Smith v Butler & Anor

The court determined that the purported suspension of the claimant, the majority shareholder and Chairman, was unlawful because there was no valid board resolution and the Managing Director did not have implied authority to suspend the Chairman in the circumstances. The court exercised its statutory discretion under section 306 of the Companies Act 2006 to order that a general meeting be called and conducted with a quorum of one so as to permit the majority shareholder to exercise his voting rights.

The judge held that contested facts as to alleged cheque and expenses irregularities were not resolved on the interlocutory material and did not justify withholding relief under section 306. The court also held that company funds should not have been used to mount an "active" defence of what was, in substance, a shareholders' dispute.

Background and parties: The dispute concerned control of Contact Holdings Ltd. The claimant, Mr Philip John Smith, held 68.77% of the shares and was Chairman. The first defendant, Mr James Carl Butler, held 31.23% and was Managing Director. The company had articles requiring the presence of two persons for member meetings and two directors for board meetings, one of whom had to be Mr Smith, creating a deadlock risk.

Factual matrix: The pleaded background included allegations that between 2002 and 2005 cash had been diverted from subsidiaries (an alleged "cheque fraud") and that between 2004 and 2011 the claimant had misused a company credit card. Ernst & Young were instructed to investigate. On 1 July 2011, at a board meeting, Mr Butler purported to suspend Mr Smith and to exclude him from company premises; there was no valid board resolution authorising the suspension.

Relief sought and procedure: The claimant sought declarations that the suspension was invalid and an order under section 306 Companies Act 2006 that an extraordinary general meeting (EGM) be called and conducted with a quorum of one so that resolutions (including removal of directors) could be put. Interim relief and undertakings were sought and given pending the main hearing.

Issues framed:

• Whether the Managing Director had implied authority to suspend the Chairman and to instruct and fund an active defence on behalf of the Company without a board resolution;
• Whether the court should exercise its discretion under section 306 to order a meeting with a quorum of one;
• Whether it was proper for company funds to be expended in defending the proceedings.

Reasoning and conclusions: The court did not decide disputed factual allegations of fraud because there was no cross-examination; it approached the legal issues on the material before it. On authority and internal company law the judge concluded that suspension of the Chairman was not a routine commercial act falling within the usual implied powers of a Managing Director and that Articles expressly protecting the Chairman’s position showed such powers were for the board. Accordingly the suspension was unlawful. Applying principles from Union Music and Vectone, and considering the ordinary right of a majority shareholder to appoint or remove directors, the court exercised its discretion under section 306 to order a meeting, permitting a quorum of one to break the deadlock. The court also held that, insofar as the dispute was a shareholders’ contest, company funds should not have been used to mount an active defence, and the company had no authority to incur such costs without appropriate board authorisation. The judge directed that the suspected tax irregularities be reported to the revenue authorities within three months and indicated provisional permission to appeal on conditions.

First instance: The court held that the purported suspension of Mr Smith was unlawful because there was no valid board resolution and the Managing Director did not have implied authority to suspend the Chairman. The court exercised its discretion under section 306 of the Companies Act 2006 and ordered that a general meeting be called and conducted in such manner as the court thought fit, including a direction that one member present shall be deemed a quorum, to enable the majority shareholder to exercise his voting rights. The court also held that the company should not have used company funds to mount an active defence of this shareholders' dispute without board authorisation and directed reporting of potential tax issues to the revenue authorities.