Case Summary: Borland’s Trustee v Steel Bros & Co Ltd
Facts
- Steel Bros' articles of association stated that if a member thereof went bankrupt, their shares would be transferred to other shareholders at a fair price below par value;
- Borland (a shareholder of Steel Bros) went bankrupt and his trustee was informed of the transfer of his shares;
- Borland's trustee argued that Steel Bros' articles of association were void because they compromised ownership and property, which tend to perpetuity (i.e. to be endless and flow constantly).
Issues
Were the articles of association void for the reason
given by Borland's trustee?
Main
Principles laid down
One: The contract created by a company's
articles of association exists prior to the rights created by the purchase of a
share and, therefore, takes precedence over those rights.
Two: A share is the interest of a shareholder
in the company measured by a sum of money, for the purposes of liability in the
first place and interest in the second, but also consisting of a mutual set of
covenants entered into by all the shareholders inter se.
Analysis
Farwell J reasoned that a simple stipulation in a
company's articles of association that a member's shares would be transferred
to another shareholder upon the former's becoming bankrupt is not a violation
of the policy of the bankrupt law. He stated that the articles are a commercial
agreement and moreso a fair agreement for the management of the company's
business. They were binding on all the company's shareholders, as opposed to
Borland being singled out unfairly and, thus, there was no question of
fraudulent preference against him.
As to the matter of the transfer of the shares of a
bankrupt member being done below par value, it was stated that "the price
was a fixed sum for all persons alike, and no difference in price arose in the
case of bankruptcy...it would have been different if there were any provision
in the articles compelling persons to sell their shares in the event of
bankruptcy at something less than the price that they would have otherwise obtained".
Upon this reasoning, the articles of association were
deemed to be valid and their transfer, in the way it had been carried out, was
permissible. The binding contract that is created when a member agrees to be
bound by a company's articles of association exists before, and thus takes
precedence over, the rights that come about as a result of the purchase of
shares.
The court also laid down the meaning of a share, that
is, the interest of a shareholder in a company measured by a sum of money
for the purpose of (i) liability and (ii) interest. A share consists of
covenants entered into by shareholders inter se and must be
fully paid for before transfer can take place.
Holding
It was held, therefore, that the articles of
association were valid.
