Usman Hussain Malik v Mahboob Hussain

The court determined multiple interconnected applications arising from a court-ordered sale of shares and property following earlier substantive judgments and a Court of Appeal decision ([2023] EWCA Civ 2). Key legal principles applied were (i) that upon formation of a valid contract for sale beneficial ownership of shares passes to the purchaser while the vendor retains an equitable right to the price and, following payment, the vendor becomes a bare trustee for the purchaser; (ii) the vendor as bare trustee must act on the purchaser's directions in respect of rights attaching to the shares; and (iii) the court has jurisdiction under s.125 Companies Act 2006 to rectify a company register where entries have been made without sufficient cause.

Applying those principles the judge granted declarations that, upon payment for the 50 sale shares, Mahboob would hold those shares as bare trustee for Usman and must exercise voting and other rights attaching to them as Usman directs, and that the Company must treat the two shares previously registered back to Nusrat in August 2022 as records requiring rectification and ordered rectification under s.125. The court authorised inclusion of a narrowly drawn power of attorney in the sale contract to allow practical exercise of voting rights pending registration, and adjusted further assurance drafting. The court refused Nusrat's application for a prohibitory injunction but refused to leave Usman unprotected: it allowed rectification of the register to show Usman as registered owner of the two shares pending a speedy trial of Nusrat's competing claim, subject to specific undertakings by Usman to mitigate irreversible prejudice to Nusrat.

Background and parties: This judgment resolves several contested applications between members of two family factions arising from the court-ordered sale of 50 shares in R N Restaurant (Stockport) Ltd and associated property. The principal parties were Usman (the purchaser under the sale mechanism), Mahboob (vendor of part of the sale shares), Nusrat (registered holder of two disputed shares) and the Company (the third defendant). The dispute followed prior High Court judgments and a Court of Appeal decision ([2023] EWCA Civ 2) that enabled Usman to buy the 50 sale shares.

Nature of claims/applications:

• Determination of disputed terms of the share and property sale contracts and inclusion of a limited power of attorney (Usman’s sale contracts terms application).
• Declarations as to the equitable position of the vendor of the 50 sale shares pending registration (Usman’s sale shares application).
• Rectification of the Company register to show Usman as legal owner of two shares and resolution of rival claims to those two shares (Usman’s two shares application; Nusrat’s two shares application).
• Company’s application for declarations as to the scope of Article 6 of the Articles of Association.
• Nusrat’s application for an interim injunction restraining Usman pending resolution of her claim to the two shares.

Issues framed: Whether (a) under general equitable principles a vendor of shares becomes a bare trustee for the purchaser after payment so that the purchaser may direct voting and other rights pending registration; (b) whether a power of attorney should be included in court-ordered sale documents to enable practical exercise of those rights; (c) whether the Company’s directors validly recorded a transfer of two shares back to Nusrat in August 2022 and whether the register should be rectified under s.125 Companies Act 2006; and (d) whether Nusrat should obtain interim injunctive protection pending determination of her claim and, if not, what protective undertakings should be imposed on Usman.

Reasoning and conclusions: The judge concluded that established equitable authorities support that, on payment, beneficial ownership vests in the purchaser and the vendor becomes a bare trustee obliged to act on the purchaser's directions; that this applies to share sales as to land (authorities considered included Lysaght v Edwards, Michaels v Harley House, Re Rose and others). Given the practical risks of delay and obstruction, and the particular factual context including prior improper alteration of the Company’s register by its board, a narrowly drawn power of attorney was appropriate for the involuntary sale contract to enable the purchaser to requisition meetings and give effect to his rights pending registration, subject to limits to avoid creating new substantive obligations. The Company’s board had no sufficient basis for its August 2022 entry and the register was rectified under s.125; the rival claim by Nusrat raised a serious question to be tried and therefore must proceed to a prompt trial, but did not justify an injunction preventing immediate rectification and immediate exercise by Usman of voting rights attached to the two shares. To avoid irreversible prejudice to Nusrat the court required Usman to give defined undertakings (no transfers or dealings with the sale shares or two shares; to comply with any subsequent court orders restoring the position if Nusrat succeeds; and to give 14 days’ notice of any proposed disposal of the business or property).

Procedural posture and timetable: The court directed an expedited timetable for determination of Nusrat’s two shares claim and left open consequential directions, costs and potential third-party costs proceedings against individual directors for further consideration.

The court made declarations and orders rather than dismissing the contested applications. It declared that upon payment for the 50 sale shares Mahboob will hold those shares as bare trustee for Usman and must exercise voting and other rights attaching to them as Usman directs; it ordered rectification of the Company register to record Usman as legal owner of the two disputed shares pending determination of Nusrat’s claim; it authorised inclusion of a narrowly-drawn power of attorney in the sale contract to enable exercise of voting rights pending registration; it refused to grant Nusrat’s application for an interim injunction but required Usman to give specific undertakings to prevent irreversible prejudice to Nusrat and directed an expedited timetable for trial of Nusrat’s two shares claim. The court explained its reasoning by reference to equitable principles on transfers and vendor’s rights, the Companies Act 2006 (including s.125), and the particular factual history including unlawful entries on the Company register by its directors.

The dispute follows earlier High Court judgments (including [2020] EWHC 2334 (Ch) and [2021] EWHC 1405 (Ch)) and was the subject of a successful appeal to the Court of Appeal, handed down 11 January 2023 (Malik v Hussain and others [2023] EWCA Civ 2), which set aside aspects of the judge’s earlier approach and required completion of the sale mechanism with a supervised, expedited process. The present hearing determined the consequential contested applications arising from that appeal and the court-ordered sale mechanism.