Lord Justice Peter Gibson
This is an appeal by the Third Defendant, Jeremy Lee Barber, from parts of the order made by Neuberger J. on 4 April 2003. The First Claimant, EIC Services Ltd. ("the Company") and the Second Claimant, its Guernsey parent company, European Internet Capital Ltd. ("the Guernsey Company"), sought a determination as to the validity of an issue of bonus shares made by the Company on 15 December 1999. Master Moncaster ordered the trial of preliminary issues. The judge, in determining those preliminary issues, held that a large number of the bonus shares were allotted to shareholders whose shares were not paid up and that the issue of the bonus shares, including the capitalisation of the share premium account for the issue, was not authorised by an ordinary resolution of the Company, as it should have been, or otherwise effectively authorised by members of the Company. However, he also held that, despite those defects, apart from s. 35A(1) of the Companies Act 1985 ("the 1985 Act") the bonus shares were validly issued but were nil paid and that s. 35A(1) was capable in principle, subject to outstanding issues yet to be determined, of operating to render unpaid bonus shares fully paid up.
The appeal is brought with the permission of the judge. At the hearing before him the Claimants, appearing by Mr. Philip Gillyon, adopted a largely neutral stance. The First Defendant, Stephen Phipps, and the Second Defendant, Jonathan Paul, appearing by David Chivers Q.C., represented all who were interested in arguing for the validity of the issue of bonus shares. Mr. Lee Barber, appearing by Mr. David Mabb Q.C., represented all whose interest it was to argue that the bonus shares were not fully paid, that the capitalisation of the share premium account and the issue of bonus shares were not properly authorised and that the bonus shares were not validly issued. On this appeal, neither the Claimants nor Mr. Phipps and Mr. Paul have chosen to appear or to be represented and Mr. Lee Barber appears in person. He relies on two skeleton arguments which Mr. Mabb prepared for the appeal. No inference can be drawn from the non-appearance of Mr. Phipps or Mr. Paul other than that they are content with the judge’s judgment and conclusions. Those of the issues which are live on this appeal are very technical, and it is unfortunate that there is no professional representation of any party on this appeal. However, the judge’s full and detailed judgments, running to 241 paragraphs, and Mr. Mabb’s skeletons for the appeal, coupled with the skeleton argument and other written submissions of Mr. Chivers before the judge, are sufficient to enable us to reach conclusions on all the issues, much as we would have welcomed the opportunity to test those conclusions in a dialogue with counsel in the ordinary way.
The Company was incorporated on 8 April 1999 with an authorised capital of £1,000 divided into 1,000 £1 shares. On 20 May 1999 James Spickernell and Julian Bryson were appointed directors in place of the first director of the Company. They acquired the Company for the purpose of investing in internet-related businesses. On 21 July 1999 the two nil paid subscriber shares were transferred to Mr. Spickernell and Mr. Bryson respectively and the authorised share capital was divided into 100,000 ordinary shares of 1p each, so that Mr. Spickernell and Mr. Bryson each had 100 1p shares.
On 12 November 1999 the authorised capital was increased to £300,000 by the creation of an additional 29,900,000 1p shares and Mr. Spickernell and Mr. Bryson, as directors, approved transfers of Mr. Spickernell’s 100 shares to Berdino International Ltd. ("Berdino"), a company owned by him, and of Mr. Bryson’s 100 shares to Okimax International Ltd. ("Okimax"), a company owned by him. The directors also that day allotted to Berdino, Okimax, Simon Reid (whom the directors appointed as a third director) and 13 others (collectively "the 16 shareholders") a total of 110,320 shares at a price of 1p each.
On 15 December 1999 at a board meeting Mr. Spickernell as chairman and Mr. Reid (Mr. Bryson was not present) allotted a total of 27,035 shares at a price of £29 each to 5 of the 16 shareholders and to 28 new shareholders ("the 28 shareholders"), thereby increasing the number of shares in issue to 137,555. They also passed a resolution ("the Bonus Issue resolution") in the following terms:
It was noted that prior to this meeting there were 110,520 Ordinary Shares in issue and following the issue of 27,035 Ordinary Shares referred to above that there were now 137,500 Ordinary Shares in issue. It was noted that following the share issue referred to above the Company now has £783,755.65 in its share premium account and IT WAS RESOLVED THAT £136,179.45 of the sum standing to the credit of the share premium account of the Company be capitalised and appropriated to the holders of the Ordinary Shares on the register of members at the close of business on the date of this meeting in the same proportion as they would be entitled to that sum were it distributed by way of dividend on condition that that sum be applied on their behalf in paying up in full at par all the Ordinary Shares to be issued and distributed credited as fully paid up to those persons in the proportion of 99 Ordinary Shares for each Ordinary Share now registered in their names.
