Chairman of board cannot be suspended by managing director alone
UPDATE 16 March 2012: The High Court’s decision described below as been confirmed in its entirety by the Court of Appeal.
The Chancery Division of the High Court gave judgment on 1 September 2011 in Smith v Butler and Contact Holdings. The case involved the suspension of the chairman and majority shareholder in a company, a Mr Smith, by his fellow director and the only other shareholder, Mr Butler, following allegations of fraud against Mr Smith.
The court had to consider two questions:
1. Whether Mr Butler, as managing director, had the power to suspend Mr Smith as an employee of the company. The court found that he did not have that power; it rejected the argument that Mr Butler had implied power to do so (Mr Butler had not been granted any express power to suspend board members). He may have had authority to suspend junior staff – as that would be part of “carrying on the company’s business in the usual way” and within a managing director’s apparent authority on commercial matters – but that authority would not be implied as extending to suspending the chairman. Only the board could do that.
2. Whether Mr Smith could request the court to make an order under section 306 of the Companies Act 2006 that the company hold a meeting of its members with a quorum of one. This would mean that Mr Smith could remove Mr Butler as a director. (The articles of the company required that the quorum for any meeting be two.) The court held that it would make such an order. It was not for Mr Butler to stop the operation of the company – in this case, the holding of a meeting and the taking of an action by a majority shareholder - because of his ability to prevent that meeting from being quorate. Nor were the allegations of fraud against Mr Smith relevant to the making of such an order, which was simply to enable Mr Smith to exercise his rights as a majority shareholder.
Although it was tentatively argued that Mr Smith should be denied the section 306 remedy because he was (allegedly) not coming to equity with “clean hands”, the judge observed that that argument was flawed. As the application for a section 306 order was being made under statute, Mr Smith was not “coming to equity” at all.
Mr Butler’s proper remedies as a minority shareholder, that court noted, lay in either a claim for unfair prejudice under section 994 of the Companies Act or a derivative action under Part 11 of that Act.
We discuss remedies under section 306 in this post.
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