The High Court ruled on the legality of share forfeiture for unpaid debts owed by a shareholder but unrelated to the shares themselves.
Background:
This is an appeal against an Order of District Judge Wales dated 19 March 2024. Key Choice Financial Planning (KCFP) Ltd. was the second defendant in the original case.
Mr. Timothy Evoy was previously a director of KCFP Ltd which was incorporated in October 2014, but ceased to be a director on 14 January 2019. Since then, there has been litigation between the parties, culminating in steps being taken by KCFP to forfeit Mr. Evoy’s shares for non-payment of a large cost liability owed to the company of £211,111.
The Articles of Association (AoA) of the company provided that KCFP has a lien over its shares as well as provisions regarding share forfeiture. The dispute centred around the interpretation of those provisions. The District Judge had ruled that the provision only authorised forfeiture for non-payment of the amount due in respect of the shares themselves and not any liability owed to the company. KCFP appealed, arguing that the Judge had misconstrued the AoA.
Decision:
The High Court dismissed the appeal and upheld the Lower Court’s decision, ruling that the articles did not permit forfeiture for debts unrelated to the shares themselves.
The High Court also made it clear the comparator must be similar AoA. Mr. Justice Michael Green held “I do not think it is reasonable to assume that a person considering the Articles of the Appellant which specifically adopts, with modifications, the Model Articles for Private Companies, would compare their provisions with a different set of Model Articles, namely those for Public Companies.”
In fact, the Model Articles for Private Companies do not contain provisions for forfeiture. The modifications included in the AoA to allow such lien and forfeiture renders the provisions, especially Article 25.1, ambiguous. For instance, the articles contain the words ‘member’ and ‘shareholder’ without much consistency. The Court could not believe that “call notices can be issued in respect of any debt of a shareholder, but that can only be enforced by forfeiture if it was a call on the amount owed in respect of that share.”
The definition of ‘call’ is not circular and the Lower Court Judge’s interpretation aligned with the broader context of the Companies Act 2006.
Implications:
This case is a good reminder that, when modifying Model Articles, it is important to ensure they are consistent and that one provision does not annul another. Interpretations of the Articles must be consistent and not be based solely on what one of the parties needs them to say in a specific situation.
This ruling also clarifies the limitations of the right of forfeiture with respect to private companies in that it is linked to the shares themselves. The reason for this is that forfeiture is viewed as a severe remedy and courts are not willing to extend its reach in a way that could endanger the rights of shareholders.