Nigel Freeborn & Ors v Emery House Property Limited & Anor

A director’s power to allot shares in a private company remains subject to statutory pre-emption rights and fiduciary duties. An allotment made to himself, which dilutes existing members and is inconsistent with shareholder arrangements, may constitute breaches of the Companies Act 2006 and of contract. Members suffering resulting prejudice may petition under section 994. A company must register a valid share transfer and cannot impose an unauthorised charge on registration. Where the appropriate remedy is clear, the court may cancel wrongful allotments and rectify the register, while shaping relief to avoid prejudice to non-parties.

The petitioners were members and leaseholders of Emery House Property Limited, a company holding the freehold of a property divided into 13 flats. The company’s arrangements contemplated one share per flat, with shares transferred on sale and shareholders having equal rights. The second respondent, a director and controlling shareholder, later allotted 12 additional shares to himself without proper corporate process, appointed non-leaseholder directors, and refused to register a share transfer to two petitioners unless a payment was made.

The petition was brought under section 994 of the Companies Act 2006. The respondents did not appear at trial. The central issues were whether the allotment and refusal to register the transfer caused unfair prejudice and what remedy should be granted.

1. Petition allowed. The allotment of 12 shares to the second respondent breached the petitioners’ statutory pre-emption rights under section 561 of the Companies Act 2006. The Model Articles did not exclude those rights.
2. Section 550 gave the director power to allot shares in the company’s single class, but that power was fiduciary and had to be exercised for proper purposes and in the interests of the company. The self-allotment breached sections 171, 172 and 175. The court relied on the reasoning of Blackburne J in Dalby v Bodilly [2004] EWHC 3078(Ch).
3. The allotment also breached shareholder agreements recorded in the parties’ email exchange and in the agreement with another shareholder. The resulting dilution caused prejudice to the petitioners as members.
4. The refusal to register the share transfer to the second and third petitioners, without good reason, caused them prejudice and entitled them to petition under section 994(2). Article 26(2) of the Model Articles gave the company no right to levy a charge on the transfer.
5. The simpler and fairer remedy was to cancel the 12 wrongly issued shares rather than issue additional shares. The court ordered registration of the transferred share in the names of the second and third petitioners and directed rectification of the register under section 125. The remedy was framed so that shareholders who were not parties were not conceivably prejudiced. The petitioners were awarded their costs against the second respondent.

First-instance decision. No earlier appellate decision is stated in the judgment.