Legal Issues in the Transfer of Contracts and Shareholder Claims

Introduction

Concerns over the validity of the transfer of Impexon’s remaining contracts to Andrew are at the heart of the current case. The topic of discussion in this context will be the rights of novation and how they relate to the rights of Impexon members. The evidence also demonstrates that Shawn, Thor, Lisa, Scarlet, and Balder are listed in the shareholders’ registry as stockholders; however, all of their holdings are unpaid, with the exception of Thor, who has paid in full for his shares. To ascertain if Shawn, Lisa, Scarlet, and Balder are shareholders or not, this topic will analyse their claims. Additionally, the case demonstrates Impexon’s involvement in liquidation. Impexon has the authority to demand payment from the members for the outstanding shares in accordance with Sections 589, 581, and 582 of the Companies Act 2006 and Section 74(1) of the Insolvency Act 1986. Determining which of the mentioned individuals owes money for their shares is the problem.

 

Which claims might Impexon plc have?

Issue- This concern relates to Shawn’s transfer of Impexon plc’s final contracts to Andrew Ltd. In this context, the next paragraphs will examine Impexon’s authority to forbid or limit the transfer of its current contract to another party during liquidation. Determining the contract’s transferability, the conflict of interest rules, and the exceptions to the conflict of interests rule will also be discussed in this context.

Rules

Novation and principle of agency- Novation is the process by which a new contract is created between a party and a third party, replacing the previous agreement between a party and another party. All of the rights and responsibilities in an existing company’s contract will be transferred to another corporation by novation, according to Roger LeRoy Miller in Cengage Advantage Books: corporation Law: The First Course – Summarised Case Edition (2014).

For greater clarity, several cases are referred here. According to the ruling in Energy Works (Hull) Ltd v. MW High Tech Projects UK Ltd & Ors (2020), the novation requires the approval of all parties. According to the ruling in Habibsons Bank Ltd. v. Standard Chartered Bank (Hong Kong) (2010), approval must be expressly stated and may be granted prior to the novation. This implies that the novation requires the explicit assent of all three parties. The new contract’s terms and objective must be stated in plain language. The novation cannot be enforced unless these conditions are fulfilled. In the 2013 case of Kakara Estate Ltd v. Savvy Vineyards, the Court of Appeal upheld these guidelines, ruling that consideration—including the form of reciprocal promises—must exist in addition to explicit or implied agreement.

Whether the novation was entered with legitimate authority is the point at hand. Specifically, if Shawn had the right to link Impexon to the novation. Section 126 (1) gives Impexon the authority to create, amend, ratify, or terminate a contract. Any person approved by Impexon and acting on the company’s behalf may use this authority. The assumptions that can be made by outsiders are listed in Sections 128 and 129. These presumptions may include that a Impexon director or company secretary is authorised to exercise the authority and carry out the responsibilities, and that the director or company secretary is a duly appointed officer or agent with the authority to do so.

Additionally, the common law concept offers the idea of agency, which states that contracts made by the business’s officers or directors (agents) bind the company (the principal). According to Peter Gillies in Business Law, NSW: Federation Press (2004), the agent needs to be a legitimate agent having the authority to sign contracts on the company’s behalf.

As was decided in Panorama Developments (Guildford) Ltd. v. Fidelis Furnishing Fabrics Ltd. (1971), where the company secretary signed contracts on the business’s behalf, the agent may also be an ostensible agent who has been expressly or implicitly authorised. The agent must have claimed to act as the agent, and a third party must have been aware of and acted upon such representation. However, if the third party entered into the contract believing the agent was the principal on his own behalf, this concept does not apply.

Conflict of Interest

Conflict of interest is another factor that is pertinent to the matter at hand. Directors are required to avoid conflicts of interest as part of their fiduciary duty under Section 175(1) of the Companies Act of 2006. The respondent was the vice-chairman of the Yorkshire College, where A served as vice-chairman in Bray v. Ford (1896).

A was receiving money because he was also the college’s solicitor at the time. This is against A’s fiduciary responsibility as vice-chairman. “Unless otherwise expressly provided, a person in a fiduciary position is not entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict,” the court decided.

Accordingly, Shawn “must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company,” as stated in Section 175(1).

