1. I am asked to advise Mr.James Beattie as to whether he can resist his removal from the directorship, if not whether he has any remedy under the Companies Act 1985. I am also asked to advise on various company law matters relevant to this case.
2. Oakfield Car Rental (company)is a private company formed in 1996. The company was formed with Mr.Philip Jones, Mrs.Julie Dodd and Mr.James Beattie who were also the first shareholders and directors of the company. The company has the nominal capital of £100 divided into 100 shares of £1 each .No share certificates were issued at any time. At the beginning Mr.James invested £15000 to make up the capital, which was obtained by re-mortgaging his home. He invested the money after having assured of 75% shareholding in the company by Mr.Jones. On 8th May 1998, Miss Katherine Davis and her father Mr.William Bridge became members of the company by the approval of a board meeting, to which Mr. James was completely unaware until very recently. Both the new members were allotted one share each. And, on 17th October 2000, Miss.Davies and Mr. Bridge were appointed as directors in an extra ordinary meeting, convened pursuant to section 368(4) of the Companies Act 1985.
3. Meanwhile in 1999, Mrs. Julie Dodd died, and her estate Kevin succeeded her directorship.
4. In September 2000, Mr.James came to know that the company issued only 5 shares, one each to its existing 5 directors. Mr.James still did not have the committed shares. Initially the company run at Mr.James’s site at the oakfield road. A year later, the company changed its venue. The company started its business with 15 cars, and at the end of year 2000 that increased to 300. During the term of last 4 years from the date of incorporation no dividend was declared. Mr.James is receiving director’s fees £400, a month, since very recently, the amount which he supposed to have received 3 years ago. Mr.James is very concerned about the manner in which the company had been run. He asked Mr. Jones for an up to date accounts and details of current shareholding of the company. Following the asking, a notice have been received by Mr.James for an extraordinary general meeting to consider the resolution of Mr.James’s removal.
Summary of Advice
5. Almost everything depends upon whether the removal would be made. In my opinion, Mr James possibly cannot resist his removal, unless it can be proved that the appointment of new two directors are not valid. If so removed, Mr.James has a clear case of unfair prejudice, and alternatively if the court find the ground for just and equitable winding up, Mr James will almost certainly obtain an order for the repayment of his investment of £15000.
Conflict of interest
6. A major aspect of directors’ fiduciary duty is that they must not let their duty to the company come into conflict with their personal interests. It is not a breach of duty per se for the directors to allow such a conflict to occur, but they are under a disability from entering into any transaction where such conflict exists. Any such transaction from which they derive personal benefit is voidable and can be set aside at the option of the company. Section 317 of the Companies Act1985 (Act) suggests for disclosure of such interests and penalty of such breach. The effect of section 317(9) is that disclosure required by section 317, does not validate the contract, which under the common law can only be validated by disclosure to and ratification by the general meeting, or by following the provision laid down in the articles. Clause 12 of the Articles of Association, if followed in all respect, the 3 directors with conflicting interests, may validate any contract entered into between the 2 companies. The section in itself does not affect the contract. The section merely creates a statutory duty of disclosure .
7. The papers before me does not provide full information as to whether any deals made between Oakfield Car Rentals and Mayfield Car Rentals on regular basis, or whether disclosure of the 3 directors interest in the Mayfield Car Rentals has been made, or whether any contract had been diverted to Mayfield Car Rental Ltd, or at all? The facts surrounding these need to be ascertained from Mr. James. His further instructions on these point need to be obtained for final advice. I like to reserve my opinion until full notification of the facts.
8. However, from the information at hand, it is clear that Mr.James was unaware of the other directors’ interest in Myfield Car Rentals Ltd.Generally, the 3 directors must have to declare the nature of their interest at the first board meeting at which the proposed contract(if any) is considered, or, where they become interested, they would have to disclose it at the next meeting of the board. The directors can give a general notice to the board of directors to the effect that they are members of a specified company and they are to be regarded interested in any contract with that company. If they fail to comply with this section are liable, on indictment, to an unlimited fine and, on a summary conviction, to a fine upto £2000.
