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Thursday, July 31, 2014

Comments About Hereford's Proposed CVA


Bulls News has come into possession of a copy of an email sent to Marc Landsman, the Nominee under the proposed CVA. It makes a number of comments and points out some problems with company administration. After an introduction the email reads :-

My concerns are numerous, and having read what I say you might need to get Counsel's Opinion about how you proceed about the various matters I mention. So what is the basis of my concerns? They relate to the company's Articles of Association and indeed certain provisions of the Companies Act 2006. Incredibly the Articles of Association of the company are exactly how they were formulated back in 1939! They have not been changed since! On 22.07.13 there was an EGM of the company, and there were two resolutions on the agenda which if passed would have led to the existing Articles being struck out and replaced by more modern Articles. But in fact those resolutions on the agenda were not even reached, and thus were not passed. So the 1939 Articles of Association remain in place, unaltered.

You could of course download the incorporation documents from the Companies House website, but to save you the bother and £1 fee for doing that, please see the attached file. I also attach a copy of Table A (1929 version) in view of the company's Articles invoking some provisions of Table A. If you feel the need you can of course verify that both these documents are genuine, by downloading them yourself. As regards the Companies Act 2006, no doubt you have a copy of that.

Firstly I point out section 171, CA2006 :-

171 Duty to act within powers
A director of a company must—

    (a) act in accordance with the company’s constitution, and
    (b) only exercise powers for the purposes for which they are conferred.

-: and in view of what follows I think you will agree that there are a number of problems. Simply the Directors appear to have had no regard for some provisions of the company's Articles of Association.

Prohibition on Directors' Remuneration
I refer you to Articles 27 of the company's Articles of Association. Clearly Directors are not permitted to be paid, either as a Director or as an employee. But your documents, especially the summary of accounts, clearly identify that Directors have been paid. Also Keyte was paid £2500 for remaining as a non-Executive Director for one month. Clearly the Articles of Association prohibit that and the other payments to Directors. They are clearly able to reclaim their expenses, but not be paid remuneration.

Borrowing Limit
I refer you to Articles 29 of the company's Articles of Association. There is clearly a borrowing limit, limited to the amount of share capital unless "there has been sanction of the company in General Meeting". Until the 22.07.13 EGM the share capital was just less than £10000, but clearly the borrowings authorised by the Directors far exceeded that amount.

A higher amount authorised by the shareholders in General Meeting? The company was incorporated in 1939, that is 75 years ago, and a review of all General Meetings would be needed to make sure, but I can say that no one I have spoken to can recollect the Directors ever asking shareholders for a higher borrowing limit. If it is suggested that shareholders have agreed a higher limit, I think the onus is on Directors to prove that to be the case.

Doubt about Validity of Issue of Shares
I shall assume you have a copy of the agenda for the 22.07.13 EGM of the company. If that is not the case, and you would like me to forward a copy to you, please ask for a copy.

Resolution 1 permitted loans to the company to be converted into shares, at the par value of 25p each. Resolution 1 was passed, as indeed was resolution 2. Both 1 & 2 were passed as Ordinary Resolutions.

Resolution 3 was rather different. It was a Special Resolution and if passed it would have allowed the Directors to issue shares on a non-pre-emption basis. But resolution 3 was voted down by shareholders; it was not passed. (And as said above, resolutions 4 & 5 relating to modernising the Articles of Association were not discussed and thus not passed.)

I refer you to Article 16 of the company's Articles of Association, and then to Articles 34 to 38 of Table A (1929 version). Shareholders did agree quite a few years ago to increase the limit on share capital from £1000 to £10000. That is, they used the power in Article 34 of Table A.

I refer you to Article 35 of Table A. That clearly refers to what we would now call pre-emption rights.

Now we need to refer to the Companies Act 2006, in particular section 571. Clearly the drafter of the agenda of the 22.07.13 EGM realised the importance of the need for a Special Resolution. But shareholders did not pass that resolution.

I think it is arguable that in the absence of the needed Special Resolution, the Ordinary Resolution 1, which was passed, is effectively useless, and did not allow loans to be converted into shares, on a non-pre-emption basis.

In any case resolution 1 purported to allow conversion of loans far in excess of the limit on borrowings, and thus are "tainted" in more than one way.

You will appreciate that Keyte converted some loans into shares, and later sold those shares to a company controlled by Agombar, which is why that company has over 55% of the shares at the moment. But as said above in is arguable the shares should not have been issued, on a non-pre-emption basis.

I also refer you to your Nominee's Report file, at 7.4. It appears that ID Sports & Leisure Limited were somehow authorised to sell shares. That arrangement clearly cannot have been correct, if only because such shares were not issued on a pre-emption basis, and no Special Resolution had been passed by shareholders to allow shares to be issued on a non-pre-emption basis.

Doubt about validity of Directors' Appointments
I refer you to Article 25 of the company's Articles of Association. It is clear that a minimum of three Directors are required., and Article 36 says the quorum shall be two. I also refer you to Article 38, then to Article 83 of Table A (1929 version). I also refer you to your Proposal.pdf document, which at page 54 of 55 usefully lists the Directors of company, both now and in the recent past. Simply after David Keyte resigned on 17.06.14, there were no Directors until two Directors suddenly appeared on 26.06.14. Which clearly begs the question, who appointed those two? There cannot have been a resolution of the Directors, under Article 83 of Table A, so that places in doubt the validity of those two appointments.

Following on from those two appointments, two more Directors were appointed. But those must also be suspect, given the problem with the first two.

In the apparent absence of any Directors, after Keyte resigned, I think it is clear that a General Meeting of shareholders was needed to appoint new Directors, but none has been called.

This goes to the heart of the matter, given the Directors have purported to agree to your appointment etc..

Summary
So Mr Landsman, those are my thoughts at this time. There are, in my opinion, a number of issues that you should investigate further. At this time I again mention section 171, CA2006, and suggest there are grounds for believing the Directors, at certain times, have not exercised a Duty of Care.

..............................................

Bulls News is also aware that Mr Landsman acknowledged receipt of that email, and asked for copies of the agendas and papers for the two EGMs held in 2013. Those were duly sent, and he has also acknowledged receipt of those documents.

Developments are expected!