CASES

DETERMINED BY THE

CHANCERY DIVISION
AND IN

LUNACY
AND ON APPEAL THEREFROM IN THE

COURT OF APPEAL

B A Y F I E L D v. H A N D S AND OTHERS. 1958

Mar. 25, 26;
April 2.
[1957 R. No. 603.] .
Vaisey J.
Company — Shares — Articles of association — Enforcement between
members—Provision that every member intending to transfer shares
should inform directors who "will take the said shares equally
"between them," and who "will pay a fair value therefor"—
Meaning of " will "—Whether directors liable to take up member's
shares—Construction—Companies Act, 1948 (11 & 12 Geo. 6, c. 38),
s. 20 (1).
Contract—Parties—Enforcement by third party—Company's articles of
association—Enforcement between members inter se.
Contract—Construction—TJt res magis valeat quam pereat—Company's
articles of association.
The plaintiff was a shareholder in a company, article 11 of the
articles of association of which required him to inform the directors
of his intention to transfer shares in the company, and which pro­
vided that the directors '' will take the said shares equally between
" them at a fair value." In accordance with article 11 the plain­
tiff so notified the directors, who contended that they need not take
and pay for the plaintiff's shares, on the ground that the articles
imposed no such liability upon them. On the plaintiff's claim for
the determination of the fair value of his shares, and for an order
that the directors should purchase such shares at a fair value: —
Held, (1) that upon their true construction the articles required
the directors to purchase the plaintiff's shares at a fair price.

[Reported by M. B. KELLY, Esq., Barrister-at-Law.]

1 CH. 1960. 1
2 CHANCERY DIVISION. [1960]

1958 (2) That article 11 was concerned with the relationship between
the plaintiff as a member and the defendants, not as directors, but
RATFIELD
V. as members of the company.
HANDS. (3) That it was not necessary, for the plaintiff to succeed in his
action, that he should join the company as a party in addition to
the directors.
Judgments of Denning L.J. in Smith and Snipes Hall Farm
Ltd. v. Biver Douglas Catchment Board [1949] 2 K.B. 500; 65
T.L.R. 628; [1949] 2 All E.R. 179; Drive Yourself Hire Co. Ltd.
v. Strutt [1954] 1 Q.B. 250; [1953] 3 W.L.R. 1111; [1953] 2 All
E.R. 1475; and Dean v. Prince [1954] Ch. 409; [1954] 2 W.L.R.
538; [1954] 1 All E.R. 749 considered.

ACTION.

Field-Davis L t d . (hereinafter called " the company ") was a

private company carrying on business as builders and contractors,
incorporated in 1941 under the Companies Act, 1929, as a com­
pany limited by shares, having a share capital of £4,000, divided
into 4,000 ordinary shares of £1 each, of which 2,900 fully-paid
shares had been issued. The plaintiff, Frank Leslie Bayfield, was
the registered holder of 725 of those shares, and the defendants,
Gordon W y n d h a m H a n d s , Alfred William Scales and Donald
Davies were a t all material times the sole directors of the
company, I n so far as is material the articles of association of
the company provided by article 6 : " N o shares in the company
" shall be transferred to a person not a member of the company so
" long as any member of the company m a y be willing to purchase
" s u c h shares a t a fair v a l u e . " Article 9 provided: " T h e
" directors m a y at any time in their absolute discretion refuse
" to register any transfer of s h a r e s . " Under the general heading
of " Directors " were the following articles: " 10. The number of
" d i r e c t o r s of the company shall not be more t h a n four. The
" following persons shall be the first directors of the company. . . .
" 11. Every member who intends to transfer shares shall inform
" the directors who will take the said shares equally between
" t h e m at a fair value but subject to the above no person shall
" h o l d more than 1,000 shares in the capital of the company.
" 12. I n the event of death of any director his shares are to be
" taken up equally between the remaining directors who will pay
" a fair value therefor together with all moneys due to the
" deceased up to the time of his d e a t h . "
On April 4, 1955, the plaintiff by a notice in writing informed
the defendants, as directors of the company, of his intention to
transfer his 725 shares to t h e m as provided by article 11. The
defendants denied any liability to take up and pay for the shares,
1 Ch. CHANCERY DIVISION. 8

