Alvona Developments Ltd. v The Manhattan Loft Corporation (AC) Ltd. & Anor [2005] EWHC 1567 (Ch)

[2005] EWHC 1567 (Ch)Case No CLAIM NO 3413 OF 2005
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 19/07/2005
Before
THE HONOURABLE MR JUSTICE PETER SMITH
Between
Alvona Developments LimitedClaimant(1) The Manhattan Loft Corporation (AC) LimitedDefendant(2) Powis Assets LimitedDefendant
Andrew Thompson (instructed by Ingram Winter Green) for ClaimantD W Mayall (instructed by Baskin Ross & Co) for Second DefendantHearing Hearing date: 6 th July 2005
Judgment

Peter Smith J :

[1]This is the judgment on hearing of an Application made by Part 8 Claim form issued on 24th May 2005 under section 371 of the Companies Act 1985 for an Order that a general meeting of the First Defendant company The Manhattan Loft Corporation (AC) Ltd (“The Company”) be held together with a direction that such meeting shall be valid provided it is attended by at least one member in person or by a proxy.[2]In addition there is an Application by the Claimant for summary judgment under Part 24 on that claim by Application issued on 29th June 2005 with the permission of the Court (Order of Etherton J 28th June 2005).[3]Prior to that Evans-Lombe J on 7th June 2005 had made an Order for expedition of the Part 8 claim.[4]Mr Thompson who appears for the Claimant acknowledged that in view of the evidence filed and absent an Order for cross examination and determination of disputed factual matters (as set out further in this judgment) it is not possible to hear the substantive application issued under the Part 8 claim form. However he contended before me that on the assumption for the purpose of the Application only that the facts of the relationship between the parties was that contented by the Second Defendant that the Claimant was in any event entitled to summary judgment even if those were the factual issues.[5]Accordingly the hearing before me was only in respect to the Part 24 Application.

BACKGROUND

[6]The Claimant Alvona Developments Ltd (“Alvona”) is a company incorporated under the laws of the Republic of Cyprus. It holds 70% of the issued share capital in the Company. The Second Defendant Powis Assets Ltd (“Powis”) is a company incorporated under the laws of the British Virgin Islands and holds the balance of the 30% shares in the Company.[7]Alvona is beneficially owned by Mario Laznik (“Mario”). He is a property developer. His affairs in England have been managed by his son Assaf Laznik (“Assaf”).[8]Powis is represented in this country by Jeff Shapiro (“Jeff”). It appears that he is the beneficial owner of Powis. He has a brother Jerome Shapiro (“Jerome”) a partner in the firm of WPF Glasner Gerber Shapiro Solicitors.

THE COMPANY

[9]The company was acquired by Alvona and Powis on 2nd June 2004 by acquiring the shares for £1,175,000 of which 70% was funded by a loan from National Westminster Bank PLC the balance being funded pro rata by Alvona and Powis. In addition to the securities over the company’s assets Mario provided a personal guarantee to the bank in the sum of £250,000.[10]The Company is carrying on the business of one venture namely a building project in London SE1. It will be apparently a successful development when it proceeds to completion. The project is managed by Nuhomes Ltd which is a company in which Jeff is beneficially interested. It is to be paid a fee of £49,000 for the management services. There is no complaint about Nuhomes or as to the management of the project. The dispute which has arisen is in respect of the composition of the board of the Company and the inability of the two respective camps to agree how to deal with an action brought by a former managing agent who was marketing the property, how to deal with the appointment of new agents Knight Frank who somewhat unusually require an advanced payment of approximately £100,000 for their fees. Alvona are content with this but Powis is not.[11]The current director (a sole director) is a Mr Pearlman an Accountant. In view of the present dispute he will only act on the joint instructions of the two camps. As the camps cannot agree those matters nor can they agree prospectively the appointment of solicitors to respond to the claim intimated and solicitors to act on the ultimate sale of the development the board is deadlocked at a vital stage.[12]The Bank is clearly concerned but is not apparently seeking to enforce the security on account of the dispute. That might well be because it regards itself as fully secured and regards the present dispute as being an internal matter which does not at this stage impact on its interest. Nevertheless disputes like this generally do have an unsettling effect on a Company’s bankers.[13]Jerome was a director at the time of the acquisition of the shares but apparently resigned on the 26th November 2004.

