Re Lake Communications Ltd

• Jurisdiction: Ireland
• Judge: Miss Justice Laffoy
• Judgment Date: 24 November 2011
• Neutral Citation: [2011] IEHC 455
• Judgment citation (vLex): [2011] 11 JIC 2401
• Court: High Court
• Date: 24 November 2011

[2011] IEHC 455

THE HIGH COURT

[No. 645 COS/2011]

Lake Communications Ltd, In Re

IN THE MATTER OF LAKE COMMUNICATIONS LIMITED

AND

OF THE COMPANIES ACTS 1963 -2009

Abstract:

Company law - Share transfer agreement - Failure to increase authorised share capital - Creation by implication of authorised share capital - Whether just and equitable that court would approve creation of additional shares - Companies Acts 1963 - 2009.

Facts Lake Communications Limited (the petitioner) and Inter-Tel Lake Limited (the sole member) were companies that were part of an international group known as the Mitel Group. As part of a re-organisation of the Mitel Group, the sole member entered into share swap agreements whereby it was agreed that the sole member would transfer to the petitioner shares held by it in other companies in consideration of the allotment of shares in the petitioner to the sole member. The shares which the petitioner had agreed to allot to the sole member exceeded the number of authorised ordinary shares that remained to be allotted (7,724 shares) by 283,745 shares. The authorised share capital of the petitioner should have been increased by the creation of a further 283,745 ordinary shares and no formal resolution had been adopted in order for this allotment to take place. A declaration was sought pursuant to s. 89 of the Companies Act 1963 that the creation of additional authorised share capital was necessitated and/or occasioned by the proposed allotment. A declaration was also sought pursuant to s. 89 of the Act that the allotment and issue to the sole member of the shares in question was valid.

Held by Laffoy J in granting the declarations sought. It was clear on the evidence that the sole member was agreeable that the allotment should be made, having regard to the terms of the exchange agreements. Given that no formal steps were taken by the petitioner to increase its authorised share capital before making the purported allotment, the purported creation and allotment were invalid. Statutory declarations had been exhibited which established that the petitioner and the sole member were associated companies at the time of the execution of the exchange agreements. The creation of the necessary shares and their allotment to the sole member pursuant to s. 89 would be just and equitable to validate. No third party would be prejudiced by validating the increase in the authorised share capital of the petitioner and the allotment to the sole member. Subject to a further affidavit being filed the court would grant orders validating the additional authorised share capital.

Reporter: R.F.

1 Judgment of Miss Justice Laffoy delivered on 24th day of November, 2011.

1. The problem and its source

2 2 1.1 The petitioner on this application, Lake Communications Limited (the Petitioner) is a company which was incorporated in the State on 14 ^th September, 1977. At all material times the Petitioner comprised a sole member, Inter-Tel Lake Limited (the Sole Member), which is also incorporated in the State. The Petitioner and the Sole Member are part of an international group known as the Mitel Group. Apart from the Petitioner and the Sole Member, three other companies in the Mitel Group are registered in the State, namely, Lake Datacomms Limited (Datacomms), Fernway Limited (Fernway) and Lake Electronics Technologies Limited (Electronics). In July 2009, as part of a re-organisation of the Mitel Group, the Sole Member entered into three Share-For-Share Swap Agreements dated 23 ^rd July, 2009 (the Exchange Agreements) with the Petitioner, whereby it was agreed that the Sole Member would transfer to the Petitioner shares held by it in Datacomms, Fernway and Electronics in consideration of the allotment of shares in the Petitioner to the Sole Member.

3 3 1.2 Immediately prior to 23 ^rd July, 2009 the authorised share capital of the Petitioner was €7,990,500 divided into-

4 (a) 6,125,000 ordinary shares of €1.30 each; and

5 (b) 400,000 11% redeemable preference shares of €0.07 each.

6 The problem addressed in this judgment concerns the ordinary shares. Immediately prior to 23 ^rd July, 2009, on the evidence, 6,117,276 ordinary shares of €1.30 each had been issued and the Sole Member was the owner of those shares.

7 4 1.3 In order to discharge the consideration moving from it under the Exchange Agreements, the Petitioner was required to issue to the Sole Member 291,469 ordinary shares in the capital of the Petitioner, made up as follows:

8 (a) 130,995 ordinary shares as consideration for the shares in Datacomms which the Sole Member agreed to transfer to the Petitioner;

9 (b) 138,172 ordinary shares as consideration for the shares in Fernway which the Sole Member agreed to transfer to the Petitioner; and

10 (c) 22,302 ordinary shares as consideration for the shares in Electronics which the Sole Member agreed to transfer to the Petitioner.

