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Cite as: [2012] WLR(D) 96, [2012] EWCA Civ 314, [2012] Bus LR 1836

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Neutral Citation Number: [2012] EWCA Civ 314
Case No: A3/2011/2394 & (A) & (B)

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(CHANCERY DIVISION) LEEDS DISTRICT REGISTRY
HIS HONOUR JUDGE BEHRENS

[2011] EWHC 2301 (Ch)

Royal Courts of Justice
Strand, London, WC2A 2LL
15/03/2012

B e f o r e :

LADY JUSTICE ARDEN
LORD JUSTICE RIMER
and
MR JUSTICE RYDER

____________________

Between:
PHILIP JOHN SMITH
Respondent
- and -

JAMES CARL BUTLER
Appellant

____________________

(Transcript of the Handed Down Judgment of
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____________________

Mr Nigel Dougherty (instructed by Berg Legal) for the Appellant
Mr Neil Berragan (instructed by DLA Piper UK LLP) for the Respondent
Hearing date : 15 December 2011

____________________

HTML VERSION OF JUDGMENT
____________________

Crown Copyright ©

    Lady Justice Arden:

    The Primary Issue

  1. The dispute between the parties to this appeal is over control of the board of directors of Contact Holdings Limited ("the Company"). The appellant, Mr James Carl Butler, owns 31.2% of its issued shares and is the managing director of the Company. The respondent, Mr Philip John Smith, owns the balance (68.8%) of the issued shares of the Company, and is its chairman.
  2. On 1 July 2011, in reliance on his authority as managing director, Mr Butler informed Mr Smith that he was suspended from his office as chairman. Mr Butler also excluded him from the Company's premises. Mr Butler did not have the authority of a resolution of a duly constituted board meeting to do this. It appears that Mr Butler had information suggesting to him that over a period of some seven years Mr Smith had utilised his company credit card for the payment of approximately £78,000 in expenses to which he was not entitled. Mr Butler feared that, if he raised that matter with the board before taking action, Mr Smith would have prevented any independent investigation by intimidating staff or witnesses and by destroying evidence. The Company, and its shareholders, would then have suffered. The primary issue on this appeal is, therefore, whether Mr Butler's powers as a managing director entitled him to act as he did.
  3. The third director of the Company, Mr Harris, is group finance director. Mr Butler consulted him before he took steps to suspend Mr Smith as Chairman. Mr Harris gave his approval in advance to Mr Butler's action on 1 July 2011. After Mr Smith left the board meeting on 1 July 2011 at which Mr Butler informed him that he had been suspended, Mr Butler and Mr Harris purported to pass a board resolution for Mr Smith's suspension but Mr Butler does not contend that this was a valid resolution.
  4. Mr Smith for his part denies any wrongdoing. His case before the judge was that he expected that there would be an adjustment to his loan account with the Company for any payment of expenses that ought not to have been made, or that his bonus entitlement would be appropriately reduced. We are not concerned with the detail of any allegation of wrongdoing by Mr Smith. The judge did not hear evidence and no findings have at this stage been made.
  5. There is evidence to suggest that Mr Butler's actions were not wholly motivated by the Company's interests. Mr Smith had expressed dissatisfaction about the way Mr Butler was running the Company since early 2011. In March 2011 he made it known that he had decided that he should use his powers as majority shareholder to appoint another person as chief executive officer ("CEO"). Mr Butler objected and claimed that the appointment of a CEO would amount to constructive dismissal. Mr Smith adhered to his proposal and said in May and June 2011 that if Mr Butler could not embrace the proposal there would have to be a parting of the ways.
  6. Mr Butler had had prior suspicions about Mr Smith's stewardship of the Company's assets on an earlier occasion. In 2009, Mr Grundy (Mr Harris's predecessor) had discovered what Mr Butler contends constituted a cheque fraud involving Mr Smith between 2002 and 2005. According to the judge, this involved the diversion of funds to Mr Smith. Mr Smith disputed the precise amounts involved in this fraud but he accepted in evidence that at least £130,000 was involved. The judge considered it likely "that the true amount involved was in excess of £450,000, even though Mr Smith may not personally have received the whole sum" (judgment, paragraph 5). We again are not concerned with the detail of the claims over the alleged cheque fraud.
  7. Mr Butler took no steps to claim redress in respect of this cheque fraud in 2009. However, in May 2011, at about the time Mr Smith was threatening to bring in a new CEO, Mr Butler, on behalf of the Company, instructed solicitors, Pannone, to investigate whether there had been a fraud conducted by Mr Smith.
  8. On 18 July 2011, Mr Smith, by his solicitors, DLA Piper UK LLP ("DLA") served on the Company a requisition pursuant to Section 303 of the Companies Act 2006 ("the 2006 Act") requesting the Company to convene and hold an extraordinary general meeting to consider resolutions for the removal of Mr Butler and Mr Harris as directors of the Company. Under section 305 of the 2006 Act, Mr Smith was entitled to convene a general meeting of the Company himself if the Company failed to do so. However, Mr Butler made it clear that he would not attend such a meeting. Under the Company's articles, the meeting will then be inquorate and ineffective.
  9. These proceedings

