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IN THE SUPREME COURT OF JUDICATURE CHANF 96/1735/B

COURT OF APPEAL (CIVIL DIVISION)

(His Honour Judge Howarth) Royal Courts of Justice

Strand

London WC2

Tuesday, 24th June 1997

B e f o r e :

LORD JUSTICE NOURSE

LORD JUSTICE ROCH

LORD JUSTICE PHILLIPS

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PETER LESLIE BERNARD ROSS

Applicant (Respondent)

-v-

ELAINE TELFORD

First Respondent (Appellant)

LINKSIDE DEVELOPMENT COMPANY LIMITED

Second Respondent

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Computer Aided Transcript of the Palantype Notes of

Smith Bernal Reporting Limited

180 Fleet Street London EC4A 2HD

Tel: 0171 831 3183 Fax: 0171 831 8838

(Official Shorthand Writers to the Court)

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MR R LANDER (instructed by Messrs Davis Blank Furniss, Manchester) appeared on behalf of the Appellant First Respondent.

MR R STERLING (instructed by Messrs Taylors, Blackburn) appeared on behalf of the Respondent Applicant.

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J U D G M E N T

(As Approved by the Court)

Crown Copyright

Tuesday, 24th June 1997

LORD JUSTICE NOURSE: This appeal raises a question as to the ambit and effect of section 371 of the Companies Act 1985 which can only be explained by reference to the matrimonial proceedings out of which it has arisen.

In 1977 Peter Leslie Bernard Ross and Elaine Ross were married. They had three daughters, now aged 21, 17 and 14 respectively. The marriage ran into difficulties and the parties separated on 26th December 1990. They were divorced some time in 1993, and in December of that year Mrs Ross remarried and became Mrs Telford.

During the marriage the parties carried on business as electrical contractors through the medium of a small group of companies, one of which is called PLB Ross Electrical Contracting Company Limited ("PLB") and another Linkside Development Company Limited ("Linkside"). Mr Ross and Mrs Telford are the two directors of and equal shareholders in PLB. They are also the two directors of Linkside, in which Mr Ross and PLB are equal shareholders. The quorum for board and general meetings of both companies is two. Accordingly, both companies are potentially deadlocked at both board and general meeting levels. Moreover, without the co-operation of Mr Ross and Mrs Telford as directors and shareholders of PLB, that company cannot appoint someone to vote for it at general meetings of Linkside.

The divorce proceedings have been described by Mr Ross as having been extremely acrimonious, not least in regard to ancillary relief. On 11th March 1993 Mr District Judge Fish (as he then was) made an order, one of whose provisions was that the net proceeds, if any, arising out of any liquidation or sale of PLB or Linkside should be divided equally between the parties. In other words, notwithstanding that Mr Ross's underlying beneficial interest in Linkside was originally 75%, Mr District Judge Fish reduced it to 50%, as in the case of PLB. That is the position as it stands today, a subsequent consent order of 19th October 1995 not having varied that provision of the earlier order in any respect.

It is necessary to mention another feature of the ancillary relief proceedings, namely Mr Ross's allegation that Mrs Telford had amassed undisclosed assets at the expense of Linkside and himself. That allegation is described by Mrs Telford in paragraph 4 of her affidavit in these proceedings:

"It was the Applicant's case within the ancillary relief proceedings that I had been involved in a substantial series of frauds upon him and Linkside. In short he was contending that I caused suppliers of goods to Linkside (namely A & F Sprinkers Ltd) to raise bogus invoices for fictitious goods which were never delivered. According to the Applicant I then arranged for these bogus invoices to be paid (along with genuine ones) by signing the Applicant's name on Linkside company cheques. The final stage of the Applicant's theory of conspiracy with such suppliers was the distribution of the money thus extracted from Linkside between the conspirators and the consequential amassing by me of a supposedly large fund which became known within the ancillary relief proceedings as ´the pot of gold'."