On 22 December 1999 Mr. Lee Barber agreed to subscribe for 2,500,000 shares at a price of £1.25 each and shortly after that he paid £3,125,000 for them. On 20 January 2000 the Company issued those shares to him and a further 220,000 shares to others also at a price of £1.25 per share. Between 4 February and 23 March 2000 the Company issued a total of 5,542,000 more shares at a price of £2.50 per share.
On 24 March 2000 the Guernsey Company made an offer to acquire all of the existing issued shares on the basis of 3 ordinary shares of 1p each in the Guernsey Company for each fully paid up share in the Company. On 9 April 2000 the Company became a wholly owned subsidiary of the Guernsey Company. Shortly thereafter Mr. Spickernell, Mr. Bryson and Mr. Reid ceased to be directors of the Company.
On 18 December 2001 the Company and the Guernsey Company began these proceedings, joining as defendants Mr. Phipps, Mr. Paul and Mr. Lee Barber as well as two others, all shareholders in the Guernsey Company and former shareholders in the Company, to represent different interests.
On 26 June 2002 Master Moncaster directed the determination of the preliminary issues.
The first part of the first issue was whether the subscriber shares were fully paid up at the time of the bonus issue on 15 December 1999. The second part of that issue was whether the shares issued on 12 November 1999 to the 16 shareholders were fully paid up on 15 December 1999.
The second issue was whether the capitalisation of reserves and the issue and allotment of the bonus shares were effectively authorised by the members of the Company.
The third issue, expressed to be conditional on the judge thinking fit to determine it, was whether, in light of the determination on the other issues, the bonus shares were validly issued or allotted.
On 13 March 2003 the judge handed down his reserved judgment. On 4 April 2003 at a further hearing on the terms of the Order, the judge delivered a further judgment to clarify several points in his earlier judgment.
As the judge explained, the importance of the first and second preliminary issues arises from the provisions of Regs. 110 and 104 of the 1985 version of Table A, incorporated as they were into the Company’s Articles of Association. By Reg. 110 so far as relevant:
The directors may with the authority of an ordinary resolution of the company –
By Reg. 104, so far as relevant:
.... all dividends shall be declared and paid according to the amounts paid up on the shares on which the dividend is paid ....
The judge concluded, having regard to the evidence on the first preliminary issue, that the subscriber shares were fully paid up at the time of the bonus issue, but that the shares issued to the 16 shareholders in November 1999 were not. On the second preliminary issue, the judge reluctantly concluded that the capitalisation of reserves and the issue of bonus shares paid up were not authorised by an ordinary resolution of the Company or otherwise effectively authorised by the members of the Company. On the third preliminary issue the judge considered the contention advanced by Mr. Mabb for Mr. Lee Barber that the bonus issue was void for mistake. He agreed with observations made by Scott J. in Re Cleveland Trust plc  BCLC 424 at p. 434 to the effect that the issue and allotment of bonus shares, once accepted by the allottee shareholder, involved a relationship between the company and the shareholder analogous to a contractual relationship. Neuberger J. accepted that the fact that the shares issued in November were not paid up at the time of the bonus issue and the absence of an ordinary resolution could properly be characterised as common mistakes. However, he considered on the facts of the case that the issue of the bonus shares to the 16 shareholders was not void by reason of the shares issued in November 1999 not being paid up at the time of the bonus issue. As for the failure of the directors to obtain the approval of the shareholders to the issue and allotment of the bonus shares, the judge took the view that that mistake did not vitiate so as to render void the issue and allotment of the bonus shares. The judge said that if that was wrong, he would still have rejected the contention that that the bonus shares were void, any voidness attaching only to the paying up of the shares rather than to the shares themselves.
