Edinburgh sheriff rules director of scaffolding company refused to approve stock transfer in bad faith

About this case:

• Citation:
  [2023] SC EDIN 14
• Judgment:
  External link
• Court:
  Sheriff Court
• Judge:
  Sheriff John Mundy

Paul Curran made an application under section 994 of the Companies Act 2006 in relation to shares he was entitled to in the first respondent, B&P Scaffolding Ltd. His position was that William Paxton, who had fallen out with his father, the late second director of the company, had refused to register the transfer because of his enmity towards his late father.

The case was heard by Sheriff John Mundy in Edinburgh Sheriff Court. Cheyne, advocate, appeared for the petitioner and McMeeken, solicitor, for the respondents.

After the petitioner left school, he began working for a scaffolding company owned in part by the second respondent’s father, the late William Paxton Sr. In about 2004, Mr Paxton Sr decided to start his own company, B&P, into which he and his son invested £10,000. The company had an authorised share capital of £100 of which four shares were issued, two to each of the Paxtons. The petitioner regularly worked for this new company and took on additional responsibilities when the Paxtons were absent.

Mr Paxton Sr’s involvement with the business reduced over the years, and his relationship with his son deteriorated in about 2017. In May of that year, he met with the petitioner and indicated that he wanted to hand over his share of the business to him. He also wished that the petitioner would become a director in the company. A stock transfer form was completed but following the death of Mr Paxton Sr in July 2017 the second respondent, as sole remaining director of B&P, declined to register it.

It was the petitioner’s case that the second respondent had not acted in the best interests of the company in refusing to register the transfer, but instead had declined to do so for personal reasons. He resented the idea that the shares had been gifted to the petitioner, and did not act in a bona fide manner with the intent of depriving the protégé of his estranged father of any interest in the company.

For the second respondent it was argued that he had refused to register the transfer in good faith, and that the petitioner could not be expected to fulfil his duties as a director of B&P as he operated a competing business. The petitioner averred that said competing business was established only when it was clear the transfer would be opposed.

Little or no foundation

In his decision, Sheriff Mundy began: “The articles of association are clear in their terms. They are I think of a fairly standard type in a company of this sort. The directors have, in their absolute discretion and without assigning any reason, power to decline to register any transfer of any share whether or not it is fully paid. On the authorities, the court has no power to interfere in the exercise of that discretion, except where it is found that the discretion was not exercised bona fide in the sense of what the second respondent considered, not what a court may consider, was in the interests of the company, but for a collateral purpose.”

Considering the arguments put forward by the respondents, he said: “The argument that the petitioner and the second respondent would not get on in the business seemed to me to be one with little or no foundation. It was not until the discussion between them when the petitioner disclosed Mr Paxton Senior’s intention to gift the shares that their relationship cooled. At the time the decision was made not to register the shares the petitioner was still working for the company and it is also apparent that the petitioner kept working for the company for some six months. It is clear, that in spite of the attempts to portray the relationship as a difficult one, the petitioner and second respondent worked well together.”

He continued: “The decision was not one made in the interests of the company as a whole. My view is fortified by the fact that there is no trace of the reasons now put forward for the refusal to register the shares in [a solicitor’s letter] on the company’s behalf dated 23 August 2017. While I accept that the statutory requirement to give reasons as required by section 771 does not mean that the second respondent is bound by the terms of the letter, the terms are relevant in assessing the evidential value of reasons subsequently given in evidence as to a director’s belief that he has acted properly.”

Sheriff Mundy concluded: “Where, as here, the reasons adduced are unsupported by evidence, it is indicative of reasons constructed post facto in order to obscure the real reason for the decision, a personal one, rather than one arrived at in what the second respondent perceived to be in the best interests of the company. It is indicative of male fides.”

The case was thereafter put out for a hearing on the question of further procedure.