Fraud or no fraud, the Register of Members reigns supreme

• The English Court of Appeal confirmed that the members of a company are taken to be those shown on the Register of Members unless and until the register is rectified, notwithstanding a purported fraudulent transfer of shares. 

• As a result, the "fraudster" who obtained 100% shareholding in the company was able validly to appoint liquidators to wind up the company.

• Although the validity of the Register of Members in such circumstances has not yet been determined by the Cayman Islands Courts, this decision is likely to be persuasive authority in the Cayman Islands given the similarities in the legislative provisions in both jurisdictions. 

Introduction

A recent judgment of the English Court of Appeal in In the Matter of JDK Construction [2024] EWCA Civ 934¹ considered whether joint official liquidators were validly appointed by a special written resolution passed by a sole shareholder, following the purported fraudulent removal of another shareholder from the company's Register of Members on the basis of a forged document.

Background

Facts

From October 2015, Mrs Jeanette Keegan (the "Initial Shareholder") and her then daughter-in-law, Mrs Julie Keegan (the "Subsequent Shareholder"), were co-directors and 50% shareholders in JDK Construction Limited (the "Company"). 

On 20 April 2019, a stock transfer form (purportedly forged by the Subsequent Shareholder in the name of the Initial Shareholder, it being executed as "J. Keegan"),²  transferred the Initial Shareholders entire interest in the Company (the "50% Stake") to the Subsequent Shareholder (the "Suspect Transfer").  The same day, the Initial Shareholder's directorship was terminated.  Thereafter, the Subsequent Shareholder was the sole director and 100% shareholder in the Company.³

Approximately two years later, on 16 July 2021, the Subsequent Shareholder⁴ resolved by way of written resolutions to place the Company into a creditors' voluntary liquidation and to appoint two liquidators.  Despite the liquidators raising requests for the books and records of the Company from the Subsequent Shareholder, former directors and the Company's accountants, the liquidators were unable to obtain a copy of the Register of Members and instead relied in good faith on the records at Companies House, which showed the Subsequent Shareholder as the sole member on or around 1 May 2019.

Subsequently:

1. two months after the Company was placed into creditors' voluntary liquidation, on 13 September 2021, the Initial Shareholder sent correspondence to the liquidators challenging the validity of the Suspect Transfer⁵ and the appointment of the liquidators, denying ever having signed the stock transfer form;

2. over a year later, in October 2022, the liquidators commenced these proceedings, seeking relief including a declaration that their appointment was valid ("Validation Claim"); and 

3. later, in November 2022, the Initial Shareholder sought declaratory relief from the English High Court, namely: (i) a declaration that the Initial Shareholder had been removed from the Register of Members without sufficient cause; and (ii) an order that the Register of Members be rectified retrospectively (together, the "Rectification Claim"). 

The First Instance Decision

The Validation Claim was initially adjourned to allow the Rectification Claim to be determined first. 

Relevantly, there was no judicial determination of the issues in the Rectification Claim, as it was stayed by way of a Tomlin Order dated 2 June 2023 between the Initial and Subsequent Shareholders and the Initial Shareholder's son who, in fact, controlled and managed the Company.  Under the Tomlin Order, the Subsequent Shareholder agreed, inter alia: (i) that she did not own the 50% Stake; and (ii) to transfer the 50% Stake to the Initial Shareholder within two days of receipt of the sealed Tomlin Order. 

Notably, the Tomlin Order: 

1. did not indicate how the Register of Members was to be amended; 

2. did not indicate how the resolution for the winding up of the Company was to be treated; and 

3. was entered into without the involvement of the liquidators.

Upon learning of the Tomlin Order, the liquidators applied for the Validation Claim to be heard, which sought declarations, inter alia, that the appointment of the joint liquidators was valid and that any procedural irregularity arising from the Subsequent Shareholder's actions did not invalidate their appointment.