The judge then considered an argument by Mr. Mabb that there was no power to issue bonus shares on the facts found by the judge and the counter-argument of Mr. Chivers that s. 35A of the 1985 Act applied. That section provides, so far as relevant:
In favour of a person dealing with a company in good faith, the power of the board of directors to bind the company, or authorise others to do so, shall be deemed to be free of any limitation under the company’s constitution.
For this purpose –
The judge accepted the argument put forward on behalf of Mr. Phipps and Mr. Paul that each shareholder who received bonus shares was a person dealing with the Company and that the issue and allotment of bonus shares constituted a "transaction or other act to which the company is a party". The judge indicated that Mr. Reid, Mr. Spickernell and Mr. Bryson and their shareholder companies did not know that the issue and allotment of the bonus shares were beyond the power of the directors for the purposes of s. 35A(2)(b). He expressed his strong inclination to conclude that the directors acted in good faith for the purposes of s. 35A(2)(c). If wrong on the applicability of s. 35A, the judge would have concluded that the effect of the two defects would not have rendered any bonus shares invalid, but would only have rendered the paying up of some of the shares invalid. That conclusion, expressed tentatively in the judge’s first judgment, was expressed as a final decision in the judge’s further judgment.
Finally, the judge said that if he had decided that the issue and allotment of the bonus shares was void in whole or in part he would have thought it right to grant a declaration to that effect.
Mr. Lee Barber appeals on the points on which he failed before the judge. He submits that:
apart from s.35A(1), the bonus issue was void by proceeding on the mistaken footing that the directors had power to capitalise a sum standing to the credit of the share premium account and appropriate it to all the members and that each of the 137,555 shares in issue conferred an equal right to participate in the bonus issue;
s. 35A(1) was not capable of operating to validate, and did not validate, the bonus issue to any extent.
THE NATURE OF A BONUS ISSUE
It is convenient at this point to refer briefly to the nature of a bonus issue. Its essence is, as Mr. Mabb submitted in his first skeleton argument for the appeal, that profits and other available reserves are capitalised and applied in paying up unissued shares or debentures, which are issued to the existing shareholders in proportion to their entitlement to dividends. The effect is that, in contrast to a dividend which reduces the assets of a company, a bonus issue does not reduce those assets since the assets and liabilities side of the balance sheet remains unchanged but the capital and reserves side of the balance sheet is rearranged with a reduction in the amount of the profits or other relevant reserves and an equal increase in the amount of the paid up share capital reflecting the increase in the issued share capital (see Hill v Permanent Trustee Company of New South Wales Ltd. 1930 AC 720 at pp. 731 - 732 per Lord Russell).
Since the Companies Act 1947 the premium on the issue of a share, viz. the amount by which the consideration received by a company for a share exceeds its nominal value, has had to be credited to the share premium account, but by s. 130(2) of the 1985 Act the share premium account can be applied by the company in paying up unissued shares to be allotted to the members as fully paid up bonus shares.
BONUS ISSUE APART FROM SECTION 35A
Mr. Lee Barber relies on the two defects found by the judge in the bonus issue.
The first was that although the directors passed a resolution with a view to making the bonus issue, they did not act with the authority of an ordinary resolution of the Company nor had the equivalent authority been obtained by all its members agreeing.
The second was that 110,320 of the 137,555 issued shares in the Company were not paid up and they would have had to be paid up, like the remaining 27,235 shares, if each of the 137,555 shares was to have the right to participate therein. It is plain that the bonus issue proceeded on the footing that all the issued shares had that right.
The consequence of the defects was that the directors had no power to capitalise any sum standing to the credit of the share premium account or to appropriate it to members, because Reg. 110 did not give them that power and the directors had no other power to that effect. They did have power to issue unpaid shares, and if the Bonus Issue resolution could be construed, as the judge accepted, as providing for the issue of unpaid shares, their action would be effective to issue bonus shares nil paid. However, it seems plain that the resolution cannot be so construed. It was part and parcel of the resolution that the sum which was specified in the resolution and stood to the credit of the share premium account was to be capitalised and appropriated to the holders of the 137,500 shares in issue on condition that the sum was to be applied in paying up in full at par all the bonus shares to be issued and distributed credited as fully paid up. That it was assumed for the purpose of the bonus issue that the shares would be fully paid up is, in my view, clear. The resolution corresponded with Reg. 110 in that respect. The evidence shows that the greater part of all the shareholders knew that they were to receive 99 bonus shares for every share held by them. No shareholder was asked to accept unpaid shares and none agreed to do so. As Mr. Chivers in his written submissions rightly said to the judge, "If one asks the question – "what was the fundamental subject matter of the contract?" it was that every shareholder should receive fully paid bonus shares". That fundamental assumption was falsified by what occurred.
