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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Smith v Butler & Anor [2011] EWHC 2301 (Ch) (01 September 2011) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2011/2301.html Cite as: [2011] EWHC 2301 (Ch)

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
LEEDS DISTRICT REGISTRY

		The Court House Oxford Row Leeds LS1 3BG
		1 September 2011

Judge Behrens:

1 Introduction

1. This is a bitterly fought dispute in respect of control of Contact Holdings Ltd ("the Company"). Mr Smith (the Claimant) is the holder of 68.8% of the shares and is Chairman of the Company. Mr Butler (the First Defendant) is the holder of the remaining 31.2% of the shares. He is also Managing Director. There is one other Director - Mr Harris – the Group Financial Director who holds no shares. Between about 2008 (when Mr Butler took over as Group Managing Director) and March 2010 Mr Smith only attended the offices of the Company 3 days a week. In March 2010 this was reduced to 1 to 2 days a week.
2. The Articles have created a deadlock situation. Under Article 10.3 no business can be transacted at a meeting of members unless a quorum is present. A quorum consists of 2 persons one of whom must be Mr Smith. Similarly under Article 17.2 the quorum necessary for the transaction of business by the Directors is also two, one of whom must be Mr Smith.
3. It will be seen therefore that if Mr Butler or Mr Smith declines to attend there can be no valid meeting of members and that if Mr Smith declines to attend there can be no valid meeting of Directors.
4. It will be necessary to set out the history in more detail later in this judgment. For the purpose of this introduction it is possible to summarise the facts quite shortly.
5. Between 2002 and 2005 Mr Smith was allegedly involved in what the Defendants describe as a cheque fraud involving two subsidiaries of the Company. As a result of that fraud substantial amounts of cash were diverted to Mr Smith. The precise amounts involved in the cheque fraud are disputed. The extent of Mr Smith's involvement is also disputed. In his witness statement Mr Smith accepts that at least £130,000 was involved. However it seems likely that the true amount may have been in excess of £450,000 even though Mr Smith may not personally have received the whole sum.
6. The cheque fraud came to light in 2009. It was at that time investigated by Mr Grundy – the predecessor of Mr Harris. Although he knew about it following the investigation Mr Butler took no steps against Mr Smith at that time.
7. It is also alleged that between January 2004 and June 2011 Mr Smith has wrongly utilised the Company credit card for payment of approximately £78,000 in respect of expenses to which he was not entitled. Mr Smith accepts that he used the Company credit card but contends that the majority of the £78,000 was spent in respect of proper business expenses. There is also an allegation that invoices were submitted to the Company in respect of work on Mr Smith's garden and building works. The amount is unspecified.
8. Mr Smith does not dispute some sums have been paid by the Company in respect of personal expenses but does not accept that his conduct in so doing was dishonest. He says he expected matters to be adjusted either in the form of a director's loan account or a reduction in the amounts of bonus he was paid.
9. Since at least the beginning of 2011 Mr Smith expressed reservations about the way that the Company was being run by Mr Butler and Mr Harris. In the result, from about March 2011 he evinced an intention to use his powers as majority shareholder to appoint another person as Chief Executive Officer (CEO). Perhaps unsurprisingly Mr Butler objected to this proposed course of action. However he gave Mr Smith no indication that he was instigating an investigation into the cheque fraud or Mr Smith's expenses claims.
10. In fact, some time in May 2011 Mr Butler on behalf of the Company instructed solicitors, Pannone, to investigate possible fraud by Mr Smith.
11. Mr Smith attended the offices of the Company on 1^st July 2011 for the purpose of attending a Board Meeting. At that meeting Mr Butler purported to suspend Mr Smith and to exclude him from the Company premises. There was no board resolution authorising the suspension. Following the suspension Mr Butler and Mr Harris have conducted the business of and made decisions on behalf of the Company without reference to Mr Smith.
12. On 18^th July 2011 Mr Smith's solicitors, DLA Piper UK LLP ("DLA") requested the Company to hold an EGM to consider the removal of Mr Butler and Mr Harris as directors of the Company. It has been made clear that Mr Butler will not attend such a meeting so that it would be inquorate.
13. On 19^th July 2011 Mr Smith instituted these proceedings against Mr Butler and the Company. In them, he seeks declaratory relief as to the invalidity of the decision to suspend him and also seeks an order under section 306 of the Companies Act 2006 that a general meeting take place and for that purpose there should be a quorum of one. On the same day Mr Smith issued an application seeking interim declarations and orders including a declaration to the effect that the decision to suspend Mr Smith was not a valid act of the Company and also an order that an EGM be convened by the court.
14. On 21^st July 2011 Pannone acting on the instructions of Mr Butler on behalf of the Company instructed forensic accountants Ernst & Young to investigate the involvement of Mr Smith in the cheque fraud and the irregular expense claims made by Mr Smith.
15. Mr Butler instructed two firms of solicitors in respect of the application. He instructed Pannone to act on behalf of the Company and Berg Legal ("Berg") to act on his own behalf. The matter was originally listed for hearing on 26^th July 2011. A substantial body of evidence was filed by Pannone shortly before the hearing. Furthermore there was not sufficient time to deal with the matter on that day. Accordingly it was adjourned until 23^rd August 2011. No relief was granted to the Claimant at that time but the Company gave a number of undertakings designed to ensure that that the Ernst & Young investigation could continue and that Mr Smith was provided with sufficient information to enable him to continue his role as Director of the Company.
16. Between 26^th July 2011 and the hearing on 23^rd and 24^th August 2011 substantial further evidence was filed on behalf of Mr Smith, Mr Butler and the Company; the bundles before me extended to over 1,100 pages.
17. The costs involved in this application have been substantial. The schedules of costs which have been filed for the period up to 23^rd August 2011 show that Mr Smith's costs are £92,565.51, Mr Butler's costs on his own behalf are £19,978.43 and the Company's costs (which included the costs of leading Counsel) are £103,089.96.
18. Mr Berragan made it clear at the outset of his submissions that the main relief that he was seeking was an order under section 306 of the Act which would permit Mr Smith to pass a resolution which would have the effect of removing Mr Butler as a director of the Company. He submitted, in addition, that in the absence of a resolution of the Board, Mr Butler had no power either to suspend Mr Smith or to instruct solicitors on behalf of the Company to defend these proceedings. In the alternative he submitted that it was inappropriate and/or a breach of fiduciary duty by Mr Butler to permit the Company actively to defend these proceedings and to spend substantial sums of the Company's money in so doing.
19. Mr Hollander QC and Mr McPherson sought to answer these submissions in a number of ways. They submitted that Mr Butler had implied authority in his capacity as Managing Director of the Company to suspend Mr Smith and to instruct solicitors and leading Counsel to defend these proceedings. In their submission this is not an ordinary dispute between shareholders; it is properly to be classified as an employment dispute and in those circumstances there was nothing improper or inappropriate in the Company seeking to defend the proceedings actively. Whilst they conceded that the Court had jurisdiction to make an order under section 306 of the Act, they submitted that the court should not do so, at least pending a trial of the issues between the parties. They submitted that the case cried out for a speedy trial. In the interim, pending such trial, the court should maintain the status quo. In particular the Court should permit Mr Butler and Mr Harris to continue to run the Company subject to undertakings similar to those which had been in place since 26^th July 2011. They submit that Mr Smith should be excluded from the business premises save for the purpose of attending board meetings.
20. In support of their submissions, they place heavy reliance on the allegations of dishonesty made against Mr Smith, the continuation of the Ernst & Young inquiry, allegations that Mr Smith will intimidate staff and/or witnesses and allegations that Mr Smith may destroy evidence relating to his alleged wrong doing.
21. In the course of their submissions they made it clear that they envisage a situation whereby after making appropriate enquiries and giving Mr Smith a chance to explain the situation Mr Butler may purport to dismiss Mr Smith as an employee. If as would be anticipated Mr Smith were to challenge the purported dismissal that would give rise to a further issue at the trial.
22. Mr Smith denies the allegations of dishonesty (save to a limited extent), intimidation or that he would destroy evidence. In any event he too has offered undertakings to the Court to ensure that company books and records are preserved, accounting staff are not dismissed without the agreement of Mr Butler or an order of the Court. He has further offered to undertake not to take any steps to remove Mr Harris as a Director.

