Inner House upholds order requiring company group to transfer shares to company that provided it with loan facilities

About this case:

• Citation:
  [2023] CSIH 14
• Judgment:
  External link
• Court:
  Court of Session Inner House
• Judge:
  Lord Carloway

Members of the Allanvale Land group argued on appeal that the position of the pursuers, BV10 Ltd, would lead to an uncommercial result. The action was originally raised by BV10 for decree for registration of the forms on the grounds that it was an integral part of the consideration of the agreement.

The appeal was heard by the Lord President, Lord Carloway, together with Lord Woolman and Lord Pentland. MacColl KC appeared for the pursuers and respondents and RG Anderson for the defenders and reclaimers.

Solely for security

In 2019 and 2020, the BV group and Allanvale group entered into a series of agreements in terms of which BV8 and BV9 would make loan facilities available to the three AL companies that were the reclaimers in the appeal. Each facility agreement contained ‘conditions precedent’ which required the reclaimers to provide stock transfer forms. They transferred shares in the debtor AL companies to BV10, which was entitled to the issue of share certificates in its name.

While the STFs were provided to BV10, none of the share certificates were issued despite repeated requests by the respondents. It was the reclaimers’ position that the provision of the transfer forms was solely for the security and reassurance of the lenders and had been intended to last only during the subsistence of the loans. However, the commercial judge held that there was nothing in the agreements supporting that position or bringing the joint venture to an end once the loans were repaid.

For the reclaimers it was submitted that BV10 were seeking to turn a debt transaction into an equity transaction after the event. A lender that did not insist upon a condition prior to advancing funds was deemed to have waived that condition. Further, the judge had held that BV10 were suing upon the STFs when shares could only be transferred in accordance with the company’s articles of association.

Counsel for the respondents submitted that the agreements had imposed no restriction on the period during which the shares were to be owned by them. The argument that, per the articles of association, directors had an absolute right to refuse to alter the register was misconceived in that such a right required to be exercised fairly and reasonably. The controlling mind of the AL companies was not now entitled to avoid implementation of the STFs.

Clear request

Lord Carloway, delivering the opinion of the court, began: “There was no provision bringing this venture to a close once the loan was repaid. There was no agreement that BV8 and BV9 would not intimate the STFs to BV10 or that they would be cancelled or returned to the reclaimers once the loans had been repaid. No background circumstances were averred, by way of context, which point to the STFs being intended only as security.”

He continued: “If commercial common sense were to be applied to the terms of the loan facilities agreements, the obvious purpose of the STFs was to give BV10 a stake in, and hence a measure of supervision and control over, the companies to whom the loans were being made.”

Addressing the power available to the directors, Lord Carloway said: “The reclaimers’ belated new argument about the discretion of directors to refuse to register new members falls to be rejected. Where, as here, articles of association give the directors such power, it must be exercised as soon as practicable and in any event within two months after the date on which the transfer is lodged. Unless the articles provide otherwise, reasons must be given. Whether reasons require to be given or not, a decision to refuse must be made bona fide in the interests of the company.”

He added: “The reclaimers maintain that there are no averments by BV10 which deal with the lodging of the STFs. In fact BV10 do aver that they have repeatedly requested that the reclaimers register them as members. In any event, this action is a clear request that this be done. There are no counter averments that the reclaimers: have considered the matter of registration; exercised any power to refuse to register BV10 as members; did so as soon as practicable; or had a bona fide reason, in the interests of the company, for refusing to register BV10. It is difficult to see what good reason there could be.”

Lord Carloway concluded: “In short, there is no substance in the reclaimers’ central contention that the STFs were only a security, or an attempt to create one. In these circumstances, the shares must be held as transferred. BV10 are entitled to be registered as members in terms of the STFs. The court will, in essence, refuse the reclaiming motion and adhere to the interlocutor of the commercial judge dated 25 August 2022.”