Sections 175(4), (5), and (6) of the Companies Act of 2006 allow for conflicts of interest.

Share transfers or prohibitions must serve the company’s best interests. Mr. Smith and Mr. Fawcett were the sole shareholders and directors of the business in Re Smith & Fawcett (1942). Fawcett passed away. They appointed a new director. Unless the executor sells half of the shares to Mr. Smith, the new director would not register Mr. Fawcett’s shares in the executor’s name.

The articles of organisation gave directors complete and unrestricted authority to reject any share transfer. According to the court, the restriction has to be implemented honestly and in the company’s best interests. Similar to this, in Boardman v. Phipps (1967), Mr. Boardman served as the trustee of the Philpps family trust while also fulfilling his fiduciary responsibility as the Phipps family’s advisor.

One of the trust’s assets is a 27 percent stake in a business. Without the approval of every beneficiary, Boardman and Tom Phipps acquired a majority stake in the business themselves. Some of the assets were capitalised, and the business distributed funds without lowering the value of its stock. Boardman and Phipps benefited from the trust. According to the court, Boardman had a fiduciary duty to the beneficiaries and ought to have placed the proceeds in constructive trust. A conflict of interest resulted from his failure to do so.

According to Section 175(4)(a), the fiduciary obligation is not violated if “the situation cannot reasonably be regarded as likely to give rise to a conflict of interest.” This implies that if the transfer is for Impexon plc’s long-term benefit, it may be permitted notwithstanding the limitations.

As an alternative, Section 175(4)(b) states that the directors have permitted the conflict of interest. This authorisation takes effect when it is accepted in a meeting and agreed upon, as stipulated in Section 175(6)(a) and (b), and when Impexon’s constitution does not render it unlawful, as stipulated in Section 175(5)(a).

A resolution must be approved for the conflict of interest. Sections 281-283 of the Companies Act 2006 outline the types of resolutions and voting rights. Therefore, any resolution, including a special resolution that could change the articles of association, can be passed by the majority shareholders, who own 75% of the shares. Ordinary resolution can be passed by a majority shareholding of 50%. Any special resolution may be blocked by an ownership of more than 25%. In this instance, a contract transfer cannot be considered legitimate unless it is authorised by a resolution.

Application and Conclusion

Novation- Regarding novation, the circumstances of the case demonstrate that Shawn unilaterally decided to give Andrew the remaining contracts. This is the first way to apply the rules to the current situation. The question is whether Shawn’s consent can bind Impexon, even in cases where the two firms’ consent was present during the contract transfer. The evidence in this instance does not support the Shawn’s authority to transfer the contracts. Whether he behaved as an ostensible agent is the current question.

Andrew might have believed that Shawn was the authorised officer or agent to bind Impexon to the transfer, or that Shawn was authorised to make the transfer based on Sections 128 and 129. However, the case’s facts demonstrate that Shawn was Impexon plc’s sole director, demonstrating that Andrew entered into the transfer agreement believing Shawn was the principal entering into the agreement on his own initiative rather than as an apparent agent specifically or implicitly approved by Impexon.

Impexon may therefore assert that the transfer is invalid.

According to market factors, for instance, consumers and social media pay close attention to whether a company engages in corporate social responsibility (CSR) in an environmentally sustainable manner because modern people’s understanding of environmental issues has continuously improved. As a result, organisations face numerous pressures.

Conflict of Interest

The conflict of interest is the subject of the second consideration. In this instance, Shawn has paid Norn plc £13,000, the full and final settlement of their claim and fees, using all of the company’s funds. Because Shawn has fiduciary duties under Section 175(1), he must make sure he stays out of any circumstance where he has a direct or indirect interest that would put Impexon’s interests at risk.

Based on the argument that Impexon plc would be unable to fulfil the contracts in its current circumstances and that the transfer would stop Impexon plc from breaking the terms of the agreement, Shawn has transferred the last of Impexon plc’s obligations to Andrew Ltd.

The conflict of interest regulations have been broken by the move.

