In the recent Happy Lamb decision Zacaroli J had to consider an application to amend pleadings in an unfair prejudice action (under section 994 of the Companies Act 2006 ("CA 2006")) to include a declaration as to the legal shareholders of the company and - the focus of this note - a rectification of the register of members under section 125 CA 2006. In doing so, he noted the different approaches that the courts have taken when considering how broad or narrow their discretion is, to decide other questions relating to the title of any person who is a party to the rectification application (under section 125(3) CA 2006). 

In one 19th century case mentioned below, the broad approach was referred to as the court acting “brevi manu” - a Roman law term signifying doing something directly and quickly, without taking a longer route. “Longa manu” might be seen as the opposite to that - and so typifying the narrow approach - i.e., requiring separate proceedings to settle disputed title issues before a rectification application is heard, rather than including resolution of the title questions as part of the rectification proceedings. 

For the time being, it seems that the English courts (at least the High Court and Court of Appeal) will be minded to adopt the “broad approach” (brevi manu)) endorsed by the Court of Appeal in re Hoicrest Ltd (2000), despite the Privy Council, in Nilon Limited  v Royal Westminster Investments S.A. (2015), having ruled that that approach “was wrong as a matter of principle”. 

Rectification under the CA 2006

The power of the courts to order rectification of a company's register of members where: (i) the name of any person is, without sufficient cause, entered in or omitted from the register, or (ii) there is a failure to remove a person's name from the register when they have ceased to be a member - now contained in rather broader language in section 125(1) CA 2006 (as amended by the Economic Crime and Corporate Transparency Act 2023) - is long established in English company law, dating back, initially, to the Joint Stock Companies Act 1856. A year later, the Joint Stock Companies Act 1857 gave the courts a supplementary power when hearing applications for rectification “to decide on any question relating to the title of any person who is a party to such proceeding …. whether such question arises between two or more members, or alleged members and the company, and generally the court may in such proceeding decide any question that it may be necessary or expedient to decide for the rectification of the register”. Section 125(3) CA 2006 retains that supplementary power in virtually the same words. 

Section 125(1) 

Applications to the court for rectification are made under a Part 8 claim form and since they proceed by way of summary procedure a highly relevant factor for the court to consider when deciding whether to exercise its supplementary power  is how appropriate it is for the underlying share ownership dispute to be resolved by that summary procedure.  Complex disputes and arguments may require separate proceedings to be brought to establish an applicant's title to the disputed shares and so her right, by means of a further rectification application, to be entered on the register as the holder of the shares.

Jurisdiction and discretion

In the Hoicrest case ([2000] 1 W.L.R. 414), Mummery LJ emphasised the distinction between jurisdiction and discretion. Section 125(1) confers jurisdiction on the courts to rectify the register if names are entered in or omitted from the register or default or unnecessary delay occurs in entering in the register the fact of a person having ceased to be a member. Section 125(3) then gives the courts a discretionary power to decide any questions relating to title (share ownership) plus generally any question necessary or expedient for rectification of the register. 

Two things follow from this. First, if the court does not have jurisdiction to hear the rectification application, there can be no question of the discretionary power being exercised. This was the problem that Zacaroli J faced in the Happy Lamb case where to have allowed pleadings to be amended to include rectification ran up against the problem that one of the shareholders allegedly wrongly entered on the register of members had been dissolved and so would have to be restored to the Companies House register in order to be made a party to the rectification application. Another example was a case (Elliot v Mackie & Sons Ltd (1935)) in which the court refused a rectification application to remove the name of individuals from the register because share transfers to them had been made in breach of trust. Any breach of trust was no concern of the company (see section 126 CA 2006 - no notice of trusts to be entered on the register) and could not therefore support a claim that “without sufficient cause” the individuals' names had been entered on the register. Rectification proceedings were not the appropriate forum for litigating the breach of trust claim. 

Second, as can be seen from the wording of section 125(3), the discretionary power is very broadly drafted - “any question relating to … title … whether … arising between members or alleged members, or between members … and the company" and “generally … any question necessary or expedient to be decided for rectification …”. In re Hoicrest, Mummery LJ warned against the “circularity” of trying to narrow down the breadth of the discretionary power by imposing on it strict jurisdictional constraints. An example of this might be to argue that jurisdictional requirements - that the company has failed to enter in or remove from, the register a name “without sufficient cause” - are not satisfied where there is a shareholder dispute but no stock transfer form that the company has failed to register in its register of members, and that therefore the court cannot exercise its discretionary power to resolve the share ownership issue and order that the register of members be rectified to reflect that position.   

Brevi manu

The broad approach to the exercise of the court's discretionary power  was notably supported by obiter (i.e., not essential to the court's decision) comments by Turner LJ in the Re Russian (Vyksounsky) Iron Works Company case ((1886) LR 1 Ch App 574). Also, of course, by the decision itself in Hoicrest  though there were some particularly important considerations in that case that arguably raise some questions as to how strong an authority it is for the brevi manu approach to the discretionary power to be followed in every case. In addition, we need to remember that at the end of the day the court’s power to decide title and other questions is a discretionary one - there can be no hard and fast rule that the power should always be exercised to resolve disputes and so enable rectification of the register.

