Background

Ceredigion Recycling & Furniture Team is a private company limited by guarantee that had been incorporated to take over a project started by volunteers in Aberystwyth to recycle furniture and other domestic items. Clause 5 of the Memorandum of Association provided that:

The income and property of the Company whencesoever derived shall be applied solely towards the promotion of the objects of the Company as set out herein and no portion shall be paid or transferred directly or indirectly to the members of the Company except by way of payment in good faith of reasonable and proper wages, bonuses and repayments (including loans) of expenses to any member or employee of the Company in return for any services actually rendered to the Company

Companies limited by guarantee have no share capital and have members instead of shareholders. Such companies are normally used for non-profit making functions.

Under section 62 of the Companies Act 2006 (“the 2006 Act”), companies limited by guarantee are exempt from the requirement to include the word ‘limited’ in its name so long that as its objects are charitable, its articles require its income to be applied in promoting its objects, its articles prohibit the payment of dividends, and its articles require the assets that would otherwise be available to members on winding-up to be transferred to another body with similar objects to its own.

In March 2019, the Company brought a claim for breach of fiduciary against two of its former directors, Mr Clifford Pope and Ms Allison Cann (together, “the Directors”) for breach of fiduciary duty in relation to the transfer of property from CRAFT into the Directors’ respective self-investment pension plans (“SIPPs”).

The Directors denied any breach of fiduciary duty and argued inter alia that the transfer of the property into the SIPPs was lawful and bound the Company. In essence, it was said that:

  1. As the Defendants acted unanimously and were the only members of the Company, their actions were to be attributed to the Company in accordance with the Duomatic
  2. The Company’s capacity is not limited by either the Memorandum or section 62 of the 2006 Act due to the abolition of the ultra vires doctrine by section 39 of the 2006 Act.
  3. Therefore, the transfer into the SIPPs was an intra vires decision of the Company which, in the absence of insolvency, it is bound by.

At trial, HHJ Jarman QC rejected the argument that the transfer of property into the SIPPs had been lawful on the basis that the Directors had acted outside the powers of the Company as limited by clause 5 Memorandum of Association and section 62 of the 2006 Act. He therefore found that the Directors had been in breach of fiduciary duty. However, he alsofound that they had not been dishonest; rather, they had been ‘beguiled’ by their professional advisors.

One of the Directors, Mr Pope (“the Appellant”), applied for permission to appeal on the grounds that HHJ Jarman QC had erred in law in finding that the Directors had acted outside the powers of the Company and relied on the abolition of the ultra vires doctrine by section 39 of the 2006 Act. The other director, Ms Cann, did not appeal but argued that, if the appeal were successful, the order against both Directors ought to be set aside.

Popplewell LJ refused permission to appeal without expressly considering the effect of the abolition of the ultra vires doctrine. As a consequence, the Appellant brought the present application to re-open that refusal of permission to appeal.

Issue (1) – Jurisdiction to re-open a refusal for permission to appeal

The Appellant’s main submission was that the Court of Appeal had the inherent jurisdiction to review a decision by a single Lord or Lady Justice to refuse permission if the issue raised on appeal was an arguable one, so that the decision to refuse permission was “wrong”. It was argued that:

  1. There is a right of appeal to the Court of Appeal by virtue of section 16 of the Senior Courts Act 1981.
  2. The Court is not competent by the exercise of powers over its own practice and procedure to alter its substantive jurisdiction.
  3. Permission to appeal is no more than a procedural filter applying to the pre-existing right of appeal against frivolous or unmeritorious proceedings.
  4. If permission to appeal is wrongly refused by a single Lord or Lady Justice on a properly arguable point of law, that decision is a nullity.
  5. An appellant is entitled to have that decision reviewed by another member of the Court or by the full Court pursuant to its supervisory jurisdiction.

In respect of existing case law, it was argued that previous decisions that sought to limit the Court’s power to re-open CPR rule 52.30 are not binding (relying on R (Gourlay) v Parole Board [2020] UKSC 50 at [37]) and were, in any event, wrongly decided.

Despite acknowledging the ingenuity of the Appellant’s submissions, the Court of Appeal considered that they were premised on “the fundamental misapprehension that this Court has some inherent jurisdiction to review a decision…to refuse permission to appeal” other than that set out in CPR rule 52.30. The inherent jurisdiction of the Court identified in Taylor v Lawrence [2003] QB 528 was subsumed into and is regulated by CPR rule 52.30. There is no other jurisdiction to which the Appellant can have resort.

Accordingly, the Court only had jurisdiction to review the decision of Popplewell LJ under CPR rule 52.30, and determined the Appellant’s application under that rule in accordance with the principles set out in R (Goring on Thames Parish Council) v South Oxfordshire District Council [2018] EWCA Civ 860 at [10] to [15] and Municipio de Mariana v BHP Group plc [2021] EWCA Civ 1156 at [60] to [64]. Those principles are discussed in more detail here [Link: http://disputeresolutionblog.practicallaw.com/court-of-appeal-permission-cpr-52-30-revisited/]

Accordingly, the Court of Appeal determined the Appellant’s application under CPR rule 52.30.

Issue (2) – The ultra vires doctrine and breach of fiduciary duty

With regard to the grounds of appeal, the Court of Appeal firmly rejected the suggestion that the abolition of the ultra vires doctrine was of any relevance to the question of breach of duty.

Section 39 of the 2006 Act abolished the ultra vires doctrine as between companies and third parties. That does not mean that directors are relieved from their liability to their company for their breach of duty merely because, qua members, they agreed with the course which was taken.

Such liability is expressly preserved by section 40(5) of the 2006 Act and, in any event, the Supreme Court made clear in Bilta (UK) Ltd v Nazir (No 2) [2015] UKSC 23 that knowledge of breach of duty is not to be attributed to the company under the Duomatic principle.

Accordingly, the application was refused because the Court considered that Popplewell LJ had been right to refuse permission to appeal (see below). As a result, it was neither necessary to re-open the refusal to avoid real injustice nor were the circumstances exceptional.

This case makes it beyond clear that the Court of Appeal will only entertain an application to re-open a refusal for permission to appeal if the very strict requirements of CPR rule 52.30 are satisfied. It also builds on the decision in Bilta (UK) Ltd v Nazir (No 2) by clarifying that, notwithstanding the abolition of the ultra vires doctrine, the Duomatic principle does not relieve directors of liability for breach of fiduciary duty.

This case also highlights a potential lacuna in the Companies Act 2006. As explained above, section 62 of the 2006 Act permits a company to exclude the word ‘limited’ in its name so long that as its objects are charitable, its articles require its income to be applied in promoting its objects, and its articles prohibit the payment of dividends. It is a criminal offence under section 63 of the 2006 Act for such a company to amend its articles so that it ceases to comply with the conditions for exemption. It appears that intention is to prevent the members of such a company from winding it up and walking away with its assets. However, the requirements of sections 62 and 63 can be entirely avoided by the addition of the word ‘limited’ to the company’s name. Perhaps it would be sensible to prevent any such a company from changing its name, or amending its articles of association having done so, without the permission of the court.