Philip John Smith v James Carl Butler and Another
| Jurisdiction | England & Wales |
| Judge | Lady Justice Arden,Lord Justice Rimer,Mr Justice Ryder |
| Judgment Date | 15 March 2012 |
| Neutral Citation | [2012] EWCA Civ 314 |
| Docket Number | Case No: A3/2011/2394 & (A) & (B) |
| Court | Court of Appeal (Civil Division) |
| Date | 15 March 2012 |
[2012] EWCA Civ 314
Lady Justice Arden
Lord Justice Rimer
and
Mr Justice Ryder
Case No: A3/2011/2394 & (A) & (B)
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(CHANCERY DIVISION) LEEDS DISTRICT REGISTRY
HIS HONOUR JUDGE BEHRENS
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Nigel Dougherty (instructed by Berg Legal) for the Appellant
Mr Neil Berragan (instructed by DLA Piper UK LLP) for the Respondent
Hearing date : 15 December 2011
The Primary Issue
The dispute between the parties to this appeal is over control of the board of directors of Contact Holdings Limited ("the Company"). The appellant, Mr James Carl Butler, owns 31.2% of its issued shares and is the managing director of the Company. The respondent, Mr Philip John Smith, owns the balance (68.8%) of the issued shares of the Company, and is its chairman.
On 1 July 2011, in reliance on his authority as managing director, Mr Butler informed Mr Smith that he was suspended from his office as chairman. Mr Butler also excluded him from the Company's premises. Mr Butler did not have the authority of a resolution of a duly constituted board meeting to do this. It appears that Mr Butler had information suggesting to him that over a period of some seven years Mr Smith had utilised his company credit card for the payment of approximately £78,000 in expenses to which he was not entitled. Mr Butler feared that, if he raised that matter with the board before taking action, Mr Smith would have prevented any independent investigation by intimidating staff or witnesses and by destroying evidence. The Company, and its shareholders, would then have suffered. The primary issue on this appeal is, therefore, whether Mr Butler's powers as a managing director entitled him to act as he did.
The third director of the Company, Mr Harris, is group finance director. Mr Butler consulted him before he took steps to suspend Mr Smith as Chairman. Mr Harris gave his approval in advance to Mr Butler's action on 1 July 2011. After Mr Smith left the board meeting on 1 July 2011 at which Mr Butler informed him that he had been suspended, Mr Butler and Mr Harris purported to pass a board resolution for Mr Smith's suspension but Mr Butler does not contend that this was a valid resolution.
Mr Smith for his part denies any wrongdoing. His case before the judge was that he expected that there would be an adjustment to his loan account with the Company for any payment of expenses that ought not to have been made, or that his bonus entitlement would be appropriately reduced. We are not concerned with the detail of any allegation of wrongdoing by Mr Smith. The judge did not hear evidence and no findings have at this stage been made.
There is evidence to suggest that Mr Butler's actions were not wholly motivated by the Company's interests. Mr Smith had expressed dissatisfaction about the way Mr Butler was running the Company since early 2011. In March 2011 he made it known that he had decided that he should use his powers as majority shareholder to appoint another person as chief executive officer ("CEO"). Mr Butler objected and claimed that the appointment of a CEO would amount to constructive dismissal. Mr Smith adhered to his proposal and said in May and June 2011 that if Mr Butler could not embrace the proposal there would have to be a parting of the ways.
Mr Butler had had prior suspicions about Mr Smith's stewardship of the Company's assets on an earlier occasion. In 2009, Mr Grundy (Mr Harris's predecessor) had discovered what Mr Butler contends constituted a cheque fraud involving Mr Smith between 2002 and 2005. According to the judge, this involved the diversion of funds to Mr Smith. Mr Smith disputed the precise amounts involved in this fraud but he accepted in evidence that at least £130,000 was involved. The judge considered it likely "that the true amount involved was in excess of £450,000, even though Mr Smith may not personally have received the whole sum" (judgment, paragraph 5). We again are not concerned with the detail of the claims over the alleged cheque fraud.
Mr Butler took no steps to claim redress in respect of this cheque fraud in 2009. However, in May 2011, at about the time Mr Smith was threatening to bring in a new CEO, Mr Butler, on behalf of the Company, instructed solicitors, Pannone, to investigate whether there had been a fraud conducted by Mr Smith.