2 The facts

23. It will no doubt be borne in mind that despite the plethora of witness statements there has been no cross-examination of the witnesses. I am thus not in a position to resolve disputed questions of fact that appear in the witness statements. Equally I am not in a position to assess the management qualities of either Mr Butler or Mr Smith.
24. However in the light of the issues raised by the parties it is necessary to set out some of the facts in rather more detail than is contained in the Introduction.

2.1 Background History

25. In November 1989 Mr Smith led a Management Buy Out of a print and packaging business. Following that MBO Mr Smith became the majority shareholder in and Managing Director of Contact (Print and Packaging ) Ltd ("P & P"). The business of P & P has grown substantially.
26. In 1992 Mr Smith formed another company Contact Originators Ltd ("Originators") to furnish the needs of P & P in relation to graphics and plate making and to sell those services to the market place.
27. By 1998 the turnover of the two companies had reached £11 million. Mr Butler was employed as Commercial Manager of P & P.
28. In 2000 an opportunity arose to supply kit to the well-known computer company Hewlett Packard. As a result Mr Smith set up another company Contact Supplychain Solutions Ltd ("Supplychain Solutions"). Mr Butler became a director of and shareholder in Supplychain Solutions.
29. In 2001 Mr Butler became a shareholder in P & P.

2.2 Company Reconstruction

30. The Company was incorporated in February 2000. Mr Smith became a director at that time. In December 2003 both Mr Butler and Mr Gavin were appointed as Directors. At or about that time, Mr Smith with the advice of the Company accountants, decided to reconstruct the business and to incorporate the 3 companies within a Group in which the top non-trading company was the Company.
31. As a result the Articles of Association were amended with effect from 4^th February 2004. As there has been no dispute as to the effect of the Articles it is not necessary to set them out verbatim.
32. I was referred during the course of the hearing to Articles 1, 7, 10.3, 16.1 and 17.2. In summary:

1. Under Article 1 the 1985 Table A Regulations are incorporated so far as not excluded or varied in the Articles.

2. Under Article 7 if an employee or director ceases to be an employee or director the Board of Directors may within 3 months invoke compulsory transfer provisions in respect of his shares. If invoked, the shares are to be acquired at a "fair value" as determined by the Auditors. It appears from Article 6.8 (although the matter was not really argued) that a fair value would be on a pro rata basis and there would be no discount for minority holdings.

3. Article 10 deals with meetings of members. Under Article 10.3 the quorum at meetings is two. One of those persons must be Mr Smith unless he waives that requirement.

4. Article 16 deals with the Appointment of Directors. Under Article 16.1 Mr Smith is entitled to be a Director so long as he holds any shares in the Company. Under Article 16.2 the Company may by ordinary resolution appoint any person who is willing to be a Director.

5. Article 17 deals with proceedings of Directors. Under Article 17.2 the quorum necessary for the transaction of business by the Directors is also two, one of whom must be Mr Smith unless he waives the requirement or has ceased to hold shares in the Company.

2.3 Shareholdings and Directors

33. There is a very helpful table prepared by Pannone of the shareholders and directors of the Company. From December 2003 there have always been 3 Directors including Mr Smith and Mr Butler. Mr Gavin remained a Director until 2007 when he was replaced by Mr Grundy. Mr Grundy remained a Director until December 2009. Mr Harris was appointed a Director in January 2010.
34. In February 2004 there were 8 shareholders. Mr Smith held 54.56%, Mr Butler 24.78%, and Mr Gavin 6.4% of the shares. The remaining 5 shareholders held the balance of 14.27%. In February 2008 the shares of the 5 minority shareholders were acquired by Mr Gavin.
35. In February 2010 Mr Gavin's shares were acquired by the Company. In the result Mr Smith became owner of 68.77% of the shares to Mr Butler's 31.23%

2.4 Trading

36. It is quite unnecessary to go into the trading of the Company or its subsidiaries in any detail. It is sufficient to note that at least two further companies – TVonics Ltd and Matthews (Originators) Limited were acquired by the Company. Furthermore at all times the Company remained profitable. The summary of results for the year ending 31^st December 2010 (which Mr Smith considers to be poor) shows an overall profit of £700,458. The most recent management accounts (for the 7 months to July 2011) show a profit of £775,000 and a turnover of £17.5 million.

2.5 Employment Terms

37. In September 2008 Mr Butler replaced Mr Smith as Group Managing Director. Before this happened on 1^St September 2008 both Mr Smith and Mr Butler signed a document which contained the following:

As a condition of relinquishing to you the role of Group Managing Director the following must be adhered to without exception

You will confer with me for agreement before sanctioning or initiating:

1/ Items of expenditure including …

2/ Employment matters, including the recruitment and dismissal of staff. Salary reviews and bonus awards …

3/ Contract agreements and any informal agreements with all customers and suppliers

4/ …

38. When Mr Butler signed the document he wrote the words "Agreed without exception" beneath his signature. In an e-mail dated 29^th August 2008 Mr Butler made the following comment on the document:

Not that you need to ask! As I do this anyway so have no problem agreeing to what I already do.

39. During the course of the application I was shown a number of service agreements both of Mr Smith and Mr Butler. Mr Butler's earlier agreements were introduced to show the historic position in relation to his bonuses. This is said to be relevant in respect of Mr Smith's explanation of events in 2009. I shall return to it later. His most recent agreement was also introduced to show the express powers contained in the contract.
40. The contract is between the Company and Mr Butler. Under clause 2.1 he is employed as Group Managing Director. Under clause 4.3 he was obliged to endeavour to promote the interests and reputation of the Company and its Associates. There are provisions for summary dismissal in the event of gross misconduct. The contract uses the word "we" and "the Company" to refer to the Employer and "you" and "the Executive" to refer to Mr Butler. The contract provides that summary dismissal may be effected by "we".
41. There are no express provisions whereby any of the powers of the Board are delegated to Mr Butler.
42. Mr Smith's contract follows the same format as that of Mr Butler. Under clause 2.1 he is employed as Group Chairman. Clauses 4.3 and 12 are in identical terms to the clauses in Mr Butler's contract.
43. Following Mr Butler's appointment as Managing Director Mr Smith spent less time at the business premises. In paragraph 20 of his witness statement Mr Smith says that he initially came in 3 days a week but after March 2010 this was reduced to approximately 1 to 2 days a week. The remainder of Mr Smith's time was spent working from home.

