David Victor Garofalo v David Crisp & Ors

On an interim application supporting a petition under Companies Act 2006 s.994, the court may exceptionally remove and replace directors where that relief is just and convenient under s.37 of the Senior Courts Act 1981. Because such an order substantially changes the management and status quo of a company, particularly when made without notice, the court should ordinarily require more than a serious issue to be tried. A high degree of assurance of success at trial, or at least a strong prima facie case, may be appropriate. The court must assess the risk of injustice, the adequacy of damages, the balance of convenience and the practical effect on the company’s viability. Deliberate sanctions breaches, concealment and serious reputational consequences justified continuation of the exceptional management order in this case.

The petitioner and the first respondent were substantial shareholders and directors of a perfume business operated through several companies. Their relationship was governed by a Relationship Agreement. The petitioner alleged that the first respondent had caused the companies to export luxury perfumes to Russia in breach of UK sanctions, contrary to an agreement to stop trading with Russia, and in breach of contractual, fiduciary and statutory duties.

A deputy judge granted without-notice orders removing the first respondent as director, appointing new management and preserving company records. On the return application, the court reconsidered the matter de novo. The central issues were whether the court had jurisdiction to make an interim change-of-management order, what merits threshold applied, whether without-notice relief was justified, and whether the orders should remain in force.

1. Outcome. The change-of-management order was continued until trial or earlier order. The delivery-up, imaging, information and passport orders required no further order at this stage and were adjourned to trial or a later application. Fortification of the cross-undertaking was reserved for consequential directions.
2. Merits. The evidence established a strong prima facie case, and a high degree of assurance, that the first respondent knowingly caused luxury goods to be traded to Russia in breach of the applicable sanctions regulations. The recorded conversation, business records, Russian retail evidence, concealment of Russian sales in management accounts and failure to obtain obvious legal advice materially supported that conclusion. The alleged furlough fraud was not finally determined but was relevant to the assessment of the first respondent’s reliability.
3. Unfair prejudice. The conduct was likely to establish unfair prejudice under s.994, including breach of the Relationship Agreement, fiduciary duties and statutory directors’ duties. The court adopted the deputy judge’s uncontroversial analysis of unfair prejudice and prejudice to the petitioner and companies.
4. Jurisdiction and threshold. Section 37 of the Senior Courts Act 1981 permitted interlocutory relief where just and convenient. Although the order was formally prohibitory in part, it was exceptional, transformative and analogous to mandatory relief. The court therefore applied an enhanced threshold above a serious issue to be tried. The order was justified by the gravity of the alleged sanctions breaches, the risk of reputational collapse, the need to distance the companies from the alleged wrongdoer and the inadequacy of less invasive measures.
5. Without notice and balance. Notice could have enabled the first respondent to avoid arrest, withhold or destroy evidence, or prevent effective delivery-up. The balance of convenience favoured continuation because damages would not adequately protect the petitioner or companies from the existential risk of renewed control by the first respondent. After seven months, the operation under new management constituted a new practical status quo, although the order remained subject to final determination at trial.