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Directors’ powers and duties

DIRECTORS’ POWERS AND DUTIES : EXTRAORDINARY GENERAL MEETINGS : LEGAL ADVICE AND FUNDING : MANAGING DIRECTORS : REMOVAL : RESOLUTIONS : SHAREHOLDERS’ RIGHTS : SUSPENSION : POWER OF MANAGING DIRECTOR TO SUSPEND MAJORITY SHAREHOLDER IN ABSENCE OF RESOLUTION OF THE BOARD : COMPANY FUNDING FOR DEFENCE : s.306 COMPANIES ACT 2006

A decision by a managing director to suspend the chairman of the company was unlawful where he had no express or implied authority to do so. There was also no implied delegated authority on the managing director to mount an active defence to the chairman’s proceedings seeking an order under the Companies Act 2006 s.306.

The claimant chairman (S) brought proceedings against the first defendant managing director (B) and the second defendant company (C) challenging the validity of a decision to suspend him and seeking an order under the Companies Act 2006 s.306 that a general meeting take place with a quorum of one. S was the majority shareholder of C. Under the articles 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 S. S had allegedly been involved in a cheque fraud and expenses fraud. S later became concerned about the way C was being run by B and another director (H) and he evinced an intention to use his powers as majority shareholder to appoint another person as chief executive officer. B objected to that course of action and instigated an investigation into S’s alleged fraud. At a subsequent board meeting, B and H purported to suspend S and signed a resolution of the board purporting to authorise the suspension. B and H then conducted the business of C without reference to S. S requested C to hold an EGM to consider B and H’s removal as directors of C, but B would not attend so that it would be inquorate. S sought an order under s.306 permitting him to pass a resolution which would have the effect of removing B as a director of C. S submitted that, in the absence of a valid resolution of the board, B had no power to suspend S or to instruct solicitors on behalf of C to defend the instant proceedings; alternatively it was inappropriate and/or a breach of fiduciary duty by B to permit C actively to defend the proceedings and to spend substantial sums of C’s money in so doing. B and C submitted that B had implied authority in his capacity as managing director of C to suspend S and instruct solicitors to defend the proceedings. They submitted that it was not an ordinary dispute between shareholders but was an employment dispute and the court should not make an order under s.306 pending a trial of the issues between the parties.

HELD: (1) There were no express provisions in B’s employment terms whereby any of the powers of the board were delegated to B. The suspension of the chairman was not a commercial decision and was not something which occurred in the day-to-day running of the company’s business. The powers of the managing director depended on the articles which seemed designed to protect S’s position as majority shareholder. They enabled him to ensure that the board could not pass a resolution dismissing him as chairman. It could not have been intended that that could be sidestepped by the implied delegated authority of the managing director. It was for the board and not the managing director to suspend the chairman. It followed that the decision to suspend S was unlawful (see paras 41, 92-95 of judgment). (2) The majority shareholder ought to be entitled to exercise his ordinary voting rights to appoint and remove directors, Union Music Ltd v Watson (2003) EWCA Civ 180, (2004) BCC 37 followed, Vectone Entertainment Holding Ltd v South Entertainment Ltd (2004) EWHC 744 (Ch), (2005) BCC 123 applied. It was not a case where there were any class rights. It was significant that B only chose to investigate S’s alleged fraud when S was threatening to appoint a CEO to the board and it was difficult to see why the alleged cheque fraud or the existence of an expense claim should prevent S from exercising his rights as majority shareholder. There was no reason to defer the decision pending a trial. The validity of the suspension had been decided and there was no need for a trial on any of the issues in the claim itself. Accordingly, there would be an order under s.306 authorising a quorum of one at a meeting for the purpose of the appointment of a new director or the removal of B (paras 111-113). (3) There was not an implied delegated authority on B to mount an active defence to S’s proceedings, Mitchell & Hobbs (UK) Ltd v Mill (1996) 2 BCLC 102 QBD applied. The question of whether there should be an EGM under s.306 was both in substance and in form a dispute between shareholders over who should control the company and it followed that company funds should not have been used for an active defence of the application, Company (No004502 of 1988) Ex p Johnson, Re (1991) BCC 234 Ch D (Companies Ct) applied (paras 117-123).

Lawtel: 12.09.2011