2.6 The alleged cheque fraud.

44. There are significant differences between Mr Gavin's version of events and that of Mr Smith. Mr Hollander QC described the fraud as being a sophisticated fraud involving alteration of documents and lasting for a substantial amount of time.
45. The fraud is described in paragraphs 22 to 43 of Mr Gavin's statement. It involved two companies P & P and Supplychain Solutions. When goods were supplied to P & P some would often be defective with the result that credit notes were supplied to P & P. The fraud involved the appropriation of the face value of the credit notes. Instead of the moneys being paid to P & P, a cheque would be made out to cash and received by Mr Smith personally. A similar but not identical system was involved with Supplychain Solutions. According to Mr Gavin some £400,000 - £500,000 was involved in the Supplychain Solutions fraud and some £150,000 in respect of the P & P fraud. Mr Gavin said all of the monies extracted were paid to Mr Smith.
46. Mr Smith disputes much of what is in Mr Gavin's statement. Mr Smith's evidence is contained in paragraphs 8 to 14 of his second witness statement. Mr Smith does not accept that he received any improper cash payments from P & P credit notes. He accepts that he received 2 cash payments of £800 and £1,000 but asserts that he repaid the business with those sums.
47. Mr Smith accepts that he received monies from the Supplychain Solutions business. He points out that that business was very successful. Mr Smith says he was approached by Mr Gavin who told him that the cash flow being generated by Supplychain Solutions gave Mr Smith an opportunity to get some cash out of the business. The position could be addressed at the year end and any relevant tax paid out of an intended bonus payment. He accepts that he received in the region of £140,000 from Mr Gavin in this way. He was not aware of the mechanism used by Mr Gavin to extract money from Supplychain Solutions. He had no dealings with the day to day accounts of Supplychain Solutions.
48. Ernst & Young have prepared a draft interim report which was available at the hearing. The report comments on 57 transactions relating to P & P involving some £162,982.51 of cheques made out to cash. The author is not able to draw any conclusions on the ultimate beneficiary of the cash. The report comments on 10 payments involving £292,025 relating to Supplychain Solutions. She comments on the difference between the cheque stubs and the actual cheque but she is unable to say who the ultimate beneficiaries of the cheques were.

2.7 The discovery of the cheque fraud in 2009

49. It is common ground that that the cheque fraud came to light in September 2009. there are rival versions of precisely what happened in the witness statements of Mr Smith and those filed on behalf of the Company. I do not find it necessary to set out the details.
50. The contemporaneous documents show that the fraud was initially discovered by Mr Grundy who immediately consulted Mr Butler. On 7^th September 2009 Mr Butler phoned Mr Smith and indicated that Mr Gavin was the prime suspect. Mr Smith's initial reaction was to notify the police but shortly afterwards he phoned back to indicate that they should wait to fully consider the facts and seek legal advice before confronting Mr Gavin. At two meetings the following day Mr Smith admitted that he had taken money out of the Company. At a further meeting after Mr Grundy had spoken to Mr Gavin, it was put to Mr Smith that Mr Gavin said that the total sum involved amounted to £500,000 and that it had all been paid to Mr Smith. Mr Smith denied that he had taken it all but did admit to receiving a sum of approximately £200,000. In a later file note there is reference to Mr Grundy showing Mr Butler a spreadsheet showing the total amount of money removed as being about £455,000.
51. It is common ground that there was a meeting between Mr Butler, Mr Grundy and Mr Fairhurst (the Company's accountant) when the question of Mr Smith removing money from the Company was discussed. There is a conflict as to the advice given by Mr Fairhurst. He says he told them that there were two options. One was for the matter to be rectified. The other was to report matters to HMRC. Mr Butler, however, suggests that Mr Fairhurst advised that the consequences for the business could be catastrophic and the advice seemed to be to do nothing.
52. Mr Smith says that Mr Butler then decided to bring the matter to a close though he did seek compensation for the loss. Mr Smith says that he agreed with Mr Butler that Mr Butler should have a bonus of £130,000 written into his service contract to compensate him for the loss. Mr Smith drew attention to clause 5.3 of his service contract which provides for a bonus of £130,000.
53. He says that he thought that the matter was at an end at that stage. When Mr Grundy left in December 2009 he passed Mr Smith a box file of documents telling him that they were the documents from the investigation. Mr Grundy suggested that Mr Smith destroy them. This suggestion was endorsed by Mr Butler when they spoke later.
54. According to Mr Butler, he struggled with the situation for many months but was unsure what to do. He says that Mr Smith was asserting that he had done nothing wrong and Mr Fairhurst was advising him to do nothing. He was prompted to instigate the new investigation in May 2011 when the Financial Controller - Ms Underwood – drew to his attention apparent irregularities in Mr Smith's expense claims. In his fourth witness statement Mr Butler addresses the points made by Mr Smith. He denies that the cash bonus of £130,000 in his service contract had anything to do with this issue. He asserts it replaced other provisions in earlier service contracts. I was shown the earlier contracts containing somewhat different bonus provisions.
55. Mr Butler does however accept that he wanted Mr Smith to believe that everything from the investigation had been destroyed even though he in fact had copies of the documents.

2.8 The alleged expenses fraud

56. There are two parts to the alleged expenses fraud. The first relates to invoices for work done by contractors in respect for personal gardening and building work at Mr Smith's home. These invoices were submitted by the contractors on Mr Smith's instructions and processed without apparent query by Ms Underwood. The sums involved are not clear.
57. Mr Smith accepts that some of his personal expenses are paid by the Company. He makes the point that the items concerned are set out separately in the invoices. He believes that he has accounted for these sums either in the form of a director's loan or (in some cases) by repaying the moneys. He suggests that other directors have also had benefits from the Company and has provided a number of examples relating to Mr Butler.
58. In his fourth witness statement Mr Butler has sought to refute the examples given by Mr Smith though he does accept that his wife received a salary from Supplychain Solutions between 2001 and 2003.
59. The second part of the alleged fraud relates to expenses charged to Mr Smith's credit card. This has been the subject of the Ernst & Young investigation. The conclusions in the draft interim report are extremely tentative. The report identifies expenses totalling £78,571 with unusual descriptions. Based on a review carried out by Mr Butler and Mr Harris, £1,522 may have been incurred for legitimate business reasons. There is no evidence to suggest that the remainder are of a business nature and there is no evidence of reimbursement by Mr Smith. It is, however, clear from the report that Ms Spencer has not interviewed Mr Smith and has no explanation from him. Furthermore she does not know if there was a Director's Loan Account or whether any of the items have been debited to such an account.
60. It is Mr Smith's case that the expenses were either proper business expenses or ought to have been dealt with by virtue of his director's loan account.