The allegation was fully investigated by the district judge, who, having recorded that Mrs Telford was questioned searchingly for an extended period and taken through many transactions recorded or partly recorded in the bank statements produced, rejected it. In giving judgment, he said:

"There was no evidence put before me on which I could conclude that Mrs Ross had been in league with any supplier to pay out the company's money on false invoices and then share the proceeds with her co-conspirator. ... I am not satisfied that there has been any dishonesty by Mrs Ross vis-a-vis the company in her withdrawal of funds. They were withdrawn by cheque and it is clear that there was a very informal attitude towards the signing of cheques, Mrs Ross having admitted that she added her husband's signature to the cheques in addition to her own when it was convenient to do so."

In 1994 Mr Ross, on his own initiative, caused Linkside to commence proceedings, first, against Mrs Telford, secondly, against A & F Sprinklers Limited and, thirdly, against National Westminster Bank plc ("the bank"). Subsequently, the proceedings against A & F Sprinklers Limited were struck out for failure to comply with a peremptory order and those proceedings are now absolutely dead. The proceedings against Mrs Telford were struck out and we are assured by Mr Sterling, who appears for Mr Ross, that they are effectively dead. In his affidavit in these proceedings Mr Ross said that he was not going on with them. He then appealed against the striking out order, but we are now assured that that appeal will be taken no further. We have been told that Mr Ross appears in person in those proceedings. Clearly, he ought at once to discontinue them. So we proceed on the footing that those proceedings are also dead.

That leaves only the action by Linkside against the bank, in which it is claimed that the bank was not entitled to debit Linkside's account with the amount of three cheques totalling £100,000 drawn by Mrs Telford in favour of A & F Sprinklers Limited in May and June 1988. The statement of claim alleges that Mrs Telford forged Mr Ross's signature on those cheques, but the bank's primary defence is that it was a common practice for each director to forge the other's signature on cheques drawn on Linkside's account and that each of them consented to and acquiesced in that practice.

It is evident that the commencement of Linkside's action against the bank, similarly in the case of the other two actions, was an attempt by Mr Ross to resuscitate the claims made by him and rejected by the district judge in the ancillary relief proceedings. Mr Sterling has sought to persuade us to the contrary, but in the light of the extensive cross-examination of Mrs Telford recorded in the district judge's judgment I am not prepared to assume, without clear evidence to that effect, that the matter of those three cheques was not as fully investigated as any other component of the alleged conspiracy between Mrs Telford and A & F Sprinkers Limited.

At some time after he caused Linkside to commence its action against the bank Mr Ross must have been advised that, having been commenced without the authority of the board, it had not been duly authorised and was liable to be struck out. On 2nd July 1996 he issued a notice of motion in Linkside's action against Mrs Telford seeking relief similar to that subsequently sought by the originating summons initiating these proceedings which was issued on 28th August 1996. The purpose of the proceedings was, and is, to have Linkside's action against the bank ratified. In the originating summons the following relief is claimed:

"1. That a meeting of the directors of Linkside Development Limited be called and held as it is impractical to conduct a meeting in the manner prescribed by the articles.

2. That one member of the company present in person shall be deemed to constitute a meeting."

I need not read 3. I should observe that what was really sought was not a meeting of the directors of Linkside but a meeting of the company. The proceedings are headed in the matter of section 371 and in the matter of Linkside. The respondents are Mrs Telford and Linkside.

The originating summons came before His Honour Judge Howarth, sitting as a judge of the Chancery Division in Manchester, on 18th November 1996, when he ordered that Linkside, on Mr Ross's requisition within 21 days, be at liberty to convene a meeting of its shareholders for the purpose of considering and voting upon a resolution for the appointment of a representative of Mr Ross's solicitors as a third director of Linkside for a period of one year from the date of appointment to such office. The judge also ordered that a representative of Mr Ross's solicitors might attend at that meeting and vote on behalf of PLB. That was the substantive relief granted by the order. The judge required an undertaking by Mr Ross to amend the originating summons to include a prayer seeking relief in the form in which it was granted. That undertaking has been complied with. He also required an undertaking by Mr Ross to indemnify Linkside against the costs of the action between it and the bank.

