Mission Capital Plc v Sinclair & Anor

MR JUSTICE FLOYD: I have before me a number of interim applications in two actions concerning the affairs of Mission Capital plc (“the Company”). At least until the board meeting of 5^th February 2008 Ronald Sinclair and his daughter Emma (“the Sinclairs”) were the only two executive directors of the Company. They were in a minority on the board of the company. Three non-executive directors, Robert Burrough, Giuseppe Chani and Michael Guthrie, (“the non-executives”) were in the majority.

The contracts under which the Sinclairs were employed had a provision, 16.1.6, which allowed the board to terminate their employment with immediate effect if he or she

“engages in conduct which in the reasonable opinion of the board is unacceptable or continues to perform his/her duties after being given a written warning in a manner which in the reasonable opinion of the board is unacceptable”.

Clause 18 provided that:

“An executive whose employment was terminated must resign all directorships forthwith.”

The clause contained a provision to give effect to this:

“Any other director of the company may, as attorney to the resigning director, execute the necessary documents to give effect to it.”

In reliance on those mechanisms, at the board meeting of 5^th February, the board purported to remove the Sinclairs from their employment and consequently as directors of the company with immediate effect. Mr Christopher Phillips was appointed as a new director with an executive role. The unacceptable conduct relied on consisted of a failure to submit important financial information to the Company and failure to meet financial forecasts. These matters are hotly disputed by the Sinclairs.

The Company commenced an action (“the Company action”) seeking injunctive relief to exclude the Sinclairs from the Company’s premises and for delivery up of certain documents. Treacy J granted an injunction over the telephone in the Queen’s Bench Division, granting interim relief to that effect.

The Sinclairs challenged the validity of the action taken at that board meeting. In substance they say that:

The Sinclairs counterclaimed in the Company’s action, which has now been transferred to this Division. In addition, the Sinclairs seek the leave of the court to continue a derivative claim under Chapter 1 of Part 11 of the Companies Act 2006 (“the derivative action”) against the non-executives and Mr Phillips and the Company.

The main applications are these:

I say that these are the main applications, because there are also applications for directions for an expedited trial, applications for a joinder of the Company’s action to the derivative action, and issues arising out of the continuation of Treacy J’s order. These are largely procedural matters which it is agreed can be sorted out once my decision on the applications I have listed has been reached. It is also agreed that the question whether Treacy J’s order is to be continued turns largely on the fate of the Sinclairs’ application to be restored to employment and directorship pending trial. I turn to these first.

By the counterclaim in the Company’s action the Sinclairs contend both that their employment contracts are still subsisting and their purported resignations from the board of directors are invalid. As to the employment contracts, there is a claim made in the counterclaim for an injunction prohibiting the company and the non-executives and Mr Phillips from preventing the defendants from attending the Company’s premises and performing the duties required of them under their service agreements. Though framed in negative terms, the effect of such an injunction would be to grant a form of specific performance of the core obligations of the service contract. As to directorships, the counterclaim includes a claim that the Company and the non-executives and Mr Phillips have breached the personal rights of the Sinclairs as directors of the Company and seeks an injunction reinstating the Sinclairs to the board.

The cause of action is based on a line of cases beginning with Pulbrook v Richmond Consolidated Mining Company (1878) 9 Ch.D 610 and followed in Munster v Cammell Company (1882) 21 Ch 183, Foster v Greenwich Ferry Company (1888) 5 TLR 16, and Hayes v Bristol Plant Hire [1957] 1 WLR 499.