2.9 Mr Smith's concerns in 2011

61. During the course of his opening Mr Berragan took me through a number of e-mails between Mr Smith and Mr Butler between March 2011 and June 2011 in which Mr Smith indicated his concern at the performance of the Company and indicated an intention to appoint a Chief Executive Officer to look after his interests. It is not necessary to go through them in detail. In summary:

1. Following a Board Meeting on 28^th April 2011 Mr Smith set out his concerns in an e-mail. Mr Smith made the point that at the beginning of the year he said he would give Mr Butler a free rein until the first quarter results were out. He went on to state that he must appoint someone to serve his interests in the Group. The appointee would work with Mr Butler and take control of the production areas which (in Mr Smith's opinion) were sadly lacking and not Mr Butler's areas of strength.

2. On 8^th May 2011 Mr Smith sent to Mr Butler a brief he intended to use in discussions with candidates for the new Group role.

3. Following a meeting with Mr Butler on 19^th May 2011 Mr Smith sent him an e-mail expressing his concerns about a number of matters. He repeated his intention to appoint a CEO. He said that the appointed individual would be brought in as CEO and would have full control over the day to day running of all the Group Companies save TVonics.

4. On 20^th May 2011 Mr Butler replied to the e-mail. It is not necessary to go through all the points he makes. In summary he asserts that he will pursue a case for constructive dismissal; he says that any attempt to change his role or force him out of the business will have a massively detrimental effect on its fortunes. He concludes by saying that he is 100% satisfied that the present position has nothing to do with his performance and commitment and that he will protect his position as Managing Director until the end.

5. Mr Smith replied to the e-mail on the same day. He made the point that as controlling shareholder he had every right to make decisions in the interest of the business. If Mr Butler was unable to embrace and see the reasoning behind this there would be a parting of the ways.

6. On 4^th June 2011 Mr Smith sent a Memo to both Mr Butler and Mr Harris in which he stated he was shocked by Mr Butler's e-mail. In the e-mail he repeated that he now intended to appoint a CEO and hoped that the four of them would work together as a solid team.

7. On 8^th June 2011 Mr Butler sent a more conciliatory e-mail to Mr Smith in which he asked a number of questions relating to the proposed appointment. There followed a meeting between Mr Smith and Mr Butler. After the meeting in an e-mail dated 13^th June 2011 Mr Smith re-iterated his intention to offer the role to the most suitable candidate. If Mr Butler felt that he could not accept the decision then Mr Smith would reluctantly agree to the termination of his employment on fair and reasonable terms.

62. In his witness statement Mr Butler suggests that the decision to suspend Mr Smith was not motivated by the threats to appoint a CEO. Indeed he suggests that there have been other discussions in the past.

2.10 The meeting on 1^st July 2011

63. Although Mr Butler commenced the investigation into Mr Smith in May 2011 it is common ground that he did not tell Mr Smith about it. Indeed, as Mr Butler acknowledges, he was keen that Mr Smith should believe that all documents relating to the alleged cheque fraud had been destroyed.
64. The events leading up to the meeting on 1^st July 2011 are set out in Mr Smith's witness statement. In the middle of June 2011 there was a concern over the finalisation of the year end accounts for 2010.
65. In any event there was a board meeting scheduled for 24^th June 2011 which was postponed due to the illness of Mr Harris. It was re-scheduled for 1^st July 2011. The board meeting began at 8.30 whereupon Mr Smith was handed a letter setting out his immediate suspension in order to complete the investigation of the financial irregularities. Mr Smith was told that he needed to leave and get legal advice and if he refused the police would be called and he would be removed from the premises. He left. Following his departure Mr Butler and Mr Harris signed a resolution of the Board authorising the suspension.^[1]
66. Steps were taken to prevent Mr Smith using his company phone or e-mail. He attempted to return to the company premises but he was refused entry.

2.11 Developments since the court hearing

67. When the hearing on 26^th July 2011 was adjourned Mr Butler and the Company offered a number of undertakings that were incorporated into the Court order^[2]. It is not necessary to set them out in detail. In summary the Company was to provide relevant documentation to Mr Smith; not to treat any resolution since 1^st July 2011 as valid; not to exclude Mr Smith from his position as director; to instruct Ernst & Young to complete the investigation as soon as practicable; to keep DLA informed of the progress of the investigation and to permit DLA to attend the premises at reasonable times to interview employees.
68. It was common ground that these orders have been complied with. At the hearing Mr Hollander QC took me through the e-mail exchanges between 26^th July 2010 and 22^nd August 2011. It is plain that Mr Smith was kept informed of developments in relation to a dilapidations claim, that he expressed continuing concerns (on 13^th August) about P & P and invited Mr Butler to summon an urgent board meeting to discuss this and other vital business, that he was supplied with Management Accounts for the 7 month period up to July 2011 on 22^nd August 2011. Those accounts show the financial position of the Company to be better than in 2010 but worse than was contained in the budget forecasts.
69. As part of the proposal that there be a speedy trial, Mr Hollander QC proposed that those orders should continue. In addition he suggested the Court should accept further undertakings as set out in paragraph 58 of Mr Butler's fourth witness statement which he accepted might need some fine tuning.
70. Those undertakings include fortnightly board meetings with an agenda agreed in advance. No discussion of matters which prejudice Mr Smith or Mr Butler at those meetings. Mr Smith is to be allowed to attend only for those meetings. An independent observer is to be present to take an accurate record and ensure good order.
71. For his part Mr Berragan offered undertakings which could be incorporated as conditions of any EGM called pursuant to the Court Order under section 306 of the Act. He too accepted that they might need some fine tuning. They include orders requiring Mr Smith to preserve all the Company's books and records; not to dismiss or change the terms of employment of the accounting staff without Mr Butler's consent or a Court order; to provide a full account of his personal expenditure for 2010 and 2011 and not to cause the Company to make any payment for his personal benefit. In addition he has offered a further undertaking not to seek to remove Mr Harris as a Director.

2.12 The allegations of intimidation

72. The allegations of intimidation are contained in the witness statements of Mr Gavin (paragraphs 49 and 50), Mr Grundy (paragraphs 50 – 52 in relation to manipulation) Ms Underwood (paragraph 79) and Mr Butler (paragraph 27 where he also alleges that Mr Smith would destroy evidence).
73. In his second witness statement he exhibits a transcript of a conversation with Mr Booth's wife which took place on 1^st July 2011 (that is to say the day Mr Smith was dismissed), a transcript of a voicemail message on Mr Harris's voicemail and the suggestion that Mr Smith has attempted to contact two persons (Mr Walton and Mr Bartlett).
74. In the voicemail message to Mr Harris, he asserts that to exclude him is illegal. He suggested that if Mr Harris is dragged along he will suffer serious consequences. He asked him if he was going to support Mr Butler in what would be a lengthy and legal procedure. He asked him to make contact.
75. It is not necessary to set out the conversation between Mr Smith and Mrs Booth. Mr Smith asserted that Mr Booth would not be there if it was not for him. He again asserted that what had happened was illegal and that he would go back to the Company on Monday and sack everyone who had anything to do with it.
76. Mr Smith denies intimidation. He points out that the allegations are vague, that there has been a low turnover of staff and that he was Managing Director until 2008. Many of the people now alleging intimidation have been with the Company for all their working lives.

2.13 Allegations of destruction of documents

77. The only documents Mr Smith is alleged to have destroyed are the documents he was given by Mr Grundy in December 2009. He was invited to destroy these by Mr Grundy; this was condoned by Mr Butler who wanted him to believe that documents relevant to the alleged cheque fraud had been destroyed.