  10. On 19 July 2011, Mr Smith retaliated by applying to the court for a declaration as against Mr Butler and the Company that Mr Butler's action was outside his powers as a managing director, and for an order under section 306 of the 2006 Act convening a meeting of the Company with a quorum of one to consider a resolution to remove Mr Butler.
  11. On 21 July 2011, Pannone gave instructions to Ernst & Young, forensic accountants, to investigate the involvement of Mr Smith in the cheque fraud and the irregular expense claims alleged to have been made by Mr Smith.
  12. Mr Smith's applications came before HHJ Behrens, sitting as an additional judge of the Chancery Division in the Leeds District Registry and were heard by him on 26 July and 23 and 24 August 2011. Mr Butler and the Company were separately represented before the judge. The Company, which was represented by leading counsel, Mr Charles Hollander QC, took an active part in resisting Mr Smith's applications. The Company filed a substantial quantity of evidence before the hearing started and again during the course of the adjournment. Mr Smith offered undertakings to the Court, pending determination of his applications, to ensure that the Company's records were preserved, that staff were not dismissed and that Mr Butler and Mr Harris were not removed as directors.
  13. On 1 September 2011, the judge gave judgment and granted Mr Smith's applications. He also granted orders against Mr Butler restraining him from preventing Mr Smith carrying out his duties as an employee. Undertakings from Mr Smith were also scheduled to his order. The Company had incurred substantial costs in resisting the application, said to total £103,089.96, as compared with Mr Butler's costs on his own behalf of £19,978.43. Those of Mr Smith were estimated to be £92,565. 51. The judge took the view that Mr Butler should indemnify the Company for the costs that it had incurred and made an order to that effect.
  14. On this appeal, Mr Butler, for whom Mr Nigel Dougherty appears, challenges the judge's orders. Mr Dougherty did not appear below. If the judge's orders are implemented, Mr Butler will be removed as a director and there may be no investigation into the alleged misappropriation of the Company's funds.
  15. Thus the primary issue on this appeal is whether Mr Butler, as managing director, had power to suspend Mr Smith and subsequently to instruct solicitors to act for the Company on the applications. There are two consequential issues. The first consequential issue is whether the judge erred in making an order that the Company should be indemnified by Mr Butler for the substantial costs which it incurred in resisting Mr Smith's applications. The second consequential issue is whether the judge erred in making an order for the convening of a meeting of the Company, with a quorum of one, for the purpose of passing a resolution to remove Mr Butler as a director.
  16. The primary issue: the powers of a managing director