and the plaintiff, by his statement of claim asked (1) that the fair 1958
value of the plaintiff's said shares might be determined by the BAYFIELD
court, (2) that the defendants be ordered to purchase such shares e.
HANDS.
at their fair value in such proportions as they might agree upon,
or in default of agreement, then equally, and (3) that an inquiry
be ordered if necessary to ascertain such fair value.

R. B. S. Instone for the plaintiff.

Michael Albert/ Q.C. and Paul Baker for the defendants.

In addition to the cases cited in the judgment, the following

cases were referred to in the course of argument: London Sack'
and Bag Co. Ltd. v. Dixon & Lugton Ltd.1; In re Greene, deed.2
Our. adv. vult..

April 2. VAISEY J., reading his judgment, stated the facts and
continued: It is article 11 with which I am mainly concerned in the
present case, in the following circumstances. On or about April
4, 1955, the plaintiff, by a notice in writing bearing that date,
informed the defendants as the directors of the company of his
intention to transfer his shares to them as provided by article 11.
The defendants were and are, however, unwilling and contend
that they are not liable to take and pay for the plaintiff's shares.
They say that article 11 imposes no enforceable liability upon
them, and they base their contention first on the wording of
article 11 itself, arguing that on its true construction it does not
purport to impose any liability on the company's directors. I t is
admitted that the words " every member . . . shall inform "
the directors does create an obligation but it is argued by the
defendants that the words " the directors . . . will take the
" shares " imports in some way the idea of an option or choice or
volition on the part of the directors having regard to the inherent
difference (not always observed) in the English language between
the words " shall " and " will."
I appreciate the force of that argument, but I cannot accept
it. In this context, while the word " shall " clearly imports
compulsion and obligation, the word " will " indicates as it seems
to me a resultant prospective eventuality, in which the member
has to sell his shares and the directors have to buy them, each
being under an obligation to bring that eventuality into effect." I

i [1943] 2 All E . E . 763. 2 [1949] Ch. 333; [1949] 1 All

E.R. 167.
4 CHANCERY DIVISION. [1960]

1958 think there is thus in the language of article 11 a mutual obliga-

KAYFIELD ti°n- ^ n a s been said that articles of association ought not to be
»• construed too meticulously. See per Wynn-Parry J. in In re
' Hartley Baird Ltd.,1 where he said: " I n the interpretation of
Vaisej^J. " such a commercial document as articles of association, the
" maxim ut res magis valeat quam pereat should certainly be
" applied, and I propose to interpret these articles in the light of
" that maxim." I am not aware that this maxim has ever been
put into English, but I suggest that it directs us to " validate if
" possible." And see also per Jenkins L.J. in Holmes v. Keyes,2
where he is reported as saying that in his view the " articles of
" association of the company should be regarded as a business
" document and should be construed so as to give them reasonable
" business efficacy . . . in preference to a result which would
" or might prove unworkable."
I hold that the defendants' case so far as it depends on the
construction of the company's articles of association fails, but T
have not overlooked the arguments based on the undoubted diffi­
culty of giving effect to article 11 in other circumstances, for
example, where the member desiring to transfer his shares is him­
self a director, or where several intimations of intention to sell
are given simultaneously. But, in my judgment, the article
ought not to be invalidated for the purposes of a case (such as
this) where it is perfectly easy to give effect to it.
Another point was taken which I hold to be equally insubstan­
tial, namely, that the plaintiff has not in terms pleaded his ability
and willingness to carry out his part of the bargain. That is a
rule of pleading which applies principally, if not exclusively, to
actions between vendors and purchasers of real estate. See
Halsbury, 2nd ed., vol. 31, p. 421. I should, in the circum­
stances, have allowed the statement of claim to be amended to
comply with the rule, if it had seemed to me to be necessary,
which I do not think it is.
The next and most difficult point taken by the defendants,
as to which it would appear that there is no very clear judicial
authority, is that article 11, as part of the company's articles of
association, does not do what it looks like doing, that is, to create
a contractual relationship between the plaintiff as shareholder
and vendor and the defendants as directors and purchasers. This
depends on section 20 (1) of the Companies Act, 1948, which reads
2
i [1955] Ch. 143, 146; [1954] 3 [1959] Ch. 199, 215; [1958] 2
W . L . B . 964; [1954] 3 All E.E. 695. W.L.E. 772, 783; [1958] 2 All E . E .
129.
1 Ch. CHANCERY DIVISION. 5

