Wheeler v Ross (unreported): Power of court to order meeting under s306 Companies Act 2006 approved

Wheeler v Ross (unreported): Power of court to order meeting under s306 Companies Act 2006 approved

 

Last month the Chancery Division used the power under s306 of the Companies Act 2006 to order a meeting of the company. s306 states:

(1) This section applies if for any reason it is impracticable-

          (a) to call a meeting of the company in any manner which meetings of that company may be called

          (b) to conduct that meeting in the manner prescribed by the company's articles or this act

(2) The court may, either of its own motion or on the application-

          (a) of a director of the company, or

          (b) of a member of the company who would be entitled to vote at a meeting,

order a meeting to be called, held and conducted in any manner the court thinks fit.

(3) Such directions may include a direction that one member of the company present at the meeting be deemed to constitute a quorum

In this instance the company was deadlocked. The applicant majority shareholder and director (W) had accused the respondent's (R) husband (X), who handled the company's finances from withdrawing money from the company account without authorisation. The respondent was the other director of the company and X's daughter was employed by the company. As a result the working relationship between those involved deteriorated. W, as majority shareholder, dismissed X and Y and replaced R as a director; however they continued to be active in the company.

W then called an extraordinary meeting to ratify X and Y's dismissal and R's replacement as a director. R, as minority shareholder, did not respond as to whether they would attend. Without R's attendance the meeting would have been inquorate (see s318) under the company's articles. W then made the instant application under s306 for a court ordered meeting.

The power to remove a director is given to the company under the Companies Act s168 and can be done via an ordinary resolution (50%+) with special notice of the resolution (s312 - 28 days notice by the proposer).  

The court granted the application holding that "the purpose of s306 order was to allow W to enforce his rights as a majority shareholder by overcoming the deficiency in him holding an inquorate extraordinary general meeting; the order was merely one of the steps necessary to put the governance of the company into a viable state".

Although R feared that the s306 order would place control of the company in to one person's hands; R was reminded of her rights under s994 of unfairly prejudicial treatment as a minority shareholder even in the face of a s306 order. According to the judge, the purpose of placing the company in the control of one person by ordering a meeting under s306 would be to allow the company's objectives to be achieved

Analysis:

The use of the word "impracticable" in s306 seems to be very broad. It seems logical that that power would extend to a situation where a company with two shareholders/directors were deadlocked. In that instance it is impossible to call and conduct a meeting, and impracticality would logically encompass impossibility. 

However, the decision to approve the application under s306 on the rationale that the company is deadlocked is not an uncontentious issue. For one it is at the courts discretion as to whether a meeting should be convened. Prof. Davies notes in Gower and Davies: Principles of Modern Company Law that this section can be used to break a deadlock and the principle of majority rule is being frustrated. In the case of El Sombrero Ltd, Re [1958] Ch 900 - a shareholder with 900 of 1000 shares wished to remove the two directors who owned the remaining 100. The directors refused to attend the meeting and the court ordered that a one person meeting should constitute a quorate meeting.

Prof. Davies goes on to note though that a company may deliberately set quorum requirements to create a deadlock situation.  If this is the purpose then it is unlikely that the court will make such an order.

The point to distinguish though is creating quorum requirements to create a deadlock on points that cannot be agreed and just refusing to turn up to a meeting. Thus, the courts discretion under s306 is going to be fact sensitive and a judge is unlikely to be sensitive to a minority shareholder serving as a director who just refuses to attend a meeting; especially under the considerations of majority rule and s994.

Based on the rationale of this case though, it is hard to envisage a situation where there is a deadlock and a s306 order will not be made. The court granted an s306 order on the premise that it would allow the company to achieve its objectives. If the company reaches a position of deadlock then it is most likely going to have the consequence of making the company's objectives difficult, if not impossible, to pursue.

On a final note, since part of the resolution concerned director removal the possibility of a written resolution for the majority shareholder was unavailable under s168. Under the written resolution procedure the holder of the majority can pass an ordinary resolution via a written resolution. Thus the need to convene a meeting is unnecessary. However ratification of the removal of X and Y who were not directors or shareholders it seems that ratification could have been dealt with via a written resolution unless the company's articles stated otherwise. From the case analysis it is unclear, but is presumed so.

For more commentary on directors' duties and shareholder litigation, visit Gibbs: Law and Life, a blog centering on directors' duties and company law, particularly on interpretation and practicality of directors' duties in the 21st Century.

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