Court of Appeal upholds estoppel by convention for forgetfulness
In Dixon and another v Blindley Health Investments Ltd the Court of Appeal held that a shareholder was estopped by convention from relying on a pre-emption agreement for the sale of shares which had been agreed by members informally through correspondence some 8 years previously and had since allegedly been forgotten.
The underlying facts arise out of a power struggle for control of a company called EFI (Loughton) Ltd ("the Company"). The Company was incorporated in 2000 in order to acquire a 125 year lease of land and buildings known as the Loughton Seedbed Centre. In December 2000, the 500 Ordinary £1 shares in the Company were split equally between 1) The Bass Family, 2) a Mr Mingay, 3) the Clarke Family, 4) the Wells Family and 5) a Mr Mark Dixon.
In 2001, Mr Mark Dixon's brother, Mr Christopher Dixon was invited to become a shareholder in the Company. It was agreed that Mr Christopher Dixon would subscribe for 100 shares in the Company and would provide an interest free loan of £80,000 to enable the other shareholders to reduce their existing loans to the Company. At the time, the shareholders agreed, in informal correspondence, that they would each have pre-exemption rights with respect to the issue or transfer of shares. The Company's Articles of Association adopted the form in Table A to the Companies (Tables A to F) Regulations 1985 ("the Regulations"), which included the provision in Articles 4 and 11 of the Regulations that the shares of the Company would be under the control of the Company's directors which empowered the directors to decline to register the transfer of shares.
In 2009, following Mr Mark Dixon's sudden death, his shareholding passed to his widow, Mrs Dixon and his brother Mr Christopher Dixon to be held jointly. Mrs Dixon registered the shares in her name and then executed a stock transfer form transferring half of the shares to Mr Christopher Dixon. Mrs Dixon also made and signed a written (but undated) declaration of trust to the effect that going forwards Mrs Dixon would hold the shares on trust for herself and Mr Christopher Dixon in equal shares. It was common ground between the parties that from about this time, Mr Christopher Dixon in fact controlled Mrs Dixon's shares and the fact that this was not disclosed to the Board of Directors of the Company or its members. Ms Lesley Anderson QC (sitting as a Deputy Judge of the High Court ("the Judge"), found that the acquisition of Mrs Dixon's shares by Mr Christopher Dixon, and the arrangements entered into between them, constituted part of a wider plan for Mr Christopher Dixon to acquire control of the Company with one of the other shareholders, Mr Wells.
In 2010, a company owned and controlled by Mr Christopher Dixon and Mr Wells agreed to buy the shares held by the Clarke family. This was approved by the Board in July 2010. By this point, Mr Christopher Dixon and Mr Wells between them owned 400 of the 600 shares in the Company; Mr Christopher Dixon owning 100 shares in his own right and 100 shares on trust for himself and Mrs Dixon, Mr Wells, with his wife, holding 100 shares and the company owned and controlled by Mr Christopher Dixon and Mr Wells owning the other 100 shares. The previous correspondence regarding pre-exemption rights with respect to the issue or transfer of shares which was agreed some 9 years earlier was not mentioned at the time these share transfers were made.
In late 2010, there were serious differences of opinion on a number of issues and relations between the Company's Board members had become strained. As a result, Mr Bass and Mr Mingay decided to sell their shares to a company called Blindley Heath Investments Ltd ("BHIL"), a company owned and controlled by a Mr Peter Boam and who later became the Claimant in the underlying proceedings. In October 2011, the shares were transferred pursuant to a written share purchase agreement and the transfer of shares was unanimously approved and agreed at a board meeting on 10 October 2011. It was common ground that BHIL was incorrectly referred to as Blindley Health Investment Properties Ltd; a company which at the time did not exist. Its BVI company number and registered office were however correct.