as follows: " Subject to the provisions of this Act, the memo- 1958
" randum and articles shall, when registered, bind the company <KAYFIELD
" and the members thereof to the same extent as if they respec- »•
" tively had been signed and sealed by each member, and '
" contained covenants on the part of each member to observe all vaisey^j.
" the provisions of the memorandum and of the articles." This
re-enacted corresponding provisions in the earlier Companies Acts,
but it seems that such provisions are for the purposes of the
present case substantially identical with the subsection which I
have just read. In the circumstances, I was referred to what the
textbooks have to say on the subject, and I think I ought to
summarise their statements.
In the 12th edition of Buckley on the Companies Acts at p. 52
allusion is made to the " large number of apparently conflicting
" judicial decisions and dicta as to the exact nature of the
" contractual relations established by the memorandum and
" articles both as between the company and the members and as
"between the members inter se," and it is further expressly
pointed out that there are decisions or dicta both to the effect that
the articles do, and also to the effect that they do not, constitute
a contract between the members inter se.
The variety of the judicial views on the matter is not I think
overstated here. Gore-Browne's Handbook on Joint Stock Com­
panies, 41st ed., at p. 45, states the effect of section 20 in these
words: " [It] is to create an obligation binding alike on the
" members in their dealings with the company, on the company
" in its dealings with the members as members, and on the
" members in their dealings with one another as members . . ;
'' and even a member cannot enforce provisions for his benefit in
'' some other capacity than that of member: for example he
" cannot assert a right to be appointed solicitor, secretary, or
" director by reason of provisions contained only in the articles;"
In Palmer's Company Precedents, 16th ed., Part I, at p. 458,
the matter is discussed on general lines, and the effect of some of
the cases is summarised, and the following quotation is cited from
the speech of Lord Herschell in Welton v. Saffery 3: " I t is quite
" true that the articles constitute a contract between each mem-
" ber and the company, and that there is no contract in terms
"between the individual members of the company; but the
" articles do not any the less, in my opinion, regulate their rights
" inter se." I find that statement somewhat cryptic.

s [1897] A.C. 299, 315; 13 T.L.R. 340. .'.:'

6 CHANCERY DIVISION. [1960]

1958 l n Halsbury's Laws of England, 3rd ed., vol. 6, at p. 129,

BAYFIELD under the sub-heading of " Memorandum and Articles," there
°- is a paragraph in these words: '' While the articles regulate the
' " rights of the members, inter se, they do not, it would seem,
Val8ey J
- " constitute a contract between the members, inter se, but only a
" contract between the company and its members, and, therefore,
" the rights and liabilities of members as members under the
" articles can only be enforced by or against the members through
" t h e company." I will consider this proposition later on.
Now the question arises at the outset whether the terms of
article 11 relate to the rights of members inter se (that being
the expression found in so many of the cases), or whether the
relationship is between a member as such and directors as such.
I may dispose of this point very briefly by saying that, in my judg­
ment, the relationship here is between the plaintiff as a member
and the defendants not as directors but as members.
In In re Leicester Club and County Racecourse Go.,* Pearson
J., referring to the directors of a company said that they
" continue members of the company, and I prefer to call them
" working members of the company," and on the same page he
also said: " directors cannot divest themselves of their character of
" members of the company. From first to last, . . . they are doing
'' their work in the capacity of members, and working members of
" the company. . . . " I am of opinion, therefore, that this is in
words, a contract or quasi-contract between members, and not
between members and directors.
I have now to deal with the point for which there is consider­
able support in the cases, that the notional signing and sealing
of the articles creates a contractual relation between the company
on the one hand' and the corporators (members) on the other,
so that no relief can be obtained in the absence of the company
as a party to the suit. The defendants' case in so far as it is
based on this point seems to be met by two recent decisions of
the Court of Appeal. I refer first to Smith and Snipes Hall Farm
'Ltd. v. River Douglas Catchment Board,5 and to the judgment
of Denning L.J. in that case, which was a case of a covenant
made, not by or with but for the benefit of the plaintiffs, and
thereby enabling them to sue without the intervention of the
covenantee. Section 56 of the Law of Property Act, 1925, was
referred to in terms which it is not necessary for me to repeat