9. Even if the transaction is validated pursuant to cl 12 of the articles, the directors with interest are still liable to fine if no such interest was disclosed at first opportunity.
10. Could instructing solicitors obtain instruction from Mr. James as to his knowledge of the 3 Directors’ interest in Mayfield Car Rental, in particular, since when he knew it? whether it is known to his nephew? Because in cases where every director knows of the interest, then failure to disclose would only be technical breach rather than a substantive default.(obiter, Lee Panavision Ltd v Lee Lighting Ltd(1992) BCLC 22)
11. There has not been declared any dividend from the company’s incorporation during the last 4 years. And also there was no review of the pre-settled wages of the directors as promised. It is apparent from the papers before me, that Mr.James was from very recently being paid £400 a month, which he supposed to get a long ago(3 years). However, the current figure of the drawing of Mr.Jones fees is not with me to suggest that, he was abusing his position. Could Instructing solicitors please enquire and obtain the precise figure of so. However, considering his living in 5 bedroomed house, I am of the view that his income of £750 a month is not sufficient to meet the rent of such a big house. Could instructing solicitors please try and obtain the figure of the amount of rent, Mr. Jones pay a month.
12. I admit that Mr. James have been really very concerned about the manner in which the Company has been run. The directors in control of the company (Mr.P.Jones, Mr.William Bridge and Miss.Katherine Davies)are not performing the function in the way they should have done. It might be possible that they have been drawing a large amount of the Director’s fees disproportionate to the amount of paid up capital of the company. The accounts provided does not reveal the director’s fees under separate head, but in my view the amount of overhead seems to cover the fees. Dividends are usually paid from the profit of the company. A large amount of any inconsiderate expenditure and director’s fees cut-off the profit of the company, which might have the result of not declaring any dividends from the date of the incorporation of the company.
13. The company can calculate the profit available for distribution by simply looking at the profit and loss account for the last 4 years. The accumulated profits seems to exceed accumulated loss every year. Persistent non-payment of dividends without an adequate reason and explanation may be the basis for a section 459 application by Mr.James.
14. The latest filed accounts are for the year ended at 2000. The accounts show that the last year profit & loss and net margin was higher than those of the previous years. All these might suggest that the business was not that successful at first stage to increase in Mr.James’s remuneration, until very recently. Could instructing solicitors please try and obtain the precise break down of the accounts provided, in particular, how much Mr. Jones and other directors was being paid by the company for all the years.
15. The turnover or sales income for the year ended in 2000 is less than the previous years, that left me with the impression that, Mr.Jones, Miss Davies and Mr.William might have diverted the business of Oakfield Car Rental to Mayfield Car Rental. If so, they would be under a breach of their fiduciary duty; which may liable them for damages to the other directors; and also a matter amounting to unfair prejudicial conduct justifying a section 459 petition.
16. Furthermore, the instructing solicitors is required to obtain the explanation from the company accountants or the directors as to why the expenditure for sub-contractors was too high in the previous years than 99-2000 .The fluctuation in the amount for the sub-contractors seems excessive and not business like.
Removal of Mr.James
17. 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, except in the case of a director of a private company who was holding office for life, whether or not subject to retirement under an age limit by virtue of the articles or otherwise. Cl 11 of Articles of Association of Oakland Car Rentals Ltd states that, no person shall be liable to vacate office by reason of his attaining age 70, which seems to suggest that the directorship of the original 3 subscribers was for life. A further instruction is needed on this point. If, thus Mr. James can show his tenure for life, he would be able to resist the other directors’ wishes to his removal. However, I do not have great confidence that the court will hold it.
