McCarthy Servicing Ltd, Re; Hecquet v McCarthy

JurisdictionEngland & Wales
JudgeSir Francis Ferris
Judgment Date12 April 2006
Neutral Citation[2008] EWHC 2279 (Ch),[2006] EWHC 832 (Ch)
Docket NumberCase No: No. 2957 of 2005
CourtChancery Division
Date12 April 2006

[2006] EWHC 832 (Ch)

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

COMPANIES COURT

Before:

Sir Francis Ferris

In The Matter of Mccarthy Surfacing Limited

In The Matter of the Companies Act 1985

Case No: No. 2957 of 2005

Between:
(1) Terence Hecquet
(2) Robert Hoare
(3) Robert Marsden
Petitioners
and
(1) Tom Mccarthy
(2) Malcolm Mccarthy
(3) Edwin Mccarthy
(4) Mccarthy Surfacing Limited
Respondents

Mr. David Chivers QC and Mr. Edward Davies (instructed by Pettman Smith of 79 Knightsbridge, London SW1X 7RB) for the Petitioners

Mr. Mark Cunningham QC (instructed by ASB Law of Claremont House, 95 Queen's Road, Brighton BN1 3XE) for the First, Second and Third Respondents

Hearing dates: 2nd and 3rd March 2006

Judgment Approved

Sir Francis Ferris
1

The matter which I have to decide comes before me as a preliminary issue in a petition under Section 459 of the Companies Act 1985. The issue is whether the petitioners named in the petition have the requisite standing to maintain the petition.

2

The question is one of law, but it is necessary to state some of the background facts, which are not in dispute.

(1) McCarthy Surfacing Ltd ("the Company") was incorporated in 1985. At all material times its share capital has been £100 divided into 100 shares of £1 each, all of which have been issued and are fully paid.

(2) The business of the Company is road surfacing and it has been very successful commercially, producing substantial profits.

(3) Originally the Company had four shareholders, namely Mr. Tom McCarthy and his brothers Malcolm and Edwin (who are the first three respondents) and Robert Hoare (one of the petitioners). In February 1989 they were joined by Terence Hecquet, the first petitioner, and the shareholdings were adjusted so that each of them held 20 shares. The five of them were also the only directors of the Company.

(4) By article 7 of the Company's articles it is provided that

"The Directors may, in their absolute discretion, and without assigning any reason therefore, decline to register any transfer of any Share, whether or not it is a fully paid Share."

(5) From late in 1992 tensions developed among the five shareholders. The details do not matter for present purposes and I have not been told much about them. It is sufficient to say that Mr. Hecquet and Mr. Hoare sided with each other against the other three shareholders. On 19th October 1994 Mr. Hecquet and Mr. Hoare presented a petition under Section 459 of the Companies Act 1985.

(6) In relation to the dispute and the petition Mr. Hecquet and Mr. Hoare were advised and assisted by Mr. Robert Marsden, a financial adviser, who is the third petitioner.

(7) The petition was unsuccessful and was dismissed.

(8) On 14th October 1996 Mr. Hecquet and Mr. Hoare each executed a transfer of his shares to Mr. Marsden.

(9) On 12th November 1996 Mr. Marsden submitted the transfers to the Company and asked to be registered as a shareholder. At a meeting on 21st November the directors of the Company decided not to register the transfers and Mr. Marsden was informed of this by a letter dated 21st November 1996.

(10) On 9th February 1998 a bankruptcy order was made against Mr. Hoare and on 27th February 1998 a similar order was made against Mr. Hecquet. In the case of Mr. Hoare the official receiver and in the case of Mr. Hecquet his trustee in bankruptcy subsequently purported to sell their shares in the Company to Mr. Tom McCarthy, the first respondent.

(11) Subsequently Mr. Hecquet and Mr. Hoare obtained their discharge from bankruptcy.

(12) Mr. Hecquet and Mr. Hoare remain the registered shareholders in respect of the shares which they held before the disputes arose.

(13) On 6th May 2005 the petitioners, that is to say Mr. Hecquet and Mr. Hoare and Mr. Marsden, presented a new petition under Section 459. This petition, in which the preliminary issue which I have to decide arises, is based upon an alleged failure on the part of those in control of the Company to consider making distributions to shareholders.