What then is the consequence of the fundamental assumption being mistaken? It was conceded before the judge, and the judge accepted, as I have noted in para. 12 above, that the law relating to common mistake can be applied by analogy to the issue of bonus shares. The observations of Scott J. in Cleveland, which the judge approved, were made in a case where three companies with common directors were involved. One company, McInnes, used a capital profit to pay a dividend to a second company, Gunnergate, which in turn paid a dividend to a third company, Cleveland. The directors of Cleveland, with the authority of a resolution of its shareholders in general meeting authorising a bonus issue capitalising part of the balance standing to the credit of the profit and loss account (largely consisting of the Gunnergate dividend), made a bonus issue. However, McInnes under its memorandum of association was prohibited from paying a dividend out of capital profit, and so Gunnergate received the sum as constructive trustee for McInnes. The profit and loss account of Gunnergate was thereby falsified. Cleveland received the dividend paid to it as constructive trustee for Gunnergate.
The question for Scott J. was whether the bonus issue by Cleveland was void. Of the four grounds for voidness advanced by Cleveland the third was that the resolution passed at the general meeting did not authorise the directors to allot partly paid or nil paid shares, and the fourth was that the fundamental, but mistaken, premise underlying the resolution of the shareholders in general meeting and the decision of the board to recommend the issue of the bonus shares was that the capital profit made available to Cleveland via the Gunnergate dividend could be utilised in paying up the shares. The amicus curiae, Mr. Charles, submitted, and Scott J. agreed, that in fact the bonus shares were fully paid up. However Scott J. recorded Mr. Charles’ acceptance that if Cleveland’s analysis were correct and the shares were not paid up, the conclusion that the issue was void for mistake would be inescapable, the shareholders having accepted fully-paid shares and not having accepted shares on which they had a liability to pay calls. Scott J. commented at p. 433:
I have no doubt that that is right.
Scott J. also accepted the correctness of Cleveland’s fourth point. He said that a fundamental premise underlying the bonus issue was that Cleveland had profits available for distribution sufficient in amount to pay up the bonus shares. He thought the relationship between company and shareholder vis-à-vis the authorised bonus issue was sufficiently analogous for the principle of common law mistake to be as applicable to the bonus issue as to an ordinary contract. After considering what was said in Bell v Lever Bros. Ltd.  AC 161 on the principles of mistake Scott J. expressed his opinion that the fundamental premises underlying the bonus issue satisfied the tests enunciated by Lord Atkin at pp. 217 and 225 and Lord Thankerton at p. 235 in that case as to what assumptions, if mistaken, will make a contract void. Scott J. also referred to Steyn J.’s remarks in Associated Japanese Bank (International) Ltd. v Credit du Nord SA  1 WLR 255 at p. 268 that the mistake must render the subject matter of the contract essentially and radically different from the subject matter which the parties believed to exist. Scott J. said (at p. 436):
The subject-matter of the contract, for present purposes, was the issue of the bonus shares. It was fundamental to the issue that the dividend deriving from McInnes’s capital profit could be used in paying up the bonus shares. The true state of affairs, in which the capital profit could not be so used and the Gunnergate dividend was repayable, did, in my judgment, render essentially and radically different the subject-matter which the parties believed to exist.
I am, accordingly, satisfied that the bonus issue can properly be declared void on the ground of common mistake.
Neuberger J.’s approach was to look at each defect separately and at the effect of each defect on individual groups of shareholders. It is understandable that a judge, in setting out his reasons, should wish to deal with the points arising one by one, but the danger of that approach is that it takes no account of the cumulative effect of the interlinked defects. Thus to decide, as the judge did, that the absence of shareholder approval was not such a fundamental or essential mistake that it rendered the issue and allotment of the bonus issue void leaves out of account the consequence flowing from that absence that any bonus shares issued could only have been nil paid. It is not relevant to pose the question, as the judge did, whether the failure to obtain the consent of the 16 shareholders to the issue of the bonus shares was a fundamental mistake. The fact is that there was neither an ordinary resolution nor the authority of the members of the Company. An exercise by the directors of their power to issue nil paid shares would have been fundamentally different from what the Bonus Issue resolution shows was contemplated. Further, to look at individual groups of shareholders and the hardship to them if the bonus issue is void leaves out of account the fundamental mistake, again apparent from the Bonus Issue resolution, that the bonus shares were to be allotted fully paid to all the members (on the mistaken footing that all were entitled to distributions by way of dividend).
