Implications of Unconscionability Doctrine in Share Transfers: A Case Study, Study notes of Law

Download Implications of Unconscionability Doctrine in Share Transfers: A Case Study and more Study notes Law in PDF only on Docsity! Trust Law International (2021, forthcoming) 1 No Longer Waning - Pennington Revived? Nosnehpetsj Ltd v Watersheds Capital Partners Ltd [2020] EWHC 1938 (Ch D) Case Note Alec J. Morris Cases cited Nosnehpetsj Ltd v Watersheds Capital Partners Ltd [2020] EWHC 1938 (Ch D) Pennington v Waine [2002] EWCA Civ 227; [2002] 1 WLR 2075 (CA) Re Rose, Rose v IRC [1952] Ch 499; [1952] 1 All ER 1217 (CA) JSC VTB Bank v Skurikhin [2019] EWHC 1407 (Comm) Collins v Simonsen [2019] EWHC 2214 (QB) UTB LLC v Sheffield United Ltd [2019] EWHC 2322 (Ch D) Introduction At times, the law is far from crystalline. This is particularly evident within the law of trusts, where it can seem that, for as many rules and principles as there are in this area of law, there are just as many qualifications to them. Matters are made worse when courts utter the mystifying term ‘unconscionability’ – as if a judicial shibboleth – and treat such as sufficient to trigger the recognition of a constructive trust. One of the most well-known examples utilising the ‘unconscionability’ justification is that of Pennington v Waine1. Eighteen years have passed since the decision and many were perhaps of the view that the case was consigned to the past. However, the recent High Court case of Nosnehpetsj Ltd v Watersheds Capital Partners2 appears to have dusted off the doctrine and breathed life into that which was thought dead and gone. This note will consider the judgment in Nosnehpetsj and will argue Pennington should never have been invoked, and that the presumption made by the judge in the case risks further undermining the formalities requirements. 1Pennington v Waine [2002] EWCA Civ 227; [2002] 1 WLR 2075. 2Nosnehpetsj Ltd v Watersheds Capital Partners Ltd [2020] EWHC 1938 (Ch). Trust Law International (2021, forthcoming) 2 Facts and decision Nosnehpetsj concerned that of a Mr Richard Buzzoni, a chartered accountant and former corporate finance specialist, who owned two companies: Nosnehpetsj Ltd (“JStephenson” written backwards3) and Watersheds Capital Partners Ltd (WCP). It was understood that Mr Buzzoni held shares in both of these companies and, in 2010, transferred his ordinary shares in WCP to JStephenson Ltd; this understanding was consistent with JStephenson Ltd’s abbreviated accounts filed at Companies House for the year ending March 2011, which showed WCP’s ordinary shares were owned by JStephenson Ltd from March 2010. Mr Buzzoni had approved the accounts before they were filed. In 2013, JStephenson Ltd transferred the WCP shares back to Mr Buzzoni personally, and for no consideration. Then, near the beginning of 2014, following an application made just over 12 months earlier, JStephenson Ltd was subsequently struck off the company register and dissolved. However, later in 2014, following a successful application from a former JStephenson Ltd employee, the company was restored to the register for the purposes of an Employment Tribunal. In addition to the restoration request, the former employee requested for JStephenson Ltd to be placed into liquidation, a request which was granted in 2015. The company was then placed into liquidation later that year and a liquidator appointed – Mr Elliot Green. Mr Green applied to the court to reverse the transfer of shares (which occurred in 2013) from JStephenson Ltd to Mr Buzzoni, as JStephenson Ltd was in fact insolvent at the time of the transfer. Despite the accounts detailing the initial transfer from himself to JStephenson Ltd in 2010 (accounts which Mr Buzzoni had himself approved), Mr Buzzoni claimed that he had in fact never transferred the WCP shares to JStephenson Ltd, arguing there was never a gift of the shares to the company and that, having not completed the necessary formalities, there was not an effective transfer of the shares (in neither law nor equity). The case was heard by Chief Insolvency and Companies Judge (Nicholas) Briggs who concluded that it was more likely than not Mr Buzzoni did intend an absolute gift of the shares to the company, having inferred such from the surrounding evidence of the case. More importantly, Judge Briggs held that, despite there being no completed share transfer form present (or evidence alluding to such), a completed form had likely existed and that there was an equitable assignment of the shares. The effect of this meant that, despite the lack of documentary evidence, 3Hereafter, ‘JStephenson Ltd’. Trust Law International (2021, forthcoming) 5 completed the necessary share transfer form (as required by statute); in his Lordship’s view, the existence of a completed transfer form alone was that which was required for an equitable assignment of shares.16 Likewise, implicit within Arden LJ’s judgment (with whom Schiemann LJ agreed) was that the presence of a completed share transfer form was necessary for there to be an equitable assignment of shares.17 Though admittedly the existence of the completed transfer form was not the sole determining factor influencing the outcome, it was still a significant one. Within her judgment, Arden LJ explained that central to the decision was unconscionability – to prevent resiling from the gift – but added that there can be “no comprehensive list of factors which makes it unconscionable for the donor to change his or her mind: it must depend on the court’s evaluation of all the relevant considerations.”18 Her Ladyship then went on to state that which she deemed the key relevant factors in the case, including that of the presence of the completed share transfer form.19 In other words, presence of that form (necessary for an equitable assignment) played an important role in the Court’s decision; it is highly unlikely the Court would have ruled as it did absent a completed