ORIGINAL AGREEMENT AS TO COMPOSITION OF BOARD

[14]Jerome acted on the acquisition of the shares. On 24th May 2004 an email was sent to Mario, Assaf and Jeff which suggested that at that stage there was an agreement that each camp would appoint one director with Alvona’s director to be Assaf and the other director either to be Mr Pearlman or some other appointee by Jeff. Somewhat surprisingly given the large size of the investment in to this single joint venture the relationship between the parties was never regulated by a written agreement.[15]Accordingly it is Alvona’s case that as the majority shareholder it has the power in effect to control the appointment to the board by virtue of the power of the shareholders to appoint and remove directors in general meeting. The present Application is designed to procure that result. It cannot procure it without the assistance of the Court because of the actions that have taken place.[16]First Alvona sought to requisition a meeting in March 2005 under section 368 of the Companys Act 1985. Jerome’s response was that he was not a director at the time the requisition served on him. It was accordingly re-served on Mr Pearlman who has ignored it. Alvona then exercised its rights under section 368 to convene an EGM itself. The proposed meeting was on the 14th June 2005 but it was in-quorate because Powis failed to attend. The articles (Article 6(A)) require two members for a quorum. It is clear that Powis will adopt the policy of “the empty chair” to ensure that no meeting of members can take place.[17]The Company remains deadlocked because the parties cannot agree matters which directors have to decide upon. Accordingly Alvona seeks(1) to call an EGM where the quorum will be one and(2) at that EGM to either remove Mr Pearlman and appoint further directors or to appoint directors alongside Mr Pearlman. The justification for this naturally is the fact that the Company belongs beneficially to them as regards 70%.[18]The policy of Powis is to do nothing. Nuhome is carrying on the management and it maintains a joint control at board level.[19]As I have said above the Company remains deadlocked and as I intimated in the course of the hearing the deadlock will continue if the present Application is not acceded to. Even if the present Application is acceded to Mr Mayall on behalf of Powis indicated that it would then seek an injunction (which of course is not before me) to prevent Alvona seeking to implement the power of appointing and removing directors pursuant to an Order of the Court. There may or may not be difficulties about whether such an injunction should be granted and if so on what terms. However it is likely in my view that faced with such an Application and providing any cross undertaking in damages fortified that the Court will maintain the status quo of joint interest through Mr Pearlman or joint appointees to the board because that is the situation which has appertained effectively since the Company was acquired in June 2004. It will then be upon the parties to agree how matters should continue. If they cannot agree then I am not convinced Court would award control to Alvona as opposed to Powis but would suggest that the parties invoke the powers to appoint receivers for example under the backcloth of a section 459 petition. The reality is it is up to the parties; they ought to be able to agree a modus vivendi until the disputes are resolved but if they cannot that will be their failure and the only way in which the dispute can then be policed in the interim is by the appointment of an impartial 3rd party. However such an Application is not before me and the views I express are merely tentative and should not be taken as expressing any concluded view if Powis made such an Application.[20]Powis is willing to agree a joint board representation. Alvona is willing to maintain a single board director on behalf of Powis but insists it should be enabled by the Court to exercise its rights by virtue of its 70% shareholding to procure the appointment of a majority of the board. It is said that the reason for the need for the majority is that the parties will not agree at board level. That demonstrates in my mind that Alvona intends in effect to impose its will on the Company at board level if it secures a majority appointment. The reality will be that Powis will have to agree or its representative will be overridden. In that eventuality the object would be to drive Powis if that is perceived by it to be unfair prejudice to present its own section 459 petition and seek injunctive relief if necessary. In that regard Alvona is prepared not to make any decisions at board level without giving Powis an opportunity to seek injunctive relief if it is advised that is appropriate. Nevertheless the intent behind the meeting is to change the effect of the agreement as contended for by Powis as set out in the paragraph below.

POWIS EVIDENCE

[21]Powis contends that it was orally agreed that the parties would have one director jointly appointed on the board. This is set out in the evidence of Jeff (paragraph 17) it is suggested by him that is was Mario’s idea. Jerome confirmed this (paragraph 8 of his witness statement). I find this agreement to be unlikely for two reasons. First, the original proposal was one representative of each on the board. That in itself would not prevent Alvona at a later stage exercising its majority powers and removing a director. Second, having made such a proposal I find it difficult to understand why Alvona would than agree to be locked in to one appointee who could not thereafter be removed unless Powis agreed. However it is not appropriate for me at this Part 24 stage to attempt to determine that dispute because as Mr Thompson has acknowledged it depends on oral testimony and cross examination.[22]It follows therefore that Powis contends there is an agreement in place that there should always be one jointly appointed director. Although this is not set out in the evidence it follows plainly from that in my view that that agreement necessarily involves restricting Alvona’s power to change that position by the exercise of it’s 70% shareholding at an EGM. That would be an implied term therefore that it would not use its voting powers so long as the agreement was in place and so as to prevent the continued operation of one single jointly agreed director. Such an implied term (at any rate of the Part 24 stage) is plainly necessary to provide business efficacy for the agreement. Without such a term the agreement as to joint shareholding is an illusion and dependant entirely on the whim of Alvona.[23]As I have said Mr Thompson accepted that for the Part 24 Application to succeed he must persuade me that it should be acceded to despite that alleged oral agreement.