  17. We are not in this case concerned with the more usual question whether a third party dealing with a managing director is entitled to assume that he has power to do what he did. As Lindley LJ held in Biggerstaff v Rowatt's Wharf [1896] 2 Ch 93 at 102, a person dealing with a managing director must see whether according to the constitution of the company a director could have the powers which that director is purporting to exercise. This appeal, however, is concerned with the question of what powers the managing director actually had. There is surprisingly little authority on that point. The powers of a managing director are not, of course, statutorily defined. The parties could have defined Mr Butler's powers when he was appointed. However, they did not do so. In Hely-Hutchinson v Brayhead [1968] 1 QB 549 at 560, Roskill J, whose decision was affirmed by this court, comprising unusually Lord Denning MR, Lord Wilberforce and Lord Pearson, went so far as to state that the question of the implied authority of a managing director was one of "considerable difficulty", as well as being "one upon which there appears to be little or no relevant authority". In the end this court held that on the judge's findings he had sufficient authority for the purposes in question.
  18. Mr Smith and Mr Butler both have contracts of employment with the Company. Mr Smith's salary is £166,000 per annum while that of Mr Butler is £130,000 per annum. Neither Mr Smith's contract nor that of Mr Butler specifies to whom they report. There is no formal board resolution approving Mr Smith's contract of employment. Both contracts are silent as to any delegation of powers by the board. Mr Smith previously occupied the office, now held by Mr Butler. When he caused Mr Butler to be appointed group managing director, he and Mr Butler agreed in a document passing between themselves that Mr Butler would consult before initiating action on "employment matters, including the recruitment and dismissal of staff". The judge attached little weight to this document since it was uncertain what it meant. In my judgment, there is nothing to suggest that this document was to impose any rights or obligations on the Company and thus it cannot displace the conclusion reached on the basis of the Company's articles.
  19. The judge's conclusion was that Mr Butler's implied powers as managing director did not extend to suspending the chairman. He was particularly influenced by two factors. First, Mr Smith had special rights under the articles of association of the Company. He had the right to be a director for as long as he was a shareholder of the Company and could, by exercising his right to be included in the quorum at board and company meetings, prevent the holding of any board or general meeting of the Company. It would, therefore, be an unlikely conclusion that the articles intended that he should be suspended by the mere say-so of the managing director. Secondly, the suspension of the chairman fell outside the day to day running of the Company's business.
  20. The judge was of the view that the dispute was, in substance, a dispute between shareholders. He made an observation to this effect in the context of a comment in Gore-Browne on Companies on one of the cases cited to him, namely Mitchell & Hobbs (UK) v Mill [1996] 2 BCLC 102, to which I shall refer below. The comment was to the effect that, contrary to the decision in that case, the powers of a managing director might be held to be implied where the question was whether a managing director had ostensible authority rather than where a question arises out of the existence of a dispute between the members.
  21. Mr Dougherty submits that Mr Butler was entitled to take such steps as would be expected of a group managing director. In practice Mr Butler was concerned with the management of the company including its relations with employees. It followed, on his submission, that Mr Butler could take steps in an appropriate case to suspend Mr Smith from his executive office. Urgent action was needed. Although Mr Butler discovered that Mr Smith had been involved in removing the Company's funds as long ago as 2009, there had been no need for him to take action then as Mr Smith had undertaken to repay the sums in question.
  22. Mr Dougherty contends that the judge was wrong not to accept this argument. The judge, on his submission, overlooked the fact that the Company had a distinct interest in the investigation of the expenses claimed by Mr Smith and in the recovery of any expenses that had been overpaid to him. In addition, the Company would be liable for unpaid tax, interest and penalties if sums had been paid to Mr Smith that did not represent the repayment of proper expenses. Indeed, as a result of his suspension, Mr Smith gave certain undertakings that benefited the Company. Thus, on Mr Dougherty's submission, the Company had achieved a fair measure of success in securing the protection of its position. The undertakings extended to the provision of Mr Smith's bank statements. The independent director, Mr Harris, shared Mr Butler's view that Mr Smith's suspension was in the best interests of the Company. The Company could now decide how best to approach the Revenue. If Mr Butler had not taken action, Mr Smith could have used the quorum provisions in the Company's articles to his own advantage and prevented any investigation into the claims against him
  23. Mr Neil Berragan, who appears for Mr Smith and appeared below, seeks to uphold the judge's judgment. He relies on the following passage from Gore-Browne on Companies at paragraph 14[9]:
  24. "A company whose business has many details to be attended to requires a manager with considerable powers. He may either be one of the directors appointed as managing director or be actually appointed as the manager, and such powers may be delegated to him by the board as the articles allow, or, if they are silent, such as in a similar business would usually be entrusted to a managing director or manager.