I have the following further comments on the judge’s reasoning.
The judge referred to the decision of this court in Great Peace Shipping Ltd. v Tsavliris Salvage (International) Ltd.  QB 279, although Mr. Chivers had not relied on it. That authority is rightly described by the judge as representing a significant development in the law and as having considered, among other cases, Bell and the Associated Japanese Bank case cited by Scott J. in Cleveland. But Neuberger J. does not say that the views of Scott J. were wrong in the light of Great Peace: on the contrary, he plainly cited them with approval. One of the three factors relied on by the judge as combining to lead him to the conclusion that the issue of bonus shares to the 13 shareholders (viz. the 16 shareholders other than Berdino, Okimax and Mr. Reid) was that whereas they were innocent of responsibility for the mistake, in contrast "on one view, its directors had misled the 16 shareholders by telling him that their shares would be paid up by one of the directors, who then failed to pay up the shares" (para. 166 of the judge’s judgment). The judge then refers to propositions (ii) and (iii) of the five necessary elements for common mistake set out in para. 76 of the judgment in Great Peace, of which proposition (iii) would appear to be the more relevant, viz. that "the non-existence of the state of affairs [the subject of the mistaken common assumption] must not be attributable to the fault of either party". However, because the judge accepts that there were common mistakes, he does not appear to adopt the possible view which he had set out. That may be because the evidence suggests that Mr. Spickernell, in giving his assurance to the 13 shareholders, was not doing so on behalf of the Company but in his personal capacity to members of the family or friends, nor was he saying that the shares issued in November 1999 would be paid up by the time of the bonus issue (Mr. Spickernell appears to have been unaware that this was necessary for compliance with Regs. 104 and 110), but rather that the 13 shareholders would not be asked to pay for their shares.
The judge also referred to para. 90 of the judgment in Great Peace for the general proposition that the law ought to uphold rather than destroy apparent contracts. Whilst that is undoubtedly correct, if circumstances arise such as Scott J. considered in Cleveland the law must declare such contracts void. I do not think that the correctness of Scott J.’s view is affected by Great Peace.
The second factor which led the judge to conclude that the issue of the bonus shares to the 13 shareholders was not void was that the 28 shareholders whose shares were fully paid up on 15 December 1999 (in fact the judge must have meant also to include the 5 shareholders who were also allotted shares at £29 each that day) and subsequent shareholders would enjoy a windfall. That is a factor which weighed heavily with the judge, but it is only correct if the judge is right that the issue on 15 December 1999 of bonus shares to shareholders with paid up shares was valid even though the Bonus Issue resolution contemplated that bonus shares would be issued to all shareholders. For the reasons to which I will come shortly I do not think that the judge is right on that point. As for subsequent shareholders, they are not relevant to the question whether the issue of bonus shares on 15 December 1999 is void.
The third factor on which the judge relied was the fact that the mistake as to the 110,320 shares being paid up was one which as at 15 December 1999 would have been perceived as capable of being put right, the amount of money needed to make the shares fully paid up being just over £1,000, which, in the context of the then perceived value of the shares, the judge described as "virtually de minimis". The difficulty with that is that the validity of the issue of the bonus shares to the 16 shareholders must be judged at 15 December 1999. At that date, in the absence of shareholder approval, the directors could not issue bonus shares to the 16 shareholders other than as nil paid shares.
