In the case of JDK Construction Limited the Court of Appeal had to consider whether an earlier decision by a High Court judge that liquidators had been validly appointed was correct.

The answer to that question turned on whether the resolutions that the company had passed to place the company into voluntary liquidation were valid given there were questions over who the members of the company were (or should have been) at the time the resolutions were passed.

The liquidators had relied on the filings at Companies House, but these did not reflect what ought to have been the position following shares being transferred without one of the shareholders knowing. Although it will be rare that shareholdings are transferred in the circumstances outlined below, one question this decision raises is how much reliance can a practitioner place on the members register? The trial judge said the register is conclusive evidence, but is it? 

And what if the register is wrong, does this place an officeholder’s appointment at risk?

Background

• JDK was a company whose shares were held by a mother and her daughter in law. The son however essentially ran the company.
• Relationships broke down and following that the mother’s shares were transferred to her daughter in law without her knowledge. Her daughter in law shared the same initial and surname and signed the stock transfer form
• Following the transfer of shares JDK was then placed into voluntary liquidation.
• There was alleged forgery/fraud re: signing the stock transfer form but there was no finding to that effect. Although even if there had been, that would not have changed the outcome in this case.
• Post appointment the mother contended that the resolutions passed to place the company into liquidation and appoint liquidators were invalid. Consequently, the liquidators issued an application seeking a declaration that they were validly appointed.
• In support of their application the liquidators explained that they had not managed to locate a physical register of the members but had relied on the electronic filings at Companies House and therefore the resolutions and their appointment were valid.
• Following the liquidators making their application the mother pursued an application to rectify the register. The liquidators’ application was stayed to allow this application to be dealt with. Ultimately the mother’s application was settled but the terms of settlement did not address the status of the shares on the register and the register was not in fact altered.

Decision

The trial judge decided that the resolutions were valid and therefore the appointment was valid determining that:

“the register is conclusive as to those who were members of the [Company] at the time of the special resolution. Section 112(2) is, in my judgment, clear that every person whose name is entered in the [Company’s] register of members is a member of the [Company]. That is reinforced by the power under section 125 that is conferred upon the court to rectify the register”

The judge made those findings notwithstanding the provisions of s127 of the Companies Act 2006 that says the register is only prima facie evidence of who the members are.

The Court of Appeal dismissed the appeal. Why?

Although there had been an application to rectify the register and this had been settled, it did not deal with rectification. At the time the trial judge considered the liquidators’ application the members register still showed the daughter in law as the sole member and therefore it was right for the judge to find that the resolutions were valid, and the liquidators validly appointed. 

Essentially the requirements of the Companies Act to pass a valid resolution had been met based on the register as it was at the time of the resolutions and as it still was at the time the liquidators’ application was considered by the judge. The outcome may have been quite different had the register of members been rectified (as to which see further below).

How much reliance can you place on the members register?

Although the judge at first instance says that the register of members is conclusive, Lord Snowden in the Court of Appeal confirmed that the principle explained in a case called Enviroco should apply.

“except where express provision is made to the contrary, the person on the register of the members is the member to the exclusion of any other person, unless and until the register is rectified”

He further said that “even in a case where a member’s name has been wrongly removed from the register as a result of forgery or fraud”, the law does not simply disregard the entries on the register. Instead, the entries on the register of members are presumptively valid and the members of a company are taken to be those shown on the register “unless and until the register is rectified”.

What does this mean in real terms for practitioners?

Practitioners can rely on the register of members and therefore be confident that resolutions to appoint liquidators, or for that matter administrators, are valid. There are two caveats to this – unless express provision is made to the contrary and unless and until the register is rectified.

Express provisions to the contrary

The only examples given in the Court of Appeal judgment where there is an express provision to the contrary were those found in s112 of the Companies Act 2006 – namely those holding subscriber shares (s112(1)) and those who have agreed to become a member (s112(2)). That is not to say there are not others, we have not done a deep dive into the Companies Act, but the situations are likely to be both rare and unlikely where the appointment of insolvency practitioners is considered. That someone will have agreed to become a member when the company is about to go into a process seems very unlikely.

Unless and Until Rectified

Even if a company is in an insolvency process, it is possible for someone to make an application to rectify the register of members. If such an application is made and a court were to make a retrospective order this could result in previous resolutions being invalid. It therefore does have the potential to unravel a liquidation or administration.

What are the chances of this? It can’t be ruled out, but the court is not going to do that without considering the position of the officeholder who has relied on the resolutions. 

The court has a discretion whether or not to make an order to rectify. It may decide not to do so. Even if it decided to make an order, it might not be retrospective and if it was, it could do so on terms that address the impact of a retrospective order on others.

The officeholder may well have sold the company’s assets and unwinding that and addressing the prejudice an order could cause to third parties – including the liquidator, third parties who have purchased assets and creditors – would be no easy task.

Although there is never 100% certainty that resolutions won’t be invalid, if a retrospective order is made at a later point to rectify the members register, the court is unlikely to make an order that would leave an officeholder exposed having relied on the register of members – which is prima facie evidence as to who the members are. 

As such practitioners should be confident that what it says on the register of members goes.