    [T]he exact status and powers of a managing director depend both upon the articles which confer a power on the board to appoint a managing director and upon the terms of the contract by which he is employed. The failure of the board to intervene where the managing director has exceeded his authority may imply ratification. Although he must be a director, his status as managing director derives from his appointment by the board to this office. He is thus both a director and, as managing director, an employee of the company."
  25. Mr Berragan submits that the judge was right for the reasons that he gave. Mr Butler accepted that there was no board authority for the suspension. Furthermore, Mr Butler had similarly, without board authority, circulated a board minute to the Company's bankers altering the bank mandate. Mr Smith volunteered undertakings. Mr Butler had taken no steps to ask for undertakings. Even after the suspension he took no steps to protect documents. The Company did not instruct accountants Ernst & Young to carry out an investigation until after Mr Smith had issued proceedings. There was no suggestion at the time Pannone were instructed that it was necessary to preserve records in order to report to the Revenue. In particular, he submits that, on the true interpretation of the terms of Mr Butler's appointment, the power to suspend the chairman without board authority cannot be implied.
  26. Mr Dougherty distinguishes the decision of Mr Andrew Machin QC, sitting as a deputy judge of the High Court of Justice, Chancery Division, in Mitchell & Hobbs at 108. In that case, the essential conclusion of the judge was that, in the absence of any evidence about the delegation of powers, neither the managing director nor any single director could authorise the commencement of proceedings without a board resolution.
  27. Both parties rely on the decision of Peter Smith J in Fusion Interactive Communication Solutions Ltd v Venture Investment Placement Ltd (No 2) [2005] 2 BCLC 571 at [44] to [58]. In that case, Peter Smith J applied the essential conclusion in Mitchell & Hobbs. Mr Dougherty submits that Peter Smith J also upheld a further principle, namely that directors acting in breach of duty could not claim that other directors lacked authority to commence proceedings to remedy the breach without the approval of a board resolution. Mr Berragan submits that those observations were obiter and that the ratio of this case was merely that on appropriate facts individual directors acting without the authority of a board can have implied authority to commence proceedings.
  28. In my judgment, the judge's conclusion on this primary issue was correct but the inquiry should proceed not, as the judge analysed it, from the special provisions of the Company's articles as to quorum but from the provisions of its articles setting out the powers of the board to appoint a managing director. The Company's articles of association in fact adopt the regulations set out in the version of Table A ("the 1985 Table A") to be found in the Companies (Tables A to F) Regulations 1985, with modifications. The power to appoint a managing director is contained in regulation 72 in the 1985 Table A. This enables the board of directors to appoint a managing director and to delegate any of their powers to the managing director. Moreover, that delegation may exclude the directors' own powers on a particular matter. Regulation 72 provides in material part:
  29. "The directors may delegate .... to any managing director or any director holding any other executive office such of their powers as they consider desirable to be exercised by him. Any such delegation may be made subject to any conditions the directors may impose, and either collaterally with or to the exclusion of their own powers and may be revoked or altered…"
  30. The power to appoint a managing director has appeared in versions of Table A since at least that appearing in schedule 1 to the Companies (Consolidation) Act 1908 (for references, see the comparative table of the various versions of Table A to be found in Buckley on the Companies Acts, divider 25).
  31. In this case, however, there is no express delegation of any specific powers by the board to Mr Butler. Mr Butler simply has a contract of employment appointing him as a managing director. This factual scenario is one that is likely to arise in many cases. On the other hand, it was clearly intended that some powers should be implicitly delegated to him. It would, however, be unusual for the powers of the board to be excluded. In those circumstances, the implied delegation of powers to Mr Butler cannot be interpreted as having that effect.
  32. Mr Dougherty's proposition is that, in principle, the implied powers of a managing director are those that would ordinarily be exercisable by a managing director in his position. In my judgment, Mr Dougherty's proposition is correct. In Hely-Hutchinson v Brayhead [1968] 1 QB 549 at 583, Lord Denning MR held that the board of directors, on appointing a managing director, "thereby impliedly authorise him to do all such things as fall within the usual scope of that office." Mr Dougherty's proposition is also supported by the passage that Mr Berragan cited from Gore-Browne on Companies. Another way of putting that point is that the managing director's powers extend to carrying out those functions on which he did not need to obtain the specific directions of the board. This is simply the default position. It is, therefore, subject to the company's articles and anything that the parties have expressly agreed. In essence, the issue is one of interpreting the contract of appointment or employment in the light of all the relevant background, and asking what that contract would reasonably be understood to have meant (Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1485, PC, and see my judgment in Stena Line v Merchant Navy Ratings Pension Fund Trustees Ltd [2010] EWCA Civ 543 at 36-41).
  33. On this basis, as might be expected, the test of what is within the implied actual authority of a managing director coincides with the test of what is within the ostensible authority of a managing director: see Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 176.
