Schofield v Jones [2019] EWHC 803 (Ch)

“(a) Section 371 of the Companies Act 1985 is a procedural section intended to enable company business which needs to be conducted at a general meeting to be so conducted. A company should be allowed to get on with managing its affairs without being frustrated by the impracticability of calling or conducting a general meeting in the manner prescribed by the articles and the Act.” (b) Where there is a majority shareholder and no class rights attaching to a particular class of shares which the convening of a general meeting is designed to override, the court in exercising its discretion under s 371 will consider whether the company is in a position to manage its affairs properly and will take into account the ordinary right of the majority shareholder to remove or appoint a director in exercise of his majority voting power. (c) The fact that quorum provisions in the articles require two members’ attendance is not in itself sufficient to prevent the court making an order under s371 to break a deadlock in favour of a majority shareholder who is seeking a proper order, such as the appointment of a director, which he has the right to procure in ordinary circumstances. (d) Section 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 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. However, a quorum provision is not in itself sufficient to constitute such an agreement.”

“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 persons 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 judgement, 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.” jurisdictional requirement of section 306 was fulfilled.”

‘It cannot be right that Mr Mitchell’s quorum tactics be allowed to stop the company having its accounts, VAT difficulties, etc dealt with. It may be many months before the s459 petition is heard. On the other hand, it would not be right for Mr Wyman, by using s371 for the purposes of constituting an effective board, to be given the opportunity of harming Mr Mitchell, eg by causing him to be dismissed as a director, or by being excluded from any participation in the affairs of the company pending the outcome of the petition proceedings.’

‘51. 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 judgement, 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)). 52. 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] 1 BCLC 453 and Vectone Entertainment Holding Ltd v South Entertainment Ltd [2004] 2 BCLC 224. 53. 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. 54. 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 benefits 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. 55. For these reasons, I would dismiss Mr Butler’s appeal on this issue also.’

‘33. On that basis paragraph (2) can be discharged and it is unnecessary to decide whether it is appropriate for the court as an interim remedy to prevent the company from exercising its undoubted statutory right to remove a director by an ordinary resolution. We have been taken to the decision of Mervyn Davies J in Re Sticky Fingers 1992 BCLC 84, where the petitioner sought an order of the court under s.371 of the Companies Act 1985 convening a meeting of the company for the purpose of appointing his own director. The court granted that relief on the basis that there was to be an equal playing field and that no steps would be taken to remove the respondent to the petition, although the petitioner was in fact a majority shareholder. That was a very different situation. In essence it is contrary to principle to impose a director on a company. It is highly impractical so to do in any event where there are disputes between the directors or indeed, as here, allegations of improper conduct. Accordingly, the court would have to be extraordinarily cautious before imposing a director on a company by way of an interim remedy, but as I have said it is not necessary to decide that point.’