Schofield v Jones

Factual and Procedural Background

The Applicant, a director of Company A, applied under Section 306 of the Companies Act 2006 for an order to convene a general meeting of the company where attendance of one member would constitute a quorum. The Respondent, also a director and minority shareholder of Company A, opposed the application. Company A, which provides services ancillary to air transport, has two members: the Respondent (minority shareholder) and another individual (majority shareholder). There is a dispute over the share split, but it is undisputed that the Respondent holds minority shares and no class rights.

The company has four directors, three of whom (including the Applicant and majority shareholder) support the application, while the Respondent opposes it. The Applicant and supporting directors allege that the Respondent breached statutory and fiduciary duties by misappropriating company funds, including setting up an offshore bank account and diverting company profits, improper use of company credit cards, and involvement in a fraudulent scheme. The Respondent denies wrongdoing.

The Articles of Association require two members to constitute a quorum, but as only two members exist and the Respondent refuses to attend meetings, the company cannot hold a quorate general meeting without court intervention. The Applicant claims the Respondent is frustrating attempts to remove him as director by not attending meetings or consenting to meetings in his absence.

Following a breakdown in relations and investigations into the Respondent's conduct, including allegations of misappropriation and misuse of company assets, the majority shareholder requested a general meeting to consider the Respondent’s removal as director. The Respondent declined to attend, rendering the meeting inquorate. Subsequently, the Applicant issued the present application seeking court assistance to convene a meeting with a quorum of one.

The Respondent has also indicated intentions to bring unfair prejudice proceedings but had not issued such proceedings at the time of the hearing.

Legal Issues Presented

1. Whether it is "impracticable" under Section 306 of the Companies Act 2006 to convene and hold a general meeting of Company A due to the Respondent’s refusal to attend and thereby frustrate the meeting.
2. Whether the court should exercise its discretion to order a general meeting with a quorum of one member to enable the majority shareholder to exercise the statutory right to remove a director.
3. Whether the existence or threat of unfair prejudice proceedings by the Respondent precludes the granting of relief under Section 306.

Arguments of the Parties

Applicant's Arguments

• The Respondent is frustrating the proper management of the company by refusing to attend general meetings, rendering them inquorate.
• The court’s intervention is necessary to enable a meeting with a quorum of one to proceed, allowing the majority shareholder to exercise the right to remove the Respondent as director.
• The statutory policy under Section 168 of the Companies Act 2006 supports shareholders’ rights to remove directors by ordinary resolution.
• The existence or threat of unfair prejudice proceedings does not bar relief under Section 306 and is merely a factor to consider.
• The Respondent has not participated in day-to-day management since February 2018 and has no intention to do so in future, supporting the grant of relief.

Respondent's Arguments

• The Respondent concedes the jurisdictional threshold under Section 306 is met but submits that the court should exercise discretion against granting relief.
• The Respondent has been excluded from management since February 2018 and has not frustrated company business.
• The application is improper because of the pending or threatened unfair prejudice proceedings under Section 994, which should take precedence.
• The remaining directors can manage the company without the Respondent, and there is no evidence of interference preventing company business.
• Reference to Re Sticky Fingers Restaurant Ltd was made to support the position that Section 306 should not be used to remove a director during ongoing unfair prejudice proceedings.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Union Music Ltd v Watson [2003] EWCA Civ 180	Clarifies that Section 306 is procedural to enable company business despite impracticability of calling meetings as per articles; majority shareholder’s right to remove directors is considered.	Used to establish that quorum provisions do not bar court orders to break deadlocks favoring majority shareholders.
Smith v Butler [2012] EWCA Civ 314	Defines "impracticability" under Section 306 and confirms court’s jurisdiction to order meetings with quorum of one when minority shareholder thwarts meetings.	Applied to find jurisdictional threshold met as Respondent thwarts meeting by non-attendance.
Re Sticky Fingers Restaurant Ltd [1992] BCLC 84	Section 371 (now 306) should not be used to remove a director indirectly when unfair prejudice petition is pending.	Distinguished on facts; court noted this was not a tactical application and Respondent had no day-to-day management role.
Re Whitchurch Consultants Ltd [1993] BCLC 1359	Existence of unfair prejudice petition is not an absolute bar to Section 371 relief; discretion must be exercised considering all circumstances.	Supported the exercise of discretion to grant relief despite pending unfair prejudice petition.
Re Woven Rugs Ltd [2002] 1 BCLC 324	Confirmed that concurrent unfair prejudice proceedings do not necessarily bar Section 371 relief, even if meeting results may generate further litigation.	Reinforced that pending litigation is a factor, not a bar, in discretion to grant relief.
Pringle v Callard [2007] EWCA Civ 1075	Expressed caution about imposing directors on companies where disputes and allegations of improper conduct exist.	Agreed that it is highly impractical to impose a director in such circumstances; supports careful exercise of discretion.
Vectone Entertainment Holding Ltd v South Entertainment Ltd [2004] EWHC 744 (Ch)	Summarizes principles from Union Music Ltd v Watson; Section 306 is procedural, majority shareholder rights considered, quorum provisions not absolute bar.	Used to support procedural nature of Section 306 and discretionary considerations.

Court's Reasoning and Analysis

The court found that the Respondent’s refusal to attend general meetings, thereby rendering them inquorate, satisfied the jurisdictional threshold of "impracticability" under Section 306. The court relied on precedents such as Smith v Butler and Union Music Ltd v Watson to confirm that quorum provisions requiring two members do not preclude the court from ordering a meeting with a quorum of one to overcome deadlock caused by a minority shareholder.

The court acknowledged the Respondent’s arguments regarding pending or threatened unfair prejudice proceedings but held that such proceedings do not constitute an absolute bar to relief under Section 306. Instead, the existence of these proceedings is a factor to be weighed in the exercise of discretion, as supported by Re Whitchurch Consultants Ltd and Re Woven Rugs Ltd.

The court considered the serious allegations against the Respondent and the majority directors’ loss of confidence in him, noting that the Respondent had not participated in company management since February 2018 and had been excluded from the bank mandate. Despite this, as a de jure director, the Respondent retained legal powers that could affect the company’s affairs. The court also noted the statutory policy under Section 168 that shareholders should be able to remove directors by ordinary resolution.

Given these factors, and the fact that the Respondent’s draft petition for unfair prejudice sought only a buy-out of his shares rather than active management or continuation in the company, the court exercised its discretion to grant the relief sought. The court declined to engage in determinations of the underlying allegations of wrongdoing, which were reserved for other proceedings.

Holding and Implications

The court GRANTED the application under Section 306 of the Companies Act 2006, ordering that a general meeting of Company A be held at which the attendance of one member will constitute a quorum.

This decision enables the majority shareholder to exercise the statutory right to remove the Respondent as a director despite the Respondent’s refusal to attend meetings. The ruling facilitates proper management of the company’s affairs by overcoming deadlock caused by the minority shareholder’s non-cooperation. The court emphasized that the existence or threat of unfair prejudice proceedings does not automatically bar such relief, but is a discretionary factor.

No new precedent was established; the decision applies established legal principles to the specific facts. The underlying disputes and allegations of misconduct remain to be resolved in separate proceedings.