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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” 12.9.2011
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clear courses of action whatever the technical or legal
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