3 The Suspension of Mr Smith

78. It is common ground that there was no valid board resolution authorising the suspension of Mr Smith. Mr Berragan accordingly submits that the purported suspension was invalid. Mr Hollander QC and Mr McPherson assert that a board resolution is unnecessary. As Managing Director of the Company Mr Butler had the necessary authority to suspend Mr Smith and to exclude him from the Company premises in his capacity as an employee.
79. It is to be noted that it is no part of Mr Berragan's case (at least in this application) that a properly quorate board could not have resolved to suspend Mr Smith in order to investigate his conduct. It is thus not necessary – at least in this part of the judgment – to examine the actual conduct at all.
80. Mr Berragan submits that the court has all the material necessary to determine whether Mr Butler had authority to suspend Mr Smith; no further evidence is necessary; it has been fully argued and there is no reason why it should not be determined in this application.
81. Mr Hollander QC accepted that there was no express provision in Mr Butler's service agreement conferring on him the power to suspend employees (or, for that matter, to authorise the defence of proceedings instituted against the Company). He however submitted that delegation of such a power should be implied. He made the point that it is plain that some powers must have been delegated to the Managing Director. Otherwise he could not even have bought a pint of milk without board authority.
82. He referred me to a passage from Pennington Company Law^[3] where the following passage appears:

A Managing Director … is invested with apparent authority to carry on the Company's business in the usual way, and to do all acts and enter into all contracts necessary for that purpose.

83. Professor Pennington then gives a number of examples including signing cheques, borrowing money, receiving payments of debts or even to give guarantees. The passage however ends on a note of caution because it concludes:

The apparent authority of a Managing Director is confined to commercial matters, however, and so he has no apparent authority to approve transfers of shares in the company or to alter its register of members. Undoubtedly he has no authority to sell the whole or any part of the Company's business as a going concern or on a break-up basis.

84. Mr Hollander QC readily accepted during the course of argument that this passage was dealing with "apparent" authority rather than "implied" authority and is thus dealing with the position as between the Company and third parties. It is not concerned with the extent of the authority as between shareholders or members of the board.
85. I was also referred to a passage in the current edition of Gore-Browne on Companies^[4]:

…the exact status and powers of a Managing Director depend both on the articles which confer the power on the board to appoint a Managing Director and upon the terms of the contract by which he is employed. … Although he must be a Director, his status as Managing Director derives from his appointment by the board to this office. He is thus both a director and, as Managing Director, an employee of the Company.

86. In a commentary on Article 29 of Bowstead on Agency it is pointed out that where the board of Directors appoints one of their number as Managing Director they thereby impliedly authorise him to do all things as fall within the usual scope of that office.
87. Mr Berragan referred me to the decision of Anthony Machin QC in Mitchell v Hobbs (UK) Ltd and Mill^[5]. The case concerned an action by a Company against the company secretary to recover £3,900 and interest allegedly wrongly withdrawn from the Company bank account. The action had been authorised by the Managing Director but there was no evidence of a board resolution authorising the commencement of the action. The judge acceded to an application to strike out the claim. In so doing he rejected a contention that regulations 70 and/or 72 of Table A gave any power to bring such proceedings unless such power had been delegated to him.
88. The heart of the judge's reasoning is at pages 107 – 108 of the report where he said:

There being, as I say, no resolution of the board authorising these proceedings, Mr Hornett is driven to submit to me that any director of the company by virtue of the powers conferred by reg 70 has the power, without reference to any other directors, and a fortiori without reference to shareholders, to cause proceedings to be instituted in the name of the company. It must follow from that submission that if a company has, shall one say, 24 directors, any of them at any time could institute proceedings against anyone else in the name of the company and there might well be a plurality of proceedings, some of which were approved by some directors, some of which were disapproved of by some directors, and so on. I do not read reg 70 as empowering a single director, where there is a board of directors, to institute proceedings without reference to his co-directors. I believe that reg 70, in its proper intent, means that the power to manage the company (and in this respect the business of the company (to use the wording of reg 70) must include the institution of proceedings in its name) is a power to be exercised by the board of directors. I do not believe that such business, and in particular the institution of such proceedings, can be carried on by a single director acting, as it were, as the board of directors.

Mr Hornett then submitted that, if he were wrong about that, Mr Radford's capacity as managing director imbued him with powers over and above those enjoyed by a non-managing director, notwithstanding that there was no evidence that any powers had been delegated to Mr Radford as managing director. He submitted to me that a managing director, ex virtute officii, had the power to institute proceedings. I do not find that in any way a matter which the articles in Table A provide for. The managing director of a company is not under the articles given any powers over and above other directors in relation to the business of the company. As I say and as reg 72 makes clear, in a particular case the managing director may have powers over and above those enjoyed by his co-directors because they may have delegated those powers to him and, if they have done, so be it. There being in the present case no such delegation, in my view, reg 72 does not assist the plaintiff company.

89. There is a comment on this decision in Gore-Browne where the authors suggest that it may be open to question in the context of the ostensible authority of the Managing Director as opposed to internal disputes within the Company itself. However as this dispute is an internal dispute between members of the Company that comment does not really assist Mr Butler.
90. Mr Hollander QC made the point that the question of what powers were impliedly delegated to the Managing Director was not really either argued or considered in the decision. Thus he submitted that the decision was of no real assistance to me.
91. Mr Hollander QC submitted that the Managing Director must have had implied authority to suspend employees pending investigations into their conduct. It made no difference whether they were junior staff or (as in this case) the Chairman of the Company. It follows, he submitted, that Mr Butler did have delegated authority to suspend Mr Smith.
92. Whilst I see the force of that submission, I do not accept it. I do not have to decide whether the Managing Director of this Company had delegated authority to suspend staff in general. It may be that he did have that authority so far as Junior Staff were concerned. The suspension of the Chairman is not, in my view, a commercial decision in the sense referred to in Pennington. Nor is it something occurring within the day to day running of the Company's business.
93. Furthermore the powers of the Managing Director depend, as Gore-Browne points out on the Articles. Articles 10.3, 16.1 and 17.2 seem to me designed to protect Mr Smith's position as the majority shareholder. They enable him to ensure that the board cannot pass a resolution dismissing him as Chairman. I do not think it can have been intended that this could be sidestepped by the implied delegated authority of the Managing Director.
94. If, as I think, it was for the board and not for the Managing Director to dismiss the Chairman, it seems to me equally clear that it was for the board and not the Managing Director to suspend the Chairman.
95. It follows that I agree with Mr Berragan that the decision to suspend Mr Smith was unlawful.
96. Two further points arise. First I agree with Mr Hollander QC that little assistance is to be gained from the document signed by Mr Smith and Mr Butler on 1^st September 2008. It is by no means clear what the expression "You will confer with me for agreement" means. Does it require an actual agreement between Mr Smith and Mr Butler in respect of all of the 4 categories of items referred to in the document? If so, is it an agreement to agree and thus unenforceable? On the other hand is it just an agreement to discuss the items in an attempt to agree them? If so, what is the consequence of a failure to hold such a discussion?
97. Second Mr Butler is not, of course, powerless as a result of the alleged dishonest conduct by Mr Smith. As Mr Berragan points out there are at least two remedies open to him. He can bring a minority shareholders petition under section 994 of the Act or he can attempt to bring a derivative action under section 206 of the Act. What he cannot do, in my judgment, is to use his position of Managing Director to confer on himself powers which should properly be exercised by the board.

