In Houldsworth Village Management Company Ltd v Barton[1] (“Houldsworth”), the Court of Appeal clarified the application of s 116 of the Companies Act 2006 (“s 116”) on the inspection of the register and index of members names. This has a wider impact on commercial law.
s 116 states that the register and the index of members’ names must be open to inspection of any member of the company upon request stating, inter alia, the purpose of inspection. s 117 of the same Act allows a company to apply to court to direct the company not to comply with the request on the basis that the inspection or copy is not sought for a proper purpose.
Houldsworth
In Houldsworth, the respondent (“Mr Barton”) owns the long lease of an apartment in a building managed by the appellant company (“Houldsworth”). Mr Barton made a request under s 116 to inspect the current register of members of Houldsworth, stating that he “wish[ed] to contact [his] fellow members… to [seek] a general meeting of members and [propose] resolutions to remove and replace the existing directors and the managing agent.”[2] Houldsworth subsequently applied to the court for a direction under s 117. Both the High Court and the Court of Appeal ruled in favour of Mr Barton.
In the Court of Appeal, Houldsworth argued that Mr Barton’s stated purpose was improper because s 116 was only concerned with matters relating to corporate governance whereas Mr Barton’s request was not made in the capacity of a member of Houldsworth concerned with the conduct of corporate affairs, but as a long-term leaseholder intent on discharging the covenants for services under his lease[3].
In a unanimous judgment, Floyd LJ acknowledged that while there was a “clear distinction”[4] between the rights of a leaseholder and the rights of a member of a company, the contents of those rights are not necessarily mutually exclusive[5]. His Lordship held that s 116 is important in ensuring proper corporate governance, which allows the shareholders to monitor the activities of the directors[6]. As such, His Lordship held that a request not made by “a member as member” is not necessarily made for an improper purpose and the court will have to have regard to the “facts and circumstances of the case” instead of fixating solely on the capacity in which the request was made[7].
In the context of the case, His Lordship held that drawing a “sharp dividing line between the covenants under the lease and the affairs of the company”[8] in such a context would give “corporate governance… a restricted and artificial meaning”[9]. This is especially so when the “sole relevant purpose” under Houldsworth’s constitution was the management of the building, and a complaint relating to the appointment of managing agents of the building would be “central to the objects of the company and to the way in which the company is run”[10]. Such an issue may be legitimately raised at a general meeting and thus lies within the “area of overlap” between the rights of the shareholder and that of the leaseholder.
While Floyd LJ endorsed Arden LJ’s (as Her Ladyship then was) dicta in Burry & Knight v Knight[11] (“Burry”) that it is neither possible to provide an exhaustive definition of what is a proper purpose nor lay down a rigid requirement for a s 116 request to be satisfied before it can be considered proper, His Lordship did provide clues as to how a proper purpose is to be determined. In particular:
- The test used to determine whether a purpose is proper is to be objective and will often depend on the precise facts and circumstances: at [16(d)][12];
- The “Proper Purpose” Guidance Note issued by the Chartered Governance Institute (ICSA) is instructive in determining what a proper purpose is: at [16(e)][13];
- The test for whether a purpose is proper does not depend on whether it is in the interests of shareholders: at [16(f)][14];
- The onus is on the claimant company to satisfy the court on the balance of probabilities that the request is improper: at [16(g)][15];
- If the court is in any doubt it should not make a no-access order: at [16(h)][16]; and
- If 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, it will usually be proper: at [19][17].
Discussion
While facts of the case are specific to the relationship between an individual’s capacity as a leaseholder and that of a shareholder, the case has a wider impact on broader commercial matters such as insolvency procedures, public company takeovers and activist situations[18], especially if there is already an existing contractual or other legal relationship between the parties involved.
For example, if a borrower engages in a debt-equity swap with a creditor for a partial cancellation of debt under a scheme of arrangement, the creditor, who becomes a member of the company, may look to make changes to the governance of the company or even buy out the company to preserve its going concerns if there are worries over the payment of the debt. In such cases, the creditor will have to make inquiries as to the membership of the company to gather support for their proposal. Houldsworth provides much illumination into this process—the fact that the creditor may be making a s 116 request with the end goal of discharging the company’s debt to them is not automatically considered an improper purpose under s 117 as the request will be considered with regards to the facts and circumstances of the case. Considering that the court’s discretion to make a “no access” order is only exercised sparingly[19], it is likely, in general cases, that s 116 requests will be allowed. Shareholders should have recourse to the various factors in the previous section which would be considered when deciding if a purpose is proper.
[1] [2020] EWCA Civ 980 [2] Houldsworth at [5] [3] Ibid, [28] [4] Ibid, [31] [5] Ibid, [32] [6] Ibid, [37] [7] Ibid, [39] [8] Ibid, [34] [9] n 7 [10] n 7 [11] [2014] EWCA Civ 604 [12] C.f. Burberry Group plc v Fox-Davies [2017] EWCA Civ 1129; [2018] Bus. L.R. 332 (“Fox-Davies”) at [35] and [47] [13] C.f. Burry at [19] [14] C.f. Fox-Davies at [48] and [50] [15] C.f. Burry at [22] [16] C.f. Burry at [25] [17] C.f. Burry at [8] and Fox-Davies at [36] [18] Robert Boyle, Dominic Sedghi, ‘Corporate Law Update’ (10 January 2020) <https://www.macfarlanes.com/what-we-think/in-depth/2020/corporate-law-update-4-10-january-2020>, accessed 23 August 2020 [19] Burry, Houldsworth