Re Russian (Vyksounsky) Iron Works, Stewart's Case 

In this case ((1866) LR 1 Ch App 574) the court allowed an application to have a name removed from the register and so was not concerned with resolving a share ownership dispute in connection with a rectification application. Nevertheless, Turner LJ, after noting the wording of the court’s statutory discretionary power, went on to give the example of a purchaser and seller of shares disputing their sale agreement and the purchaser seeking rectification of the register to have his (it always was “his” in those days!) name included. He said:

“Would not the court have authority to entertain the application? …. there would be power to apply to the Court under this section to have the name of the purchaser entered on the register, though it would depend on the circumstances of the case, and the extent to which the purchaser established his right to specific performance of that agreement, whether the court would interfere brevi manu to order the name to be entered on the register, or would direct the case to stand over till it had been decided between the parties, in a suit for specific performance, whether the purchaser was entitled to have his name entered on the register.”

A brevi manu approach of resolving the dispute as to entitlement to the shares and then ordering that to be reflected in the register, all as part of the rectification application, obviously has the merit of convenience to commend it. However, as Turner LJ indicated, it would all depend on the circumstances of the case and how straightforward or not resolving a share ownership dispute looked as though it may be. 

Re Diamond Rock Boring Co Ltd, Ex p Shaw 

Ex p Shaw ((1877) 2 QBD 463) involved a dispute between the seller and purchaser of shares as to whose name should be entered on the register, and since the legal entitlement to share ownership of the purchaser was clear - the seller (who had been defrauded of the purchase price for his shares) had executed a stock transfer form in favour of the purchaser - the court ordered the purchaser's name to be entered on the register. Lord Coleridge CJ said the question whether the court could exercise its supplementary power discretion was “put out of all question by the strength of … ‘And generally the Court may in any such proceeding decide any question that it may be necessary or expedient to decide for the rectification of the register’ “; and that ”the legislature intended to give the Court jurisdiction to make an order so as to decide questions of title, trusting to the discretion of the Court not to decide in this summary manner any intricate or difficult question of title; but that, if the Court think fit, they have jurisdiction to make the order in all cases". 

Re Hoicrest

In this case ([2000] 1 WLR  414) the applicant for rectification argued that his co-director held certain shares on trust for him pursuant to an oral agreement. The respondent denied this and the trial judge rejected the rectification application on the grounds that as no legal transfer of the shares could be produced, there was “sufficient cause” for the company not to enter his name on the register and therefore no jurisdiction to rectify the register. The Court of Appeal reversed that ruling and made directions for the trial of a preliminary issue on the question of the applicant's entitlement to the transfer of the shares to him.

Mummery LJ, giving the court's judgment, acknowledged that it would not be appropriate to consider exercising the supplementary power to resolve title issues in every rectification application. It had been argued before the court that oral evidence and cross-examination were necessary to resolve the dispute and a summary jurisdiction with affidavit evidence would be procedurally inappropriate. However, if it came down to a choice between: (i) dismissing the application and requiring separate proceedings to be started to resolve the title issue, and (ii) allowing the rectification application to proceed but with a trial of a preliminary issue on the applicant's claims to beneficial ownership of the disputed shares, the court preferred the second course; not the least because that would likely be the more cost effective way to proceed.  

Since this decision to allow the resolution of a beneficial ownership dispute to be resolved as part of a rectification application, even in the absence of any clear evidence as to title to the shares (as we have seen in the above mentioned cases), attracted strong criticism from the Privy Council in the Nilon case (see above), it is worth noting the following distinguishing features about the decision. 

First, as both the Privy Council and Zacaroli J noted, Hoicrest was essentially a case management decision - working out the least expensive way of trying to resolve the litigation over the disputed shares which had “taken two years to get nowhere”. Secondly, since the trial judge's ruling, the new Civil Procedure Rules had come into force which encouraged the Court of Appeal's approach of dealing with the issue by way of case management rather than simply striking out the application. Thirdly, since the applicant had left it very late in the day to formulate his case for being entitled to certain of the shares held by his co-director, when giving directions for the trial of the beneficial ownership questions, Mummery LJ reserved the right for the co-director to apply to strike out the applicant's statement of case in support of his beneficial ownership. 

Longa manu

The narrower approach to the exercise by the court of its supplementary power to resolve share ownership disputes - which I am referring to as "longa manu" as the opposite of “brevi manu”, though that is not a term used in the case reports - has historical precedent and notably recent (2015) Privy Council support in the Nilon case.