BASIS OF APPLICATION

[24]Alvona seeks to envoke the Court powers under section 371 Companies Act 1985 which provides as follows:- “371 Power of court to order meeting(1) if for any reason it is impracticable to call a meeting of a company in any manner in which meetings of that company may be called, or to conduct the meeting in manner prescribed by the articles or this Act, the court may, either of its own motion or on the application – (a) of any director of the company, or (b) of any member of the company who would be entitled to vote at the meeting, order a meeting to be called, held and conducted in any manner the court thinks fit.(2) Where such an order is made, the court may give such ancillary or consequential directions as it thinks expedient; and these may include a direction that one member of the company present in person or by proxy be deemed to constitute a meeting.(3) A meeting called, held and conducted in accordance with an order under subsection (1) is deemed for all purposes a meeting of the company duly called, held and conducted.” (a) of any director of the company, or (b) of any member of the company who would be entitled to vote at the meeting, order a meeting to be called, held and conducted in any manner the court thinks fit.[25]Mr Thompson submits (and there is no dispute over this) that the purposes of section 371 is to provide a speedy procedural remedy to cure any technical obstacles to the proper management of a company.[26]It is accepted that the Courts powers under section 371 can be used to override quorum provisions contained in the articles of association or any agreements which affect the quorum of meetings otherwise than in the articles of association.[27]The difference between the parties is that Alvona has a right to invoke the procedure even if there was an agreement as alleged by Powis. It on the other hand contends that the Court should not sanction an exercise under section 371 which is designed to override an agreement of the type which Powis contends exists.[28]The resolution of this dispute involves the consideration of a number of authorities.[29]The first of those is Harman and an other v BNL Group Ltd [1994] 1WLR 893 C.A. In that case the company shareholding consisted of 190,000 B shares held by B and 310,000 A shares, 260,000 of which were held by H and M. Under an agreement entered into between the shareholders the two classes of shares ranked pari passu save in relation to pre-emption rights and a shareholder meeting could not have a quorum unless a B shareholder or proxy was present. A dispute arose between the two respective camps and H and M sought an order that a quorum of any meeting would be constituted by any two members of the company (whether or not a B shareholder or proxy). The judge at first instance made such an order. The Court of Appeal overturned that decision. There were extant proceedings under section 459 of the Companies Act 1985. Nevertheless the Court of Appeal declined to grant an order because to do so would override the class rights of B which were entrenched by virtue of the agreement. The relevant part of that judgment is at page 898:- “For present purposes I do not regard it as the function of the court to intervene in these sort of proceedings by requiring various cross undertakings to achieve the conduct of the business of the company on sensible terms. That is for the parties’ advisers to achieve. It is not for the court to make a new shareholders’ agreement between the parties and impose it on them. Beyond that, however, I am of the view that the judge has not given sufficient weight to the situation of the section 459 petition and the allegations there. He has misdirected himself. Much more, it is not right, in my view, to invoke section 371 to override class rights attached to a class of shares which have been deliberately – in this case by the shareholders’ agreement – imposed for the protection of the holders of those shares, although they are a minority. It is not the case that the overriding position is that the majority shareholders must prevail on everything. Class rights have to be respected and I regard the right of Mr Blumenthal, as the holder of the B shares, to be present in the quorum as a class right for his protection which is not to be overridden by this machinery. I would therefore allow this appeal.”[30]It is clear from that judgment that the Court of Appeal acknowledged that the power under section 371 was sometimes not capable of being exercised. It cannot be regarded as necessarily being merely a matter of regulating defects in the machinery of company meetings.[31]The section was further considered in the Court of Appeal in Ross v Telford [1998] 1 BCLC 82. In that case a husband and wife were the directors of two companies. They were also equal shareholders in one of the companies. The quorum for the board and general meetings of both companies was two with the result that both companies were potentially deadlocked at both board and general meeting levels. An acrimonious divorce and ancillary relief proceedings took place between the husband and wife with the husband claiming that the wife fraudulently amassed undisclosed assets at the expense of one of the companies L Ltd and he brought proceedings in the name of L Ltd against amongst others the companies’ bank claiming that the bank was not entitled to debit L’s account with 3 cheques totalling £100,000 drawn by the wife in favour of a supplier. The husband applied to court for an order under section 371 requiring a meeting of L Ltd to be called in all that L’s actions against the bank could be ratified. The judge at first instance ordered that L Ltd on the husbands requisition could convene a meeting of its shareholders for the purpose of considering voting on a resolution for the appointment of representative of the husband’s solicitors as a third director of the company for one year and that a representative of the husband’s solicitor could attend that meeting and vote. The judge therefore overrode the deadlocking by imposing on the shareholders a power on the part of one of them to impose a third party who would vote with the husband at board level.