Smith v Butler & Anor

A managing director’s implied authority to conduct the company’s ordinary commercial business does not extend to suspending the chairman where the articles protect the chairman’s position and the matter is outside day-to-day management. Such a suspension requires board authority. A court may order a general meeting under Companies Act 2006, section 306, and may direct that one member constitutes a quorum where the articles create an impracticable deadlock, provided no substantive class right is overridden. Company funds should not be used for an active defence of proceedings which are, in substance, a dispute between shareholders.

The claimant held approximately 69 per cent of the shares in Contact Holdings Ltd and was its chairman. The first defendant held the balance and was managing director. The company’s articles required the claimant’s presence for a quorum at members’ and directors’ meetings.

After the claimant was suspended without a valid board resolution, he sought declarations that the suspension was invalid and an order under section 306 of the Companies Act 2006 permitting a general meeting with a quorum of one. The defendants relied on alleged financial misconduct, the continuing investigation, and the need to preserve the status quo. The court also considered whether the company could fund an active defence.

1. Suspension. The purported suspension was unlawful. The authorities concerning a managing director’s apparent authority to conduct ordinary commercial business did not establish internal authority as between the company’s directors and shareholders. The articles, particularly Articles 10.3, 16.1 and 17.2, protected the claimant’s position as majority shareholder and chairman. Suspending the chairman was neither an ordinary commercial decision nor part of the company’s day-to-day management. It was therefore a matter for the board, not the managing director. Mitchell v Hobbs (UK) Ltd and Mill [1996] 2 BCLC 102 supported the conclusion that, absent delegation, a managing director could not exercise a power which belonged to the board.
2. Meeting under section 306. The court ordered a meeting at which one member could constitute a quorum for the appointment of a new director or removal of the first defendant. Section 306 is procedural. It enables company business which requires a general meeting to proceed where the prescribed method is impracticable. Quorum provisions do not themselves create a veto or class right. The court must consider the company’s ability to manage its affairs, the ordinary rights of a majority shareholder, and any conditions needed to achieve justice. The alleged fraud and expense claims did not justify postponement. They remained unproved or under investigation, and protective undertakings could address legitimate concerns. The existence of possible unfair-prejudice or derivative proceedings was not a bar. The approach in Union Music v Watson [2003] 1 BCLC 453, Vectone Entertainment v South Entertainment [2004] 2 BCLC 224 and Woven Rugs [2002] 1 BCLC 324 was applied.
3. Funding the defence. The company had no implied authority, in the circumstances, to mount an active defence without a board resolution. In any event, the proceedings were in substance a dispute between shareholders over control of the company. Applying the principle in Re a company (No 004502 of 1988), ex parte Johnson [1992] BCLC 701, derived from Re Crossmore Electrical & Civil Engineering Ltd [1989] BCLC 137 and Pickering v Stephenson (1872) LR 14 Eq 322, company funds should not have been used for the active defence.
4. The court expressed provisional views that permission to appeal and a stay might be appropriate on terms, including no company funds being spent on an appeal without permission. It directed that the alleged tax irregularities be reported to the revenue authorities within three months.

First-instance decision. No prior appellate history is stated in the judgment.