Thursday 18 July 2019

UK: England and Wales: a new liability on forfeiture of shares?

Judgment was given yesterday by Chief Master Marsh in Zavarco Plc v Yusof [2019] EWHC 1837 (Ch). It is noteworthy because of the analysis provided in respect of the effect of a provision in the Articles of Association on the consequences of the forfeiture of shares.

The company's Articles contained a provision stating that forfeiture extinguished all interests in the shares and all other rights relating to them; it also provided that where a person's shares had been forfeited, that person remained liable to the company for all sums payable by that person under the Articles (whether accrued before or after the date of forfeiture). The question for Master Marsh was the effect of this provision: did it - as the editors of Palmer's Company Law had stated - create a new obligation as debtor? The answer is of wide interest given the prevalence of such provisions (see, for example, the model articles for public companies: here, .doc).

Master Marsh disagreed with the position adopted in Palmer's Company Law and explained that in his view the position was as follows. Forfeiture changed the nature of the relationship but the sum owed remained the same. This sum remained, and was always, a contractual debt by virtue of section 33(2) of the Companies Act 2006. It was wrong to see the liability as a contributory transformed into a different liability. The preservation of the liability, arising from the articles of association, did not create a new liability or a new cause of action.

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