Union Music Ltd. & Anor v Watson & Anor

Section 371 of the Companies Act 1985 gives the court a discretionary procedural power to enable company business to proceed where a meeting is impracticable in the prescribed manner.

A quorum provision requiring two members does not, without more, give a minority shareholder a veto. The court may order a meeting attended by one member where the shareholdings are unequal and the proposed act is one which the majority would ordinarily be entitled to procure. The power does not extend to overriding an entrenched class right or other substantive right. The availability of derivative proceedings or a section 459 petition does not make section 371 inappropriate.

Union Music Limited held 51 per cent of Arias Limited's shares and Russell Watson held 49 per cent. The shares formed a single class. A shareholders' agreement required both shareholders, or their representatives, to attend any general meeting at which business was transacted.

Following the resignation of Mrs Watson as a director, the board was deadlocked. Mr Watson indicated that he would not attend a general meeting, thereby preventing a quorum. Union sought an order under section 371 of the Companies Act 1985 for a meeting to consider appointing an additional director and, in related proceedings, ratifying the main action.

The High Court refused the section 371 order and dismissed the related Part 8 proceedings as an abuse of process. The central issues were whether the quorum arrangement prevented section 371 relief and whether the separate Part 8 proceedings were abusive.

The Court of Appeal unanimously allowed the appeal on the section 371 application. It ordered that a meeting be called to consider and vote on the appointment of a further director, even if only Union attended. Permission to appeal in the Part 8 proceedings was refused, subject to costs.

1. Nature and scope of section 371. Section 371 of the Companies Act 1985 is a procedural provision intended to enable company business requiring a general meeting to proceed. The court's power is discretionary, but the discretion must be exercised properly having regard to the relevant circumstances. The existence of quorum provisions requiring two members is not, by itself, a sufficient reason to refuse an order for a proper corporate act such as appointing a director.
2. Quorum provisions and class rights. Under section 14(1) of the Companies Act 1985, the memorandum and articles bind the company and its members contractually. That contractual effect does not prevent the court overriding an ordinary quorum provision under section 371. Re El Sombrero Ltd [1958] Ch.900 and Re Opera Photographic Ltd [1989] 1 WLR 634 established that a member's choice not to attend does not itself confer a veto. The limitation identified in Harman v BML Group Ltd [1994] 1 WLR 893 concerned an entrenched class right, not an ordinary quorum provision.
3. Application to the company. The shareholdings were unequal and there was only one class of shares. Clause 6.1.18 of the agreement was therefore a quorum provision rather than a class right or substantive veto. The court was not required to assume that the parties had contracted for permanent deadlock. It should consider whether the company could manage its affairs properly, the ordinary right of a majority shareholder to appoint or remove a director, and the limited scope of the proposed meeting. Those considerations justified intervention. The availability of a derivative action or a petition under section 459 did not make section 371 the wrong route.
4. Part 8 proceedings and costs. The separate Part 8 proceedings, issued in London while the main action was stayed in Manchester and seeking substantially the same relief, were an abuse of process. The section 371 issue should have been dealt with in the main action after an application to lift the stay. The London costs remained payable by Union on the indemnity basis; the relevant Manchester costs were payable by Mr Watson, with apportionment remitted to the judge if necessary.

• Court of Appeal (Civil Division). [2003] EWCA Civ 180: allowed the appeal concerning section 371, ordered a meeting to consider appointment of a new director, and refused permission to appeal in the Part 8 proceedings subject to costs.
• High Court, Chancery Division, Manchester District Registry. On 13 June 2002, His Honour Judge Howarth refused the section 371 order, dismissed the Part 8 proceedings as an abuse of process, and made costs orders against Union.
• Earlier procedural appeal. The stay of the main action had previously been upheld on the election issue, but that appeal was dismissed on 29 April 2002 and the stay was lifted.