Are Company Registers Really That Important?
A Court of Appeal case has recently highlighted how important your company’s register of members can be, even if they are incorrect due to fraudulent activity.
How did the register of members get to be incorrect?
Jeanette and Julie Keegan were mother and daughter-in-law, as well as both 50/50 shareholders and directors of JFK Construction Ltd.
Julie’s relationship with her husband, Jeanette’s son, broke down, and she decided to execute a stock transfer form in order to transfer Jeanette’s shares to herself, signing it ‘J. Keegan’. Julie also filed the appropriate documents at Companies House to detail the share transfer and to terminate Jeanette’s directorship.
Julie then signed a written resolution as sole director, resolving to wind the company up and appoint liquidators.
As you might expect, Jeanette disputed the share transfer, alleging that Julie had forged the paperwork by imitating her mother-in-law. She sought to rectify the register of members, and to add herself back on.
She also argued that the written resolution was invalid, since Julie should not have been the sole director if everything had been done according to the law.
Meanwhile, the liquidators went to court to seek confirmation that their appointment was valid.
The High Court ruled that the liquidators’ appointment was valid, and although Jeannette appealed this, the Court of Appeal dismissed the appeal.
Why did the court decide the incorrect register of members was still applicable?
Section 112 of the Companies Act 2006 defines a ‘member’ as someone who has subscribed to the company’s memorandum, or has agreed to be a member, and is entered into the register of members.
The Court ruled that this fundamental principle of UK company law should apply, even in cases where a member is removed as a result of fraud or forgery.
If a person claims they have been wrongly removed, they would need to seek a Court order to rectify the company’s register. If they want that rectification to apply retrospectively, they must explicitly request this in their application. Entries on the register of members are presumed to be valid and the members of a company are taken to be those shown on the register “unless and until the register is rectified“.
Ultimately in this case, at the time of the written resolutions, Julie was the only member of the company according to the register, and therefore the resolutions were valid and effective.
Key Takeaways
The register of members is of central importance in determining who holds title to shares, and who is entitled to vote. It is considered a superior source of evidence by the courts, and the Courts will look there first, to determine who the shareholders are and what voting rights they have.
If, as in this case, someone claims that their name has been unlawfully removed from the register, it is their duty to prove it.
What should you do now to avoid company register problems?
Every company should keep its registers accurate and up-to-date at all times. If you own shares in a company, or are involved in running one, it’s a good idea for you to inspect the register periodically to ensure all shareholders are recorded as expected.
Notably, once the new Economic Crime and Corporate Transparency Act – is in full swing, the register of members will be the only mandatory register that companies will have to keep and update, as it will no longer be possible to store this information in the centralised records at Companies House.
If you’re involved in a share sale/purchase transaction, it’s essential for the buyer(s) to ensure the register of members is updated in a timely manner following completion, so that it reflects the new ownership of the shares. Your legal advisors should also include a Power of Attorney to give the right to the buyer(s) to exercise all rights attached to the shares until they have been entered into the register of members, which covers the buyers during the period between the sale and the register being updated. This is a standard component of each M&A transaction that Devant executes for its clients, where our client is buying the shares.
Whilst it may not have made a difference in this case, it would also be prudent to ensure your company is registered for PROOF, a free Companies House service designed to protect your company from unauthorised changes to your records. It prevents the filing of certain paper forms, including:
- changes to your registered office address
- changes to your officers (appointments, resignations or personal details)
- changes to your company name by special resolution
This means that these changes can only be made using the online forms, so that only someone with access to your company’s authentication codes can do so.
You can join PROOF by signing in to your Companies House online filing service, and following the steps set out here: https://www.gov.uk/guidance/protect-your-company-from-corporate-identity-theft. Don’t forget to tell anyone who files for you though (like Devant, if you’re a Company Secretarial client of ours), and make sure they have the authentication codes!