Company's Register Of Members Was Conclusive Evidence Notwithstanding Unauthorised Transfer Of Shares

The Court of Appeal has held that the sole member of a company was the person whose name was listed in its register of members, even though she had acquired 50% of the company's shares by executing an instrument of transfer without the transferor's authority.

What happened?

Bland and Anor v Keegan [2024] EWCA Civ 934 concerned a private company limited by shares.

By the relevant point in time, the company was effectively controlled and managed by an individual, but the shares in the company were held as to 50% by his mother and 50% by his wife (i.e. the mother's daughter-in-law), both of whom were also directors.

In due course, the relationship between the mother (on the one hand) and the son and daughter-in-law (on the other hand) broke down.

Shortly afterwards, the daughter-in-law executed a stock transfer form purporting to transfer the mother's 50% shareholding to the daughter-in-law. Subsequently, filings were made at Companies House showing the transfer of the shares, as well as the termination of the mother's directorship.

Two years later, the mother and son reconciled, but the son and the daughter-in-law separated and divorce proceedings commenced. (For ease, we will continue to refer to daughter-in-law as such.)

The daughter-in-law then unilaterally passed a special resolution to wind the company up.

The mother subsequently challenged the resolution, claiming that the daughter-in-law had forged her signature. She argued that the effect of this was that the transfer was a "nullity", that the resolution was not validly passed (because the daughter-in-law held only 50% of the company's shares, rather than the 75% required) and that the joint liquidators had not been validly appointed.

The joint liquidators issued proceedings, seeking a declaration from the court that their appointment was valid on the basis that the company's register of members, which showed only the daughter-in-law as a member of the company, was conclusive proof of the company's membership.

The High Court granted the liquidators' declaration. The mother appealed to the Court of Appeal.

At this stage, it is important to note two assumptions made by the Court of Appeal:

• The mother alleged that her signature had been forged deliberately but the daughter-in-law contested this. The court proceeded on the assumption that the signature had been forged, but the court did not make any factual finding to this effect. Instead, the judges merely noted that the outcome of the case would have been the same, whether the signature had been forged or the instrument of transfer had simply been executed without the mother's authority.
• The parties were not in fact able to locate the company's register of members. Instead, the court was invited to assume that the register of members (wherever it was) reflected the filings that had been made at Companies House, and that is what the court in fact did.

What did the court say?

The Court of Appeal dismissed the appeal and upheld the High Court's decision.

The judges referred to the key case of Enviroco Ltd v Farstad Supply A/S [2011] UKSC 16, in which the Supreme Court laid out a "fundamental principle of United Kingdom company law" that "except where express provision is made to the contrary, the person on the register of the members is the member to the exclusion of any other person, unless and until the register is rectified".

(In Enviroco v Farstad, the holding company of a subsidiary had granted security over its shares in the subsidiary under a mechanism that transferred legal title to the shares to the lender's nominee. This caused the holding company to cease to be a member of the subsidiary and, hence, the subsidiary to cease to be a subsidiary of the holding company.)

The court said that this general principle should apply when deciding who a company's members are for the purposes of voting on a shareholder resolution, "even ... where a member's name has been wrongly removed from the register as a result of forgery". (Again, we note that the court did not actually conclude that any forgery had taken place.)

Rather, "the entries on the register of members are presumptively valid and the members of a company are taken to be those shown on the register 'unless and until the register is rectified'".

On that basis, the only member of the company at the time of the special resolution to place it into liquidation (and, therefore, the only person entitled to vote on that resolution) was the daughter-in-law.

The mother's lawyer had argued that this "opened the door to a fraudster obtaining control of a company" by simply forging instruments of transfer or doctoring the register of members.

However, the judges said that the court had various tools at its disposal to address this kind of situation and to undo the effects of misconduct. These included rectifying the register of members, ordering payment of compensation and allocating loss between the parties.

Previous case law showed that the courts even have the power to rectify a register of members with retrospective effect but yet leave any resolutions passed in the meantime valid and intact.

What does this mean for me?

Cases of forgery are uncommon and, indeed, as we note above, it was not determined that any forgery had in fact occurred in this case.

However, disputes do arise more frequently over whether one person was authorised to sign on behalf of another. This may be because the chain of authorisation is unclear, or because there is a dispute as to whether the circumstances allowing a person to sign have in fact arisen.

For example, it is common for a company's articles to specify that, where an individual employee or officer leaves the company (i.e. becomes a "leaver") (either in specific circumstances or in any scenario), they must transfer their shares and that, if they do not sign an instrument of transfer, some other, specified person may sign one on their behalf.

Similarly, a company's articles may contain drag-along provisions that require minority shareholders to transfer their shares to an arm's length third party to whom the majority agree to sell their shares. Again, if a minority shareholder does not sign an instrument of transfer, the majority may be able to sign on their behalf.

But a shareholder may argue that they are not required, in the circumstances, to transfer their shares and that any instrument executed in an attempt to do so would be signed without their authority.

In the context of a drag-along, this might happen if (for example) a shareholder alleges that an offer made by a third party was not on arm's length terms and so did not engage the drag-along.

In the context of a private equity investment, this might happen if (for example) the leaver claims that they have been incorrectly characterised as a "bad leaver" and forced to transfer strip equity which they are in fact entitled to retain.

The judgment in this case does not resolve these kinds of dispute.

However, what it does show is that, even if a transfer is made without authority, provided the company's register of members is written up to reflect the transfer, the company and its members can at least rely on that register when proposing and passing any resolutions, and that any resolutions passed since the transfer shouldn't be called into question.

The case also shows the value of good record-keeping. Although it has long been assumed that a company can make small, non-contentious administrative or clerical amendments to its register of members, it is clear that more substantive corrections require an order of the court. This can be time-consuming and expensive. Diligent attention to secretarial matters can avoid the need for this.

Access the Court of Appeal's decision that a company's register of members was conclusive notwithstanding an unauthorised transfer of shares

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