The judge then gave directions for an inquiry to be undertaken in order to see whether Mr Ross was able to finance Linkside's action against the bank. But it is clear that the substantive relief granted was not in any way dependent on an affirmative answer to that inquiry. In other words, if the order had not been stayed, it would have been possible for the meeting to go ahead, for the newly constituted board of Linkside to ratify the action against the bank and for a negative answer then to be given to the inquiry at a stage when the stable door would have been closed after the horse had bolted. I shall revert to that matter later. That is the clear effect of the order. On 13th December 1996 Mrs Telford entered a notice of appeal against it. At an inter partes hearing on 13th January 1997 this court granted a stay of the order over the hearing of the appeal, which it ordered to be expedited.

It will be observed that the relief granted by the judge was different from that sought in the originating summons, in that the order enabled Mr Ross and a representative of his solicitors between them to outvote Mrs Telford on the board of Linkside and thus to ratify the action against the bank. It appears that this method of breaking the deadlock was suggested by the judge himself and it is by no means clear that it was put to counsel before judgment was given. However, that was the order he made and that is the order whose validity we must consider on this appeal, the question being whether section 371 empowered the judge to make an order having that effect.

Section 371 of the 1985 Act, to which the marginal note is "Power of court to order meeting", provides:

"(1) If for any reason it is impracticable to call a meeting of a company in any manner in which meetings of that company may be called, or to conduct the meeting in manner prescribed by the articles or this Act, the court may, either of its own motion or on the application -

(a) of any director of the company, or

(b) of any 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.

(2) Where such an order is made, the court may give such ancillary or consequential directions as it thinks expedient; and these may include a direction that one member of the company present in person or by proxy be deemed to constitute a meeting."

Subsection (3) is consequential and need not be referred to. Section 371 appears in chapter IV (entitled "Meetings and Resolutions") of part XI of the Act (entitled "Company Administration and Procedure"). On a first reading it appears to be concerned with remedying procedural impracticabilities in the holding of a company meeting.

The question, as posed by Mr Sterling, is whether section 371 is an appropriate vehicle for resolving deadlock between two equal shareholders. He says that it is because it is in the widest possible terms and contains no limitations. He relies on authority, in particular on the decisions of Morritt J in Re Opera Photographic Ltd. [1989] 1 WLR 634 and Mervyn Davies J in Re Sticky Fingers Restaurant Ltd. [1991] BCC 754, for the proposition that resort can be had to the section in contentious circumstances, the order in each of those cases having been made in the face of opposition from another shareholder or shareholders. He points out, correctly, that the other remedies available to an equal shareholder in a case of deadlock are limited. There are objections to his proceeding either under section 459 of the 1985 Act or by way of a derivative action. Equally, a winding up petition on the just and equitable ground is cumbersome. In summary, Mr Sterling says that section 371 must have been intended to enable the court to break a deadlock.

The primary effect of the order made by the judge in this case was to regulate the affairs of PLB by authorising a representative of Mr Ross's solicitors to be appointed to represent that company at a general meeting of Linkside. Such an appointment would normally be made at a board meeting of PLB, but whether it was made there or in general meeting the effect of the order was to break the deadlock in PLB. Mr Lander, for Mrs Telford, does not base any procedural objection on the fact that PLB is not a party to these proceedings but he does object to the order as a matter of substance. He says that section 371 does not empower the court to break a deadlock at either a board or general meeting of a company. Indeed, it has nothing to do with board meetings. As for general meetings, he says that the two decisions relied on by Mr Sterling go no further than to show that the court can make orders so as to prevent a minority shareholder from using quorum tactics to stop a majority shareholder from exercising the voting rights attached to his shares. It does not at all follow that the court can make an order so as to permit a 50% shareholder to override the wishes of the other 50% shareholder.

