Bushell v Faith [1970] AC 1099
Citation:Bushell v Faith [1970] AC 1099
Rule of thumb: Can the Companies Act be contracted out of? No, but extra rights can be given which dilute the effect of some of the rights. Extra rights given to a person under a contract, which do not directly breach a statute, but instead give extra votes building on top of those already given in the statute, will not be unenforceable terms due to a breach of public policy. The Court in this case affirmed the principle of ‘the Companies Act as a floor of rights’ - the Court confirmed that the Companies Act is a floor of rights that cannot be contracted out of in the Company Articles, but shareholders can still acquire additional rights on top of this Act in the Company Articles.
Background facts:
The facts of this case were that Mr Faith started a property development business with his 2 sisters, Mrs Bushell and Mrs Bayne. They all put in an amount of their capital and all took 33 shares each from a total of 99 shares. Faith started as the only director and was responsible for getting the projects done. Bushell and Bayne started to grow frustrated with the way Faith was running the projects. At the Annual General Meeting (AGM) Bushell and Bayne proposed a vote upon the directors and voted against Faith. Faith used his shareholding to vote against this. Bushell informed Faith that they had voted to remove him and to contact companies to resign, but Faith refused to resign.
Arguments:
The matter then went to Court. Faith argued that there was a term in the company that gave multiplied the votes of a director in a company by 3 times. Faith therefore argued his shares held 99 votes, and this outweighed the votes of Bayne and Bushell who only had 66 votes with their shares. Bushell argued that this term in the company articles contracted out of the companies act that gave them provision to vote and that directors should be removed by majority vote. Bushell argued this invoked the public policy principle and made this Article in the Articles of Association invalid and inapplicable. Faith responded to this that there was not actually a single provision of the Companies Act him getting extra shares was in breach of. Faith argued that he had been given additional rights rather than any other shareholder having rights taken away from them.
Judgment:
The High Court had ordered Mr Faith to resign as a director on the basis that he had contracted out of the Companies Act in Article 9 the Company Articles, meaning that Article 9 was an invalid term, but the Court of Appeal reversed this, holding that Mr Faith had given himself extra rights rather than contracting out of the Companies Act, and it was appealed to the House of Lords. The The Court upheld the arguments of Faith - he was entitled to remain as a director. There was indeed not one provision of the Companies Act that was actually being clearly breached due to the company articles. The House of Lords and the Court of Appeal actually disagreed on this matter - this case shows how there can be a fine line between a statutory provision being breached and someone being given extra rights. The House did affirm that for a contractual provision to be contrary to public policy and inadmissible it has to be in clear breach of a statutory provision. If a statutory provision is vague and broadly worded then this is unlikely to be the type of statutory provision that a contractual term could be said to invalid on the grounds of public policy. This is an important case for people looking to defend a contractual term that may be in breach of a statutory provision. This case affirmed statutory provisions as a floor of rights that people cannot dig up, but can have additional rights on top of.
Ratio-decidendi:
‘with some reluctance I agree with the majority of your Lordships that this appeal must be dismissed. Article 9 of the articles of association of this company is obviously designed to evade section 184 (1) of the Companies Act, 1949 [sic], which provides that a company may by ordinary resolution remove a director notwithstanding anything in its articles. The extra voting power given by that article to a director, whose removal from office is proposed, makes it impossible in the circumstances of this case for any resolution for the removal of any director to be passed if that director votes against it.... "we must take the law as we find it', Lord Reid , 'the extra voting power given', Lord Reid
Warning: This is not professional legal advice. This is not professional legal education advice. Please obtain professional guidance before embarking on any legal course of action. This is just an interpretation of a Judgment by persons of legal insight & varying levels of legal specialism, experience & expertise. Please read the Judgment yourself and form your own interpretation of it with professional assistance.