• Firstly, considering that Impexon is in a capital-poor phase and needs all available resources to recover, the move is not a suitable course of action.
• Secondly, the transfer violates Section 175(1) as Shawn was named a director of Andrew. because of the transfer, he now has a direct interest that runs counter to the Impexon’s objectives.
• Thirdly, Impexon is not benefiting from the transfer because it has spent all £13,000 of its funds on Norn and has no money left over.
• Fourthly, according to the resolution requirement outlined in Section 281-283, the case facts do not demonstrate that the transfer was authorised by the necessary quorum.

Impexon may therefore argue that the transfer violates Shawn’s fiduciary obligations and creates a conflict of interest, rendering it void.

Who are the company’s shareholders?

In this instance, it is unclear if Shawn, Thor, Freyga, Scarlet, and Balder are eligible to be stockholders of the business. In order to ascertain if the persons listed above are shareholders, the following paragraphs will address paid or unpaid shares, as well as the payment or nonpayment of the shares allotted.

Prior to identifying Impexon’s shareholders, it is crucial to take note of the requirements that determine if any of the people on the list are shareholders.

Any individual, business, or organisation that owns stock in a firm might be considered a shareholder. Shares are distributed “when a person acquires the unconditional right to be included in the company’s register of members,” according to Section 558. Stated differently, the names and other details of the individuals are provided to the registrar and registered in relation to the shares. In this instance, they are all listed in the company’s shareholder registration as Impexon stockholders.

They must all be regarded as stockholders as a result. The facts, however, demonstrate that they all have distinct claims regarding their ownership of the corporation. To ascertain whether Shawn, Thor, Freyga, Scarlet, and Balder are shareholders, this will be covered in the paragraphs that follow.

• Sweat equity – Shawn – In this instance, Shawn claims that sweat equity is how he gets his shares. Sweat equity can be issued by a business, allowing the receiver to participate as a shareholder. Sweat equity is provided for unpaid labour, such as efforts, expertise, intellectual property rights, or value additions, as stated by Dean A. Shepherd and Evan J. Douglas in Attracting Equity Investors: Positioning, Preparing, and Presenting the Business Plan (1999) and by Modwenna Rees-Mogg in Crowd Funding: How to Raise Money and Make Money in the Crowd (2013). According to Stuart F. Bollefer and Jack Bernstein in Shareholders’ Agreements: A Tax and Legal Guide (2009), sweat equity recipients who the company wishes to include as shareholders may participate in the day-to-day activities of the business. As a result, their shares may be entitled to the same rights as ordinary shareholders, including the ability to vote, attend meetings, and receive dividends.

Typically, shareholders pay for the shares they get. The rules of payment are provided in Section 582. Sweat equity is a problem where services are paid for using shares. This has to do with could According to Section 582(1), shares may be paid in cash or cash equivalents, which may include goodwill and expertise. In this instance, Shawn was Impexon’s only director. This indicates that he was the only individual in charge of the management, operation, and decision-making of the business. As a result, he has been given the sweat equity of a shareholder, which makes him accountable and entitles him to vote and make choices on the company’s behalf. Shawn is a stockholder as a result.

• Shares for receiving dividends – Scarlet

In Scarlet’s argument, she asserts that she purchased the shares in return for dividends from Impexon plc for two years. In essence, a shareholder may have preferred stock. and they are not eligible to vote. A predetermined annual dividend was paid to them. This is perhaps the most significant cash reward. The owners of these shares have no say in decisions made at shareholder and general meetings and are not eligible to vote. Accordingly, preference shareholders “must be treated as having all the rights of shareholders, except so far as they renounced these rights on their admission to the company,” according to Lord Macnaghten in Birch v. Cropper (1889).

• Paid Shares – Thor

The only shareholder to have paid for his share is Thor.
It should be mentioned that a shareholder may be a common shareholder who owns ordinary or common shares in a firm, giving them the ability to vote on issues pertaining to the business. They have authority over how the business is run and have the right to file a remedial lawsuit if there is misconduct that could endanger the business.

