Ceredigion Recycling & Furniture Team v Clifford Pope
| Jurisdiction | England & Wales |
| Judge | Lord Justice Newey,Sir Julian Flaux C,Lord Justice Edis |
| Judgment Date | 14 January 2022 |
| Neutral Citation | [2022] EWCA Civ 22 |
| Docket Number | Case No: A3/2021/1273 |
| Court | Court of Appeal (Civil Division) |
[2022] EWCA Civ 22
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
BUSINESS LIST (ChD)
HIS HONOUR JUDGE JARMAN QC
SITTING AS A JUDGE OF THE HIGH COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Sir Julian Flaux, THE CHANCELLOR OF THE HIGH COURT
Lord Justice Newey
and
Lord Justice Edis
Case No: A3/2021/1273
Guy Adams (instructed by Redkite Law LLP) for the First Defendant/Applicant
Lydia Seymour (instructed by Hugh James Solicitors) for the Claimant/Respondent
Joshua Griffin (appearing pro bono) for the Second Defendant/Second Respondent
Hearing date: 30 November 2021
Approved Judgment
Introduction
The first defendant to these proceedings, Clifford Pope, applies by an application notice dated 9 August 2021 under CPR 52.30 and this Court's inherent jurisdiction for an order that permission be granted to reopen the appeal, following refusal by Popplewell LJ on paper of permission to appeal against the Order dated 20 July 2021 of HHJ Jarman QC (“the judge”), sitting as a Judge of the High Court in the Business List (Chancery) of the Business and Property Courts in Wales at Cardiff. The judge held, inter alia, that the claimant was entitled to relief (to be dealt with at a later hearing) for breaches by both defendants of their duties as directors of the claimant.
The application to reopen the appeal came before Andrews LJ on paper on 11 August 2021. In the Order she made she considered that Popplewell LJ had not directly engaged with one of the issues raised by the first defendant's proposed appeal and ordered that the application to reopen should be dealt with at the same time as the application for permission to appeal, if reopening the appeal was allowed, at a hearing before the full Court, which the claimant was directed to attend. That hearing took place before this Court on 30 November 2021.
The factual background and the judgment below
The factual background which is of significance for the present application can be derived from the findings in the judgment of the judge dated 30 June 2021, none of which findings is challenged in the proposed appeal. The claimant is a company limited by guarantee incorporated in 1998 to take over a project started some years earlier by volunteers in Aberystwyth to recycle furniture and other domestic items. One of the volunteers was the first defendant who became a director, with four others. Clause 5 of the Memorandum of Association provided:
“The income and property of the Company whencesoever derived shall be applied solely towards the promotion of the objects of the Company as set out herein and no portion shall be paid or transferred directly or indirectly to the members of the Company except by way of payment in good faith of reasonable and proper wages, bonuses and repayments (including loans) of expenses to any member or employee of the Company in return for any services actually rendered to the Company.”
The Memorandum also provided that clause 5 “may only be changed by a unanimous vote of all Members at an Extraordinary General Meeting…”
In 2003 the claimant purchased a property which then comprised a derelict platform at Aberystwyth Railway Station and adjacent waste land for £50,000, £40,000 of which was raised by mortgage. The claimant employed professionals to design and build an ecologically sustainable building on the land. Just under £2.7 million was received to fund the design and build from public bodies including the Welsh European Funds Office and the local authority. The claimant moved into the new premises (“the property”) in 2006, by which time the directors had reduced to three, the first and second defendants and another, who resigned in 2009, after which the defendants were the only directors and members.
The first and second defendants took financial and accountancy advice in relation to the provision for themselves of pensions from the claimant. In a board meeting in March 2012, they agreed to make employer's contributions of £288,000 for the two of them into self-invested pension plans (“SIPPs”) with Suffolk Life. These took the form of payments of appropriate portions of the freehold of the property funded by a £200,000 bank bridging loan. The claimant paid £288,000 to Suffolk Life. Further payments were made to the SIPPs later in 2012 and in 2013. By January 2014 95% of the beneficial interest in the property had been transferred into the SIPPs.