The judge said that Cleveland did not cast doubt on his conclusion for four reasons. The first was the windfall in the present case (but not found in Cleveland) to which I have referred in para. 28 above, and which I reject for the reasons to which I come in para. 31 below. The second is that in Cleveland neither the company nor its directors misled the shareholders whereas the directors misled 13 shareholders in the present case. But in the instant case, for the reasons given in para. 28 above, Mr. Spickernell was not acting as a director or otherwise on behalf of the Company in giving his assurance. The third is that there was no question of Cleveland being able to recover from anyone a sum equal to the amount wrongly paid to it by McInnes via Gunnergate, whereas in the present case it was clear at 15 December 1999 that the shares issued in November to the 16 shareholders could and would be paid up in due course. That assumes that the issue of bonus shares to the 16 shareholders would by such payment for the shares issued in November be validated, whereas the true position in law was that at 15 December 1999 the directors of the Company only had power to issue nil paid shares to the 16 shareholders. The fourth reason was that the mistake in Cleveland was "conceptually, as well as commercially, far more "essential" or "fundamental" to the issue of the bonus shares than the mistake in this case". That would appear to be at variance with Scott J.’s view that the issue of nil paid shares, when the shareholders thought that they were accepting fully paid shares, would be void for mistake, and again it takes no account of the fact that at 15 December 1999 the directors could only issue nil paid shares. With respect to the judge, I am not persuaded by his reasons for distinguishing Cleveland.
I come now to the question whether, if the issue of bonus shares to the 16 shareholders was void, the issue of bonus shares to the holders of the other shares already in issue and paid up was valid. In relation to this question it is important to bear in mind that of the 137,555 issued shares, 110,320 shares were nil paid and only 27,235 were fully paid. If the Bonus Share resolution is read in the light of that fact, it would be very surprising if it were to have effect by leaving valid the issue in respect of some 20% of the issued shares while the issue in respect of some 80% of the shares was invalid. It is obvious from the Bonus Issue resolution that it was a fundamental assumption underlying the bonus issue that each of the 137,555 shares in issue conferred an equal right to participate in the issue.
Further, the directors only had power to issue bonus shares nil paid. But it is clear from the Bonus Issue resolution that the specified sum in the share premium account was to be capitalised and that this was a necessary step to the issue of the bonus shares as fully paid up at par.
Accordingly I conclude, in respectful disagreement with the judge, that (subject to s. 35A) the issue of the bonus shares by the Bonus Issue resolution was void. I do not accept that it is open to the court to preserve its validity in relation only to a small portion of the shares in respect of which the issue was to be made by striking out the provisions in the resolution for capitalising reserves and paying up the shares. That surgery is too violent and produces a result far removed from what was plainly intended.
For s. 35A(1) to validate the bonus issue it was necessary to find that the shareholders receiving the shares were persons dealing with the Company in good faith and that the reasons why the bonus issue would otherwise have been invalid were limitations under the Company’s constitution on the power of the board of directors to bind the Company. The judge held that a shareholder of a company receiving shares (whether or not bonus shares) from the company is "a person dealing with the company" within the scope of s. 35A(1). He considered that as a matter of ordinary language, such a shareholder would be within the ambit of those words, and he said that, in the absence of a powerful reason to the contrary, it is inappropriate to treat naturally wide words in a statute as subject to an implied limitation. The judge also referred to the decision of this court in Smith v Henniker-Major  Ch. 182 and found that the reasoning of each member of this court appeared, if anything, to support his conclusion. He also found that s. 322A of the 1985 Act indirectly supported his conclusions. That section sets out circumstances in which s.35A cannot be relied on. Those circumstances are limited to transactions between a company and a director of it or of its holding company or a person connected with the directors or a company with whom such a director is associated. Finally the judge expressed the view that the present case plainly fell within the policy behind s. 35A as expressed by Carnwath L.J. in Smith at para. 108:
The general policy seems to be that, if a document is put forward as a decision of the board by someone appearing to act on behalf of the company, in circumstances where there is no reason to doubt its authenticity, a person dealing with the company in good faith should be able to take it at face value.
I have to say that my immediate reaction to the question whether a shareholder receiving bonus shares is "a person dealing with the company" is not the same as that of the judge. Having regard to the nature of a bonus issue (see paras. 17 and 18 above) and the fact that it is an internal arrangement with no diminution or increase in the assets or liabilities of the company, with no change in the proportionate shareholdings and with no action required from any shareholders (see Whittome v Whittome (No. 1)  SLT 114 at p. 124 per Lord Osborne), I do not think that the shareholder is a person dealing with the company as a matter of ordinary language. The section contemplates a bilateral transaction between the company and the person dealing with the company or an act to which both are parties such as will bind the company only if the section applies and it will not apply if the person deals with the company other than in good faith. It would be very surprising if a bonus issue made by a single resolution applicable to all shareholders were to be rendered by the section binding in part but void in part depending on the circumstances of the individual shareholders. Nor do I agree with the judge that it matters not whether the shareholder receives a bonus issue or pays for his new shares. If a shareholder receives shares otherwise than by way of a bonus issue (for example, by a rights issue requiring payment of new consideration), then he would have to deal with the company, and the question would be whether a shareholder is within the intended reach of the section.