The application in Pulbrook was by way of a motion to restrain the directors of the company from restraining or interfering with the plaintiff acting as a director of the company. The articles of the company included an eligibility requirement for a director that he should be the registered owner of a nominal value of shares in his own right and an obligation to vacate office if he held less than that amount. Mr Pulbrook had enough shares registered in his name and was elected a director, although before his election he had transferred his shares to one Cuthbert by way of security for a loan. Cuthbert then registered the transfer and became the registered owner. Pulbrook was, as a result, excluded from board meetings. Prior to the hearing, the subject of the report, Pulbrook had obtained an order from the Court of Common Pleas and affirmed by the Divisional Court rectifying the register of shareholders on his undertaking not to question the prior acts of the directors. That finding, of course, said nothing about his qualification as a director. A principal issue before Sir George Jessel MR was whether Pulbrook was validly elected a director. As appears from the note of argument, the plaintiff contended that the requirement to be a shareholder did not require beneficial ownership. The company contended, first, that no personal cause of action existed; the only action lay at the suit of the company. Secondly, the company contended that, when elected, Pulbrook was not the holder in his own right of the necessary number of shares. Thirdly, it contended that, even if he was validly elected, once the transfer to Cuthbert was registered, Pulbrook was bound to vacate office under the terms of the articles. Finally, it argued that being restored to the register of shareholders by the Court of Common Pleas did not entitle him to take his seat as a director.

The Master of the Rolls first considered as a matter of law whether there was a personal action by a director who is improperly and without cause excluded by his brother directors from the board. He said:

“It appears to me that for the injury or wrong done to him by preventing him from attending board meetings by force, he has a right to sue. He has what is commonly called a right of action, and those decisions which say that, where a wrong is done to the company by the exclusion of a director from board meetings, the company may sue and must sue for that wrong, do not apply to the case of wrong done simply to an individual.”

The Master of the Rolls decided the other issues raised by the company as to whether Pulbrook was validly elected a director and whether he was subsequently obliged to resign in favour of the plaintiff, holding, contrary to the submissions of the company, that he was validly elected a director and subsequent changes in the register had not affected the validity of his election.

It is well settled that a court will not in normal circumstances grant specific performance of the core obligations of a contract of employment. This applies also where a company director’s service agreement is wrongfully terminated – see Chitty on Contracts 29^th Ed paragraph 27-020.

A director’s remedy for breach of his service contract sounds in damages. The policy underlying this rule was expressed by Sir Donald Nicholls VC in Re Tottenham Hotspur [1994] 1 BCLC 655 in this way:

“The greater the level of mutual trust required by the contract, the less desirable it is to keep the parties harnessed together.”

The Sinclairs contend that whilst in general this is a rule about specific performance, there are exceptions where it is clear that both employer and employee do have confidence in one another – see, for example, Hill v Parsons [1972] Ch 305 and Irani v Southampton and South West Hampshire Health Authority [1985] IRLR 203.

The orders sought by the Sinclairs in relation to employment and indeed to directorships have a mandatory character. I was referred to the passage in the judgment of Chadwick J in Nottingham Building Society v Eurodynamics Systems [1993] FSR 468 at 474, which received the endorsement of the Court of Appeal in Zockoll Group v Mercury [1998] FSR 354:

“In my view the principles to be applied are these. Firstly, this being an interlocutory matter, the overriding consideration is which course is likely to involve the least risk of injustice if it turns out to be "wrong" in the sense described by Hoffmann J.

Secondly, in considering whether to grant a mandatory injunction the court must keep in mind that an order which requires a party to take some positive step at an interlocutory stage may well carry a greater risk of injustice if it turns out to have been wrongly made than an order which merely prohibits action, thus preserving the status quo.

Thirdly, it is legitimate, where a mandatory injunction is sought, to consider whether the court does feel a high degree of assurance that the plaintiff will be able to establish this right at a trial. That is because the greater the degree of assurance the plaintiff will ultimately establish his right, the less will be the risk of injustice if the injunction is granted.

But, finally, even where the court is unable to feel any high degree of assurance that the plaintiff will establish his right, there may still be circumstances in which it is appropriate to grant a mandatory injunction at an interlocutory stage. Those circumstances will exist where the risk of injustice if this injunction is refused sufficiently outweigh the risk of injustice if it is granted.”

Interim restoration to directorships.

Similar considerations apply in relation to an order requiring a company to allow a director to continue to act in that capacity. In Pringle v Callard [2007] EWCA Civ Arden LJ observed:

“In essence it is contrary to principle to impose a director on a company.  It is highly impractical so to do in any event where there are disputes between the directors or indeed, as here, allegations of improper conduct.  Accordingly, the court would have to be extraordinarily cautious before imposing a director on a company by way of an interim remedy…”

The order sought is again mandatory in character.