  34. The holder of the office of managing director might today more usually be called a chief executive officer in (at least) a public company. He or she has generally to work on the basis that his appointment does not supplant that of the role of the board and that he will have to refer back to the board for authority on matters on which the board has not clearly laid out the company's strategy. He or she would thus be expected to work within the strategy the board had actually set.
  35. In this case, however, it was clear that the strategy of the board was that Mr Smith should be executive chairman. Therefore, his suspension was clearly a matter for the board, and not for Mr Butler acting alone. To my mind it is inconceivable that Mr Butler did not need the instructions of the board on the question of the suspension of the chairman of the board. The fact that Mr Smith has special rights as a director and shareholder under the quorum provisions in the Company's articles reinforces this conclusion, but my conclusion does not rest on those provisions.
  36. I do not accept the submission that my conclusion renders Mr Butler powerless to act even if Mr Smith controlled the board and could prevent any investigation into the claims against himself contrary to the best interests of the Company. Mr Butler is a shareholder himself and has the right to seek relief from unfairly prejudicial conduct by the majority shareholder under section 994 of the 2006 Act. Indeed that is the course which he has now taken. On 29 September 2011 Mr Butler presented a petition to the court under section 994 seeking an order that he, or the Company, do purchase Mr Smith's shares at fair value.
  37. Alternatively, Mr Butler could have brought a statutory derivative action against Mr Smith in accordance with Part 11 of the 2006 Act. Those provisions could be used even if it was necessary to obtain urgent relief. If he were not a shareholder, he would not be able to take this action. If he could not take effective corrective action, he might have to consider whether he could continue to be a director or would have to resign.
  38. The decision in Mitchell & Hobbs has to be seen in the context of its particular facts. The company was a small private company with two directors and three shareholders (the directors and the company secretary). The company secretary withdrew a small sum from the company's bank account and put it in a safe place in order to prevent one of the directors from dissipating it. That director then caused the company to sue the secretary. The result in the case is, therefore, hardly surprising.
  39. Part of the judge's reasoning in Mitchell & Hobbs, however, was that since there was no express delegation of powers to the managing director he had no greater powers than any single director. He held:
  40. "[Counsel submitted that] Mr Radford's capacity as managing director imbued him with powers over and above those enjoyed by a non-managing director, notwithstanding that there was no evidence that any powers had been delegated to Mr Radford as managing director. He submitted to me that a managing director, ex virtute officii, had the power to institute proceedings. I do not find that in any way a matter which the articles in Table A provide for. The managing director of a company is not under the articles given any powers over and above other directors in relation to the business of the company. As I say and as reg 72 makes clear, in a particular case the managing director may have powers over and above those enjoyed by his co-directors because they may have delegated those powers to him and, if they have done, so be it. There being in the present case no such delegation, in my view, reg 72 does not assist the plaintiff company."
  41. In my judgment, the last sentence that I have quoted goes too far. The managing director has certain powers by implication from his office. Even in a small company those powers will often include power to commence proceedings unless the board has expressly or by implication decided that such proceedings should not be taken or would be likely not to ratify the commencement of proceedings. In Mitchell & Hobbs, there were two directors who had fallen out with each other. As in this case one of the directors had sufficient shares to bring about the removal of the other. The warring directors would probably not agree that the board should ratify the commencement of the proceedings. The actual decision in the case was, therefore, correct. Moreover, it is important to note that the application in Mitchell & Hobbs was for summary judgment, and so no witnesses were heard. The judge could not, therefore, take the more obvious course of inquiring whether the director who had authorised the commencement of proceedings had acted in the best interests of the company as opposed to his own personal interest.
  42. Fusion Interactive Communication Solutions Ltd again turns on its particular facts. The facts were such that the judge could draw an inference that two of the company's directors (one of whom was the managing director) had power to commence proceedings on behalf of the company. The judge's holding that a managing director had no implied power to commence proceedings was, therefore, not essential to his conclusion. This case does not, therefore, establish the wider principle for which Mr Dougherty contends (see paragraph 24, above).
  43. The judge's conclusions on this primary issue were also influenced by the fact that the dispute was in reality a dispute between members of the Company. In my judgment, the proposition that a managing director has by implication power to suspend the company chairman and exclude him from the company premises is so clearly erroneous that it was unnecessary for him to invoke this feature in order to be able to reach the conclusion that he did.
  44. Accordingly, in my judgment, the judge was correct in his conclusion that Mr Butler had no implied authority as managing director to suspend Mr Smith from his role as executive chairman of the Company. It follows that Mr Butler had no power as managing director to cause the Company to support his actions by resisting Mr Smith's applications or to incur substantial costs in doing so.
  45. Consequential issue (1): indemnification of the Company for its costs of the proceedings