* (1885) 30 Ch.D. 629, 633; 1 » [1949] 2 K.B. 500; 65 T.L.K.

T.L.E. 658. 628; [1949] 2 All E.E. 179.
1 Ch. CHANCERY DIVISION. 7

195
here. This same principle is further exemplified by the case, of ^
Drive Yourself Hire Co. (London) Ltd. v. Strutt," see especially BAYFIELD
the judgment of Denning L.J. as there reported. "•
The case of the plaintiff may also be said to rest upon the well- '
known decision of Carlill v. Carbolic Smoke Ball Co.,7 to which Valsey J
-
I need not refer except to say that it seems to me to be relevant
here. To the like effect is Clarke v. Earl of Dunraven," upon
which the plaintiff here also relied.
In general discussions on the effect of section 20 to be found in
the cases, I have, of course, considered the dissentient speech of
Lord Herschell in Welton v. Saffcry,* and the comprehensive
review of the earlier authorities by Astbury J. in Hickman v.
Kent and Romney Marsh Shee-pbreeders' Association.10 Among
the numerous dicta in the judgment in that case, one which seems
to me to be helpful and convincing is the one which reads as
follows 11 : " the articles of association are simply a contract as
" between the shareholders inter se in respect of their rights as
" shareholders. They are the deed of partnership by which the
" shareholders agree inter se."
Strangely enough the case which comes perhaps nearest to the
present is one in which the point under section 20 of the Act was
not taken, and either disregarded or ignored, but I cannot say
that it was overlooked, as the decision was a decision of the Court
of Appeal. I will read the headnote from the report of the case,
the name of which is Dean v. Prince 12 : " The articles of assoeia-
" tion of a private company carrying on a light engineering
" business provided that a deceased director's shares should be
"purchased by the surviving directors at a price to be certified
" by an auditor as a fair value. A director who held a controlling
" interest in the company died. The auditor, having made a
■" certified valuation, stated in writing that for the purpose of his
" valuation he had not regarded the company as a going concern
" but that he had valued on a ' break-up ' basis, because in his
"opinion the shares had no value on any other basis, having
" regard to the losses made by the company. On appeal from
" Harman J., who held that the valuation was invalid and not
" binding because the auditor had proceeded on the wrong basis
■*' and had not attributed any special value to the. shares in
» [1954] 1 Q.B. 250; [1953] 3 '» [1915] 1 Ch. 881.
•W.L.E. 1111; [1953] 2 All E.E. 1475. " Ibid. 891.
' [1893] 1 Q.B. 256; 9 T.L.E. 124. " [1954] Ch. 409;. [1954] 2 W.L.B.
» [1897] A.C. 59; 13 T.L.E. 58. 538; [1954] 1 All E.E. 749.
9
[1897] A.C. 299, 315; 13 T.L.E.
540.
8 CHANCERY DIVISION. [^®®®]
1958
'' question although they carried control of the company: —
HATFIELD " Held (1) that the auditor was right in not attributing a special
"• " value to these shares on account of their carrying control. The
' ' shares of the company should be valued as a whole and the
Vaisey j . ■< total then divided rateably amongst all the shares equally;
(2) that the auditor had correctly rejected the ' going concern '
" basis of valuation, as the company had no expectation of profit-
'' making.''
The decision of Harman J. was reversed on the question of
valuation, and in the course of his reserved judgment, Wynn-
Parry J., sitting as a member of the court, said this 13 : " . . . the
" auditor, in my view, has to have regard to the realities of the
" situation, he must take into account that the other directors,
" and not merely one of them, are bound to purchase the shares
" in question."
To show how close is the similarity between that case and the
present, I will read from the report of the case before Harman J. 14
the article which was in question there: " I n the event of the
" death of any member his shares shall be purchased and taken
" by the directors at such price as is certified in writing by the
" auditor to be in his opinion the fair value thereof at the date of
" death, and in so certifying the auditor shall be considered to
" act as an expert and not as an auditor and accordingly the
" Arbitration Act, 1889, shall not apply. Unless otherwise agreed
" the directors shall take such shares equally between them."
I will refer, but only in passing, to another case closely
bearing on the point now under consideration of Borland's
Trustee v. Steel Bros. & Co. Ltd.15 There, there was a provision
in a company's articles of association compelling a shareholder
at any time during the continuance of the company to transfer his
shares to particular persons at a particular price. I t was held
that these provisions were not void as being repugnant to absolute
ownership nor as tending to perpetuity, and it was also held that
there was nothing in such a provision to defeat the rights of a
trustee in bankruptcy. The case was decided by Sir George
Parwell J., who made a number of remarks which bear on this
question. I do not propose to refer to them in detail except one
remark, where he says 16 : " these articles are nothing more or
" less than a personal contract between Mr. Borland "—that was
the director who went bankrupt—" and the other shareholders in