Whilst it was common ground that the Sinclairs had an arguable case on the facts to support a claim that the board meeting was invalid and their claim that they are entitled to damages for breach of their employment contract, both Mr Collings QC for the Company and Miss Newman QC for the non-executives and Mr Phillips contended that there was no seriously arguable prospect of the Sinclairs obtaining relief at the trial which had the effect of restoring them to their positions as employees. Miss Newman submitted that the company’s repudiation of the employment contracts had unarguably brought them to an end. It mattered not that the Sinclairs had not accepted the repudiation. An employment contract was an exception to the general rule that a party who wrongfully repudiates cannot contend that his unaccepted repudiation has the effect of terminating the contract. Both Mr Collings and Miss Newman submitted that, whatever the position about termination, there was no prospect of an order for its specific performance.

In Gunton v Richmond-upon-Thames London Borough Council [1980] 3 WLR 714 the Court of Appeal, by a majority with Shaw LJ dissenting, held that the effect of a wrongful repudiation by the employer of an employment contract did not terminate the contract automatically. Buckley LJ held at 730E that a court might easily infer that the repudiation had been accepted, thereby ending the contract, but that is another matter. He also held that incidental or collateral terms might survive if the injured party wanted them to. Brightman LJ agreed with Buckley LJ in his conclusion. He held that the effect of a wrongful dismissal was to terminate the relationship of master and servant, but not every right or obligation under the contract was extinguished – see 735G to 736C. Shaw LJ at 721 to 722 held that a contract of employment could not possibly survive what he described as a total repudiation.

Subsequent to Gunton’s case it was argued in the Court of Appeal in Powell v Brent London Borough Council [1988] ICR 166 that wrongful repudiation by the employer determined the contract without the need for acceptance so that an order could not be made requiring an employer to keep the employee in a post pending trial. The Court of Appeal declined to decide the matter on that basis, deciding instead that the proposition was arguable either way. This opened the door to the interim injunction sought provided that the court could be satisfied that the requisite degree of mutual confidence existed so as to bring the case within the Hill v Parsons exception.

Despite the advent of the CPR, I do not think it is necessary or appropriate on this interim application to decide this issue of termination finally now. It seems to me that it is one which is better decided against the background of decided facts at the trial. I must nevertheless ask the question whether, on the evidence before me, there is shown a real prospect that the Sinclairs will persuade the court at trial that this case falls within an exception to the general rule that a contract for personal services would not be specifically enforced. Mr Greenwood, for the Sinclairs, stressed that it is the Company and not the non-executives who employ his clients. He submitted that it is possible that the evidence at trial will establish not only that there was no justification for their purported dismissal but that their efforts on behalf of the Company were exemplary. A company in general meeting could by then have voted in favour of affirming the Sinclairs’ contract.

It has to be recognised that a vital ingredient in the success of the claim for specific performance is the existence at the date of trial of a sufficient degree of mutual confidence between the Company and the Sinclairs. It is plain that, in contrast to Hill v Parsons and Powell v Brent, where the court had material before it to make the relationship clear, it cannot seriously be argued that that degree of confidence now exists in the present case. Whilst the Company has filed some late evidence giving an indication of 44.5% support amongst shareholders so far ascertained, there is no evidence properly before me of the degree of support which the Sinclairs currently enjoy. Mr Greenwood told me on instruction that the Sinclairs had indications of 40% support. It is suggested on this basis that it was not unrealistic to suggest that the Company might vote in favour of reinstating the Sinclairs. On the basis of those materials I could not speculate what the Company’s view in general meeting would be today, far less extrapolate it to what the position might be at trial.

It follows that I do not consider it to be seriously arguable on the evidence before me that the Sinclairs will succeed at trial in obtaining the relief now sought by way of injunction to restore themselves to their executive positions within the Company. The necessary evidence of a sufficient degree of mutual trust is simply not present.

If the employment contract is, as I have held, arguably still in existence, then I consider it to be arguable that the attempted reliance on clause 18 of the service contracts was ineffectual, depending as it did on the termination of the employment. Mr Greenwood had a refinement on this argument, that in clause 18 “termination” should be construed as “lawful termination”. It is not necessary to go into that. It might equally be said in the case of the Sinclairs that de facto employment and directorship were to be inextricably linked. I express no view about either contention.

