Articles of association - implied term

Cream Holdings Ltd v Davenport - Court of Appeal, November 2011

On leaving the company, a director was required, in terms of the articles, to transfer his shares at a value determined by a third party accountant. The company sought to appoint a third party accountant. However, the director alleged that there was an absence of full financial disclosure by the company and refused to sign the accountant's letter of engagement. The company then sought a court declaration to confirm the engagement terms so as to progress matters.

The court implied a term in the company's articles of association that the transferor of shares (i.e. the director) would, in effect, co-operate with the appointment of an accountant for share valuation, and not unreasonably refuse to agree to terms of the accountant's engagement, if reasonable.

The articles allowed either party to instruct the President of the ICAEW to nominate a third party valuer but the accountants, as valuers for both parties, quite naturally required a letter of engagement signed by both company and ex director. The letter of engagement is reproduced in the judgement and makes interesting reading as it sets out procedures for obtaining information, receiving opinions, working through drafts to final form. Typically articles of association even if detailed do not venture into stating in detail the procedures to be followed by the valuer.

The ex director was worried that the company would not provide the valuers with all requisite information, information which the director knew existed but which he could not himself provide. The protection here, if necessary, would be an injunction rather than obstructing the appointment.

An unusual case - we see many more applications to court on the construction of contracts other than articles of association.

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