  46. There is a corollary to the conclusion just reached about Mr Butler's powers as managing director of the Company: when Mr Butler caused the Company to instruct solicitors to take an active part in resisting the applications issued by Mr Smith, he had no power to do so. The judge so held and I agree. Mr Butler had no board authority and was causing the company to support the steps that he had wrongly taken.
  47. In a short supplementary judgment, the judge decided that he had sufficient power to order Mr Butler to indemnify the Company for the costs that it had incurred, and that he should exercise that power.
  48. Mr Dougherty submits that the judge effectively short-circuited the procedure necessary where it was alleged that a director had acted in breach of duty and Mr Butler was prejudiced. On his submission, if the correct procedure had been followed, Mr Butler would have been able to rely on section 1157 of the 2006 Act. Mr Dougherty submits that the Company had its own separate commercial interests to protect and that accordingly this was a situation in which the conditions in section 1157 were fulfilled.
  49. Section 1157 empowers the court to grant relief where a director is found to have acted in breach of duty and it appears to the court that he:
  50. "acted honestly and reasonably, and that having regard to all the circumstances of the case (including those connected with his appointment) he ought fairly to be excused, the court may relieve him, either wholly or in part, from his liability on such terms as it thinks fit."
  51. Mr Berragan, on the other hand, submits that Mr Butler had no authority to defend the proceedings in the name of the company. In any event, he further submits, there was no need for the Company to expend any funds in defending Mr Smith's applications and that the judge's reasoning should be upheld. He relies, by analogy, on the authorities preventing the use of company funds where a case is in substance a dispute between shareholders. Mr Smith's applications before the judge were essentially a dispute between shareholders.
  52. I have no doubt that the judge had power to order Mr Butler to pay the Company's costs (see section 51 of the Senior Courts Act 1981). The judge had a wide discretion with respect to such an order. Moreover, Mr Dougherty has not satisfied me that there was any matter which the judge could take into account under section 1157 of the 2006 Act in this case but not under his discretion to make an order as to costs.
  53. More fundamentally, however, if I am right in my conclusion on the primary issue that Mr Butler had no authority to cause the Company actively to defend Mr Smith's applications, then it followed that Mr Butler was liable to pay the Company's costs on an indemnity basis under the well-established practice applying where proceedings are brought in a company's name without authority (see generally, Buckley on the Companies Acts, paragraph 127.10).
  54. Finally and in any event, I do not consider that section 1157 of the 2006 Act would afford any grounds for resisting the order in this case. So long as Mr Butler proposed to resist Mr Smith's applications, the Company could avoid any significant expenditure by simply filing a defence that it would abide by the order made by the court. There were some relatively trivial costs that the Company could not avoid, such as the costs of acknowledging the claim. If the proceedings had gone further it may have had to incur more substantial costs in entering the formal defence that I have described and giving disclosure. But no claim has been made for any apportionment of the costs which Mr Butler was ordered to pay to the Company to indemnify it for the costs which it had incurred in defending Mr Smith's applications.
  55. For these reasons, I would dismiss Mr Butler's appeal on this issue.
  56. Consequential issue (2): did the judge err when he made an order convening a general meeting of the Company with a quorum of one?