[32]The wife appealed that order. The Court of Appeal allowed the appeal determining that section 371 was not an appropriate vehicle for resolving deadlock between two equal shareholders since section 371 did not empower the company to break a deadlock at either board or general meetings and in fact had nothing to do with board meetings. Section 371 was it is said a procedural section and was not designed to effect substantive voting rights or to shift the balance of power between shareholders by permitting a 50% shareholder to override the wishes of the other 50% shareholder where they have agreed that the power would be shared equally and where a potential deadlock was a matter which must be taken to have been agreed on with the consent of protection for each of them.[33]The key part of the judgment is that of Nourse LJ at page 87 as follows:- “The primary effect of the order made by the judge in this case was to regulate the affairs of PLB by authorising a representative of Mr Ross’s solicitors to be appointed to represent that company at a general meeting of Linkside. Such an appointment would normally be made at a board meeting of PLB, but whether it was made there or in general meeting the effect of the order was to break the deadlock in PLB. Mr Lander, for Mrs Telford, does not base any procedural objection on the fact that PLB is not a party to these proceedings but he does object to the order as a matter of substance. He says that s 371 does not empower the court to break a deadlock at either a board or general meeting of a company. Indeed, it has nothing to do with board meetings. As for general meetings, he says that the two decisions relied on by Mr Sterling go no further than to show that the court can make orders so as to prevent a minority shareholder from using quorum tactics to stop a majority shareholder from exercising the voting rights attached to his shares. It does not at all follow that the court can make an order so as to permit a 50% shareholder to override the wishes of the other 50% shareholder. In support of his submissions Mr Lander has relied on what he would call the principle of the thing, which is that s 371 is a procedural section not designed to affect substantive voting rights or to shift the balance of power between shareholders in a case where the potential deadlock is something which must be taken to have been agreed on with the consent and for the protection of each of them. Mr Lander also relies on the decision of this court in Harman v BML Group Ltd [1994] 2 BCLC 674, [1994] 1 WLR 893. In that case the leading judgment was given by Dillon LJ, with whom Leggatt and Henry LJJ agreed. There some shareholders were seeking to obtain an order under s 371 which would have had the effect of overriding the class rights of another shareholder. Dillon LJ pointed out ([1994] 2 BCLC 674 at 678, [1994] 1 WLR 893 at 896) that it was entirely novel to seek to use the machinery of convening a meeting under the section to override class rights. In the decisive passage at the end of the judgment, he said ([1994] 2 BCLC 674 at 679, [1994] 1 WLR 893 at 898) that it was not right to invoke the section to override class rights attached to a class of shares which had been deliberately imposed for the protection of the holders of those shares although they were a minority.”[34]It will be seen that Mr Lander counsel for the wife submitted that where there was an agreement that power should be shared equally and when the potential deadlock was something which must be taken to be agreed upon section 371 could not be used to change that. He also and the key word in my view is “also” relied upon the decision of Harman which as I have said was a case dealing with class rights.[35]Mr Lander’s submissions were accepted. The decision was not based on class rights because there was only one class of shares and each shareholder had 50% of the shares in that class. The decision of the Court of Appeal was based on an agreement between the shareholders as to 50-50 re-presentation which the Court of Appeal decided could not be overturned by the use of section 371.[36]The section was further considered by Mr Mann QC (as he then was) (sitting as a deputy judge of the High Court) Re Woven Rugs [2002] 1 BCLC 326. In that case once again it was not suggested that there were shares of different class but that there was an express or implied agreement in the nature of a shareholders agreement between the parties to the effect that each side should have one director on the board. The contentions are summarised in paragraph 16 of the judgment.[37]Miss Roberts who appeared for the applicant accepted that if such an agreement was established it would be wrong to order a shareholders meeting at which it was intended to propose a resolution to contravene the agreement referring to the Harman case. It was therefore necessary for Mr Mann to decide whether or not such an agreement was made. Having considered the evidence his decision was that there was no such agreement and he accordingly made an order under section 371. Before doing that he summarised the law in paragraph 14 of his judgment as follows:- “There is little dispute as to the relevant law in this case. The parties are in essence agreed as to the principles to be applied. The main principles are as follows:(a) Section 371 gives the court a discretion. An applicant for an order is not entitled to an order as of right; nor is the respondent entitled to resist the order as of right. Re El Sombrero Ltd [1958] 3 All ER 1, [1958] Ch 900; Re H R Paul & Son Ltd (1973) 118 Sol Jo 166.