Nigel Freeborn & Ors v Emery House Property Limited & Anor

The court heard a petition under section 994 of the Companies Act 2006 alleging that the second respondent, as director and controlling shareholder, unlawfully allotted 12 additional shares to himself and refused to register a share transfer. The court held that the allotment breached the petitioners' statutory pre-emption rights under s.561 and was also a misuse of the directors' power to allot, involving breaches of directors' duties under ss.171, 172 and 175. The allotment additionally breached an agreed shareholders' arrangement between leaseholders and the respondent. The refusal to register a share transfer was also prejudicial under s.994. The court granted relief by cancelling the 12 improperly allotted shares, directing registration of one share in favour of the transferees, and ordering rectification of the register under s.125, together with costs to the petitioners.

This is a first-instance Companies Court judgment on a petition under section 994 of the Companies Act 2006 concerning Emery House Property Ltd, the registered freehold owner of a building divided into 13 flats. The petitioners are leaseholders and shareholders who complain that the second respondent, who incorporated the company and was a director, retained five shares but later caused a further 12 shares to be allotted to himself, diluting the petitioners' holdings. The petition also alleges refusal to register a valid transfer of a share.

The procedural posture: substituted service on the second respondent was permitted, the trial took place remotely and the respondents did not attend. The respondent filed a defence lacking a statement of truth and failed to comply with disclosure and witness statement directions. The court nevertheless heard live evidence from two petitioners and accepted a hearsay witness statement of another shareholder.

The issues framed by the court were:

• whether the 12-share allotment breached the petitioners' pre-emption rights under s.561;
• whether the director's power to allot under s.550 had been exercised in breach of fiduciary duties (ss.171, 172 and 175);
• whether there was an enforceable shareholders' agreement or understanding limiting shareholdings and transfers; and
• whether prejudice arising from dilution and refusal to register a transfer entitled the petitioners to relief under s.994 and what remedy was appropriate.

The court's reasoning: the Model Articles did not exclude statutory pre-emption and so s.561 applied; the allotment thus breached statutory pre-emption. Although s.550 permits directors to allot where the articles allow, that power is fiduciary and must be exercised for proper purposes; the conduct in issuing 12 shares to the director himself was a breach of ss.171, 172 and 175 and unfairly prejudicial because it diluted shareholders. The court accepted evidence of a shareholders' agreement or common understanding limiting shareholdings and transfers, and found the refusal to register a transfer to be without good reason and prejudicial. The court fashioned a remedy aimed at restoring parity without prejudicing non-participating shareholders: cancelling the improperly allotted 12 shares, directing registration of the transferees' share, and ordering rectification of the register under s.125. Costs were awarded to the petitioners. The court noted other ongoing building management issues but left those to be resolved after control of the company is restored to leaseholder shareholders.

The petition under section 994 of the Companies Act 2006 succeeded. The court found that the allotment of 12 shares to the second respondent breached the petitioners' pre-emption rights under s.561 and involved breaches of the directors' duties under ss.171, 172 and 175 and of an existing shareholders' agreement. The court ordered cancellation of the 12 improperly allotted shares, directed that one share be registered in the names of the Second and Third Petitioners, directed rectification of the register under s.125, and awarded costs to the Petitioners.