Company made a defective issue of bonus shares to its members. Issue was whether this issue of shares could be saved by section 35A (now section 40). Two issues were whether a gratuitous transaction fell under scope of section 40, and whether a shareholder could constitute a ‘third party’. Held:
· Section 40 requires there to be a bilateral transaction between company and the third party.
· Thus a gratuitous issue of shares does not fall under section 40.
· However if shareholders were to purchase shares from the company, they would be dealing with the company.
Ø As here, there is some form of consideration from shareholders.
· Even if a shareholder was ‘dealing with’ the company (i.e. transaction was bilateral), ‘third parties’ can never include:
i) membersof a company
ii) thecompany itself
· Protection of section 40 should not exceed that provided for in Directive.
Ø And it is clear Directive did not intend to protect shareholders