A recent case1 in the Court of Appeal of England and Wales reiterates the importance of having trustees entered as the member of a company, rather than the trust itself being entered as the member.
This case involved two corporate trustees (the “Trustees”) in their capacities as trustees of the Erutuf Trust making a derivative2 claim against Mr Verhoef (the “Defendant”) on behalf of the subsidiary companies of Tellisford Limited (“Tellisford”) in respect of alleged misappropriations of assets of the subsidiaries (the “Derivative Proceedings”).
The Trustees applied for the Court's permission to continue the proceedings (the “Permission Application”), as is required under the English High Court rules in the case of derivative proceedings.
However, the register of members of Tellisford did not name the Trustees as the members of the company, but instead named the Erutuf Trust itself. It transpired that the register of members had named the Erutuf Trust as the member of Tellisford from the outset and had never been updated (or corrected), despite several changes of the trustees of the Erutuf Trust over the years. Therefore the Trustees were not members of Tellisford and had no standing to bring derivative proceedings which could only be brought by a member.
Because of the above, in parallel with the Permission Application, the Trustees had made an application to the court for rectification of the register of members of Tellisford to enter the Trustees as members instead of the Erutuf Trust (the “Rectification Proceedings”). However, these proceedings had a direct impact on the Derivative Proceedings, because at the hearing of the Permission Application, the Trustees were not able to show that they were a member of, or the legal owners of the shares in, Tellisford. The Court in the Permission Application, therefore, held that they did not have the standing to bring the claim, and whether they were members was to be decided by the Rectification Proceedings.
Despite that, the court gave conditional permission to the Trustees to pursue the Derivative Proceedings, the condition being the Trustees being entered as the members of Tellisford in the Rectification Proceedings. The Court granted leave to the Defendant to appeal whether the Court had jurisdiction to grant conditional permission.
The Defendant did appeal that issue to the Court of Appeal, even though in the meantime the Trustees had succeeded in the Rectification Proceedings in having the register of members of Tellisford rectified so that they were entered as members.
The Court of Appeal agreed that the Trustees were not members of Tellisford and therefore lacked the standing to bring the Derivative Proceedings. However, the Court of Appeal disagreed with the granting of conditional permission and stated that the issue of the rectification of members should have been determined prior to permission being granted. The Court of Appeal decided that the Permission Application should have been adjourned until the Rectification Proceedings had been decided.
The consequences of having the Erutuf Trust entered as a member of Tellisford rather than the Trustees were significant. If the Trustees had been correctly entered as members in the register in the first place, the decision to grant permission for the Derivative Proceedings in the Permission Application would have been straightforward. Instead, because of the mistake, it involved additional proceedings to rectify the register and two additional hearings. These court applications and appearances would have cost a significant amount of money and taken time to determine and they were only a preliminary skirmish (the Derivative Proceedings were issued on 1 October 2019 and the Court of Appeal decision was given on 28 July 2021).
This case highlights, inter alia, two important points of trust and company law:
Firstly, a trust is not a legal person or a separate legal entity and it is therefore not capable of holding assets. The trustees of a trust hold the legal title to the trust assets, with the beneficial estate held by the beneficiaries of the trust. This means that a shareholder of a company cannot be a trust, but rather the legal shareholder is the trustee of the trust and it is the trustee that should be entered in the register of members.
Secondly, the register of members is an extremely important document in determining who the shareholders of a company are. As can be seen from the facts of the case, the court looked at the register of members to determine that the Trustees were not entered in the register of members and were, therefore, not a shareholder in Tellisford which prevented them from having standing to bring the Derivative Proceedings until they had the register rectified.
Both the Isle of Man Companies Act 1931 (“CA 1931”) and the Isle of Man Companies Act 2006 (“CA 2006”) similarly provide that the individual/entity entered in the register of members will be deemed the member of a company. Section 103 CA 1931 and section 62(3) CA 2006 provide that the register of members of a company is prima facie evidence of any matters required or permitted by the Acts to be contained in the register. Section 63(1) of CA 2006 further provides that the entry of the name of a person in the register of members as holder of a share in the company is prima facie evidence that the legal title in the share vests in that person.
Section 103 CA 1931 provides that a trust is not to be entered on the register.
These points are relevant to:
- company administrators who are maintaining the register of members of a company, and should therefore enter the names of members correctly; and
- trustees who own shares in a company, and who should ensure that they, and not the trust, are the registered members, so that they can timeously and effectively enforce their rights as members should the need arise.
Rectification of Register
The case above also highlights that if a person is incorrectly entered on the register of members, it is appropriate that this be rectified as the mistake can have a direct impact on the company.
The rectification of the register for a 1931 Act Company is set out in section 101 CA 1931. This provides for an application to be made to court (this can be made by any of the aggrieved party, any member of the company, or the company itself) and that the court has the power to decide any question relating to the title of any person in respect of the shares of the company.
The rectification of the register of a 2006 Act company is less onerous and does not necessarily require an application to court. Instead, section 64(1) CA 2006 allows a “self-help” alternative, and provides that the directors can amend the register, provided they have passed a resolution at a board meeting authorising the same and that that any person affected or to whom such amendment relates consents to such amendment being made. If the rectification cannot be dealt with in such way, sections 64(2) and (3) provide that an application to court may be made and the court has power to determine any question that it may be necessary or expedient to be determined in respect of the rectification.
A similar “self-help” remedy may be possible for a 1931 Act Company in that, if the directors are satisfied the rectification is straightforward and ought to be made, and all affected persons consent, in practical terms there may be no one to object. We are, however, not aware of any judicial authority as to the effectiveness of this approach.
Although a trust is occasionally entered as a member in the register of members of a company, this should be avoided as it can lead to unnecessary difficulties for the company and the trustees in the future. The name in the register should be the trustees of such trust. Whilst mistakes on the register of members can be resolved, for a 1931 Act company (and potentially a 2006 Act company) such rectification can involve court proceedings, which can have a significant time and financial burden for the parties involved.
1 Boston Trust Company Limited and another v Gordon Verhoef  EWCA Civ 1176
2 Strictly, it was a double derivative claim, whereby a member of a holding company brings proceedings to enforce claims, not on behalf of the company of which it is a member, but on behalf of subsidiaries of that company.
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