Ross v Telford & Anor

Section 371 of the Companies Act 1985 provides a procedural remedy for impracticability in calling, holding or conducting a company meeting. It does not authorise the court to regulate another company’s affairs, alter substantive voting rights, or break a deadlock between equal shareholders. The power cannot be used to shift an agreed balance of control. Even where jurisdiction exists, the discretion to facilitate ratification of company litigation must be exercised in light of prior proceedings, beneficial interests and the funding consequences of the proposed order.

Following matrimonial and ancillary relief proceedings, Mr Ross caused Linkside Development Company Limited to bring proceedings against a bank concerning three cheques signed by Mrs Telford. The companies were deadlocked, with Mr Ross and Mrs Telford holding equal voting positions. Mr Ross applied under section 371 of the Companies Act 1985 for an order enabling a meeting to appoint a third director or representative who could procure ratification of Linkside’s action.

His Honour Judge Howarth granted substantive relief enabling Mr Ross to overcome Mrs Telford’s opposition. Mrs Telford appealed. The central issue was whether section 371 empowered the court to make an order which affected PLB’s affairs and broke an equal-shareholder deadlock, and whether the discretion had been wrongly exercised in any event.

1. Appeal allowed. The application was dismissed, with costs here and below.
2. Per Lord Justice Nourse, with Lord Justices Roch and Phillips agreeing, section 371 of the Companies Act 1985 is directed to procedural impracticability in calling, holding or conducting a company meeting. Its ancillary-direction power does not authorise the court to regulate the affairs of another company or to alter substantive voting rights. It has no application to board meetings and cannot be used to break a deadlock between two equal shareholders.
3. The decisions in Re Opera Photographic Ltd [1989] 1 WLR 634 and Re Sticky Fingers Restaurant Ltd [1991] BCC 754 did not support the wider proposition that section 371 could resolve an equal-shareholder deadlock. They concerned more limited uses of the section in contentious meeting circumstances. The principle was confirmed and applied from Harman v BML Group Ltd [1994] 1 WLR 893, where the Court of Appeal held that the section could not be invoked to override deliberately protected class rights.
4. In the alternative, even if jurisdiction had existed, the discretion was exercised on a wrong principle. Although there was no res judicata, the court was entitled and bound to consider that the subject matter of the bank action had already been investigated in the ancillary relief proceedings. That investigation undermined the assumption that the action was prima facie meritorious.
5. The order also failed adequately to account for the parties’ beneficial interests, the inevitable liquidation of the companies, and the risk that the action would be ratified and further costs incurred before the funding inquiry was resolved. Taken together, those matters made the order wrong in principle.

• Court of Appeal (Civil Division) — Appeal allowed unanimously. The respondent applicant’s application was dismissed, with costs here and below.
• High Court of Justice, Chancery Division — His Honour Judge Howarth ordered that Linkside could convene a shareholders’ meeting to consider appointing a third director and permitted representation for voting purposes, thereby enabling ratification of the bank action.