4 Should the Court order a meeting under section 306?

98. Section 306 of the Act provides:

306 Power of court to order meeting

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

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

(b) to conduct the 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 the meeting,

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

(3) Where such an order is made, the court may give such ancillary or consequential directions as it thinks expedient.

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

(5) A meeting called, held and conducted in accordance with an order under this section is deemed for all purposes to be a meeting of the company duly called, held and conducted.

99. As Mr Berragan pointed out this application is necessary because he wishes the Court to give a direction under sections 306(3) and (4) that at the meeting one member present shall be deemed to constitute a quorum. On behalf of Mr Smith, DLA have already invoked the power under section 303 of the Act to require the directors to call a meeting. Thus there would have been power under section 305 of the Act for Mr Smith to call a general meeting. However the procedure at such a meeting would be governed by Article 10 so that if, as has been intimated, Mr Butler did not attend it would be inquorate.
100. I was referred to two authorities on section 306 – Union Music v Watson^[6] and Vectone Entertainment v South Entertainment^[7]
101. The facts in Union Music can be taken from the headnote:

W, a world-renowned singer of operatic arias, and his manager at the time, the first claimant, incorporated the second claimant, A Ltd, as a vehicle for the promotion, management and exploitation of W's career. The first claimant held 51% of the shares and the balance of 49% was held by W. The directors were the first claimant, W and W's wife until she resigned. The articles effectively provided that a quorum had to be present before any business could be transacted at any meeting and that any company meeting had to be attended by at least two members unless there was only one registered member.

Clause 6.1.18 of a shareholders' agreement entered into by the first claimant, A Ltd and W provided that the company was not to hold any meeting of shareholders or purport to transact any business at any such meeting unless duly authorised representatives or proxies for each of the shareholders were present.

Disagreements arose between W and the first claimant, which claimed that W had entered into a contract with another management company in breach of his fiduciary duty to A Ltd. The first claimant initiated proceedings against W in the name of A Ltd even though there had been no vote sanctioning the commencement of the proceedings in any board meeting or general meeting. When the first claimant sought to convene a meeting of A Ltd to sanction the proceedings W refused to attend. Furthermore, because the directors were deadlocked after W's wife resigned the first claimant was unable to obtain board approval for the institution of proceedings by A Ltd.

The first claimant applied for an order under s 371 of the Companies Act 1985 requiring A Ltd to hold a meeting of the company in order to sanction the proceedings. The judge held that although the test of impracticability was satisfied because it was almost certain that the general meeting which the first claimant wanted would not be able to take place because there would not be a quorum, it would not be appropriate for the court to exercise its discretion under s 371 to break a deadlock which was of the parties' own making. The judge accordingly dismissed the first claimant's application. The first claimant appealed.

102. The appeal was allowed. The leading judgment was delivered by Peter Gibson LJ. The judgment (which repays reading in full) contains a review of the previous authorities. I shall not repeat the analysis especially as the principles to be derived from it are set out in the Vectone case to which I shall refer shortly. In the analysis he made a number of comments about the facts of the case:

1. It was not a case where there were class rights. There was nothing in the Articles which conferred any right on W as shareholder which was not also conferred on A Ltd. [see paragraph 39]

2. It was not a case where the shareholdings were equal. Thus the agreement was not designed to ensure that power should be shared equally . Clause 6.1.18 was in the nature of a quorum provision. [see paragraphs 41 and 42]

103. The heart of the decision is to be found in paragraphs 46 to 48 of the judgment:

[46] There is no doubt that if, as one would expect, Union exercises its voting rights at a meeting not attended by Mr Watson or his proxy, it would be doing so in contravention of cl 6.1.18. For the reasons which I have already given, I do not see that as being an insuperable obstacle in the way of the court making an order under s 371. The court should consider whether the company is in a position to manage its affairs properly. It ought also to take into account the ordinary right of a majority shareholder to remove or appoint a director in exercise of his majority voting power. A meeting would be limited to the single act of enabling the appointment of a new director to be considered and voted on. Taking the view that I do that cl 6.1.18 is in the nature of a quorum provision rather than a provision confirming a substantive right, it seems to me that the judge was wrong to rely on that provision to refuse to order the meeting.

[47] I would add that I also disagree with the judge's view that Union had chosen the wrong means in view of the possibilities of a derivative action or a s 459 petition. I see no reason why a shareholder in the position of Union should not utilise the simple means afforded by s 371 rather than incur the greater difficulties and expense of the other possibilities. It is unnecessary to consider the other points which were taken by Mr Bartley Jones as to why the judge erred in relation to s 371.

[48] If Buxton LJ and Morland J are in agreement thus far, it follows that the judge's order cannot stand, and this court should consider whether it should exercise the power under s 371. On that, as it seems to me, the answer is plain. I can see no sufficient reason why the order should not be made so that the deadlock in the board can be broken. Of course, I acknowledge that that means that the majority shareholder will have his way by the appointment of a director of its choice, save where the parties have agreed to complete equality. One side or the other has to prevail, and I cannot see that the contractual provisions in the agreement provide a sufficient reason why the power should not be exercised. Companies should have effective boards able to take decisions. I would therefore be prepared to make an order for the calling of a meeting to consider the question of the appointment of a further director and to allow the voting on that, even though only one member is present at that meeting.

104. Mr Hollander QC and Mr McPherson referred me to paragraph 32 of the judgment where Peter Gibson LJ, in the course of his preliminary observations made the point that the section was procedural and that it was designed to allow the Company to get on with managing its own affairs. They point to the fact the Company is being managed at the moment. Mr Berragan, on the other hand makes the point that the affairs of the Company that the section is concerned with are the affairs that can be determined by the members at a general meeting. It has nothing to do with the day to day running of the business of the Company by one or other of the Directors.
105. The Vectone case also involved a situation where the Claimant (the 60% majority shareholder) was unable to pass resolutions appointing additional directors authorising the institution of legal proceedings and removing a director because the 40% minority shareholder did not attend the meetings which were accordingly inquorate.
106. The application under what was then section 371 of the 1985 Act came before Richard Sheldon QC who made the order sought.
107. In paragraphs 32 and 33 of his judgment the judge set out the principles :

[32] …I derive the following principles from the Union Music case.

(a) Section 371 of the Companies Act 1985 is a procedural section intended to enable company business which needs to be conducted at a general meeting to be so conducted. A company should be allowed to get on with managing its affairs without being frustrated by the impracticability of calling or conducting a general meeting in the manner prescribed by the articles and the Act.

(b) Where there is a majority shareholder and no class rights attaching to particular classes of shares which the convening of a general meeting is designed to override, the court in exercising its discretion under s 371 will consider whether the company is in a position to manage its affairs properly and will also take into account the ordinary right of the majority shareholder to remove or appoint a director in exercise of his majority voting power.

(c) The fact that quorum provisions in the articles require two members' attendance is not in itself sufficient to prevent the court making an order under s 371 to break a deadlock in favour of a majority shareholder who is seeking a proper order, such as the appointment of a director, which he has the right to procure in ordinary circumstances.