share transfer form.20 Nosnehpetsj: Pennington revived? Evidently, Nosnehpetsj was not a case which stood on all fours with Pennington; it was, at best, bipedal. Though it involved a transfer of shares, and by way of gift, it was not in a familial setting nor did it concern giving effect to the deceased transferor’s wishes; it concerned an insolvency, with the transferor still alive, and those who were to ultimately benefit from the invocation of Pennington not being the intended donee/recipient, but rather third-party creditors on whose behalf the liquidator was acting. Such differences aside, more important was how Pennington was considered. Within the judgment, Judge Briggs listed the factors which he considered to have supported unconscionability in Pennington. Rather surprisingly though, he did not to refer to the Court of Appeal decision but the remarks of the puisne judge in the High Court decision instead. Consequently, his Justice iterated three factors which 16Delivery of such was not needed (Ibid, at [81-83] and [87] per Clarke LJ). 17Ibid, at [66] per Arden LJ. 18Ibid, at [64] per Arden LJ. 19Ibid. 20The same for which could be said of Re Rose, Rose v IRC [1952] Ch 499; [1952] 1 All ER 1217 (CA). Trust Law International (2021, forthcoming) 6 he considered supported unconscionability in Pennington, viz. that there was an intention to make an immediate gift; the donee had been informed of the gift; and that it would have been unconscionable to recall the gift.21 Careful consideration of these factors, however, reveals their problems. The first and second elements, taken together, are equivalent to impromptu benevolent comments potentially being enforced – and far from being a saving grace, the third element is a petitio principii; it begs the question. A close examination of the judgment also reveals that Judge Briggs neglected to mention the subsequent, specific factors which her Ladyship deemed significant in Pennington – the very factors which influenced the Court of Appeal in their finding that it would have been unconscionable to resile. One such factor being the presence of the completed share transfer form.22 Though it is perhaps unfair to say that, this particular omission, shows his Justice’s reluctance to attribute sufficient weight/significance to the need for a completed share transfer form to be present, the omission should not be ignored. This is because, in not discussing the importance of such a form having to being present, it meant his decision to presume there was a completed form (on the balance of probabilities23) was but a small step to take. Yet, even this seemingly small step can have unforeseen consequences. Rule in Re Rose Judge Briggs said it was likely that Mr Buzzoni and Mr Stephenson had produced a stock transfer form, that it would have been completed by the defendant, Mr Buzzoni, and the form subsequently countersigned by the company.24 The judge then stated: “…it is more likely than not the stock transfer [form], although not registered, was left on the Company file and was one of the documents shredded. Alternatively, it was uploaded electronically and held on the Company server which either no longer exists or has not been disclosed”.25 21Nosnehpetsj Ltd v Watersheds Capital Partners Ltd [2020] EWHC 1938 (Ch) at [41]. 22Ibid, at [40]. 23Ibid, at [92]. 24Ibid. 25Ibid. Trust Law International (2021, forthcoming) 7 That is, any discussion of Pennington v Waine should be considered superfluous as such a presumption places Nosnehpetsj on a similar footing to Re Rose26; the donor being deemed to have executed and delivered the share transfer form to the donee company, but the transfer of shares not being registered by the company. This seemingly slight step taken by his Justice – finding that there was likely a completed transfer form and it was received by the company – consequently meant the rule in Re Rose should have been the applicable rule, not that of Pennington; the transferor had done all within his power to give effect to the transfer of the shares.27 Nevertheless, as alluring as the Re Rose point is, we should be careful not to ignore the fact the judge’s presumption is doing a fair amount of work here. Though it may seem somewhat innocuous, his presuming there existed a share transfer form (which was completed and then received by the company), meant that the only other issue was to establish an intention to transfer the shares – an intention which he was able to infer without too much difficulty from the surrounding evidence.28 This meant Judge Briggs was able to overlook the need for actual evidence of a completed share transfer form (despite such being important in both Pennington and Re Rose) and to take a fairly broad sword to the problem. As a result, Nosnehpetsj does little for supporting the formalities requirements – something which Arden LJ explicitly warned about29 – and nor does it do much to provide clarity in an already disordered area of the law. It now seems possible for there to be an equitable assignment of shares despite there being no evidence of a completed share transfer form. Looked at critically, Nosnehpetsj appears to be close to a decision where the court had strived officiously to uphold a gift. 26Re Rose, Rose v IRC [1952] Ch 499; [1952] 1 All ER 1217 (CA). 27That the transferor subsequently contests the transfer will not necessarily preclude the rule from applying (see eg. Mascall v Mascall (1984) 50 P CR 119). 28Nosnehpetsj Ltd v Watersheds Capital Partners Ltd [2020] EWHC 1938 (Ch) at [90]. Thus, removing the need to consider a possible presumed resulting trust. 29“Nothing in this judgment is intended to detract from the requirement that a donor should comply with any formalities required by the law to be complied with by him or her, such as, in the case of a gift of shares, the completion of an instrument of transfer” (Pennington v Waine [2002] EWCA Civ 227; [2002] 1 WLR 2075 at [69] per Arden LJ).