  57. That leaves the question whether the judge erred in making an order under section 306 of the 2006 Act. This applies where it is "impracticable" to hold a meeting of a company. In this case, the quorum required by the Company's articles for general meetings is two members, present in person or by proxy. Although the articles state that one of those present must be Mr Smith, in practice Mr Butler must also be present, as they are the only two members of the Company. Thus Mr Butler's attendance at general meetings of the Company is necessary to make up the quorum and without his presence the meeting cannot conduct any business. He can, therefore, easily thwart the holding of a general meeting to consider a resolution for his removal by simply not turning up. He had indeed threatened to take that course. Accordingly, in my judgment, the judge was entitled, and bound, to find that it was "impracticable" to convene and hold a company meeting to consider a resolution for Mr Butler's removal. The jurisdictional requirement of section 306 was fulfilled.
  58. Section 306 goes on to provide that, when the court convenes a meeting under this section, it may make a direction that one member of the company present at the meeting, should be deemed to constitute a quorum. The judge's order contained such a direction, provided that the member was Mr Smith. The further question, therefore, is whether the judge's exercise of discretion to make an order under Section 306 on these terms can be set aside on appeal. It was, of course, the exercise of a discretionary judgment and this court would not interfere with such a judgment on appeal unless it was clearly wrong or some material factor was wrongly taken into account or (as the case may be) left out of account.
  59. The judge gave clear reasons for exercising his discretion in favour of Mr Smith. He held that the majority shareholder ought to be entitled to exercise his ordinary voting rights to appoint and remove directors. It was not a case where there were any class rights. It was a case where the will of majority shareholder was being thwarted by the refusal of the minority to attend meetings of the Company so as to render the meetings inquorate (see judgment, paragraph 111). The judge went on to give a number of other reasons. In particular, he held that Mr Butler was motivated by his concern to protect his position as managing director of the Company. He had neither chosen to investigate the cheque fraud nor put in motion any investigation of expense claims by Mr Smith until May 2011 even though Mr Smith had been making claims for expenses openly for a number of years (judgment, paragraph 112(1) and (2)).
  60. Mr Dougherty accepts that there are circumstances in which the court can, in its discretion, make an order under section 306 convening a meeting and directing a quorum of one. He further accepts that the fact that there are special quorum provisions in the Company's articles would not in itself be sufficient to prevent the court making an order under s 306: see, generally, Union Music Ltd v Watson [2003] 1BCLC 453 and Vectone Entertainment Holding Ltd v South Entertainment Ltd [2004] 2 BCLC 224.
  61. Mr Dougherty submits, however, that the judge should not have made an order convening a meeting of the Company with a quorum of one in this case. He submits that it was plain that Mr Butler had only taken steps to suspend Mr Smith in order to protect the Company's interests. His motive had been improperly characterised by the judge.
  62. We did not call on Mr Berragan to respond to these submissions. In my judgment, the judge's exercise of his discretion is unimpeachable in this court. The shareholders have a statutory right to remove a director by ordinary resolution under section 168 of the 2006 Act. Section 168 thus reflects the statutory policy that shareholders should be able to remove a director by ordinary resolution. Section 168 does not override provisions as to the convening or conduct of meetings in a company's articles of association. However, the statutory policy reflected in section 168 must, in my judgment, far outweigh the power which Mr Butler has to paralyse company meetings by staying away. The court is not disturbing the bargain in the articles between the parties as to the balance of power between the shareholders by ordering a meeting with a quorum of one. Only Mr Smith has the benefit of a right to be part of the quorum because of the specific requirement in the articles that he must be counted towards the quorum requirement. Mr Butler enjoys no similar privilege. For the court not to make an order under section 306 on Mr Smith's application would have created a right ad hoc in favour of the minority shareholder that was not part of the bargain between the shareholders.
  63. For these reasons, I would dismiss Mr Butler's appeal on this issue also.
  64. Disposal of this appeal

  65. I would, therefore, dismiss this appeal.
  66. I would also dismiss the application to adduce fresh evidence that was filed by Mr Butler shortly before the appeal was heard. Essentially that application was made in support of his case that it was in the Company's best interests that Mr Smith should be suspended and that it was contrary to the Company's interests that a meeting should be convened with a quorum of one to pass a resolution removing Mr Butler as a director. In the event, Mr Dougherty rightly did not pursue the application.
  67. Lord Justice Rimer:

  68. I have had the advantage of reading Arden LJ's judgment in draft. I respectfully agree with her reasons for upholding the judge's conclusions that Mr Butler had no authority as managing director to suspend Mr Smith from his role as chairman or to procure the Company to defend his proceedings. I also agree with Arden LJ's reasoning and conclusions on the two consequential issues. I add only that I should prefer not to express any general view as to a managing director's implied authority (if any) to commence or defend legal proceedings on behalf of the company of which he is such a director.
  69. I too would dismiss the appeal.
  70. Mr Justice Ryder:

  71. I have had the advantage of reading the judgment of Arden LJ.  I respectfully agree with her reasons and conclusions and I too would dismiss the appeal.


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