Court Power to Call a Meeting in an Establish Company in UK as per Companies Act

02 Dec

For best company formation UK it is necessary that all the important decisions of a company are conducted through meetings, voting and resolutions. Meetings play an important role in long run of a company. It is a common way of taking formal decisions in companies, especially in public companies. This article discusses about who amongst the company are allowed to call a meeting and a special focus is given on the authority of the court to call meetings in a situation of gridlock.

Calling a Meeting

Before taking any decision, it is a formality to call a meeting in which the decision to be taken is presented as a resolution. Then the members who are authorised to vote, can vote on that resolution. This maintains a sense of confidence in the company and makes best company formation UK easier and effective, because the member’s views about any action taken in the company are considered. According to Companies Act 2006 the following fellows in a company can call a general meeting:

  • Directors (Section 302).
  • The director can be asked by the members who own 5% of the rights of voting or voting capital to call a meeting (Subsection 303 and 304).
  • If the directors refuse for the meeting, members can call the meeting themselves (Section 305).

Power of Court to Summon a Meeting

It is an interesting addition to the knowledge of how to set up a business UK that a court is also authorised to call a meeting as mentioned in Section 306 of Companies Act 2006. Also, Companies Act 1985 has dedicated a section for this matter. It is stated in Section 371 of Companies Act 1985 that:

  • If it is not possible to summon a meeting in the manner that is to be followed to call the meeting or arrange a meeting as prescribed by this Act, the court is allowed to call for a meeting either on its own or on the request of any party that may include:
  • Company’s director.
  • Company’s member. (They are ratified to vote at the meeting, order, hold or conduct a meeting as per the order of the court).
  • In situations where any such direction is given by the court, it may also give directions that it may feel expedient, with direction to consider a member personally or a proxy to arrange a meeting.
  • Any meeting that is summoned and arranged under the first clause of this section, will be considered as a duly called and held meeting of the company for all matters.

Union Music Ltd Case

The case gives an elaboration of the authority of court to call a meeting. The case was related to Russel Watson (W) and Union Music Ltd. Following the Section 371 of Companies Act 1985, U requested to hold a meeting of Arias (A). U held majority of the shares of A. The rest of the shares belonged to W and he was the other director as well. It was mentioned in the agreement of the shareholders of A that, all the shareholders have to use their right of vote such that no meeting could be held and no transaction could be made by A in the absence of any shareholder or representative. There was an argument between W and U. W gave threats of not attending the meeting. There was a deadlock as nothing could be done about the business or appointment of directors. The Court of Appeal assented to the application, and stated that although Section 371 did not permit the court to bring any changes in the rights of classes or to end the gridlock between two shareholders having equal number of shares, this case was different because it did not include any such rights or equal shares.

It was held by Peter Gibson LJ that:

  • Section 371 only aims to make a company able to run its business, which has to be discussed at company’s general meetings. It cannot be doubted that the reason for it is to allow a company to manage its matters and not be prevent by the impossibility of calling a meeting following the instructions of the Act and company’s articles.
  • However, a discretion is given to the court by this power, and it should be exercised in matters that are relevant to it. The provisions for quorum in table A that demands the presence of two members in the meeting will not be enough to stop the court from taking any action under Section 371 in situations when the applicant is requesting an appropriate order for appointing any director and in regular matters, a majority shareholder may have the authority to do it so.
  • There is no reason enough to stop the order of breaking the gridlock. Nor does the agreement provide enough regulations about it. Such an order may help the majority shareholder in choosing its own director, but in any case one side has to be prevalent. There should be strong boards in a company that are capable of taking decisions. Therefore, I would prefer to call a meeting for appointing a new director of the company and give permission to conduct voting for this matter in the presence of only one member.