Mr Justice Hodge KC of the English High Court held that the Register of Members is conclusive as to who are the shareholders of a company at a particular point in time; even assuming that the share transfer form was a forgery, since the Register of Members only listed the Subsequent Shareholder as a member at the time the special resolution to wind-up the Company was passed, the Company was validly placed into voluntary liquidation.  Therefore, the Court granted the applicants' request for declaratory relief, confirming the joint liquidators' appointment to be valid. 

The Court of Appeal's Decision 

The Initial Shareholder appealed the High Court's decision, arguing:

1. that the transfer of its shares, the entry on the register and the resolution for the winding up and appointment of the liquidators were all void and of no legal effect; 

2. the Register of Members is only prima facie evidence (i.e. a presumption subject to rebuttal), not conclusive as to membership of the Company; and 

3. that the First Instance decision "opened the door to a fraudster obtaining control of a company by the simple expedient of forging a stock transfer form or making unauthorised alterations to the register of members…"

The liquidators resisted the appeal. 

The issue before the Court of Appeal was: whether, even assuming the share transfer form was a forgery, the Initial Shareholder was an "eligible member" of the Company for the purposes of participating in the special resolution to place the Company into voluntary winding-up. 

Lord Justice Snowden described both the facts and the course of these proceedings as "unusual". 

Ultimately, the Court of Appeal unanimously dismissed the appeal and confirmed the primacy of the Register of Members in determining who the shareholder(s) of the Company were at a given point in time.  Snowden LJ found that the Register of Members is presumptively valid unless and until the register is rectified, noting: "the law does not simply disregard entries on the register." 

Therefore, even if a Register of Members is liable to be rectified retrospectively (i.e. following a Court determination that a share transfer was in fact fraudulent and of no effect), unless a rectification application has been made and the register actually rectified,⁶ an act by a shareholder(s) named in the Register of Members is likely to be valid.  

On this basis, the Court of Appeal found that it was correct for the trial judge to "rely upon the (presumed) state of the register of members when considering the validity of the [w]ritten [r]esolutions". As the Subsequent Shareholder was the only member of the Company when the written resolutions in question were approved, the winding up of the Company and the appointment of the liquidators was valid.

Interestingly: 

1. Neither the original nor a copy of the Register of Members was before the Court.  In finding that the Register of Members is presumptively valid as to who its shareholders are, the English Courts proceeded on the assumption that the Company’s accountants had made entries in the Register of Members to reflect the filings submitted at Companies House. 

2. There was no factual finding as to the alleged fraud or forgery. 

3. Although the Court of Appeal confirmed section 122 English Companies Act (as amended) applies a two-prong test as to who is a shareholder of a company (i.e. every person who: (i) agrees to become a member; and (ii) whose name is entered in its Register of Members), the Court of Appeal focused solely on the second prong in reaching its decision. 

4. If the Rectification Claim had been determined by the Court before the trial of the Validation Claim, the outcome of this case may well have been different.

The Significance of the Court of Appeal's Decision 

Appellate decisions of the English Courts (such as this decision) are not binding in the Cayman Islands, although they are ordinarily of persuasive and, in certain circumstances, highly persuasive value.

As the applicable English and Cayman Islands legislation is in near identical terms, this decision is significant to Cayman Islands jurisprudence. Generally speaking, Cayman Islands case law has developed in line with the English law approach to date,⁷ i.e. the primacy of the Register of Members is recognised.⁸

However, it remains to be seen how the Cayman Islands Courts will approach a wrongful removal of a shareholder in alleged fraudulent circumstances and, in particular, whether the same weight will be placed on the remedy of rectification to correct the mischief of fraudsters. 

As noted above, the English Court of Appeal did not opine on the purported forgery and/or fraudulent transfer of the 50% Stake. With this in mind, future litigants should carefully consider whether a suspected forgery and/or fraudulent transfer of shares is void⁹ or voidable (i.e. whether the complainant has an immediate right to rectification¹⁰) before taking any legal action.