18. Special notice(28 days) is required of such a resolution to remove him, at the meeting at which Mr.James would be removed. It is clear from the papers before me that there is no problem with the time table of notice. It is also apparent that, on receipt of notice of an intended resolution so to remove Mr.James, the company sent a copy of it to Mr.James. The only possible way for Mr. James, is to rely on section 304 of the 1985 Act, which entitles him to be heard on the resolution at the meeting.Thus, he will be left with a chance to object the resolution. However, in my view, his sole
objection without any special class of share with high poll cannot resist his removal. Whether a share or class of shares has any vote on the matter and, if so, what is its voting power on the resolution in question depends entirely on the voting rights attached to that share or class of shares by the articles of association. The articles of association of Oakland Car Rentals Ltd does not reveal of any such voting rights. In the absence of so, it is highly unlikely that Mr. James can challenge his removal at the meeting on 7th May 2001.
Validation of the 17th October meeting
19. The directors are deemed not to have duly convened the meeting if they convene a meeting for a date more than 28 days after the date of the notice convening the meeting[Section 368(8)]. The meeting convened under section 368, on 17th October, for the appointment of 2 new directors is thus not duly convened because the notice of so was on 13th September, and the meeting convened on 17th October, hence it is more than 28 days have elapsed. Thus, any decision made at the meeting not duly convened are invalid. If so, the appointment of the two new directors(Miss Davies and Mr.William) is not valid, and a further court order might be needed to inactivate them from any function of the company.
20. If the appointment of the new directors can be proved to be void, there is a small chance to reach an ordinary resolution to remove Mr.James by the existing 3 directors (namely, Mr.James, his nephew Kevin and Mr. Jones). It is necessary to obtain instruction from Mr. James in respect of his terms with his nephew Kevin. Thus, in between the 3 directors, namely Mr. Jones, Mr.James and Kevin; if Mr.James and Kevin go against the removal there is no chance of reaching any ordinary resolution as to Mr.James removal.
21. Even if the removal would be made, the above provisions are not to be taken as depriving Mr. James of compensation or damages payable to him in respect of the termination of his appointment as director. Thus, Mr. James could claim compensation for his removal, if made.
|Share allotment and inspection of the members’ register|
22. It is not suggested in the papers at hand, that whether the shares allotted to Miss.Davies and Mr.William was a transfer out of Mr.Jones’s 24 share, or a fresh allotment. However, from Mr.James’s statement it is apparent that all the 5 directors have been issued one share each, which seems to suggest an allotment. Now the question is- how come the new shares have been allotted without increasing the authorised share capital? Because, the 100 shares have already been promised to the original 3 subscribers, although they are all not issued yet. However, could instructing solicitors enquire and obtain the information as to the person, who set up the company and arranged the provision for each director to hold one share each. Alternatively, if it is a transfer, the instruction need to be obtained as to whether Mr. James or Mrs. J Dodd had been requested to purchase the shares, allotted to the new members in 1998. If not so, it’s a breach of cl 6 of the articles of association, which may liable the company for damages to Mr. James. To overcome this confusion, an application can be made to the court under section 356 of the 1985 Act. If so, the court may order for inspection of the member register, so that the applicant can determine how many shares had been allotted to the new members? which shares have been allotted? who are the shareholders at the moment? how much they paid for those? whether the allotment was in discount or with premium(as the business was good) Etc. Delivery of the share certificate 23. If the removal order can be proved to be unjustified Mr. James can apply to the court for an order pursuant to section 185 of the1985 Act, that the company and its directors do forthwith deliver a certificate for 74 fully paid shares of £1 each in the capital of the company. The articles of association of the company do not contain any provisions restricting the transfer of fully paid shares.
Absence in Board meeting
24. As to the minutes, dated 8th May 1998, Mr James claimed no knowledge of distributing shares to the new members, because Mr. James stated in his statement that he assumed the P.Jones transferred his own shares to Miss. Katherine Davies and Mr. William Bridge. And also Mr.James had not been informed of so. At common law, every director is entitled to notice of director’s meetings and to be able to attend and speak (Harben v Phillips,1883,23 Ch D 14). So, any such meeting will not be held to be valid board meetings and, therefore, the decisions taken even a quorum is present will not bind the company (Re Homer District Consolidated Gold Mines,1888,39 Ch D 546). Thus, Mr. James, has the right to know what is going on at that meeting. It affects his individual interest as well as his liability as director, and entitles him damages for such breach.