Shortly afterwards, Mr Christopher Dixon made what the Judge described as "an important discovery" when going through some papers that belonged to his late brother, he came across the old 2001 correspondence which contained the pre-emption agreement agreed between members years earlier. Until he discovered them, Mr Christopher Dixon claimed he had forgotten all about the existence of the correspondence and the pre-emption agreement. The evidence of Mr Clarke, Mr Wells, Mr Bass and Mr Mingay was that they had also all forgotten about the existence of the pre-emption agreement. Upon discovery of the papers, Mr Christopher Dixon set about attempting to use the correspondence to block the registration of the transfer of the sale shares to BHIL. One way in which he attempted to do this was to try and coerce his brother's widow, Mrs Dixon to say it was in fact her who had discovered the pre-emption agreement when going through her late husband's old papers. The Judge commented that, partly as a result of this, she could not safely rely upon Mr Christopher Dixon's evidence at all, unless corroborated.
Nonetheless, Mr Christopher Dixon raised the issue of pre-emption rights and objected to any transfer of the sale shares to BHIL allegedly in breach of them. At a board meeting on 22 November 2011, the Board declined to register the transfer of shares to BHIL.
As a result, BHIL brought proceedings seeking, amongst other relief, a declaration that as at October 2011, there was no binding, valid or enforceable pre-emption agreement affecting or restricting the transfer of the sale shares to BHIL.
High Court decision
The Judge found that:
(i) the earlier 2001 correspondence was intended to be and did constitute a binding pre- emption agreement conferring "'pre-emption rights" on each signatory;
(ii) none of the actions of the parties could be said to reveal an intention to abandon the rights under the pre-emption agreement, but that;
(iii) Mr Christopher Dixon, Mr Wells and Mr Clarke were estopped by convention from enforcing the rights because the parties shared a common assumption that there was no valid rights of pre-exemption and had conducted themselves on that basis, thus giving rise to an estoppel by convention; and
(iv) in circumstances where Mr Christopher Dixon, Mr Wells, Mr Clarke, Ms White and Mrs Dixon acquired benefits under the respective earlier dealings in 2009 and 2010 at the expense of Mr Bass and Mr Mingay, it would be unconscionable and inequitable for them to seek to rely, after their alleged rediscovery in October 2011 of the pre-emotion rights as a ground for refusing registration of the sale shares to BHIL.
Grounds of Appeal
The judgment was appealed. The grounds of appeal were limited to the Judge's decisions:
2)as to the effect of the October 2011 Board Meeting at which the Board unanimously approved and agreed to the transfer of Mr Bass and Mr Mingay's shares to BHIL pursuant to a written share purchase agreement;
3)as to the validity of the decision at the November 2011 Board meeting not to register the transfer of the sale shares to BHIL; and
The Court of Appeal considered each of the above in turn.
1)Estoppel by convention
A common assumption communicated between the parties
The Court of Appeal stated that estoppel by convention is "not founded on a unilateral representation, but rather on mutually manifest conduct by the parties based on a common, but mistaken, assumption of law or fact" and that its basis is consensual. The effect of the estoppel by convention is therefore to bind the parties to their shared, even though mistaken, understanding or assumption rather than to provide a cause of action (as is the case in promissory and proprietary estoppel). If and when the parties realise that the common assumption between them is mistaken, the parties may be estopped from departing from the assumption if it would be unconscionable for the party seeking to deny the assumption to be permitted to do so.
Chitty on Contracts states that estoppel by convention arises when the parties have acted on an assumption “…being either shared by both or made by one and acquiesced in by the other. The parties are then precluded from denying the truth of that assumption, if it would be unjust or unconscionable to allow them (or one of them) to go back on it. It can arise by virtue of a common assumption which was not induced by the party alleged to be estopped but which was based on a mistake spontaneously made by the party relying on it and acquiesced in by the other party”.
It was not sufficient for the parties to have merely conducted themselves on the basis of the shared assumption; the parties must have communicated the shared assumption to each other. The communication must be "very clear conduct crossing the line….of which the other party was fully cognisant". The Judge at first instance referred to various examples of conduct which demonstrated that in this case a common assumption existed between the parties. Whilst the Court of Appeal did not agree with all of the examples provided, they concluded that there had been sufficient communication between the parties to establish a common assumption that there were no valid rights of pre-emption in relation to the shares. This effectively rejected the appellants' argument that any assumption was not sufficiently clear and equivocal since the transfers could be explained on the basis that Mr Bass and his family did not object to them on a "one-off" basis and/or for reasons unassociated with any assumption.
