Commercial Property Bulletin 3

Directors Beware

An interesting case was decided by the Court of Appeal at the end of July this year that sheds light on individual shareholders rights to inspect a leaseholder-owned management company’s register of members with a view to that shareholder contacting the other shareholders of the company to call a meeting of the members of the company to remove and replace the existing directors and managing agents.

Any person may, on payment of the prescribed fees, inspect a company’s register of members if they submit a request which (among other things) states the purpose for which the information is to be used (sections 116 and 117, Companies Act 2006) (CA 2006)).

Where a company receives a section 116 request for access, it has five working days from receipt of that request to allow inspection and/or provide a copy of the register, or, if it believes that the request is not made for a proper purpose, to refer the request to the court (section 117, CA 2006). If the court is satisfied that the inspection or copy is not sought for a proper purpose, the court must direct the company not to comply with the request by making a “no access order”, and it may make a further order regarding the company’s costs.

Unless a company obtains an order under section 117 of the CA 2006, it must comply with a request for access and non-compliance incurs a criminal penalty (section 118, CA 2006).

As the CA 2006 does not define a “proper purpose”, the question of what is a “proper purpose” falls to be decided by the courts.

The Chartered Governance Institute has published ICSA Guidance on Access to the Register of Members: Proper Purpose Test which is intended to provide an industry view on the test, and to give non-exhaustive examples of what should constitute a proper purpose and what is likely to be an improper purpose.

The Court of Appeal has provided guidance on the application of the “proper purpose”, highlighting that:

The expression “proper purpose” in section 117(3) of the CA 2006 ought to be given its ordinary and natural meaning.

The purpose should first be identified. This will normally be described in the request, but the court is not restricted to the purpose in the request. The court will determine the purpose of the request on the balance of probabilities on the evidence before it.

After the purpose is established, the court will consider whether it is proper. The test whether a purpose is proper is an objective one made by the court on the evidence before it and will often depend on the precise facts and circumstances.

The court may have regard to the Chartered Governance Institute guidance.

The test for whether a purpose is proper does not depend on whether it is in the interests of shareholders. The person (whether a shareholder or not) making the request may have his or her own interests in making the request.

The onus is on the claimant company to satisfy the court on the balance of probabilities that the request is improper.

If the court is in any doubt it should not make a no-access order.

It is for the person making the request, rather than the court, to consider whether access will be of value to that person.

The Court of Appeal:

Considered that, for a request by a member, a proper purpose ought generally to relate to the member’s interest in that capacity and/or to the exercise of shareholder’s rights.

Explained that the discretion to make a “no access” order should be exercised sparingly because, if members cannot communicate with other members, the board is put in a strong position and “corporate governance is accordingly weakened”. It considered that a strong case was required to prevent access, otherwise the relationship between the board and the shareholders would not operate as it was intended to operate “with the shareholders monitoring the activities of the directors”.

Gave as an example of a proper purpose where a member needed the information in the register because he or she wanted to obtain support from fellow members to requisition a general meeting of the company.

The facts of the case

(Houldsworth Village Management Co Ltd v Barton [2020] EWCA Civ 980 (29 July 2020)

B, who was both a leaseholder and a member of the leaseholder-owned management company (responsible for the management of residential apartments), made a request under section 116 of the CA 2006 to inspect the company’s register of members. In his request, B stated that the purpose for which the information was to be used was:

”to contact my fellow members with a view to seeking a general meeting of members and proposing resolutions to remove and replace the existing directors and the managing agent.”

In its memorandum, the company’s objects were to acquire, hold, manage and administer the property. The directors of the company had delegated their property management functions to managing agents.

The company sought a declaration under section 117 of the CA 2006, objecting to B’s request on the basis that while seeking to remove persons as directors of a company may be a proper purpose, replacing its managing agents was not. The High Court dismissed the company’s claim and refused to make the “no-access” order.