25. The letter of P.Jones, dated 5th March, in response to the solicitor’s letter, stated that, Mr. James was present at the meeting on 17th October 2000, where Miss. Davis and Mr. Bridge were confirmed as directors of the company. But, it was not suggested whether Mr. James was present on the 8th May 1998 meeting, where they allotted shares to Miss. Davis and Mr. Bridge.
26. However, in my opinion, Mr. James’s subsequent approval of Miss Davies and Mr.William Bridge becoming directors on 17th October meeting, might be prejudicial, in the sense that, he thus approved the previous meeting valid. And if so, the new directors’ appointment cannot be challenged on the basis that they are not the members of the company. Because a director need not be a shareholder .
Unfair prejudice and equitable winding up
27. Now to consider, whether any hope to getting a meaningful return of the £15000, which Mr.James invested if he would be removed. It might be that any sum so advanced by Mr.James, was with little hope of getting a meaningful return on it, and might be with the hope that such investment would tie to the company. Hence, there is a little chance of any repayment order of so. However, I anticipate that we can successfully argue that three subscribers have invested their capital on the footing that each would earn a living by working for the company and drawing a remuneration as a director. In such cases, if it can be said that the members had a legitimate expectation of continued employment as a director, dismissal from the office may constitute unfairly prejudicial conduct, which in my view gives Mr.James a ground for section 459 petition. I am reasonably confident that this view will be accepted by the court. But, it is doubtful whether section 459 petition would help him to recover the invested money. However, alternatively in my view the only possibility of recovery of £15000 rest on the application for equitable winding up of the Oakland Car Rentals Ltd. Because, it is unjustified for the majority directors to remove Mr.James without giving an opportunity to remove his investment from the company. Furthermore, without any serious misconduct from Mr.James’s part, his removal would be inequitable.
28. The matter of principal concern here is that, winding up of the company in this circumstance might be found by the court drastic and possible chance of employees losing their job. Furthermore, if there is an alternative remedy, namely seeking relief for unfair prejudice, the court may be reluctant to order winding up. However, it is still possible to add prayer for just and equitable winding up as an alternative to the relief for unfair prejudice, only if winding up of the company is the relief which Mr.James prefers: Practice Direction(Companies Court:Contributory’s petition,1990).
29. It is not suggested in the papers before me that, whether any shareholders’ agreement was made so as to retain any investment in case of any director’s removal. If so, the equitable winding up may not help to recover the same.
30. Furthermore, it is my view that Oakfield Car Rentals Ltd will be regarded by the Courts as a quasi-partnership. The company was formed on joint venture basis by the family members. This is evident that the company was to be run on the basis of personal relationships, which the court must take into account in considering winding up. In such cases the Courts possibly find that the intention was that the company would be run on the basis of mutual trust and confidence(Re Company(No.003028 of 1987)BCLC 282). The lack of confidence by Mr.James on the other directors can be supportive to this application.
31. If the court would find difficulty in accepting the above views, any recovery of that sum may not be possible. However, I am of the view that if any removal would be made, that would entitle Mr. James a good amount of compensation. Furthermore, the non-disclosure of conflicting directors’ interest in Mayfield Car Rental Ltd allow Mr.James a reasonable amount of fines. Doubtless these would bring the loss down substantially.
32. I would therefore advise that it is preferable for Mr.James to wait until his removal. Possibly then he would have a cause of action for the prejudicial conduct of the other directors, or alternatively bring a petition for just and equitable winding up. If the company is wound up, Mr.James might recover his invested amount of £15000. However, I am of the view that, even if such removal is made it would be a removal from the directorship. Mr.James would still be the members of the company if not wound up. Lastly, I am afraid to say that no order of injunction may be granted to restrain the other share holders voting in his removal, because there is no petition yet.
If it can be of any further assistance, please do not hesitate in contacting me.
Dated. 23rd April 2001