(d) Section 371 is a procedural section not designed to affect substantive voting rights or to shift the balance of power between shareholders in a case where they had agreed that power should be shared equally and where the potential deadlock is something which must be taken to have been agreed for the protection of each shareholder. However, a quorum provision is not of itself sufficient to constitute such an agreement.

[33] I also refer to the Woven Rugs case [2002] 1 BCLC 324 at [14] where Mr Anthony Mann QC approved the following main principles (citations omitted), which were not in dispute in that case:

'(a) Section 371 gives the court a discretion. An applicant for an order is not entitled to an order as of right; nor is the respondent entitled to resist the order as of right.

(b) The effect of s 303 of the Companies Act 1985 is to give a majority shareholder a right to remove and appoint directors. That has to be borne in mind in considering the exercise of the discretion.

(c) The quorum provisions in the articles cannot be regarded as conferring on a member some form of veto in relation to company business.

(d) The existence of a concurrent s 459 petition is not necessarily a bar to the grant of an order under s 371; nor is the fact that the results of the proposed meeting would be likely to generate further such litigation.

(e) If there is an arrangement which effectively gives a right in the nature of a class right to the respondent shareholder, then the court will not make an order if the result of that order would be to infringe that class right.

(f) It is open to the court, in the exercise of its jurisdiction, to impose conditions or other restrictions when making an order if it is necessary to do so in order to achieve justice in the case.'

108. In the course of the evidence Mr Butler appeared to be asserting that the quorum provisions in Article 10 gave him some sort of class right to protect his position as a minority shareholder. However in the light of these authorities and (possibly) of the fact that there were 8 shareholders in February 2004 when the articles were adopted Mr Hollander QC did not pursue the argument. Instead he submitted that the quorum provisions were a factor to be taken into account in the exercise of the court's discretion.
109. The main submission made by both Mr Hollander QC and Mr McPherson was that the Court should refuse to order a meeting in the exercise of its discretion or at least should not order a meeting at this stage. It should defer a decision until after the proceedings are concluded. In their submission the case cried out for a speedy trial.
110. They rely on the alleged dishonesty of Mr Smith both in respect of the cheque fraud and in respect of the expenses allegedly overclaimed by Mr Smith. Whilst the investigation of Ernst & Young continues it is, they submit, inappropriate for there to be such a meeting. They refer me to the serious nature of the fraud both in the amounts involved and its sophistication involving – as Mr Hollander QC submitted – the alteration of cheque stubs. They refer me to the evidence that Mr Smith has destroyed documents, and been involved in the alteration of documents. They also rely on what they describe as the quite extensive evidence that Mr Smith is an intimidating character who would intimidate potential witnesses including (according to Mr McPherson) witnesses who have not yet provided witness statements. Finally, although they accept it may not add much to the other submissions they rely on the maxim that he who comes to equity must come with clean hands.
111. Despite the force and vigour with which these submissions were put I cannot accept them. It seems to me that this case falls within the principles in the cases to which I have been referred. It is a case where the majority shareholder ought to be entitled to exercise his ordinary voting rights to appoint and remove directors. It is not a case where there are any class rights. It is a case where the will of the majority shareholder is being thwarted by the refusal of the minority to attend meetings of the Company so as to render the meetings inquorate.
112. I turn then to the arguments put forward by Mr Hollander QC and Mr McPherson:

1. To my mind it is of considerable significance that Mr Butler chose to take no action in respect of the cheque fraud between December 2009 and May 2011 and only chose to raise it in May 2011 when Mr Smith was threatening to use his power as majority shareholder to appoint a CEO to the board. In the light of Mr Butler's e-mail of 20^th May 2011 it seems to me to be perfectly plain that the decision to instruct Pannone was part of his attempt to protect his position as the Managing Director to the end. The extent of Mr Smith's involvement in the fraud is, at the moment unproved though it is conceded he did receive a substantial sum from Supplychain Solutions. It is to my mind difficult to see why the cheque fraud should prevent Mr Smith from exercising his rights as majority shareholder. Mr Berragan accepts that the court can impose conditions and has offered undertakings which could be incorporated in any order. It may be that these conditions may need some fine tuning but in principle I would regard them as adequate to protect Mr Butler's position as minority shareholder. It has to be remembered that there is nothing to prevent Mr Butler commencing unfair prejudice proceedings and/or seeking permission to commence a derivative action. Indeed I was told that such a course was under active consideration.

2. Very similar considerations apply to the allegations relating to the expenses claim. Mr Smith has been making claims for expenses openly for a number of years. The decision to investigate the claims in May 2011 is to my mind related to Mr Butler's desire to protect his position as the Managing Director. The investigation is at an early stage and the extent of the eventual claim is by no means clear. The sums involved, whilst by no means trivial, are not large when compared with the assets of the Company and there is no reason to believe that Mr Smith is not in a position to repay the Company any sums found due. It is not clear why the existence of an expense claim should prevent Mr Smith from exercising his rights as majority shareholder.

3. I agree with Mr Berragan that there is no reason to defer the decision pending a trial – whether speedy or otherwise. An application under section 306 is designed to be a relatively speedy procedure and to postpone a decision in effect gives the control of the Company to Mr Butler pending a trial which (as the voluminous evidence filed indicates) might be lengthy. In fact as Mr Berragan points out the currently pleaded case relates only to the validity of the suspension without a resolution of the board and to the holding of the EGM. I have dealt with the validity of the suspension above and thus there is no need for a trial on any of the issues in the claim itself. The trial envisaged by Mr Hollander QC and Mr McPherson is, no doubt, a Counterclaim by the Company in respect of the alleged frauds by Mr Smith. Such a claim has not been authorised by a resolution of the board. Thus in order to bring such a claim Mr Butler will either have to persuade the Court that such a resolution is unnecessary or to seek to bring derivative proceedings. I note incidentally that one of the problems in both the Union Music case and the Vectone case was the inability to get a board resolution to authorise proceedings.

4. The allegations of witness intimidation appear to me to relate to the proposed counterclaim and not to the claim by Mr Smith. For reasons already given, no witnesses are necessary in relation to Mr Smith's claim. In any event the allegations are to a large extent vague. It has to be borne in mind that most of the witnesses have worked with Mr Smith for a long time and at no stage were moved to seek alternative employment. The allegations relating to Mr Smith's conduct shortly after 1^st July 2011 are explicable on the basis of his anger at what had happened to him that morning. In any event it is not clear to me that what he said went further than an attempt by Mr Smith to canvass support. It can hardly be suggested that Mr Smith should not be allowed to talk to Mr Harris or Mr Booth.

5. The only allegation of alteration of documents relates to the cheque stubs. It is not suggested that Mr Smith was involved in the alterations himself. As I have noted, the full extent of Mr Smith's involvement is not established. In any event, as Mr Berragan points out, the documents relating to the cheque fraud were kept by Mr Butler and all have been handed over to Ernst & Young. It is not clear what documents Mr Smith can now alter.

6. The only allegation of destruction of documents relates to the bundle of documents given to Mr Smith by Mr Grundy in December 2009. However it is accepted that Mr Smith was encouraged to destroy the documents by Mr Grundy and that Mr Butler in some way condoned that decision. He wanted Mr Smith to believe that there were no documents relating to the cheque fraud. In my view it does not lie in Mr Butler's mouth to complain that the documents were destroyed after condoning their destruction.