The company appealed against the decision on the basis that B’s purpose was not proper as it did not relate to B’s rights as a member of the company, arguing that:

It was essential to differentiate between B’s two different capacities as a leaseholder and as a member, as the appointment and removal of managing agents was relevant to the leaseholder capacity but not the capacity as a member. A request which had as its purpose the enforcement of the covenants under the lease was not a proper request.

The judge at first instance had made an error by equating management and governance of the company with the discharge of covenants for services under the lease. Section 116 was only concerned with matters relating to corporate governance.

B had made an earlier request for inspection of the register of members of another unrelated property management company of which he was a member, and in relation to that company’s section 117 application, the High Court had held that the purpose of B’s request was not a proper one. The court concluded in that case that B’s purpose was to contact other leaseholders to invite them to support him in challenging the service charge and removing the managing agents, and that B’s purpose was to further his interests as a leaseholder and had nothing to do with his interests as a member of the company. The court further concluded that B wished to obtain the information to harass the company or harm its members.

Decision

The Court of Appeal dismissed the appeal.

The Court concluded that:

Proper purpose

A member who is seeking to communicate with other members to challenge, in good faith, the way the company is being run should normally be regarded as having a proper purpose.

Capacity as member or leaseholder and corporate governance

While there is a clear distinction between the rights of a leaseholder and the rights of a member, those rights are not necessarily mutually exclusive. Generally, if a person has several rights which afford a remedy, they can choose which right to exercise to achieve their goal.

B’s attempt to exercise his rights as a member through a general meeting was not improper, even if the ultimate remedy he sought (removal of the directors and appointment of new managing agents) could be achieved by another route. To argue otherwise, was to draw a sharp dividing line between enforcement of the covenants under the lease and corporate governance, and to give to corporate governance a restricted and artificial meaning:

a complaint relating to appointment of agents to carry out the day-to-day management was central to the company’s objects and to how the company was run, and so was a legitimate matter to raise at a general meeting concerning the company’s affairs. It lay within the area of overlap between the rights of shareholder and those of leaseholder;

as the company in general meeting could properly pass a resolution, at the instigation of a shareholder, to remove the managing agents, it is difficult, if not impossible, to suggest that B had an improper purpose, whatever his rights may be under his lease or under the landlord and tenant legislation; and

in this context, corporate governance is not to be given such a narrow interpretation as suggested by the company. In stating that a proper purpose ought to be relevant in some way to the member’s interests as a member of the company, the court was not seeking to lay down anything in the nature of a rigid requirement which must be satisfied before a request by a member can be proper the courts observation was no more than a reflection of the fact that members are in general likely to be interested, and properly so, in the proper running of the company.

In the previous case that B was involved with the Court of Appeal stated that the Judge had erred in treating the guidance of “proper purpose” as a rigid requirement and holding that a request which is not made by a member “as member” is necessarily not made for a proper purpose. Such an interpretation would lead to a different test to members and non-members. It stated that the Judge had lost sight of the requirement to ask whether, on the facts and circumstances of the individual case, the request is a proper one. That requires a focus on the facts and circumstances of the case and cannot be answered simply by reference to the capacity in which the request is made.

Once it was accepted that B’s purpose was one which lay properly within his rights as a leaseholder as well as his rights as a shareholder, it is not for the company to determine in which capacity B may choose to challenge the appointment of the managing agents.

This decision will be of relevance to leaseholder-owned management companies, in its finding that for the purposes of section 116 of the CA 2006, it is artificial to create a division between corporate governance issues and leasehold matters. It is also likely to have wider implications for companies more generally in concluding that a section 116 request by a member does not need to relate to the interests of the member in their capacity as a member of the company, instead the question to ask is whether, on the facts and circumstances of the individual case, the request is a proper one.

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Best wishes,

Client Services Team

Commercial Property Bulletin written by Steve Cook (Copley Clark trading name of Parfitt Cresswell Solicitors)