In support of his submissions Mr Lander has relied on what he would call the principle of the thing, which is that 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 have agreed that power shall be shared equally and where the potential deadlock is something which must be taken to have been agreed on with the consent and for the protection of each of them. Mr Lander also relies on the decision of this court in Harman v BML Group Ltd. [1994] 1 WLR 893. In that case the leading judgment was given by Dillon LJ, with whom Leggatt and Henry LJJ agreed. There some shareholders were seeking to obtain an order under section 371 which would have had the effect of overriding the class rights of another shareholder. At page 896H Dillon LJ pointed out that it was entirely novel to seek to use the machinery of convening a meeting under the section to override class rights. At page 898F-G, in the decisive passage at the end of his judgment, he said that it was not right to invoke the section to override class rights attached to a class of shares which had been deliberately imposed for the protection of the holders of those shares although they were a minority.

In my view the submissions of Mr Lander are correct. In particular, I am satisfied that neither of the two decisions relied on by Mr Sterling is authority for the proposition that section 371 enables the court to break a deadlock between two equal shareholders and that that is confirmed by the decision of this court in Harman v BML Group Ltd. For these reasons I would hold that the judge had no jurisdiction to regulate the affairs of PLB in the way that he did and, without such a power, the possibility of a representative of Mr Ross's solicitors being appointed to represent it at a general meeting of Linkside could not acquire reality. That is enough to dispose of this appeal in favour of Mrs Telford. I am also of the opinion that, even if there had been jurisdiction, this court would be bound to hold that, in making the order, the judge exercised his discretion on a wrong principle.

On this part of the case Mr Lander has relied principally on three matters. First, he has said that this application is in substance nothing more nor less than an attempt by Mr Ross to relitigate an issue which was fully investigated and decided against him in the ancillary relief proceedings. That was a point which was considered by the judge, who appears to have thought that it would not be right for him to go into the proceedings before Mr District Judge Fish or even, perhaps, to look at his judgment. With respect, I entirely disagree. Admittedly, there is no question of res judicata, but in the exercise of a discretionary power of this kind a judge would be not only entitled but bound to take into account the fact that the subject matter of the action which it was sought to ratify had already been investigated in previous proceedings. Accordingly, the essential plank on which the judge's exercise of discretion was founded, namely that Linkside's action against the bank was meritorious and that it was prima facie entitled to judgment in its favour for £100,000, is undermined.

Secondly, Mr Lander has relied on the district judge's order that the net proceeds of any liquidation of Linkside as well as of PLB shall be divided equally between the parties. Mr Lander submits that it was therefore a wrong exercise of the judge's discretion to allow the action to be ratified against the opposition of someone who in reality was beneficially entitled to half the assets of Linkside. Mr Sterling's response to that is that, until there is a liquidation, the underlying beneficial interests in Linkside remain 75/25% in favour of Mr Ross. In some cases I can see that that would be a point of some substance. Not so here, because neither company is trading. Each company has assets. Each company is at a standstill. Sooner or later, as a result of an undertaking given by Mr Ross when he succeeded in having the name of Linkside restored to the register in May 1994, Linkside will have to be liquidated. Inevitably that means that PLB will also be liquidated. So I do see some force in Mr Lander's second point.

His third point is that the judge's order, insofar as it failed to make the requisitioning of the general meeting of Linkside conditional on a favourable answer to the inquiry as to Mr Ross's ability to finance the action, was wrongly made. Mr Lander says that if the order stands, it will be possible for the action to be ratified and for more costs to be run up. If it was then found that Mr Ross was unable to satisfy his indemnity, that might be of little comfort to Mrs Telford, even if the action was later discontinued. That is another point which tells in favour of Mrs Telford. Taking the three points together, I am satisfied that the order made by the judge would have been wrong in principle, even if he had had the jurisdiction to make it.

For all these reasons I would allow this appeal and dismiss Mr Ross's application.

LORD JUSTICE ROCH: I agree.

LORD JUSTICE PHILLIPS: I also agree.

Order: appeal allowed with costs here and below (to include the costs of the three hearings at first instance and the appeal and associated applications); the respondent applicant's application dismissed; legal aid taxation for the appellant first respondent.