• Doctrine of mistake and shareholding – Lisa

Lisa relies on the doctrine of mistake to set aside the contract regarding the allotment of shares as ‘she knows now that buying the shares was a bad business deal’. The doctrine of mistake in contract law encompasses both mistakes of law and mistakes of fact. Based on what John Cartwright, in his book Misrepresentation, Mistake and Non-disclosure. According to John Cartwright (2012), factual errors can be divided into three categories. The first is the common mistake, which occurs when two people make the same error due to a common misinterpretation of the facts. The second is a unilateral error, in which one person commits an error and the other party is aware of it. The third is a mutual error, in which there is a sincere miscommunication between the parties about the goals of the agreement. In Unlocking Contract Law (2013), Chris Turner states that although both parties make a mistake, they are not the same. In Cooper v. Phibbs (1867), Lord Westbury stated that an agreement may be revoked as having been made based on a shared error if there is a mistake regarding the parties’ respective and proportionate rights. According to the ruling in Raffles v. Wichelhaus (1864), a contract is void if there is no consensus ad idem. Therefore, if a contract is created based on an incorrect understanding of the facts, it may be null and void from the start.The most prevalent type of common mistake is a quality mistake. According to Lord Atkin’s ruling in Bell v. Lever Bros. (1932), a contract may be deemed void if both parties made a mistake regarding a quality that “makes the thing without the quality essentially different from the thing it was believed to be.” When the criteria are applied to Lisa’s case, her reliance on the doctrine of mistake is invalid because none of the three mistakes covered here apply to her circumstances. She “now knows buying the shares was a bad business deal,” as seen by her justification for not having to pay for her part. The word “now” is crucial in this context because she was accurate about the shares at the time of allotment. At the time she was listed as a shareholder, she was unaware that purchasing the shares was a bad bargain, and there was no error regarding her rights. She just now says it was a mistake because of the company’s financial situation. Therefore, this error cannot be linked to her being listed as a shareholder. This record is supported by the share registry.

Hence, Lisa is a shareholder.

• Valueless shares – Balder

The question at hand is whether Balder received fair compensation for his firm shares with the shares that were awarded to him.

Balder has refused to pay for his shares in this instance, arguing that they are worthless and cannot be a valuable payment. This calls into question whether the consideration—the underpaid share—can be enforced. “Some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss, or responsibility given, suffered, or undertaken by the other party” was the definition of a valuable consideration in Currie v. Misa (1875).  According to James C. Fisher in Contract Law in England and Wales (2018), a promise cannot be enforced unless it is accompanied by significant consideration. Therefore, at least the form of a current or upcoming trade is necessary for consideration. It is impossible to enforce a simple desire to provide a benefit.

There must be some minimum material in a consideration. “A promisor will have a motive for making a promise, which is only enforceable when the motive can be construed as obtaining something valuable,” according to Mindy Chen-Wishart in Contract Law (2012). In this instance, Balder has not paid the company any money for the shares that are still outstanding. Since there was no possibility of a future exchange at the time he was given the shares, Balder’s assertion that “the shares are valueless they cannot constitute valuable consideration” demonstrates that there is no minimal content. This indicates that Balder had no need to pay for the shares or use the allocated shares to acquire any particular rights in the business. For Balder, the unpaid shares are therefore not a valuable consideration.

Conclusion

Shawn, Thor, Lisa, and Scarlet are shareholders. Balder is not a shareholder.

Who owes money for their shares?

Shawn, Thor, Lisa, and Scarlet are all shareholders, as the aforementioned sections demonstrate. The others have not paid for their shares, with the exception of Thor.

A corporation may also permit members to make partial payments or payments at a later time in accordance with Sections 589, 581, and 582. When the shares must be paid up will be specified in the articles of organisation and, if applicable, a shareholders’ agreement. The payment may be made at the time of incorporation, upon allocation, at a later date, whether or not one is indicated, following a payment demand or call in the event of financial difficulties, or during the company’s winding up.  Shares are considered unpaid if a member obtains them without paying the premium and the necessary nominal value. As a result, any outstanding shares must be paid by a certain date or in the event that the business goes out of business.

Since Impexon is under liquidation in this instance, it has the right to demand payment for the outstanding shares. “No contribution is required from any member exceeding the amount (if any) unpaid on the shares in respect of which he is liable as a present or past member,” according to Section 74(2)(d) of the Insolvency Act 1986. Impexon is a share-limited company. As a result, each shareholder has an obligation to contribute to Impexon’s assets up to the value of the shares they own. This liability establishes a debt payable at the periods when calls are made to enforce liability, as stated in Section 80 of the 1986 Act. Impexon is a share-limited company. As a result, each shareholder has an obligation to contribute to Impexon’s assets up to the value of the shares they own. As a result, Impexon has the right to demand payment of the nominal £1.00 for the shares that were distributed to the parties.

