Meeting - Convening of meeting - Power of court to order meeting
Smith v Butler and another: Chancery Division, Leeds District Registry (Judge Behrens sitting as a judge of the High Court): 1 September 2011
The applicant was the holder of 68.5% of the shares in CH Ltd (the company) and was its chairman. The first respondent was the holder of the remaining 31.2% of the shares and was the company's managing director.
The other director of the company was H; he was also the group's financial director but did not hold any shares in the company. Under article 10.3 of the articles of association, no business could be transacted at a meeting of members unless a quorum was present. A quorum consisted of two persons one of whom had to be the applicant.
Similarly, under article 17.2, the quorum necessary for the business of the directors was also two, one of whom had to be the applicant. Pursuant to articles 10.3 and 17.2 of the articles therefore, if the first respondent or the applicant declined to attend there could be no valid meeting of members, and if the applicant declined to attend, there could be no valid meeting of directors. Between 2002 and 2005, the applicant was allegedly involved in what the respondents described as a cheque fraud involving two of the company's subsidiaries.
As a result of that fraud, substantial amounts of cash were diverted to the applicant. The cheque fraud came to light in 2009. However, the first respondent took no steps against the applicant at that time. It was further alleged that between January 2004 and June 2011, the applicant had wrongly used the company credit card for payment of approximately £78,000 in respect of expenses to which he was not entitled (the expenses claim).
Since at least the beginning of 2011, the applicant had expressed reservations about the way that the company was being run by the first respondent and H. Consequently, from about March 2011, he evinced an intention to use his powers as majority shareholder to appoint another person as chief executive officer, a course which the first respondent objected to. On 1 July, the applicant attended the offices of the company for the purpose of attending a board meeting. At that meeting, the first respondent purported to suspend the applicant and to exclude him from the company's premises. There was no board resolution authorising the suspension.
Following the suspension, the first respondent and H had conducted the business of and made decisions on behalf of the company without reference to the applicant. On 18 July, the applicant's solicitors requested that the company hold an extraordinary general meeting (EGM) to consider the removal of the first respondent and H as directors of the company. It had been made clear that the first respondent would not attend such a meeting so that it would be inquorate. On 19 July, the applicant commenced proceedings against the first respondent and the company, seeking declaratory relief as to the invalidity of the decision to suspend him. He further sought an order pursuant to section 306 of the Companies Act 2006 (the act), and for that purpose there should be a quorum of one.
Section 306 of the act provided that, on the application of a director of a company or a member of that company, the court had the power to order a meeting to be called, held and conducted in any manner the court thought if, for any reason it was impracticable to call a meeting of that company in a manner in which meetings of that company might be called or to conduct the meeting in the manner prescribed by the company's articles or the act. The applicant offered undertakings which could be incorporated as conditions of any EGM called pursuant to section 306 of the act.
The respondents submitted, inter alia, that such an order should not be made at all, or at least should be deferred until after the proceedings were concluded. In their submission, the case cried out for a speedy trial. The application would be allowed.
In the circumstances of the instant case, there should be an order under section 306 of the act authorising a quorum of one at a meeting for the purpose of the appointment of a new director or the removal of the first respondent. The case was one where 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 the majority shareholder was being thwarted by the refusal of the minority to attend meetings of the company so as to render the meetings inquorate.
Further, it was difficult to see why the cheque fraud should prevent the applicant from exercising his rights as a majority shareholder. The court could impose conditions and the applicant had offered undertakings which could be incorporated in any order and would be adequate to protect the first respondent's position as minority shareholder. Very similar considerations applied to the expenses claim.
Furthermore, there was no reason to defer the decision on the section 306 application pending a trial - whether speedy or otherwise. Postponement of such a decision would in effect give control of the company to the first respondent (see  -  of the judgment). Union Music Ltd v Watson  1 BCLC 453 applied; Vectone Entertainment Holding Ltd v South Entertainment Ltd  All ER (D) 52 (Apr) applied.
Neil Berragan (instructed by DLA Piper UK LLP, Manchester) for the applicant. George McPherson (instructed by Berg Legal, Manchester) for the first respondent. Charles Hollander QC (instructed by Pannone, Manchester) for the company.