I turn to that question. Section 35A, as Robert Walker L.J. pointed out in Smith at para. 19, represents Parliament’s second attempt to give effect to Art. 9 of the First Council Directive on Company Law, 68/151/EEC. The section was introduced by s. 108 Companies Act 1989. The First Directive was, of course, adopted before the United Kingdom joined the European Community and so there was no United Kingdom input into the language of the Directive. Art. 9(2) provides that limits on the powers of the organs of the company may never be relied on "as against third parties".
The judge said that he did not find the reference to "third parties" in the Directive to be of much assistance to Mr. Lee Barber’s case for two reasons. The first was that it was not entirely clear what is meant by "third parties" in Art. 9(2). With respect, although "third parties" is not defined, to my mind it is tolerably clear from the Directive itself that third parties do not include members of the company (see, for example, the sixth preamble). In the context of a company, the term "third parties" naturally refers to persons other than the company and its members. The judge’s second reason was that Art. 9(2), if not requiring legislation to protect members dealing with the company, did not prevent s. 35A going further, as Schiemann L.J. pointed out in Smith at para. 119. That is true, but in construing s. 35A, given that its purpose was to implement the Directive, it must be relevant to have regard to the extent of the requirement of Art. 9(2) in the absence of any other known mischief which the section was designed to counteract. In my judgment the Directive supports the view that a member receiving a bonus issue is not "a person dealing with a company".
As for the other reasons given by the judge as to why s. 35A applied, I am not able to derive assistance for the present case from the court’s judgment in Smith. The issues in that case were entirely different, relating as they did to the actions of a director. The explanation of the policy of the section given by Carnwath L.J. does not purport to explain who is a person dealing with the company for the purposes of the section. Nor, in my view, does s. 322A assist. It does not follow from the fact that the legislature has dealt specifically with transactions between a director and a company that an inference can be drawn about the applicability of s. 35A to shareholders who in that capacity deal with the company.
In his supplemental skeleton argument for this appeal Mr. Mabb referred to certain Parliamentary material which Mr. Lee Barber wished to adduce in accordance with Pepper v Hart  AC 593. In view of the conclusion which I have reached on " a person dealing with a company", it is unnecessary to go into that.
The judge left open the question of the good faith of the shareholders, and that issue is not before this court.
Mr. Mabb in his skeleton argument for this court took the point, on which he failed before the judge, that the words of Reg. 110 "with the authority of an ordinary resolution of the company" and the provision in Reg 110(b) that the sum resolved to be capitalised was to be appropriated "to the members who would have been entitled to it if it were distributed by way of dividend and in the same proportions and appl[ied] .... on their behalf" were limitations under the company’s constitution with the meaning of s. 35A(1). In view of my conclusions on the applicability of s. 35A it is unnecessary to deal with this point either.
For these reasons, I would allow the appeal and declare that the bonus issue on 15 December 1999 was void.
Lord Justice Sedley
Mr. Justice Newman
I also agree.
Re Cleveland Trust plc  BCLC 424
Hill v Permanent Trustee Company of New South Wales Ltd. 1930 AC 720
Bell v Lever Bros. Ltd.  AC 161
Associated Japanese Bank (International) Ltd. v Credit du Nord SA  1 WLR 255
Great Peace Shipping Ltd. v Tsavliris Salvage (International) Ltd.  QB 279
Smith v Henniker-Major  Ch. 182
Whittome v Whittome (No. 1)  SLT 114
Pepper v Hart  AC 593
Companies Act 1985: s.35A, s.108, s.130
First Council Directive on Company Law, 68/151/EEC: Art.9
Authors and other references
Table A, incorporated as they were into the Company’s Articles of Association (1985 version)
The Respondents did not appear and were not represented
The Appellant appeared In Person and was not represented
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