Jones v Jones & Ors

In a quasi-partnership company, the articles may be qualified by an understanding that equal participants alone will determine management. Where it is seriously arguable that a third director’s vote breached that understanding, a resolution passed by that vote may lack valid authority and may justify interim protection under Companies Act 1985.

The rule against using company money in shareholders’ disputes applies to the company’s participation in unfair-prejudice proceedings. It does not ordinarily prevent a duly authorised corporate claim for breach of duty, unless the claim is in substance a shareholders’ dispute or is pursued for an improper shareholder purpose. A corporate claim is not thereby converted into a derivative action.

Two brothers each held half the shares in a quasi-partnership company. After their relationship broke down, the company, acting through the brother and his wife as directors, dismissed the appellant and began a Chancery action alleging breaches of fiduciary duty. The appellant then presented an unfair-prejudice petition under Companies Act 1985, section 459.

Pumfrey J refused interim relief restraining the company from funding or pursuing the Chancery action, and did not require the controlling brother to give a personal cross-undertaking in damages for orders excluding the appellant from management. The appellant appealed.

The central issues were whether the wife’s vote could validly authorise or ratify the corporate action, whether company funds could be used for that action, and what interim protection was appropriate pending trial.

Decision

1. The appeal was allowed unanimously. Lady Justice Arden gave the reasons, with whom Mr Justice Douglas Brown and Lord Justice Rix agreed. The appellant had raised a serious issue for trial that the company’s quasi-partnership arrangements prevented the wife from determining disagreements between the two equal participants by her vote as director.

2. If that contention succeeded, the resolution ratifying the Chancery action lacked valid authority. At an interim stage, disputed facts about the parties’ understanding could not be resolved. The court rejected the suggestion that a notional independent board could replace the requirement for a valid board resolution under the company’s constitution, including the understandings which could qualify that constitution in a quasi-partnership.

3. The balance of convenience favoured restraining the company from pursuing or incurring further professional costs in the Chancery action until judgment on the unfair-prejudice petition. Relevant considerations included uncertain recovery from the controlling brother, unmonitored allocation of common litigation costs, the appellant’s cross-undertaking, the likelihood of an overall settlement, and the tactical advantage obtained by funding one side of the shareholders’ dispute from company resources. The restraint did not prevent defences, counterclaims, a cross-petition, or a properly constituted derivative action.

4. The court rejected the wider submission that the general rule against expenditure of company money on shareholders’ disputes barred every corporate claim connected with such a dispute. The rule stated in Pickering v Stephenson and Re Crossmore Electrical and Civil Engineering Ltd applied to company participation in section 459 proceedings, but not to a duly authorised claim belonging to the company merely because the same facts were relevant to a shareholders’ dispute. Halle v Trax B W Ltd, [2000] BCC 1020, concerned a derivative action and did not govern a corporate action.

5. Pumfrey J had therefore erred by not addressing the narrower submission, although he was right in result to reject the wider submission. Since the authority for the corporate claim might prove invalid, the controlling brother should also continue to provide a personal cross-undertaking in damages for the orders excluding the appellant from the company’s premises and management.

• Court of Appeal (Civil Division) Allowed the appeal unanimously and granted interim protection restraining the company from pursuing the Chancery action pending determination of the unfair-prejudice proceedings.
• High Court of Justice, Chancery Division (Pumfrey J) On 26 October 2001 dismissed the application to restrain the company from funding and pursuing the Chancery action, and did not continue the controlling brother’s personal cross-undertaking in damages.