29 JUN 2015
Board decisions – a cautionary tale
cases are important because the court develops the law, whether by creating a
new rule or by applying an existing rule in a new way. Other cases are important because, even if
they do not take the law any further, they illustrate its practical impact.
recent High Court decision in Re
Melodious Corporation  EWHC 621 (Ch) falls into the latter category,
at least as far as its purely company law aspects are concerned. The fact that the judge in that case
concluded that a board resolution which had been passed at an inquorate board
meeting was invalid is hardly a surprise.
However, the circumstances in which the resolution was passed, and the
implications of its invalidity, should serve to remind directors, company
secretaries and anyone else who is involved in companies’ affairs of the
importance of ensuring that board decisions are taken in accordance with the
procedure set out in the company’s articles of association.
Melodious Corporation (2015)
facts of the case, so far as relevant for the purposes of this article, were as
case therefore turned on a very straightforward question of fact: was Madam Ho present at the board
meeting? Having considered the evidence
with some care, the judge concluded that she was not present, and accordingly
held that the meeting was inquorate and that the decision to appoint an
administrator was invalid. He reached
this conclusion notwithstanding the fact that the intention had clearly been to
appoint an administrator and notwithstanding also his finding that Madam Ho
would have agreed to put the company into administration if she had been asked.
- The case centred around a British Virgin Islands
company, Melodious Corporation, which had two shareholders: a Miss Chan and a Mr Leung.
- At the relevant time, the board of Melodious
consisted of two directors, Miss Chan and her mother, Madam Ho.
- The company’s articles stated that if the
company had only two directors, the quorum for board meetings was two.
- Following a consultation with a Mr Paterson, an
insolvency practitioner who was a partner in a reputable firm of accountants,
Miss Chan decided to put Melodious into administration.
- Minutes of a board meeting in October 2007 stated
that the board had decided to put the company into administration pursuant to paragraph
22(2) of Schedule B1 to the Insolvency Act 1986 (under which directors have the
power to appoint an administrator) and to appoint Mr Paterson as its
- Mr Paterson proceeded to act as the company’s
administrator for approximately a year, and then took steps to convert the
administration into a liquidation.
- Some years later, in 2014, Miss Chan applied to
the court for an order concerning the status of a sum of money derived from the
company’s property investment activities.
Whilst Mr Paterson contended that he had been appointed to be the
company’s administrator and that the sum was an asset of the company, Miss Chan
argued that the company had never been put into administration and that the sum
should be paid into an account in the names of her solicitors and Mr Leung’s
- The basis of Miss Chan’s claim that the company
had never entered administration was that Madam Ho had not attended the October
2007 board meeting, and that the meeting was therefore inquorate.
- Although the minutes corroborated Miss Chan’s
account, in that they stated that she was the only director in attendance, Mr
Paterson argued that in fact Madam Ho was also present.
Article continues below...
efforts to balance the interests of shareholders, directors and creditors in
order to ensure that the company remains an attractive business vehicle, the
company law regime incorporates various features which are designed to reduce
the burden of responsibility on one or other of those parties. A prime example of such a feature is the unanimous
consent rule, under which a unanimous decision of a company’s shareholders will
generally be valid even if it does not comply with the formal shareholder
decision-making procedures in the Companies Act 2006. Oher examples include the rules governing the
deemed re-appointment of the auditor of a private company (section 487) and those
dealing with pre-incorporation contracts, which ensure that a third party who
neglects to ascertain whether the company with which he believes he is dealing
has actually been formed will generally be able to enforce the contract, albeit
against the promoter rather than the company itself (section 51).
are, however, limits to the lengths to which the regime is prepared to go in
this regard. For example, a director who
does not trouble to familiarise himself with the scope of his statutory duties is
unlikely to receive much sympathy from the court in the event that a claim is
brought against him for a breach of duty.
In the course of upholding a judgment against a director for breach of
duty, the Court of Appeal in Towers v
Premier Waste Management Ltd  EWCA Civ 923 noted that the judge at
first instance “was not over impressed by Mr Towers [the director in question],
finding that he down-played his role, regarded the whole matter as
insignificant and did not seem to appreciate his position of trust as a
director”. Indeed, the doctrine of
limited liability – one of the foundations of English company law – assumes
that creditors will take responsibility for their own protection by perusing a
company’s public documents before deciding whether or not to do business with it. As Lord Watson put it in Salomon v A Salomon and Company, Ltd  AC 22: “in my opinion, a creditor who will not take
the trouble to use the means which the statute provides for enabling him to
protect himself must bear the consequences of his own negligence”.
In Melodious, the judge declined to
overlook the absence of a quorum, despite the fact that in his opinion the
director whose presence would have rendered the meeting quorate would, if she
had been asked, have voted in favour of the decision, and despite the fact that
the effect of his conclusion was that a company which had apparently been
placed in administration in 2007 was held, more than seven years later, not to
have entered administration after all. In
other words, this was an example of a situation in which those involved in a
company’s affairs were expected to act with a degree of common sense and
are some areas of the law in which it might be argued that the regime could do
more to reduce the burden of responsibility on particular parties. The rule that an “outsider” cannot enforce
the articles, for example, may be unduly harsh, given that many new directors have
little experience of company law and may well assume that they can protect
their position through appropriate wording in the articles. In other areas, however, it is difficult to
argue that the regime should adopt a more lenient approach. In Melodious,
the court had no qualms about imposing on Mr Paterson, the insolvency
practitioner who subsequently acted as the company’s administrator, the burden
of ensuring that the resolution was passed in accordance with the articles. Mr Paterson had prepared the minutes, and the
judge noted that he had a copy of the company’s articles and had simply failed
to check them. Here, the court’s strict
approach was surely justified. (In fact,
a stricter approach still would have been justified. Rather surprisingly, the judge appeared to
take the view that Miss Chan, despite the fact that she was a director, did not
bear any responsibility for the flawed decision.) One of the first lessons anyone associated
with companies learns is that, in conducting a company’s affairs, regard must
be had not only to the Companies Act 2006 and any other relevant legislation,
but also to its articles. Directors or
advisers who fail to follow this simple rule in relation to the taking of a board
decision can have no grounds for complaint if the decision is later held to have
been invalid, and if the events which flowed from it are thereby compromised.