(b) The effect of s 303 of the Companies Act 1985 is to give a majority shareholder a right to remove and appoint directors. That has to be borne in mind in considering the exercise of the discretion in this case. Re Opera Photographic Ltd [1989] BCLC 763,[1989] 1 WLR 634.(c) The quorum provisions in the articles cannot be regarded as conferring on a member some form of veto in relation to company business. Re Opera Photographic Ltd [1989] BCLC 763 at 765, [1989] 1 WLR 634 at 637.(d) The existence of a concurrent s 459 petition is not necessarily a bar to the grant of an order under s 371 (Re Whitchurch Insurance Consultants Ltd [1993] BCLC 1359); nor is the fact that the results of the proposed meeting would be likely to generate further such litigation (Re Opera Photographic Ltd).(e) If there is an arrangement which effectively gives a right in the nature of a class right to the respondent shareholder, then the court will not make an order if the result of that order would be to infringe that class right. Harman v BML Group Ltd [1994] 2 BCLC 674, [1994] 1 WLR 893.”[38]Part of the debate before me revolved around the consideration of what sub paragraph (e) meant. Mr Thompson contended that it was only supposed to cover class rights which were entrenched. I do not see that is the case for three reasons. First, it does not limit itself to class rights it talks of “a right in the nature of a class right”. Second, it would have meant that the case proceeded on a false premise. If the agreed understanding of the law was as suggested as said by Mr Thompson there would have been no debate by the judge analysing whether or not there was any agreement as contended by the respondent. No such agreement could have any impact on this analysis on the exercise of the judicial discretion under section 371. Third it flies in the face of the concession make by Miss Roberts in paragraph 17 that such an agreement would have the impact that Mr Mayall contends would apply in the present case.[39]A third opportunity for consideration of section 371 occurred in the Court of Appeal decision in Union Music Ltd & anr v Watson & anr [2003] 1 BCLC 453.[40]It is once again important to look at the facts upon which the decision was based. The shareholding in the relevant company was split 51% as regards the First Claimant and 49% by the First Defendant. The parties entered into a shareholders agreement regulating the relationship between each other. The major relevant clause for the purpose of the decision was clause 6.1.18 which provided:- “[the following is prohibited without the prior written consent of both shareholders] holding any meeting of shareholders or purport to transact any business at any such meeting unless there shall be present duly authorised representatives or proxies for each of the shareholders. ”[41]The proposed invocation of section 371 by the Claimant in the case was to overcome the fact that W would not attend any meeting. It would therefore necessarily involve overriding the effect of clause 6.18.1. The judge at first instance declined to make an order determining that he was bound by the result of the Harman and Ross decisions not to make an order which would overturn 6.18.1 of the shareholders agreement. The Court of Appeal overturned that decision.[42]It is necessary to set out in detail the reasoning of the Court of Appeal because of the parties contention before me as to the effect of the judgment. The main judgment was that of Peter Gibson LJ. It appears to be an extempore judgment and therefore might not necessarily appear as clear as it would have been if the judgment had been reserved. The key parts of his judgment are as follows:- “ [32] I venture to make a few preliminary observations about s 371. It is a procedural section plainly intended to enable company business which needs to be conducted at a general meeting of the company to be so conducted. No doubt the thinking behind it is that a company should be allowed to get on with managing its affairs, and that should not be frustrated by the impracticability of calling or conducting a general meeting in the manner prescribed by the articles and the Act. [33] One situation Parliament envisaged where s 371 might be utilised can be seen from s 371(2), allowing the court to direct that a meeting attended by only one member should suffice. That suggests that Parliament had in mind a situation where there was a quorum provision requiring the attendance of more than one member, such as is contained in reg 40 of Table A. Save for the condition of impracticability, no other express conditions are imposed on the ability of a director or member to call for a meeting, or on the ability of the court to exercise its power. But the power confers on the court a discretion and, like all discretions, it must be exercised properly having regard to the relevant circumstances. The authorities provide examples of cases where the power has been exercised and where it has not. The fact that there are quorum provisions in Table A requiring two members’ attendance will not in itself be sufficient to prevent the court making an order under s 371, where the applicant is seeking a proper order such as the appointment of a director, something which a majority shareholder would have the right to procure in ordinary circumstances. [34] In this context it is to be borne in mind that by s 14(1) of the Act, the memorandum and articles bind the company and its members to the same extent as if they respectively had been signed and sealed by each member, and contained covenants on the part of each member to observe all the provisions of the memorandum and articles. For my part, I have difficulty in seeing how an agreement constituted by the statutory deeming provision is to be treated in any way differently from an express agreement, such as a shareholders’ agreement, containing a quorum provision. Both have effect as contractual agreements as between the shareholders. [35] The first case, Re El Sombrero Ltd [1958] 3 All ER 1, [1958] Ch 900, like Re Opera Photographic Ltd [1989] BCLC 763, [1989] 1 WLR 634, establishes that the contract between the members of a company as created by the articles can be overridden by the court ordering a meeting under s 371, and that a right in a member to choose whether or not to attend a meeting does not amount to a right of veto, or to a right to frustrate the wishes of the majority. In Re Opera Photographic Ltd [1989] BCLC 763 at 764, [1989] 1 WLR 634 at 636 Morritt J referred to the decision of Brightman J in Re H R Paul & Son Ltd (1974) 118 Sol Jo 166. Brightman J is reported as saying:
