MI Squared Limited v Jeremy King

The claimant sought urgent injunctive relief under section 44 of the Arbitration Act 1996 to restrain directors of the defendant group from repaying or replacing a secured creditor's loan without the prior written approval required by a shareholders' agreement (the SHA). The court applied the principles applicable to interim injunctions (American Cyanamid) but, because the decision would be practically determinative, moved beyond the "serious issue to be tried" test and took account of the relative merits.

The judge analysed the scope of clause 3(a) of the SHA (the majority shareholder approval obligation), the qualification in that clause permitting directors to act where they are "lawfully able" and where fiduciary duties require a course of action, and the directors' duties when a company is or may become insolvent (the Sequana duty). The court concluded that MI Squared had an arguable case that the SHA was engaged but that the directors' decision to accept a replacement loan from the Fund was at least one of the options reasonably open to them and not obviously mandated away by their fiduciary duties. The allegation of an improper purpose in procuring the new funding was, on the material before the court, thin.

Weighing the balance of convenience, the judge accepted that both sides faced real prejudice but found the evidence of likely substantial harm to the operating subsidiaries if the injunction were granted more compelling. For these reasons the application for an interim injunction was refused.

This is a first-instance application under section 44 of the Arbitration Act 1996 by MI Squared, the 74% majority shareholder, seeking an urgent interim injunction to prevent the First to Fourth Defendants (directors) and the group from repaying or replacing the secured loan provided by Minor Hotel Group MEA DMCC (MHG) without MI Squared's prior written approval, as required by the shareholders' agreement dated 18 December 2017 (the SHA). The contested transaction was a proposed replacement loan from CK Opportunities Fund I (the Fund) to the intermediate holding company (CKHL) to discharge the MHG loan and other debts.

• Nature of the application: urgent injunctive relief under s.44 Arbitration Act 1996 to restrain repayment, incurring indebtedness or creating charges without majority shareholder approval.
• Key factual background: MI Squared holds 74% of the Company; MHG had a secured loan to the Company guaranteed by CKHL and operating subsidiaries; administrators were appointed over the Company; the Fund offered a borrower-friendly replacement loan secured by group assets; relations between MI Squared and the directors had deteriorated.
• Issues framed by the court: (i) whether clause 3(a) of the SHA and Schedule 1 were engaged by the Proposed New Loan; (ii) the breadth of the qualification permitting directors to act where their fiduciary duties required it; (iii) whether the directors were mandated by fiduciary duties (including the Sequana duty to creditors) to accept the replacement loan; (iv) whether the directors acted for an improper purpose; and (v) the balance of convenience and adequacy of damages.

The court explained that section 44 applications are governed by the same principles as applications under s.37(1) Senior Courts Act 1981, and ordinarily the American Cyanamid framework applies. Because the injunction would be effectively determinative, the court took account of the relative merits without conducting a mini-trial.

On construction, the judge accepted MI Squared's contention that clause 3(a) could extend to powers exercised in relation to wholly owned subsidiaries and that the SHA contained express language contemplating exercise of powers in relation to other group members. On the question whether fiduciary duties required the directors to accept the Proposed New Loan, the judge found it strongly arguable that accepting the Fund's terms was at least one option reasonably open to the directors, although not obviously the only proper course. The improper purpose allegation (that the directors sought to place themselves to frustrate an orderly sale) was described as thin on the material before the court. The monitors and other features pointed in favour of the directors' decision.

In balancing convenience the judge accepted both parties faced significant potential prejudice but found the evidence of real and substantial harm to the operating companies from an injunction (and consequent administration) more persuasive. Accordingly the court refused to grant the interim injunction sought by MI Squared.

The application for interim injunctive relief under section 44 of the Arbitration Act 1996 is dismissed. The judge concluded that, taking account of the relative merits (because the injunction would be practically determinative), the claimant had not established sufficient grounds: the directors' choice to accept the Proposed New Loan was at least one option reasonably open, the improper purpose case was thin on the material before the court, and the balance of convenience favoured refusal of the injunction.