The Nilon Ltd  Case 

In Nilon, the court reviewed a long line of 19th century and later cases and drew from them a number of conclusions. First, from the earliest days of the court's rectification powers, the courts “have made it clear that the summary nature of the jurisdiction makes it an unsuitable vehicle if there is a substantial question in dispute”. Second, that Hoicrest appeared to be alone in deciding that it is sufficient for the applicant to have a prospective right, rather than an immediate right, to be entered on the register - “[it] stands alone in being an actual decision which turned on the question of whether proceedings for rectification are a permissible vehicle for determining a dispute about beneficial ownership and whether they can be used …. by a person claiming an order for transfer of shares” (#48). Third, the legislation is primarily concerned with legal title and "the overwhelming majority of cases turn on legal title", typically involving scenarios where either a transfer has been executed but not registered or a shareholder (sometimes holding partly paid shares and facing liability as a contributory in the company's liquidation) was seeking to be removed from the register. 

The Privy Council concluded:

“… proceedings for rectification can only be brought where the applicant has a right to registration by virtue of a valid transfer of a legal title, and not merely a prospective claim against the company dependant on the conversion of an equitable right to a legal title by an order for specific performance of a contract. It follows that Re Hoicrest Ltd was wrong as a matter of principle, however, sensible it might have been as a matter of case management” (#51). 

As with Hoicrest, there were particular circumstances in Nilon that influenced the court's strong reluctance to support the application (under BVI law) for rectification. The applicants argued that V (who was outside of the BVI jurisdiction) had breached an obligation to procure the issue to them of shares in Nilon Ltd, a BVI company, and so were seeking to join V in the rectification proceedings as a necessary and proper party. The court ruled that: "although in general it is not objectionable to bring a viable claim against D1 … within the jurisdiction … with the principal object of joining D2 … outside the jurisdiction, as a necessary/proper party, the combination of the motive and the artificiality of the rectification proceedings, and the fact that they are dependant on a trial of the underlying facts, means that the appropriate order in these circumstances is … to strike it out".   

Ward and Henry's Case

In this 19th century case ((1867) LR 2 Ch App 431) referred to in Nilon, the two judges - Turner LJ (already mentioned above) and Lord Cairns LJ - diverged on the brevi manu v longa manu approach. Turner LJ stuck to his previous (hypothetical) support for a broad approach in resolving title questions (seen in Stewart's Case mentioned above) while Lord Cairns LJ saw “insuperable” difficulties in allowing that broad approach. In the event, they both agreed that the court should not exercise its discretion to rectify the register. The headnote to the case neatly summaries their approaches: the court's jurisdiction, per Turner LJ, is general and not confined to cases where there has been error, mistake, or default on the part of the company (on the register) and per Lord Cairns LJ, is confined to cases where the register is incorrect through default on the part of the company. Lord Cairns LJ saw “rectification” as requiring some mistake to be corrected and if the applicant was not in a position to assert any legal title to shares that should have been perfected by entry on the register, there could not be any default in respect of which the court should exercise its supplementary powers to remedy. 

So where does this leave us?

The cases are at least agreed on two things - whether the supplementary power should be exercised to decide title questions is always a matter for the court's discretion, dependant on the particular facts surrounding the rectification application and that in especially complex share ownership disputes the Part 8 summary procedure under section 125 is unlikely to be appropriate and separate proceedings may be required. 

Secondly, there does nevertheless seem to be a genuine difference in approach as to what a court should be prepared to do in resolving title issues in connection with rectification proceedings - between what I have called the brevi manu (or broad) approach in Hoicrest and longa manu  (or restricted) approach in Nilon. 

While Hoicrest, as a Court of Appeal decision, is always going to be a more persuasive authority for proceedings under section 125 - as Zacaroli J acknowledged in Happy Lamb - than Nilon, which is a Privy Council decision, that would, of course, change if we had a Supreme Court decision that decided to follow the thinking of its "fellow" judges sitting as the Privy Council court. But how likely is it that there would be a successful appeal to the Supreme Court in which that court overturned the exercise by a lower court of its supplementary powers under section 125, and thereby added further cost and delay to the rectification proceedings?

Perhaps all we can say is that the approach endorsed by Nilon in relation to section 125(3) is to regard beneficial ownership and other contractual disputes as exceptional and not eligible for resolution as part of the summary procedure under section 125. 

While accepting that the supplementary power is very broadly worded, it needs to be viewed in its context, which is not as an alternative means of resolving separate share ownership claims but rather addressing any subsidiary questions that arise in the rectification proceedings. Converting a prospective ownership right into a legal right that must then be reflected on a rectified register, is, in this analysis, not a subsidiary question

With its very forceful rejection of the Hoicrest approach, Nilon has sounded a warning shot against any court being oveready to incorporate in rectification proceedings less than straightforward share ownership disputes. Sensible case management is one thing but to encourage litigants who are in dispute about their entitlement to shares (or even, as in Nilon, whether any shares should have been issued to them) to throw the entirety of their dispute into summary proceedings under section 125 is quite another. 

[View source.]