11 As the authorised share capital of the Petitioner was, as I have recorded, 6,125,000 ordinary shares, of which 6,117,276 had already been issued, the shares which the Petitioner had agreed to allot to the Sole Member under the Exchange Agreements exceeded the number of authorised ordinary shares remaining to be allotted (7,724 shares) by 283,745 shares.

12 5 1.4 The steps taken by the parties to implement the Exchange Agreements were the following:

13 (a) the Exchange Agreements were executed by the Petitioner and the Sole Member on 23 ^rd July, 2009;

14 (b) on 23 ^rd July, 2009 stock transfer forms were executed by the Sole Member in favour of the Petitioner in respect of the shares in Datacomms, Fernway and Electronics to be transferred to the Petitioner in accordance with the Exchange Agreements;

15 (c) at a board meeting on 23 ^rd July, 2009 the board of the Petitioner approved the transaction embodied in the Exchange Agreements with effect from 17 ^th July, 2009 and resolved that 291,469 ordinary shares of €1 (rather than €1.30, there obviously being a typographical error) each be allotted and issued to the Sole Member with effect from 17 ^th July, 2009 and that the consequential formalities be complied with; and

16 (d) a share certificate was executed naming the Sole Member as the registered holder of 291,469 fully paid ordinary shares of €1.30 each in the Petitioner

17 6 1.5 The steps which were not taken, but should have been taken, in order to give to the intentions of the Petitioner and the Sole Member were the following:

18 (a) the authorised share capital of the Petitioner was not increased by the creation of a further 283,745 ordinary shares to enable a valid allotment and issue of the entirety of the shares to be allotted by the Petitioner to the Sole Member under the Exchange Agreements (291,469 ordinary shares) to be effected;

19 (b) no formal resolution was adopted by the Petitioner in general meeting authorising the allotment and issue of 291,469 ordinary shares to the Sole Member pursuant to s. 20 of the Companies (Amendment) Act 1983 (the Act of 1983), although it is clear on the evidence that the Sole Member was agreeable that the allotment should be made, having regard to the terms of the Exchange Agreements to which it was a party; and

20 (c) the Register of Members of the Petitioner was not updated to reflect the purported allotment to the Sole Member.

21 7 1.6 The form B5 (return of allotments), which was signed by a director of the Petitioner on 23 ^rd July, 2009, was not received by the Companies Registration Office (CRO) until 6 ^th August, 2010. By letter dated 25 ^th January, 2011 from the CRO to the Petitioner's solicitors it was pointed out that the authorised share capital of the Petitioner would have to be increased before the allotment the subject of the B5 could occur. At that time, nothing was done to address the problem which the CRO had highlighted. The problem came to the fore again during the summer of 2011 in connection with the auditing of the Petitioner's accounts for the year ended 30 ^th April, 2011. It had not been adverted to when the Petitioner's accounts for the year ended 30 ^th April, 2010 were being audited, because the Register of Members had not been updated.

22 8 1.7 Neither the officers of the Petitioner nor the Petitioner's solicitors have been able to unearth any resolution of the Petitioner passed in July 2009 authorising the increase of its share capital to facilitate a valid allotment to the Sole Member in pursuance of the Exchange Agreements.

2. The proposed solution

23 2 2.1 The substantive relief sought on the petition presented by the Petitioner on 9 ^th November, 2011, and on its notice of motion issued on the same day, is as follows:

24 (a) a declaration pursuant to s. 89 of the Companies Act 1963 (the Act of 1963), as amended, that the creation of additional authorised share capital of €368,868.50 by the Petitioner comprising 283,745 ordinary shares of €1.30 each in or around 23 ^rd July, 2009 necessitated and/or occasioned by the proposed allotment and the issue to the Sole Member of 291,469 ordinary shares of €1.30 each by the board of the Petitioner at a meeting held on 23 ^rd July, 2009 pursuant to the Exchange Agreements was and is valid for all purposes; and

25 (b) a declaration pursuant to s. 89 of the Act of 1963, as amended, that the allotment and issue to the Sole Member of 291,469 ordinary shares of €1.30 each by the board of the Petitioner at a meeting held on 23 ^rd July, 2009 (pursuant to the Exchange Agreements) was and is valid for all purposes.

26 3 2.2 The Petitioner has also sought, to the extent that it is considered necessary, directions as to the steps to be taken in relation to the hearing of the petition. I will return to that matter later. Certain ancillary orders are also sought. I will return to those...