Then Peter Gibson LJ gave reference of a case stating its facts and verdict:

Harman Case

In the case of Harman v BML, a fact was highlighted that a class of shares had been conferred a right of class which could be overruled by calling a meeting. The court held that it could not be done. Under the provisions regarding the changes in class rights given by Subsection 629-640 of Companies Act 2006, the verdict was not surprising at all. The company that was involved in the case owned a share capital including 290,000 A shares and 210000 B shares. There was one B shareholder whereas 4 A shareholders. The agreement of A shareholders stated that B shareholder should be authorised to maintain his directorship until he or any of his relative owns the B shares and any general meeting in the absence of B shareholder or his proxy was invalid. Dillion LJ stated:

  • The clause of the agreement that authorised B shareholder to be present in the meeting was sufficient to help him maintain his directorship and specially protected his directorship.
  • Class rights should be given their due regard, and the right given to B shareholder to be present in the meeting as a quorum for his security cannot be overruled by Section 371.

In reference to this case Peter Gibson LJ continued:

  • Dillion LJ states it clearly that the court does not hold the power to design a new contract of the shareholders and implement it.
  • However, the present case does not have any relevance with the rights given to class of shareholders. There Is no provision in the agreement that gave any right to W which is not given to U. There is a single class of share. It was argued by Mr. Freedman regarding the case of Cumbrian Newspaper that even if there is a single class and same rights of the shareholders, there is an existence of class rights. I believe, nothing in the verdict of Scott J about the Cumbrian case gives support to this argument.

Peter Gibson LJ again gave reference to another case:

Ross Case

  • In another case, that is, the Ross v Telford case, there were two companies, who had a husband and wife as the only two directors. Amongst the two companies, one company’s shares were equally divided between the couple. Whereas the other company had the husband and the first company as its shareholders.
  • The judge ordered, in a rancorous divorce, that the amount generated after the auction of or upon the windup of any company, should be distributed equally. The second took an action against the bank giving the reason that the signature of the husband had been faked by the wife on the cheques.
  • The husband demanded that the action of the first company should be authorised under section 371 and there should be a representative of the first company’s shareholder selected by him, present in the meeting. The gridlock could be ended if any such order was given.
  • The wife was allowed to appeal that the court was unauthorised to make any such order under 371st section, allowing a shareholder to cancel the requirements of the second shareholder, when they hold equal shares.  She also appealed that section 371 was not designed to create an imbalance in power by giving it more to any one of the shareholder in a case where it had been assented upon by the shareholders to hold equal powers and when a deadlock is important to secure the rights of any shareholder.

Peter Gibson LJ then stated again:

  • The shares were not equally divided in the present case. Nor was the agreement allotting equal powers to the shareholders. Mr. Watson and his wife were expected to be in one party, constituted the major part of the board, leaving the shareholder with major shares as a minority on the board. It seems Mrs. Watson was responsible for the deadlock created in this situation because she stopped acting as the director. Union held major shares and it was being anticipated that Union could make appointment of a new director.
  • I do not think that the judgement given stating that the contracting parties had intended for this gridlock in the contract. What they intended was to make a meeting invalid in the absence of Mr. Watson.
  • The agreement’s provision no. 6.1.18 is more inclined towards quorum’s provision than class rights’ provision. Undoubtedly, if Union votes in a meeting in the absence of Mr. Watson, it would breach clause no. 6.1.18. However, this cannot stop the court from taking an action under section 371. The state of the company to handle its matters should be taken into consideration by the court.   As well as, the right given to a shareholder holding majority of the shares, to appoint or remove directors via voting, should be considered by the court.
  • A meeting can be called for the only action of appointing a director via voting. I believe the judge gave a wrong judgement by refusing to summon a meeting. Additionally, I believe the judge did not have a correct view about Union that it was trying to misuse the derivative action or section 994 of Companies Act 2006.
  • I do not understand that what would cause a shareholder like Union to go for a more difficult option instead of making use of section 371.

He then ordered to summon a meeting that would handle the matter of appointing a director and allow the shareholders to vote upon it even when only one member is present on the meeting. Buxton LJ gave a similar judgement. Both the judgements were concurred by Morland J.

In order to have better understanding of how to set up a business UK there is a need to know about the different regulations and scenarios on conducting a meeting and what have taken place in different companies’ cases. After going through these regulations and cases, one who is about to establish company in UK or wants to buy a limited company from companies house will have a better understanding about how do the members and shareholders get rights of meeting and other conducts according to the number of their shares and the variation in rulings when the proportion of shares is equal or unequal.

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