3

I must begin by setting out the material parts of Section 459, which are as follows:

"459 Order on application of company member

(1) A member of a company may apply to the court by petition for an order under this Part on the ground that the company's affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members (including at least himself) or that any actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.

(2) The provisions of this Part apply to a person who is not a member of a company but to whom shares in the company have been transferred or transmitted by operation of law, as those provisions apply to a member of the company; and references to a member or members are to be construed accordingly."

4

Those entitled to petition by virtue of subsection (1) are the members of the company. The term "member" is defined in Section 22 of the Act as follows:

"22 (1) The subscribers of a company's memorandum are deemed to have agreed to become members of the company, and on its registration shall be entered as such in its register of members.

(2) Every other person who agrees to become a member of a company, and whose name is entered in its register of members, is a member of the company."

5

Those who are not members within this definition can petition under Section 459 only if they come within subsection (2). This subsection embraces two categories namely (i) persons to whom shares have been transferred and (ii) persons to whom shares have been transmitted by operation of law. Category (ii) is not relevant to this case. It includes persons such as trustees in bankruptcy or personal representatives who have become entitled to shares in that capacity but have not had their names entered in the company's register of members. Category (i) is self explanatory. It consists of persons in whose favour a transfer of shares has been executed. By definition they must not yet have had their names entered in the register of members. Subsection (2) applies only to "a person who is not a member of a company", that is to a person who does not have standing to petition by virtue of subsection (1).

6

The petitioners submit that this somewhat basic analysis of the Section provides the complete answer to the challenge to their standing. Mr. Hecquet and Mr. Hoare have standing because each of them remains a member of the Company within the definition in Section 22 and is thus within Section 459(1). Mr. Marsden has standing because, while he is not a member, he has received a transfer of shares and is thus within Section 459(2).

7

The respondents originally challenged the standing of the petitioners on the basis that they did not admit the "authenticity or legitimacy" of the Transfers in favour of Mr. Marsden and, on the footing that there had been no effective Transfers, they relied upon the vesting of the shares owned by Mr. Hecquet and Mr. Hoare respectively in the official receiver or trustee in bankruptcy. The preliminary issue was ordered to be tried at a time when this was the nature of the challenge. The respondents have subsequently changed their stance. They now proceed on the footing that the Transfers were effective, although, somewhat unsatisfactorily, they have admitted this only for the purpose of the trial of the preliminary issue. Their case before me is based on the argument that the analysis of Section 459 on which the petitioners rely is incomplete.

8

On behalf of the respondents Mr. Cunningham argued that there are two aspects to the concept of standing for the purposes of Section 459, which he described as "formal" and "substantive" respectively. The petitioners' argument proceeds on the basis that all that is required is formal standing. In truth, said Mr. Cunningham, what is required is substantive standing as well.

9

Mr. Cunningham sought to derive the requirement of substantive standing from the words of Section 459 which require that a petitioner shall show that the company's affairs "are or have been carried on in a manner which is unfairly prejudicial to the interests of its members generally or some part of its members (including at least himself)". The analysis relied upon by the petitioners ignores the fact that the purpose of Section 459 is to remedy unfair prejudice to the interests of the member or transferee presenting the petition. Here, he claimed, neither Mr. Hecquet and Mr. Hoare nor Mr. Marsden has any interest to be protected. So far as Mr. Hecquet and Mr. Hoare are concerned they have each transferred their shares to Mr. Marsden and, having divested themselves of their beneficial interests of those shares, cannot claim that their interests have been unfairly prejudiced. As to Mr. Marsden, he has asked to be registered as a member of the company but this has been refused by the directors in exercise of their discretion. Having taken no steps to obtain rectification of the Company's register of members under Section 359, Mr. Marsden must be taken to have accepted that the refusal is unchallengeable. Even if Mr. Marsden does not accept this, it is in fact the case. He has no prospects of becoming a member of the Company and thus no prospect of having any interest as a member.

10

I was referred to a number of authorities. The earliest was Re a Company No 007828 of 1985 (1986) 2 BCC...

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