7. I agree with Mr Hollander QC that the maxim of equity he cited adds nothing to the arguments on discretion. Indeed as this is an application under a statute it is doubtful if Mr Smith is "coming to equity" at all.

113. For these reasons I have come to the conclusion that there should be an order under section 306 authorising a quorum of one at a meeting for the purpose of the appointment of a new director or the removal of Mr Butler. The precise terms of the order including any fine tuning of the conditions to be attached will be a matter for discussion at the resumed hearing.

5 Funding of the Defence

114. It will be recalled that the costs involved in this application are substantial. Up to the end of the first day of the hearing Mr Smith's costs were over £92,000, the Company's over £103,000 and Mr Butler's personal costs nearly £20,000. Mr Smith owns nearly 70% of the Company and is naturally concerned that he is substantially funding both sides of this litigation. On his behalf Mr Berragan has submitted that it was improper for the Company to incur such costs in this litigation. He takes two points. First in reliance on the Mitchell case he submits that there is no authority to defend these proceedings in the absence of a board resolution. Second he submits that this is a dispute between shareholders and that it was improper of Mr Butler to use company funds for the purpose of funding such a dispute.
115. I was tempted to deal with the question of whether the Company should be entitled to defend these proceedings with the assistance of experienced leading Counsel as a preliminary issue on the first day of the hearing. However having heard argument I was persuaded by Mr Hollander QC to permit him to continue to remain to deploy his full arguments on the issues that arose in the application. I made it clear that this was a case management decision and that I would rule on the submissions in my judgment.
116. Two principles are involved. The first is whether the Managing Director has authority to authorise the active defence of proceedings against the Company by the majority shareholder without a board resolution. By active defence I would include the sort of defence that has been mounted in this application. I would not include the filing of an Acknowledgement of Service, a defence agreeing to comply with orders of the court and the provision of relevant documents on disclosure.
117. This issue raises very similar questions to those discussed in section 3 above. I do not intend to repeat the views expressed in that section. I note that in the Mitchell case the judge held that a Board resolution was necessary to institute proceedings against the secretary. In the absence of express delegation the Managing Director had no such power. As noted above, the Articles are designed to protect Mr Smith's position. In those circumstances I am not persuaded that there was implied delegated authority to bring proceedings against Mr Smith. I am equally not persuaded that there was implied authority to mount an active defence to Mr Smith's proceedings.
118. The second point relates to whether, in any event, Mr Butler should have used company funds to mount the active defence. The relevant principles are contained in the decision of Harman J in Re a company (No 004502 of 1988), ex parte Johnson^[8]. That case concerned an application in a section 459 petition to restrain other parties from causing the company to incur any costs in the action save in respect of an application under section 127 of the Act and/or in disclosure. The judge set out the law as follows:

That application is based upon a line of authority which has been becoming evident in recent years. The principle was drawn to the profession's attention by the decision of Hoffmann J in Re Crossmore Electrical & Civil Engineering Ltd [1989] BCLC 137 at 138, where he said:

'The company is a nominal party to the s 459 petition, but in substance the dispute is between the two shareholders. It is a general principle of company law that the company's money should not be expended on disputes between shareholders.'

That reminder of the classic view was based by Hoffmann J on Pickering v Stephenson (1872) LR 14 Eq 322, so nobody can suggest that it is a new development in the law.

119. Mr Hollander QC did not dispute the principle of law exemplified by the decision. However he submitted that this dispute was not properly to be characterised as a dispute between two shareholders. It was he submitted an employment dispute to which the Company was a party. In those circumstances there was nothing improper in spending the Company's money in defending the application.
120. I cannot accept that submission. The question of whether there should be an EGM under section 306 is to my mind both in substance and in form a dispute between shareholders over who should control the Company.
121. It is true that the claim form also seeks relief on the basis that the suspension of Mr Smith was invalid. However, as is clear from the pleaded case, this is on the basis that Mr Butler as the Managing Director had no power to suspend Mr Smith. This to my mind is in substance rather than form a dispute between shareholders.
122. In my view all of the issues in the claim are in substance a dispute between shareholders. It is true that Mr Butler envisages a counterclaim in respect of the alleged cheque and alleged expenses fraud. However for reasons already given such a counterclaim has not been authorised by the board and no derivative proceedings have been commenced by Mr Butler.
123. It follows in my view that I agree with Mr Berragan that company funds should not have been used for the prosecution of an active defence in this application.

6 Miscellaneous Matters

6.1 Appeal and stay of execution

124. There has, of course been no argument on this so the views I now express are provisional. I express them, though, in the hope that time can be saved at the resumed hearing next week.
125. It will be apparent from the length of this judgment that there are issues of law in this case which, in my view, are properly arguable in the Court of Appeal. On the other hand the situation is urgent. In those circumstances I would provisionally be inclined to grant permission to Mr Butler and/or the Company to appeal together with a stay on terms. Those terms would be:

1. The Notice of Appeal should be filed and served within 7 days of the date of the handing down of the judgment (i.e. by 4 p.m 8^th September 2011). The Notice of Appeal is to be accompanied by an application for expedition of the hearing of the appeal. No doubt DLA on behalf of Mr Smith would wish to support the application for expedition. Any letter of support sent by DLA to be accompanied with the application. DLA to be notified of any hearing of the application for expedition.

2. The proposed appeal to be prosecuted with all due speed and diligence.

3. Not without the permission of the Court of Appeal to expend any company funds on the appeal.

126. I would not presently be minded to impose any stay on any order for costs that may follow this judgment. However I have at present no evidence of means and this must be regarded as a very provisional view.

6.2 Inland Revenue

127. It is apparent that on any view of the facts there have been irregularities in the tax returns of the Company arising out of the cheque fraud allegations. In the course of the hearing I raised the question whether this had been reported to the Revenue authorities. I was told that it had not yet been reported but that either Mr Butler or Mr Smith intended to do so. I indicated that I regarded it as part of my duty to ensure that a relevant report was made.
128. That remains the position. In my view this matter must be reported to the revenue authorities within 3 months of the handing down of this judgment (i.e. by 30^th November 2011). I invite Mr Smith and/or Mr Butler to give an undertaking that such a report will be made and that I shall be informed by one of the solicitors acting in this case that such a report has been made. In the absence of a suitable undertaking I shall myself refer the papers in this case to the appropriate revenue authorities.

6.3 Gratitude

129. I cannot leave this case without thanking all concerned for the clear, helpful way that this by no means straightforward case has been prepared and presented. Although the argument took the best part of two days I do not think it could have been dealt with more quickly.

Note 1   It was no part of Mr Butler or the Company’s case that the resolution was valid.     [Back]

Note 2   Although nothing turns on it clause 6 of the Schedule was not offered by the Company.    [Back]

Note 3   8th Ed at pp 147 -148    [Back]

Note 4   Paragraph 14[9] Update 7    [Back]

Note 5   [1996] 2 BCLC 102    [Back]

Note 6   [2003] 1 BCLC 453    [Back]

Note 7   [2004] 2 BCLC 224    [Back]

Note 8   [1992] BCLC 701    [Back]