In July 2012 the defendants also arranged for the claimant to enter into a leaseback arrangement under which the claimant would pay rent to the SIPPs in increasing amounts as the freehold in the property was transferred to the SIPPs. In August 2014, the freehold of the property was transferred to Suffolk Life. Thereupon the rent became £60,000 per annum. By that stage £358,000 had been contributed by the claimant to the pensions of each of the defendant directors over a four year period. This represented almost the full value of the property.
The first defendant had identified four employees who might become additional or replacement directors. Towards the end of 2014 the transfer of the property, the leaseback and pension payments came to the attention of the local press and adverse articles appeared in the papers. The four indicated they did not wish to become directors although two were co-opted onto the board in June 2015. The following month, a budget statement was presented to the board which made no provision for directors' salary for 2016/2017. The claimant was suffering from poor performance. The second defendant was unhappy with this and resigned as a director in December 2015. The first defendant continued as a director, though he ceased to work for the claimant in March 2016 and resigned as a director in December 2017.
In March 2019, the claimant issued the claim form in the present proceedings. Against the first and second defendants the claimant claims that the transfer of the property to the SIPPs amounted to a breach of their duties as directors and seeks the return of the property or alternative and consequential relief. The defendants deny any wrongdoing, contending that, as the claimant was a company limited by guarantee with no shareholders, they were entitled as the only members and directors to make the transfer and their actions could be attributed to the claimant, so that they had acted lawfully. On behalf of the first defendant Mr Guy Adams relied on section 39(1) of the Companies Act 2006 (“the 2006 Act”) which provides that the validity of any act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company's constitution and on section 40(1) which provides that in favour of a person dealing with the company in good faith, the power of the director to bind the company, or to authorise others to do so, is deemed to be free of any limitation under the company's constitution.
As recorded by the judge in the section of his judgment headed “Issues of law” Mr Adams relied on the line of authorities from Salomon v Salomon & Co Ltd [1897] AC 22 to Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [1983] 1 Ch 259, in support of his submission that a company is bound in a matter which is intra vires the company by the unanimous agreement of its members or shareholders and, if the company was solvent, no complaint could be made.
At [80] of his judgment the judge noted that Mr Adams submitted that the decision in respect of the pension arrangements could be attributed to the company. The judge referred to the Supreme Court decision in Bilta (UK) Ltd v Nazir (No 2) [2015] UKSC 23 citing passages from the judgments including that of Lord Neuberger PSC who stated the principle in relation to attribution at [7]:
“Where a company has been the victim of wrong-doing by its directors, or of which its directors had notice, then the wrongdoing, or knowledge, of the directors cannot be attributed to the company as a defence to a claim brought against the directors by the company's liquidator, in the name of the company and/or on behalf of its creditors, for the loss suffered by the company as a result of the wrong-doing, even where the directors were the only directors and shareholders of the company, and even though the wrong-doing or knowledge of the directors may be attributed to the company in many other types of proceedings.”
The judge also referred to the so-called Duomatic principle on which Mr Adams relied, saying at [85] and [86] of his judgment:
“85 Lord Toulson at paragraph 187 referred to the non-statutory “consent principle,” that shareholders who have a right to vote may by unanimous agreement bind the company in a matter in which they had power to do so by passing a resolution at a general meeting ( In re Duomatic Ltd [1969] 2 Ch 365).
86 However, this principle does not apply if a decision is invalid because it is a fraud or ultra vires. See Palmer's Company Law at 7.446:
“The Duomatic principle does not permit shareholders to do informally what they could not have done formally by a resolution. It follows that it cannot be used to ratify any act which is ultra vires the company, such as an unlawful payment of dividends, or the exercise of powers for an improper purpose.””
The judge considered that regard had to be had to the issue of vires notwithstanding section 39 of the 2006 Act which he considered was concerned with capacity rather than vires. He also referred at [87] of his judgment to section 62 of the 2006 Act which provides that a company is entitled to...
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