The appellants asserted that the doctrine of estoppel by convention could not apply as both parties had simply forgotten that any rights existed, which they argued was entirely different from an assumption adopted by the parties that such rights did not exist. The Court of Appeal disagreed.
The majority of cases of estoppel by convention arise from a mistake made by the parties or a mistake made by one of the parties that is then acquiesced in by the other party. The Court of Appeal stated that the authorities do not suggest that the principle is confined to cases of mistake, commenting that "a mistaken recollection is not in our minds, legally different from a state of forgetfulness". The essence of the principle is that parties have conducted themselves on a conventional basis which is wittingly or unwittingly, different from the true basis and whether the states of affairs had been misappreciated, misremembered or forgotten should make no difference to whether the parties had in the event mutually adopted a common assumption.
Unconscionable and inequitable
The Judge at first instance further pointed to the fact that Mr Christopher Dixon, Mr Clarke, Mr White and Mrs Dixon had acquired benefits by the transfers of the 2009 and 2010 shares at the expense of Mr Bass and Mr Mingay and that it would therefore be unconscionable for Mr Christopher Dixon to now rely on the pre-emption rights as grounds for refusing to register the transfer of shares to BHIL. The Court of Appeal saw no reason to disturb this conclusion, commenting that "…it seems to us that having benefited from the assumption in pursuing their plan to take control of the Company, it would be unconscionable and inequitable to allow them to go back on it in the context of the transfer to BHIL", further commenting that "it will be seldom if ever be fair to allow a party who has benefited from the assumption to repudiate it in order to prevent the other party obtaining a like benefit".
2 & 3) October and November 2011 Board Meetings
As the Court of Appeal's decision on the issue of estoppel was sufficient to determine the appeal, the Court of Appeal dealt with the October and November 2011 Board Meetings only briefly. The Court of Appeal held that even if the pre-emption rights had been valid, the fact that there had been no formal agreement or resolution to approve the transfers was beside the point: the point instead was that there was a decision by the directors not to reject them which entitled BHIL to register the shares on the presentation of stock transfer forms. The Court of Appeal disagreed with the High Court decision that a board may never change its mind stating that "circumstances may arise where it would be duty bound to do so".
4) Incorrect Company name
The appellants argued that the Judge at first instance was wrong to conclude that there was no substance in their point that the share purchase agreement and stock transfer forms had no effect because the Company name was incorrect and in fact no company of that name existed at the time. The Court of Appeal agreed with the Judge's conclusion that the point had neither merit nor legal substance. The Court of Appeal found that further investigation would have revealed the true identity of BHIL, especially as there were no other contenders. The Court of Appeal agreed that it was therefore a clear misnomer.
Outcome of the Appeal
- The appeal was dismissed. Mr Christopher Dixon, Mr Wells and Mr Clarke were estopped by convention from relying on and enforcing the pre-emption rights conferred in the 2001 correspondence and were therefore unable to block the transfer of sale shares to BHIL under the share purchase agreement; and
- BHIL was entitled to the registration of the transfer of sale shares upon presentation of stock transfer forms and to therefore become a registered member of the Company.
This case confirms that the estoppel of convention can be based on forgetfulness as well as mistake. It is also a useful reminder to companies, both large and small, that when agreeing or changing members rights, it may be prudent to give some thought to whether these would be better set out in a more permanent company document, such as a company's articles of association, rather than in informal correspondence which can easily be overlooked, especially over time.
  EWCA Civ 1023
 Paragraph 73 of Judgment in Dixon and another v Blindley Heath Investments Ltd  EWCA Civ 1023
 Paragraphs 3 - 107, 31st Edition
 Paragraph 79 of Judgment in Dixon and another v Blindley Heath Investments Ltd  EWCA Civ 1023
 Paragraph 101, ibid
 Paragraph 110 ibid