‘The jurisdiction conferred by the section was discretionary and his Lordship was therefore not bound to make an order but to refuse B. Ltd’s application would deprive the majority shareholder of the right to alter the articles of association, and confer on the minority a right of veto not commensurate with their shareholding. His Lordship did not accept that the quorum provisions should be regarded as a right vested in the minority to frustrate the wishes of the majority and he would therefore grant the relief sought.’ [36] Morritt J continued ([1989] BCLC 763 at 765, [1989] 1 WLR 634 at 636): ‘The plain fact of this matter is that deadlock exists between the two individuals which has to be resolved one way or another. It is either capable of being resolved by ordering a meeting, at which no doubt Mr Martin [a minority holder and director] will be removed, and which will then no doubt result either in him exercising the pre-emption rights under the articles of selling his shares, or presenting a petition for the winding up of the company, or presenting a petition under s 459 [of the 1985 Act] based on unfair prejudice to him. If no order is made the deadlock will continue because no meetings can be conducted which are going effectively to manage or procure the management of this company, and if that persists for any length of time then no doubt one or other of the individuals will again be presenting a petition based on that deadlock in order to provide some form of resolution. In the circumstances I do not think that the distinction which counsel for the second respondent seeks to draw is a valid one. The point still remains that the applicant, as the 51% shareholder, has the statutory right under the Companies Act 1985 to remove Mr Martin as a director. As Brightman J’s decision in Re H R Paul & Son Ltd shows, the quorum provisions cannot be regarded as conferring upon the second respondent some form of veto as being his entitlement. If he is, as no doubt he will be, removed if I make the order sought it may then well be that further proceedings will have to be undertaken by one side or another to procure the purchase of the other’s shares, but that seems to me to be inevitable in any event. It would be in those proceedings that the wrongfulness or otherwise of the conduct of either of the individuals would have to be determined in order to decide what order to make and what form the relief should be. In those circumstances I see no reason not to exercise the discretion which it is accepted exists in this case and I will accordingly make the order sought.’ [37] Harman v BML Group Ltd [1994] 2 BCLC 674, [1994] 1 WLR 893 turned on the fact that there was a class right attached to a class of shares, which the convening of a general meeting was designed to override. That, this court held, could not be done. I add the comment that that is hardly surprising in view of the elaborate provisions in Ch II of Pt V of the Act prescribing the procedures and conditions for varying any class rights. The company in question had a share capital consisting of 290,000 A shares and 210,000 B shares. There were four A shareholders but only one B shareholder, a Mr Blumenthal. A shareholders’ agreement provided that Mr Blumenthal should be entitled to remain in office as director so long as he, or any family company of his, should be the owner of the B shares, and that a general meeting should be inquorate unless the B shareholder, or his proxy or representative, attended. [38] Dillon LJ, giving a judgment with which Leggatt and Henry LJJ agreed, said that the provision requiring the B shareholder to be present was essential to entrench Mr Blumenthal’s right to remain a director and was a special provision to secure his directorship. Dillon LJ also said ([1994] 2 BCLC 674 at 680, [1994] 1 WLR 893 at 898): ‘Class rights have to be respected and I regard the right of Mr Blumenthal, as the holder of the B shares, to be present in the quorum as a class right for his protection which is not to be overridden by this [the s 371] machinery.’
He made it clear that it was not for the court to make a new shareholders’ agreement and impose it on the parties. [39] The present case is not one with entrenched or any class rights, as it seems to me. There is nothing in the agreement or in the memorandum and articles of Arias which confers any right on Mr Watson as shareholder which is not also conferred on Union as shareholder. There are simply no classes of shares: there is but a single class. I would add at this point that we were taken by Mr Freedman to Cumbrian Newspapers Group Ltd v Cumberland & Westmorland Herald Newspaper & Printing Co Ltd [1986] BCLC 286, [1987] Ch 1 for the proposition that a class right could exist even though there was only one type of share in issue and the rights of the shareholders were the same. In my judgment, nothing that was said by Scott J in the Cumbrian case supports so broad, and indeed astonishing, a proposition. There is, in my view, no assistance from the Cumbrian case towards resolving the dispute in the present case. [40] Ross v Telford [1998] 1 BCLC 82 was a case where