Ferris George & Sons Ltd V Kalim Khoury (1965)

LawGlobal-Hub Lead Judgment Report

BRETT, J.S.C. 

Ferris George & Sons Limited is a private limited company incorporated in Nigeria under the Companies Act, and one of the members of the company is George who is registered as the holder of 30,500 fully paid £1 shares. On the 17th September, 1959, his holding was put up for sale by auction on the order of the High Court and was bought for £25 by the respondent, Kalim Khoury, who applied to the company for registration as a shareholder.

Article 6 of the Articles of Association of the company reads as follows -Transfer of Shares.

6. No transfer of shares inter VIVOS shall be made to a person of whom the Directors do not approve and the Directors shall have an absolute discretion as to accepting or rejecting any transfer and shall not be bound to give any reason therefor.”

No formal resolution has ever been passed by the Directors rejecting the transfer, but up to the present it has not been registered. On the 11th June, 1960, the respondents solicitors wrote to the company threatening proceedings in court if the transfer was not registered; on the 1st November, 1960, a deed of transfer was executed by the Registrar of the High Court in favour of the respondent, and on the 9th January, 1961 the respondent instituted the present proceedings, in which he seeks an order of the court that the company shall register the transfer. On the 7th February, 1961, a meeting of the Directors was held, at which the Board agreed to accept the transfer, and instructed the Acting Secretary of the company to prepare a Share Certificate, but on the 13th February, 1961, there was a meeting of the company, at which fresh Directors were appointed, and a resolution was passed objecting to the transfer. The resolution passed by the former Directors on the 7th February has not been implemented, but no resolution to rescind it has been passed by the new Directors.

The hearing of the respondents suit was delayed pending the determination of other proceedings in which the validity of the appointment of the Directors who passed the resolution on the 7th February, 1961, was unsuccessfully challenged, and on the 31st July, 1963, Holden, J., gave judgment in the present suit allowing the respondents claim.The only ground of appeal argued reads as follows:-

“The learned trial Judge failed to take into consideration that where the Directors of a Private Company have adiscretionary power to refuse to register a transfer of shares,then in the absence of evidence that they have not acted bona fide, their refusal cannot be challenged and the Court cannot order registration.”

Notice of this ground was only served on the day on which the appeal came up for hearing, and though counsel for the respondent did not ask for an adjournment he is to be excused if he failed to draw attention to certain authorities which appear to be in his favour; if counsel for the appellants has not had the opportunity of commenting on and seeking to distinguish those authorities he has only himself to thank.

As a general proposition the submission made on behalf of the company is supported by the two cases cited by counsel for the company. In In re Coalport China Company [1895] 2 Ch. 404 the articles of association of private company placed various restrictions on the transfer of shares to person who was not a member, and article 33 provided that the directors may refuse to register any transfer (a) where the company has a lien on the shares; (b) where it is not proved to their satisfaction that the proposed transferee is a responsible person; (c) where the directors are of the opinion that the proposed transferee is not a desirable person to admit to membership. Where the directors had refused to register a proposed transfer, and given no reason for their refusal, the Court of Appeal declined to interfere, holding, in the words of Lindley, L.J., that It is for those who say that the directors have exercised their power improperly to give some evidence to that effect. In In re Smith & Fawcett Limited (1942) Ch. 304, Article 10 of the articles of association provided that The directors may at any time in their absolute and uncontrolled discretion refuse to register any transfer of shares Lord Greene, M.R., pointed out that Private companies are in law separate entities just as much as are public companies, but from the business and personal point of view they are much more analogous to partnerships than to public corporations. Accordingly, it is to be expected that in the articles of such a company the control of the directors over the membership may be very strict indeed. There are, or may be, very good business reasons why those who bring such companies into existence should give them a constitution which confers on the directors powers of the widest description.

He then went on to say, In the present case the article is drafted in the widest possible terms, and I decline to write into that clear language any limitation other than a limitation, which is implicit by law, that a fiduciary power of this kind must be exercised bona fide in the interests of the company. Subject to that qualification, an article in this form appears to me to give the directors what it says, namely an absolute and uncontrolled discretion.

Article 6 of the articles of Ferris George & Sons Limited confers as wide a discretion as that conferred in In re Smith & Fawcett Limited, but on the evidence the directors have never positively exercised their power of rejecting the transfer, and there is authority for saying that mere inaction is not enough for this purpose. In In re Hackney Pavilion (1924) 1 Ch. 276 Astbury, J., held that where the articles gave the directors the power of declining to register a transfer that power, even where exercisable in the absolute and uncontrolled discretion of the directors, required to be actively exercised by a vote of the Board ad hoc, and that a mere failure to pass a resolution for registration (on an equality of votes with no provision for a casting vote) was not a formal exercise of the right to decline in the circumstances Astbury, J., ordered the register to be rectified. This decision was approved and followed by the House of Lords in Moodie & Anor v. W. & J. Shepherd (Book binders) Limited & Ors. (1949) 2 All E.R. 1044, and should be followed by the courts in Nigeria. Its effect in the present case is that the ground of appeal argued turns on a point which does not arise, since the directors have not refused to register the transfer, and that the cases relied on by the company are irrelevant.

The article considered in In re Hackney Pavilion referred merely to a power to decline to register a transfer, whereas the article now under consideration confers a discretion as to accepting or rejecting any transfer.

It might be argued that the article makes a positive resolution accepting a transfer necessary in order to vest any rights in the transferee which the Court can enforce, but we need not decide this point since in the present case such a positive resolution has been passed by the duly appointed directors and the articles do not prescribe any further formalities.

It is also unnecessary to decide whether the successors to the directors who passed the resolution had the power of rescinding it, since if they had such a power they have not purported to exercise it. In our view, the respondent is in a comparable position to that of the transferee in In re Hackney Pavilion, and the trial Judge was right to order the register to be rectified in his favour.

The appeal is dismissed with costs which we assess at 35 guineas.

Other Citation: (1965) LCN/1281(SC)