British Murac Syndicate Ltd  v. Alperton Rubber Co. Ltd

Facts of the Case

The plaintiff syndicate was empowered[1], both by S.88 of the company’s articles of association and by a separate contract, to nominate two directors to the defendant company’s board. The directors of the defendant company had called a general meeting to alter the articles by cancelling S. 88. The plaintiff was granted an injunction.

SARCANT J. quoted the passage from Allen v. Gold Reefs of West Africa Ltd[2], which clearly recognises that if the court sees that a contract involves as one of its terms that an article is not to be altered, then the company is not at liberty to alter that article so as to break that contract.

Brief Analysis Of This Case 

The contract between the plaintiff (syndicate) and the defendant company clearly involved as one of its terms that Article 88 was not to be altered, that is that the plaintiff syndicate so long as it held the stipulated number of shares was to have a perpetual right of nominating two directors of the company.

It has been said that Punt v. Symons & Co.[3] is an express authority in favour of the defendants’ contention, but it has been overruled by Baily v. British Equitable Assurance Co.[4] In that case the Court of Appeal in the view which they took of the facts of the case considered that there was a contract between the company and the policy holders of the company that the full profits should be applied in declaring bonuses on the policies of the various holders, and held that the company was prevented from altering its articles so as to provide that a certain portion of the profits should be carried to a reserve fund in breach of that contract. Although that decision of the Court of Appeal was reversed by the House of Lords, it is clear that it was not reversed owing to any dissent on the part of the House of Lords from the principle enunciated by the Court of Appeal.

Indeed, the learned Lords have recognised that principle. All that the House of Lords decided was that on the true interpretation of the bargain between the policyholders and the company there was in fact no contract between them that the allocation of the whole of the profits to the policies by way of bonus should be a perpetual arrangement.

The decision of the Court of Appeal therefore to be a clear authority for the proposition that a company may be restrained by injunction from altering its articles of association for the purpose of committing a breach of a definite contract one of the terms of which is that the articles shall not be altered.

Second Objection,

That the contract under which the plaintiff syndicate is to have the right of appointing two directors is in the nature of a contract of service, and accordingly is one which, on the ordinary principles relating to that class of contracts, the court will not specifically enforce so as to compel one person to accept another as his servant.

The question is whether the relation between a company and a director is in the nature of a contract of service within the meaning of that doctrine. It appears quite clearly from Automatic Self-Cleansing Filter Co. v. Cuninghame[5] that directors may have rights and powers and duties under the constitution of the company independently of the direction of a majority of the shareholders, that is to say, that to some extent at least they may occupy an independent position.

It is true that in Bainbridge v. Smith[6] the Court of Appeal declined to grant an injunction to force a certain person on a company as its managing director in spite of the existence of a contract to that effect, but apart from other reasons for that decision a managing director is to some extent in a different position from that of an ordinary director because he is half director and half manager.

Further question is not whether a particular man shall be forced upon an unwilling company, but whether there is a general right on the part of the plaintiff syndicate to nominate persons who shall be directors of the defendant company. What the defendant company is trying to do is to get rid altogether of a general right of nomination and not merely to object to receiving in the capacity of director a particular individual. It is common knowledge that agreements of this kind, under which debenture-holders or preference shareholders or other persons who have a permanent stake in a company have a right to appoint one or more directors of the company for the purpose of protecting their interests, are exceedingly common. It is also obvious that merely to award damages for the breach of such an agreement would be a wholly inadequate and illusory remedy.

Accordingly it is accepted that an agreement for good consideration, under which a shareholder in a company, while he continues to hold his shares or a certain number of them, shall in virtue of that holding have the right of appointing or nominating a director of the company, is one that cannot be enforced by the injunction of this court.

Conclusion

The right is one which ought to be so enforced, and the enforcement of which by way of declaration or injunction is not in conflict with the ordinary rules against the specific performance of contracts relating to service. It is not as if the plaintiff syndicate had a power of nominating an absolute majority of the board of directors. To a contract of that kind there might possibly be objections inasmuch as it would be putting the control of the company in the power of an outsider. In the present case the nomination of two directors by the plaintiff syndicate only secures the presence of some person or persons – not constituting a majority on the board of directors in order that the views advocated by the plaintiff syndicate may be represented and find expression on the board. That being so, one ought to accede to the claim of the plaintiffs.

References: 

[1] British Murac Syndicate Ltd v. Alperton Rubber Co. Ltd, (1915) 2 Ch. 186 Chancery Division.

[2] Allen v. Gold Reefs of West Africa Ltd, (1900) 1 Ch. 656.

[3] Punt v. Symons & Co., (1903) 2 Ch. 506.

[4] Baily v. British Equitable Assurance Co., (1905) UKHL 578.

[5] Automatic Self-Cleansing Filter Co. v. Cuninghame, (1906) 2 Ch 34.

[6] Bainbridge v. Smith, 13 Ga. App. 790 (1913).