Removal of Directors Lord Morris' Dissent in Bushell v Faith [1970] AC 1099
| Author | Dr Fang Ma |
| Pages | 137-153 |
Lord Morris’ Dissent in
Bushell v Faith [1970] AC 1099Dr Fang Ma8.1 Introduction 137
8.2 Background 139
8.3 Lord Morris’ dissent 140
8.4 Weighted voting rights versus Parliament’s intention in drafting the Companies Act
1948, section 184 141
8.4.1 Meaning of ‘ordinary resolution’ in the Companies Act 1948, section 184 142
8.4.2 Should weighted voting rights be valid in general circumstances and invalid for specific purposes? 143
8.4.3 Did article 9 defeat the purpose of the Companies Act 1948, section 184? 145
8.4.4 Could the statutory power in the Companies Act 1948, section 184 be
contracted out? 148
8.5 Company law reform 150
8.6 Conclusion 153
8.1 INTRODUCTION
In English company law, the management of a company’s affairs is vested in the directors instead of shareholders.
Limited by Shares states that ‘Subject to the articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company’.
138 Part II – Company and Commercial Law
statutory provision in the Companies Act 1948, s 184 (the predecessor of the CA 2006, s 168) could be circumvented by a private arrangement in the Articles of Association in respect of weighted voting rights. Whilst the majority of the House of Lords
It is submitted in this chapter that Lord Morris was correct in concluding that the weighted voting clause defeated the purpose of the Companies Act 1948, s 184 which explicitly provides that:
A company may by ordinary resolution remove a director before the expiration of his period of office, notwithstanding anything in its articles or in any agreement between it and him. (emphasis added)
The majority’s decision has created uncertainty as to Parliament’s intention behind the Companies Act 1948, s 184 and the mandatory status of this statutory provision. It is further argued that Parliament had missed the opportunity of clarifying this area of law until the recent introduction of s 168 in the CA 2006.
It is submitted that reforming the law in this area should have taken place earlier, to acknowledge the practical effect of weighted voting rights, and to resolve the tension between the House of Lords’ decision at common law and the statutory provision, which permits the removal of directors by ordinary resolution at any time.
This chapter is structured as follows. Paragraph 8.2 provides the background of Bushell, while paragraph 8.3 outlines the dissenting judgment given by Lord Morris. Paragraph 8.4 examines in detail the four main grounds for the House of Lords’ decision: first, what was the meaning of the phrase ‘ordinary resolution’ in the Companies Act 1948, s 184; secondly, whether the weighted voting rights, which were considered valid in general, should be given effect for the purpose of removing directors; thirdly, what was the legislative purpose of s 184 and whether it was defeated by the weighted voting clause; and finally, whether the statutory power in s 184 could be contracted out. Paragraph 8.5 considers the changes introduced by the CA 2006, s 168 and argues that this area of law could have been clarified sooner had Lord Morris’ judgment been adopted by Parliament earlier.
8.2 BACKGROUND
The facts of Bushell v Faith were not disputed. Bush Court (Southgate) Ltd had an issued capital of £300 in £1 shares in 1968, which was distributed equally between three shareholders: the claimant Mrs Bushell, the defendant Mr Faith (her brother) and their sister. The claimant and the defendant were the only directors of the company. The two sisters were dissatisfied with their brother’s conduct as a director and requisitioned a general meeting for the purpose of passing a resolution removing him from office as a director. On a poll at the meeting they both voted for the resolution, while he voted against it.
A dispute arose as to whether the resolution had been passed or defeated under the Companies Act 1948, s 184(1). The company adopted Table A of the 1948 Act as its Articles of Association with certain modifications, such as article 62 and article 9. Article 62 provided that:
subject to any rights or restrictions attached to any class or classes of shares on a show of hands, every member present in person shall have one vote, and on a poll every member shall have one vote for each share of which he is a holder.
Article 9 of the Articles of Association, which granted the weighted voting rights, stated that:
In the event of a resolution being proposed at any general meeting of the company for the removal from office of any director, any shares held by that director shall on a poll in respect of such resolution carry the right to three votes per share and regulation 62 of Part 1 of Table A shall be construed accordingly.
The claimant contended that the resolution had been passed by 200 votes, being those of herself and her sister, to 100, those of the defendant. The defendant argued that in accordance with article 9 of the Articles of Association, his 100 shares carried 300 votes, and that, therefore, the resolution had been defeated by 300 votes to 200. The claimant claimed a declaration that the resolution had been validly passed and an injunction restraining the defendant from acting as a director of the company.
At the Chancery Division of the High Court of Justice, Ungoed-Thomas J held that article 9 of the Articles of Association was invalid because it infringed the
140 Part II – Company and Commercial Law
Companies Act 1948, s 184. The resolution for removing the director, therefore, had been validly passed. It was held by Ungoed-Thomas J that ‘It would make a mockery of the law if the courts were to hold that in such a case a director was to be irremovable’.
The decision of the High Court was unanimously overruled by the Court of Appeal. Harman LJ held that the Companies Act 1948, s 184 did not ‘prevent certain shares or classes of shares having special voting rights attached to them and on certain occasions.
Parliament has never sought to fetter the right of the company to issue a share with such rights or restrictions as it may think fit. There is no fetter which compels the company to make the voting rights or restrictions of general application and it seems to me clear that such rights or restrictions can be attached to special circumstances and to particular types of resolution. This makes no mockery of section 184; all that Parliament was seeking to do thereby was to make an ordinary resolution sufficient to remove a director. Had Parliament desired to go further and enact that every share entitled to vote should be deprived of its special rights under the articles it should have said so in plain terms by making the vote on a poll one vote one share.
In essence, the House of Lords confirmed that an ordinary resolution was sufficient for the removal of directors under s 184; in relation to the number of votes per share for the resolution, the company was free to issue shares with rights or restrictions as it saw fit. Furthermore, a clause which attached weighted voting rights to certain shares was valid both in general circumstances and for specific purposes. It concluded that the weighted voting rights were consistent with Parliament’s intention regarding s 184.
8.3 LORD MORRIS’ DISSENT
Lord Morris’ succinct judgment, due to its significance for the purpose of this chapter, is cited in full below and is then explored in paragraph 8.4:
… it is provided by s 184 (1) that a company may by ordinary resolution remove a director before the expiration of his period of office. The company may do so notwithstanding anything to the contrary in its articles. So if an article provided that a director was irremovable he could nevertheless be removed if an ordinary resolution to that effect was passed. So also if an article provided that a director could only be removed by a resolution carried by a majority greater than a simple majority he...
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