Ultimately, it is for the Court to dispense justice and to apportion losses appropriately between innocent parties, such as liquidators, who may well be victims of a fraudulent scheme or otherwise find themselves caught in the cross-fire of an unsavoury shareholders' dispute.  

Key observations

Liquidators, shareholders, directors and managers of Cayman Islands companies, as well as practitioners in the jurisdiction, should note the following: 

1. All parties potentially impacted by a suspected fraudulent transfer of shares should seek legal advice early on regarding their rights, the causes of action and remedies potentially available.

2.Parties who seek to settle legal proceedings (whether by a Tomlin Order, a settlement agreement or deed) should ensure that the terms of any order, agreement or deed: (i) accurately reflects the agreement reached; and (ii) comprehensively caters for any impact it may have on on-going, related legal proceedings or other dealings between the parties.

3.This decision highlights the importance of maintaining accurate and compliant company registers at all times.

4. A company who fails to keep an accurate Register of Members is liable to a fine of KYD 5,000, as is each Director and manager of the company who knowingly and wilfully authorises or permits such default, under sections 40 and 44 of the Companies Act (2023 Revision) (the "Companies Act").

5. All acts by a director, manager and liquidator falling within section 73(2) Companies Act are valid, notwithstanding any defect that may be discovered afterwards in their appointment or qualifications.

6. Nonetheless, a liquidator who is on notice of a potential fraudulent transfer of shares or a dispute as to shareholding or a potential defect in their appointment should not turn a blind eye and should make relevant enquiries when investigating the company's affairs.

7. Directors are reminded of their fiduciary duties, inter alia, to act in the best interests of the company and for a proper purpose when resolving to approve a proposed transfer of shares.¹¹

8. A shareholder who is the victim of a fraudulent transfer of their interest in a company to a third party should consider seeking, inter alia, retrospective rectification of the Register of Members, noting:

• acts of a shareholder(s) named in an inaccurate Register of Members in the interim may be determined to be valid; and
• a rectification application should be made promptly and may include a request that the company pay: (i) dividends during the period in which the complainant was wrongfully removed from the register; and (ii) compensation.

9. Other shareholders or interested parties should obtain legal advice regarding what steps (if any) are required to safeguard their interests, for example, from the risk of dilution, the loss of a veto power and/or the fraudulent transfer of an interest(s) to third parties. 

Citations:

1. Specifically, between Andrew Bland and Janet Francis Mayo (as Respondents) and Jeanette Keegan (as Applicant).
2. The Subsequent Shareholder admitted to signing the stock transfer form as "J. Keegan", in the capacity as herself, without an intention of forging or purporting to forge the Initial Shareholder's signature.
3. Confirmation Statements in the form CS01, inter alia, were filed with the UK Companies House on 31 May 2019 and 20 April 2020 listing the Subsequent Shareholder as the 100% holder of the shares in the Company.
4. i.e. the only person that needed to be given notice of and to vote upon the resolution. 
5. But accepted the termination of her directorship on the same day as the Suspect Transfer.
6.  and provided other corporate formalities are complied with, such as proper notice and voting formalities, for example.
7. See for example, Ebanks v Waterfront Developments Ltd (unreported, 21 June 2018, Rix JA) and In the Matter of Hammer International Foundation (14 August 2024, Asif J) applying Re Sussex Brick Company [1904] Ch 598. 
8. Provided the Register of Members substantially complies with section 40 of the Companies Act (2023 Revision), per Kawaley J in In the Matter of Global Cord Blood Corporation (29 July 2022, Kawaley J) at [46] – [47]. 
9. Argentine Holdings (Cayman) Limited v Buenos Aures Hotel Corporation S.A. and others [1997 CILR 90].
10. Having regard to the decision of the Privy Council on appeal from the BVI Court of Appeal in Nilon Limited and another v Royal Westminster S.A and others [2015] UKPC 2 at [51] – [53].
11. For example, considering the purported purpose of the share transfer, the value of the assets which the shares represent and the consideration to be paid.