On 18 July 2011, Mr Smith, by his solicitors, DLA Piper UK LLP ("DLA") served on the Company a requisition pursuant to Section 303 of the Companies Act 2006 ("the 2006 Act") requesting the Company to convene and hold an extraordinary general meeting to consider resolutions for the removal of Mr Butler and Mr Harris as directors of the Company. Under section 305 of the 2006 Act, Mr Smith was entitled to convene a general meeting of the Company himself if the Company failed to do so. However, Mr Butler made it clear that he would not attend such a meeting. Under the Company's articles, the meeting will then be inquorate and ineffective.
These proceedings
On 19 July 2011, Mr Smith retaliated by applying to the court for a declaration as against Mr Butler and the Company that Mr Butler's action was outside his powers as a managing director, and for an order under section 306 of the 2006 Act convening a meeting of the Company with a quorum of one to consider a resolution to remove Mr Butler.
On 21 July 2011, Pannone gave instructions to Ernst & Young, forensic accountants, to investigate the involvement of Mr Smith in the cheque fraud and the irregular expense claims alleged to have been made by Mr Smith.
Mr Smith's applications came before HHJ Behrens, sitting as an additional judge of the Chancery Division in the Leeds District Registry and were heard by him on 26 July and 23 and 24 August 2011. Mr Butler and the Company were separately represented before the judge. The Company, which was represented by leading counsel, Mr Charles Hollander QC, took an active part in resisting Mr Smith's applications. The Company filed a substantial quantity of evidence before the hearing started and again during the course of the adjournment. Mr Smith offered undertakings to the Court, pending determination of his applications, to ensure that the Company's records were preserved, that staff were not dismissed and that Mr Butler and Mr Harris were not removed as directors.
On 1 September 2011, the judge gave judgment and granted Mr Smith's applications. He also granted orders against Mr Butler restraining him from preventing Mr Smith carrying out his duties as an employee. Undertakings from Mr Smith were also scheduled to his order. The Company had incurred substantial costs in resisting the application, said to total £103,089.96, as compared with Mr Butler's costs on his own behalf of £19,978.43. Those of Mr Smith were estimated to be £92,565. 51. The judge took the view that Mr Butler should indemnify the Company for the costs that it had incurred and made an order to that effect.
On this appeal, Mr Butler, for whom Mr Nigel Dougherty appears, challenges the judge's orders. Mr Dougherty did not appear below. If the judge's orders are implemented, Mr Butler will be removed as a director and there may be no investigation into the alleged misappropriation of the Company's funds.
Thus the primary issue on this appeal is whether Mr Butler, as managing director, had power to suspend Mr Smith and subsequently to instruct solicitors to act for the Company on the applications. There are two consequential issues. The first consequential issue is whether the judge erred in making an order that the Company should be indemnified by Mr Butler for the substantial costs which it incurred in resisting Mr Smith's applications. The second consequential issue is whether the judge erred in making an order for the convening of a meeting of the Company, with a quorum of one, for the purpose of passing a resolution to remove Mr Butler as a director.
The primary issue: the powers of a managing director
We are not in this case concerned with the more usual question whether a third party dealing with a managing director is entitled to assume that he has power to do what he did. As Lindley LJ held in Biggerstaff v Rowatt's Wharf [1896] 2 Ch 93 at 102, a person dealing with a managing director must see whether according to the constitution of the company a director could have the powers which that director is purporting to exercise. This appeal, however, is concerned with the question of what powers the managing director actually had. There is surprisingly little authority on that point. The powers of a managing director are not, of course, statutorily defined. The parties could have defined Mr Butler's powers when he was appointed. However, they did not do so. In Hely-Hutchinson v Brayhead [1968] 1 QB 549 at 560, Roskill J, whose decision was affirmed by this court, comprising unusually Lord Denning MR, Lord Wilberforce and Lord Pearson, went so far as to state that the question of the implied authority of a managing director was one of "considerable difficulty", as well as being "one upon which there appears to be little or no relevant authority". In the end this court held that on the judge's findings he had sufficient authority for the purposes in question.
Mr Smith and Mr Butler both have contracts of employment with the Company. Mr Smith's salary is £166,000 per annum while that of Mr Butler is £130,000 per annum. Neither Mr Smith's...
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