary constructive trust in the company’s freehold or a right to monopolisable lease premia against the company. The court further held that a meeting where the only attending member was the same person whose multiple shares were represented by proxies was not properly quorate under the Articles/Table A and Companies Act provisions.

The court made costs orders largely on a reciprocal basis: for the Transfer of Shares Issue, the Appointment of Directors Issue and the Register inspection Issue each side to bear their own costs; the judge indicated no order as to costs of the counterclaim subject to possible submissions.

Background and parties:

• The proceedings were first-instance Chancery Division (Companies Court) trial held 18–22 January 2016 before Deputy Judge Richard Spearman Q.C. The claimants are long leaseholders of flats 3, 6, 8 and 9; the defendant (also sued as Mrs Alexander) is the long leaseholder of flat 4 and had acted as sole director of the freehold company (Willow Court (Harrow) Ltd). A Part 20 defendant is the company which owns the freehold.

Nature of relief sought:

• The claim sought (i) an order compelling the defendant to concur in and take reasonable steps to secure and register a transfer of 10 shares to the purchaser of flat 5, (ii) a declaration that the defendant’s refusal to consent to appointment of the four claimants as directors at a requisitioned meeting (pursuant to Article 15 of the Articles and by reference to section 303 Companies Act 2006) was unreasonable and that the claimants were entitled to be appointed, (iii) Orders to secure access to the Register of Members, and (iv) costs.

Issues before the court:

• Whether the 10 shares in question should have been transferred and registered in the name of the flat 5 purchaser, and who should bear costs of that issue.
• Whether Article 15 entitled each member to be appointed a director and whether the defendant’s opposition was unreasonable such that declaratory/mandatory relief was appropriate, together with costs.
• Whether the claimants were entitled to access/copies of the Register of Members under the Companies Act 2006 and whether procedural deficiencies defeated their demand, and costs.
• The defendant’s counterclaim alleging an "Acquisition Agreement" recorded in RA1/1 and asserting rights to ground rents and premia, and declarations as to company meetings and the constructive trust/beneficial interest allegations.
• Whether certain company meetings were quorate where a single member attended in person while proxies held votes for blocks of that member’s shares.

Court’s reasoning and findings (concise):

• Transfer and registration: the Articles require share transfers on change of ownership of the associated flat. The stock transfer evidence was either defective or not shown to have been delivered at the relevant time; equally the claimants had not brought rectification proceedings or joined proper parties (the purchaser or the assignors). The court therefore declined to order mandatory transfer or to decide contested factual accounting detail and ordered each side to bear their own costs on this issue.
• Appointment of directors: on construction of Article 15 (read with Article 13 and the Articles as a whole) the Articles provided that the members for the time being shall be the company’s directors (subject to the maximum number). The defendant conceded that she would not contest a declaration in that form; the substantive relief was effectively conceded and the remaining issue was costs. Having considered late pleading and the consequences of pursuing an "unreasonable refusal" formulation, the judge ordered that each side should bear their own costs of the directors issue.
• Register of Members: copy/inspection demands were pleaded with reference to particular letters; at trial it transpired that the pleaded reliance was inaccurate and that the letter upon which the claim depended had not been pleaded, raising prejudice. The defendant had however provided a copy of the Register in evidence, and the remaining dispute was limited to costs. The court refused late amendment and ordered each side to bear their own costs of this issue.
• Counterclaim and Acquisition Agreement: the court accepted the authenticity of RA1/1 and found it recorded an agreement among the participating purchasers that the majority contributor (the defendant) would receive ground rents from non-participating leaseholders in consideration for contributing more purchase funds. The court held, however, that that personal agreement did not create a proprietary constructive trust over the company’s legal freehold in favour of the defendant so as to give her exclusive rights to company receipts or lease extension premia; any such rights were personal obligations between signatories and did not bind the company absent unanimous shareholding assent or an effective company-level transfer/assignment. The judge further found the defendant had not established a right to monopolisable premia as against the company. The counterclaim was therefore unsuccessful in the principal proprietary forms of relief sought.
• Quorum and proxies: the court held that the Articles/Table A and Companies Act provisions do not permit a quorum to be constituted by a member and proxies appointed by that same member such that both the member (personally) and the member’s proxies count towards the quorum in respect of the same shares; attending in person by the member obviates the proxy as a matter of principle. The 13 February 2014 meeting (where the only member present was also the appointing member of proxies) therefore failed to satisfy quorum rules.

Other procedural and evidential matters:

• The trial involved allegations of forged documents; a joint expert’s report was inconclusive and the judge found, on the balance of probabilities, that the key document RA1/1 was genuine and that the claimants’ witnesses had unreliable recollections in part. The judge emphasised problems with pleading, rolling disclosure and the widening of issues which increased costs for both sides.

At first instance the Court determined the competing issues. The court refused to order mandatory transfer or rectification in favour of the claimants in respect of the 10 shares since the stock transfer relied on was ineffectual or not shown to have been delivered and the claimants had not pursued rectification by the proper parties; it accepted the construction that Article 15 entitled members to be directors and (following the defendant’s concession) was prepared to grant a declaration in that form; it found the Register inspection demands were defectively pleaded so that only costs remained in dispute; it found RA1/1 authentic and that there had been an agreement conferring the defendant a personal entitlement to ground rents but rejected a proprietary constructive trust over the company freehold and a right to monopolisable lease premia; and it held that a meeting attended only by a member whose shares were separately represented by proxies was not quorate. Costs were ordered largely on a each-side-to-bear-own basis for the principal issues, and there was no immediate order as to the counterclaim costs pending submissions. Rationale: construction of the Articles, analysis of the defective stock transfer and standing to seek rectification, assessment of documentary authenticity and equitable principles, and application of Companies Act and Table A/Articles provisions on quorum and proxies.