Accordingly,

Shawn is a shareholder in Sweat Equity. He is therefore exempt from paying his portion. The question of whether Shawn should be held personally accountable for his careless appraisal of some mead for Norn plc, which later sued Impexon and resulted in the liquidation and full and final settlement of £13,000 of Impexon plc’s funds to Norn plc, is pertinent given the case’s facts.

A director may be held accountable for their carelessness, default, or breach of duty or trust, according to Section 232 of the Companies Act of 2006, which is pertinent in this case. Any clause that seeks to shield them from these obligations is null and void. His carelessness resulted in the debt and, ultimately, the liquidation. Other stockholders may file a derivative lawsuit against him, and he is held personally accountable for his careless actions.

The only one who has paid for all of his shares is Thor. As a result, he will not be responsible for paying for his shares.

As was previously shown, Scarlet is a preferred shareholder. She must pay for her shares in order to comply with the liquidation call for payment and Lisa cannot use the law of mistake to escape paying for her shares. As a result, if the liquidator Odin calls, she will be responsible for paying for her shares.
Balder, as previously shown, lacks an enforceable consideration because there was no need for the corporation to receive any payment of these shares or for him to get anything of value in return.

CONCLUSION

First, since Shawn was not permitted to transfer the contracts, Impexon cannot be bound by the transfer of the remaining contracts. There was a conflict of interest because it went against his fiduciary obligations to Shawn. Therefore, the transfer is invalid.

With the exception of Thor, who made a complete payment, the evidence demonstrates that all shares are unpaid. Thor is a common stockholder as a result. Shawn is the only director and sweat equity shareholder in charge of running, managing, and making decisions for the business.

However, he bears personal responsibility for the careless behaviour that resulted in the company’s debt. Lisa is also a shareholder because she “now knows buying the shares was a bad business deal,” thus she cannot rely on the theory of mistake. Scarlet is a preferred shareholder who receives a fixed annual dividend but has no voting rights. Balder is not a shareholder because, at the time of his registration as a member, there was only a motive and no legally binding consideration. Scarlet and Lisa are therefore required to pay for their outstanding shares upon a call for payment of the share.

Bibliography

Legislation

• The Companies Act 2006
• The Insolvency Act 1986

Cases

• Bell v Lever Bros (1932) AC 16
• Birch v Cropper (1889) Cooper v Phibbs (1867)
• Boardman v Phipps [1966] UKHL 2
• Bray v Ford [1896] AC 44
• Currie v Misa (1875) LR 10 Ex 153
• Cooper v Phibbs (1867) LR 2 HL 149
• Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd & Ors [2020] EWHC 2537 (TCC)
• Habibsons Bank Ltd v Standard Chartered Bank (Hong Kong) Ltd [2010] EWCA Civ 1335
• Kakara Estate Ltd v Savvy Vineyards 3552 Ltd [2013] NZCA 101
• Panorama Developments (Guildford) Ltd. v Fidelis Furnishing Fabrics Ltd. [1971] 2 QB 711
• Re Smith and Fawcett Ltd. [1942] Ch 304
• Raffles v Wichelhaus (1864) 2 H&C 906

Books

• Bollefer SF and Jack Bernstein, Shareholders’ Agreements: A Tax and Legal Guide (C C H Canadian, Limited 2009)
• Cartwright J, Misrepresentation, Mistake andNon-disclosure (Sweet & Maxwell 2012).
• Chen-Wishart M, Contract Law (OUP Oxford 2012)
• Fisher JC, Contract Law in England and Wales (Wolters Kluwer 2018)
• Gillies P, Business Law, NSW (Federation Press 2004)
• Miller RL, Cengage Advantage Books:Business Law: The First Course – Summarized Case Edition ( Cengage Learning 2014)
• Rees-Mogg M, Crowd Funding: How to Raise Money and Make Money in the Crowd (Crimson 2013)
• Shepherd DA and Evan J. Douglas, Attracting Equity Investors: Positioning, Preparing, and Presenting the Business Plan (SAGE Publications 1999)
• Turner C, Unlocking Contract Law (Taylor & Francis 2013).