a husband and wife were the only two directors of each of two companies. They were equal shareholders of one of the companies. The shareholders of the second company were the husband and the first company. In an acrimonious divorce the district judge had directed that the net proceeds arising out of the liquidation or sale of either company should be divided equally. An action had been brought by the second company against a bank, alleging that the wife had forged the husband’s signature on cheques. The husband wanted a meeting to be called under s 371 to ratify the second company’s action, with a nominee chosen by him representing the first company shareholder. Thus, the deadlock would have been broken if the order had been made. Judge Howarth, at first instance, made an order under s 371, but on appeal this court reversed his decision. Nourse LJ, with whom Roch and Phillips LJJ agreed, said that neither the El Sombrero case nor the Opera Photographic case was authority for the proposition that s 371 enabled the court to break a deadlock between two equal shareholders, and that that was confirmed by the Harman decision. In so holding, this court accepted submissions from the wife that the court cannot make an order under the section so as to permit a 50% shareholder to override the wishes of the other 50% shareholder, that s 371 was a procedural section not designed to affect substantive voting rights or to shift the balance of power between shareholders in a case where they had agreed that power should be shared equally, and where the potential deadlock is something which must be taken to have been agreed for the protection of each shareholder. [41] In the present case the shareholdings were not equal. The agreement was not designed to ensure that power should be shared equally. Initially, as I have noted, Mr and Mrs Watson, who might be expected to have been in one camp, were the majority on the board, with the majority shareholder left as the minority on the board. The deadlock happens to have been caused by Mrs Watson ceasing to be a director. Union, as the majority shareholder, could be expected to be able to remove or appoint a director. I do not agree with the judge’s suggestion that the parties had contracted for a situation of deadlock. What the parties had contracted for, I accept, was that if Mr Watson chose not to attend or be represented at a general meeting, then there could be no general meeting. [42] Clause 6.1.18, however, seems to me more in the nature of a quorum provision than a provision for a class right, which it plainly was not, or a substantive right. Thus, the present case, as it seems to me, is one which is distinguishable from both the Harman and the Ross cases. The position is similar to that in the Opera Photographic case. [43] For completeness I should also mention that we were taken by Mr Freedman to a further case, Re Woven Rugs Ltd [2002] 1 BCLC 324, a decision of Mr Anthony Mann QC on 3 December 2001. In that case there was little dispute as to the relevant law, and the parties were agreed as to the principles to be applied (see [2002] 1 BCLC 324 at 328–329). Those principles included:
‘(e) If there is an arrangement which effectively gives a right in the nature of a class right to the respondent shareholder, then the court will not make an order if the result of that order would be to infringe that class right.’
Harman is given as the authority for that. [44] Mr Freedman also referred us to the fact that the majority shareholder in that case accepted that if, as had been contended by one side, there was an agreement in the nature of a shareholders’ agreement between the parties to the effect that each side should have one director on the board, and that if such an agreement was established, it would be wrong to order a shareholders’ meeting at which it was intended to propose a resolution which contravened that agreement. Thus, the points for which that case was cited to us were conceded and, as I have noted, it related to rights in the nature of a class right. For the reasons I have already given, I cannot see that any right in the nature of a class right is involved in the present case. [45] I conclude that the judge was wrong in thinking, as he appears to have done, that Harman and Ross constrained him not to exercise the power under s 371 in this case. The judge also treated the agreement as containing a provision which would be contravened if the judge were to order a meeting to be held in accordance with s 371. There would be, of course, no contravention if the meeting were called and Mr Watson chose to attend the meeting. However, realistically, I acknowledge that it may well be that Mr Watson would choose to abstain from attending the meeting, as indicated in his solicitor’s witness statement. The judge felt that he could not in the circumstances exercise his discretion to cause not only a meeting to be held, but business to be conducted. 46] There is no doubt that if, as one would expect, Union exercises its voting rights at a meeting not attended by Mr Watson or his proxy, it would be doing so in contravention of cl 6.1.18. For the reasons which I have already given, I do not see that as being an insuperable obstacle in the way of the court making an order under s 371. The court should consider whether the company is in a position to manage its affairs properly. It ought also to take into account the ordinary right of a majority shareholder to remove or appoint a director in exercise of his majority voting [power. A meeting would be limited to the single act of enabling the appointment of a new director to be considered and voted on. Taking the view that I do that cl 6.1.18 is in the nature of a quorum provision rather than a provision confirming a substantive right, it seems to me that the judge was wrong to rely on that provision to refuse to order the meeting.”