" [1954] Ch. 409, 431. " [1901] 1 Ch. 279; 17 T.L.R. 45.
" [1953] Ch. 590; [1953] 3 W . L . R . " [igoi] l Ch. 279, 290.
271; [1953] 2 All E.R. 636.
1 Ch. CHANCERY DIVISION. 9

1958
" the company under the 16th section of the Companies Act,
" 1862," that section being the section which corresponded at BAYFIELD
that date to section 20 of the present Act which is now in force. »•
On the whole, if the proper way to construe the articles of '
Valsey J
association of a company is as a commercial or business document -
to which the maxim " validate if possible " applies, I think that
the plaintiff in this action ought to succeed. Not one of the
judges in the case to which I have already referred, Dean v.
Prince,17 showed any signs of shock or surprise in the assumption
there made of a contract between directors being formed by the
terms of a company's articles. I am encouraged, not I hope
unreasonably, to find in this case a contract similarly formed
between a member and member-directors in relation to their
holdings of the company's shares in its articles. The conclusion
to which I have come may not be of so general an application as
to extend to the articles of association of every company, for it is,
I think, material to remember that this private company is one
of that class of companies which bears a close analogy to a
partnership; see the well-known passages in In re Yenidje
Tobacco Co.1*
Nobody, I suppose, would doubt that a partnership deed might
validly and properly provide for the acquisition of the share of
one partner by another partner on terms identical with those of
article 11 in the present case. I do not intend to decide more
in the present case than is necessary to support my conclusion,
though it may be that the principles upon which my conclusion is
founded are of more general application than might be supposed
from some of the authorities on the point.
I will make an appropriate declaration of the plaintiff's rights,
or will order the defendants to give effect to them, and if neces­
sary there must be an inquiry to ascertain the fair value of the
shares. I am asked not to decide what is the proper date at
which the value of the shares is to be fixed, as to which indeed
there be no question, but to leave these to be either agreed or
decided hereafter. There must be liberty to apply.

Declaration accordingly.

Solicitors: Simpson, Palmer & Winder; Mark Lemon.

" [1954] Ch. 409. " [1916] 2 Ch. 426; 32 T.L.E. 709.