Zavarco Plc v Ranjeet Singh Sidhu

This appeal concerned the statutory rules in the Companies Act 2006 governing payment for shares in a public company, in particular whether (i) shares taken by a subscriber on incorporation are subject to the Chapter 6 valuation and allotment rules (sections 593–594) and (ii) whether a subscriber who takes shares on incorporation is obliged to pay cash under section 584 and, if so, whether the court can grant relief under section 606. The Court of Appeal held that subscriber shares taken on formation are not "allotted" within the meaning of the Chapter 6 allotment provisions, so section 593 did not apply. The court further held that a subscriber's undertaking in the memorandum, read with the statement of capital and initial shareholdings, obliged the subscriber to pay cash for the number of shares shown on formation (section 584) and that section 606 (a Chapter 6 remedy) does not permit relief from that obligation. For those reasons the respondent company’s claim for €84 million and interest succeeded, and the appeal was dismissed.

The appellant, Mr Sidhu, was registered as holding 840 million ordinary shares (nominal value €84 million) in Zavarco plc on its incorporation. The company claimed that those subscriber shares were unpaid and that Mr Sidhu was liable to pay their nominal value. Key issues before the Court of Appeal were whether the Chapter 6 valuation/allotment provisions (sections 593–594) applied to shares taken on formation, whether the subscriber undertaking in the memorandum required payment in cash for the shares taken (section 584), and whether the court could grant relief from any such liability under section 606.

The facts were that the company was incorporated with very large initial capital; no cash was expected to be paid for the subscriber shares; and there was considerable uncertainty as to the beneficial owners of the consideration shares to be issued in connection with the acquisition of a Malaysian group. The judge at first instance treated the claim as founded on section 593 and, applying the Chapter 6 framework, ordered payment by Mr Sidhu. On appeal the Court analysed the 2006 Act’s formation regime, noting that under section 16(5) and section 10 a subscriber becomes holder of the shares specified in the statement of capital and initial shareholdings on registration.

• On allotment: the court held that shares taken on formation are not "allotted" by the company within the meaning of the Chapter 6 allotment provisions and that section 559 expressly excludes those provisions from applying to subscribers’ shares.
• On the subscriber undertaking and section 584: the court concluded that the memorandum undertaking to take "at least one share" must be read with the statement of capital so that the subscriber undertakes to take the number of shares stated on registration; section 584 therefore requires those shares taken pursuant to that undertaking to be paid up in cash and operates to enforce the existing contractual obligation rather than creating a separate statutory penalty.
• On relief under section 606: section 606 is a Chapter 6 provision and does not confer a power to relieve a subscriber from an obligation imposed by section 584 in Chapter 5; the court therefore had no power to grant relief under section 606 in respect of the subscriber’s cash obligation.

The Court also endorsed the trial judge’s exercise of fact-based discretion in rejecting the appellant’s valuation evidence absent expert valuation evidence and in the circumstances of late reliance on audited accounts.

Appeal dismissed. The Court held that subscriber shares taken on formation are not "allotted" for the purposes of Chapter 6 (so section 593 did not apply); the subscriber’s undertaking, read with the statement of capital and initial shareholdings, obliged the subscriber to pay cash for the shares taken on incorporation under section 584; and the court had no power under section 606 (a Chapter 6 provision) to relieve a subscriber from that Chapter 5 obligation. The primary judgment below was right in result though reached by a different route.

This is an appeal to the Court of Appeal from the decision of Upper Tribunal Judge Jonathan Richards, sitting as a High Court judge, reported at [2021] EWHC 1526 (Ch). Related prior proceedings between the parties and others include earlier High Court and Court of Appeal litigation concerning Mr Nasir: Zavarco plc v Nasir [2017] EWHC 2877 (Ch) and Zavarco v Nasir [2021] EWCA Civ 1217.