[36] Morritt J continued ([1989] BCLC 763 at 765, [1989] 1 WLR 634 at 636):

[43]At paragraph 33 it confirms that the quorum provisions of table A are not “in itself” (sic) sufficient to prevent the court making an order under section 371. This is despite the fact that the articles constitute a contract it being observed in paragraph 34 that those articles can have no different treatment from an express provision containing a quorum provision.[44]In paragraph 35 it is reiterated that the articles can be overridden under section 371 and the right of a member to choose not to attend a meeting does not amount to a right to veto or a right to frustrate the wishes of a majority. As is shown by the Opera case [1989] BCLC 763 the court on the facts were able to resolve the deadlock by a meeting under section 371 as an alternative to the presentation of a petition under section 459 Companies Act 1985. Morritt J (as he then was) plainly considered it appropriate on that case to make an order to break the deadlock. A desire to break the deadlock whilst commendable is not of itself a justification for making an order under section 371 as the Ross case demonstrates.[45]In paragraph 37 of the judgment in Union Music referred to above Peter Gibson LJ referred to the Harman decision and reiterated that it was a decision that applied to class rights. However significantly in paragraph 38 he said that it was clear in his mind that Dillon LJ who gave the judgment in the Harman case that it was “not for the court to make a new shareholders agreement and impose it on the parties”.[46]In paragraph 39 he rejected the argument that there was any class right issue in the case before him. He also rejected the argument that there could be a class right issue even though there was only one type of share in issue and the rights of the shareholders were the same. I observe that in the case before me it was not suggested that there were any class right issues either.[47]In paragraph 40 he referred to the Ross case and in the course of that paragraph he says as set out above that section 371 was a procedural section “not designed to effect substantive voting rights or to shift the balance of power between shareholders in a case where they had agreed that power should be shared equally, and where the potential deadlock is something which must be taken to have been agreed for the protection of each shareholder”.[48]He rejected the submissions that the effect of clause 6.1.18 was to create a deadlock. He determined that it was merely a procedural restriction as regards the attendance at the meeting. In paragraph 44 significantly he said this:- “ [clause 6.1.18] [is not a class right] or a substantive right ”. Thus he distinguished the Harman and Ross cases. Accordingly it seems to me that he is suggesting that section 371 cannot be used to overturn class rights or “substantive rights” (whatever that might mean).[49]In paragraph 43 he referred to the Woven Rugs decision without criticism of that decision. He observed in paragraph 44 that the case had been cited by Mr Freedman QC for reliance upon an agreement to the effect that each should have one director on the board. In so referring to the submission he said this “thus, the points for which that case was cited to were conceded and as I have noted related to rights in the nature of a class right. For the reasons I have already given I cannot see that any right in the nature of a class right is involved in the present case”.[50]It is this crucial paragraph which was the subject matter of substantial debate before me. Mr Thompson submits that in reality Peter Gibson LJ is not intending for there to be a difference between class rights and rights in the nature of a class right. He submits that there is clearly only the power to prevent intervention when a class right is infringed. That is he submits why Peter Gibson LJ refers to the point as having been conceded.[51]Mr Mayall contends however that paragraph 42 of the judgment plainly considered something other than class rights but in addition considered substantive rights. In addition of course he relies upon the Woven Rugs case which was not a class right case and the Ross case which was also not a class rights case. In both those decisions the courts considered that they could (and in one of them did) decline to exercise section 371 jurisdiction if the effect would be to override such an agreement. Mr Thompson was constrained to concede that there was something more than a class rights issue but submitted that the agreement contended for by the Respondents in this case was not a substantive right which affected the voting rights.[52]I have difficulty with that submission. In the Ross case the effect of the deadlock agreement was to prevent any voting which would seek to overturn the deadlock. In the Woven Rugs decision the fetter appeared only to apply in respect of any attempt to use its shareholding to change the rights to appoint their own directors to the board. In the present case it is not contended by the Respondent that the fetter is anything other than any action taken by Alvona to use its shareholding to break the joint directorship.[53]Buxton LJ followed the reasoning of Peter Gibson LJ see paragraphs 54 and 56 of his judgment.[54]Whilst I accept that paragraph 44 of Peter Gibson LJ’s judgment is a little difficult to follow because it refers to class rights when the Woven Rugs case was not a class right case I assume that he is using the phrase “in the nature of a class right” as an alternative to “substantive right” referred to in paragraph 42 of his judgment. If that is correct the paragraph makes sense.[55]It is not appropriate for me to decide beyond the facts of this case whether or not the agreement contended for is or is not a substantive right for the purposes of section 371. That must be decided on a case by case basis.[56]I am nevertheless firmly of the view that it is impossible to distinguish the agreement contended for by Powis from the one contended for and upheld to create deadlock in the Ross case. The purpose of the agreement was to ensure that there would be one joint director. I do not see that is any different from the result of the Ross case. As regards that right it was plainly intended that the right could not be taken away except by agreement i.e. a deadlock would arise if a dispute arose over the appointment or removal of that joint director.[57]I therefore conclude that it would not be right at the Part 24 stage on the assumption that the agreement is as contended by Powis to make an order under section 371.[58]I take on board Mr Thompson’s submission that this kind of case has an impact on applications under section 371. The section was plainly intended to be a procedure to be invoked summarily (and thus speedily). Nevertheless that apparently simplified procedure has been overturned by the application of class rights and other matters in my view by the courts. Whilst this might involve arguments that were capable of being ventilated under a section 459 petition it is clear that the courts have allowed arguments that could be used under section 459 petition to be deployed on a section 371 application. One can see that clearly for example form Opera and Harman most clearly.[59]Equally in refusing to make an order under section 371 it seems to me that it is still open to either party if it believes that the other party is behaving in a way which unfairly prejudices its interests to present a petition under section 459. Mr Thompson submitted that as a majority shareholder Alvona would not be in a position to do that. However the authorities Re Legal Costs Negotiated Ltd [1999] BCC 547 and Re Baltic Real Estate No 2 [1993] BCLC 503 show that whilst that is usually the case it is not an absolute principle. If Powis is acting in a way which unfairly prejudices Alvona as regard its majority shareholder i.e. by asserting an agreement which does not exist or otherwise blocking Alvona in its perceived legitimate rights as the majority shareholder I do not see why a 459 petition should not lie. Even if I am not right in that it would be able to issue a petition for just and winding up. This is a classic quasi partnership I would have thought for the purpose of a venture namely the development and sale of the property. That is reinforced in my view by the fact that Mr Thompson accepted that it would be envisaged that the Company would be liquidated when the development was completed.[60]In case this is considered elsewhere I should say that if I had been in the position to make an order under section 371 I would have required Alvona to undertake that it would not exercise the power so as to create a majority on the board. However that does not arise because I am of the opinion no application should be made under section 371.[61]I am very grateful for the very determined and comprehensive submissions put forward by both counsel and their careful analysis of the Union case which I found particularly helpful.[62]I should also say of course that I am not making any determination other than that the Alvona Part 24 application fails. It is still open to it to seek to establish that there is no agreement as contended by Powis but that is for another day.[63]Accordingly I decline to make an order on the Application of Alvona and dismiss it.