Miss Newman submitted that there is no real prospect that the Sinclairs would succeed at trial in obtaining an order restoring them to the board. She submitted that the Pulbrook line of authorities made it clear that the personal right of a director to be allowed to carry on his duties to the company did not arise unless it was beyond dispute or common ground that the director was indeed a director. She took me through the line of authorities and submitted that in each case there was either a finding prior to the attempted exclusion of the director that the director was validly in office, or, alternatively, no attempt to exclude the director.

I have no hesitation in rejecting these submissions. As I have tried to show above, in Pulbrook there was a lively dispute before Jessell MR as to whether Mr Pulbrook had been validly elected considering that he was not the beneficial owner of the shares. I would in any event be surprised to find a cause of action which depended on a prior conclusion of this sort. If the claimant is lawfully a director, it should not avail the remaining directors if they take points which ultimately turn out to be incorrect about the claimant’s status; if the claimant is found to be a director at trial and was wrongly excluded it should suffice. For present purposes I regard the proposition of law contended for by the Sinclairs as manifestly arguable.

I have to consider where the balance of justice lies in relation to the two limbs of the injunction, although on the employment limb the question only arises on the basis that I am wrong that there is no serious prospect of success. Mr Greenwood very fairly recognised that the case on the balance of justice for restoring the Sinclairs to their respective employment faced more considerable difficulty than does his case on the balance of justice for restoring them to the board as non-executive directors.

So far as employment is concerned, I must assume, contrary to my finding, that there is some prospect that at trial the Sinclairs will be able to establish that there is sufficient mutual confidence between them and the Company for the court to grant a degree of specific performance. However, I do not and cannot assume a high degree of assurance that that will be so. That much is simply not established on any view by the evidence. I therefore need to look to see whether the injustice to the Sinclairs if I refuse the injunction sufficiently outweighs the injustice to the Company and its directors if I grant it. First, the position of the Sinclairs if I refuse to restore them to employment, the factors relied on in their evidence go to what they describe as “the need” for them to continue to stop the non-executive having unfettered control and to continue to run the Company effectively. They suggest that the business of KML in particular, a subsidiary, and various other projects will suffer as a result.

Next, the Company’s position. The Company contends through the evidence of Mr Burrough that there has been a total breakdown of mutual trust between the existing board and the Sinclairs and the effect of restoring them to executive positions would be highly detrimental to the Company’s attempts to stabilise the Company following the uncovering of the causes for their present complaints.

Balancing the respective cases of the parties, I have no hesitation in finding that the balance of justice is plainly in favour of refusing injunctive relief. Firstly, it seems to me that to restore the Sinclairs to their executive positions under the control of a board of directors with whom they are locked in litigation is a recipe for strife at the workplace. Secondly, the concern felt by the Sinclairs about the future of the company is no doubt genuine, but it is by no means certain that the Company will not manage satisfactorily without them. Thirdly, even if the relative injustices on the Cyanamid basis were evenly balanced, which I do not think they are, they are certainly not so heavily weighted in favour of the Sinclairs to justify granting mandatory relief of the kind sought here.

When one comes to consider what Mr Greenwood described as his primary case for reinstatement as non-executive directors, the weights in the respective scales shift somewhat. The case for being so restored is now put for the Sinclairs on the ability to stop Mr Burrough’s faction having unfettered control and being able to police improprieties on his part. It seems to me that the balance of justice is again against the grant of such an injunction. I should say that to allay some of the more extreme concerns of the Sinclairs, the Company has offered an undertaking by letter not to sell the Company, its subsidiaries or its assets, or wind up the Company without giving the Sinclairs notice. Subject to a more realistic period of notice, say seven days, it seems to be an undertaking which I should take into account on the balance of justice, notwithstanding that it does not go as wide as the Sinclairs would have liked.

The restoration of the Sinclairs to form a minority group on the board would not give them the power to prevent impropriety, although it would give them advance notice of it. Nevertheless, similar considerations to those which apply in the case of employment apply here as well. An injunction is mandatory in effect and although I have held this aspect of the case to be arguable, Mr Greenwood did not go as far as to say that I can assume a high degree of confidence that it will succeed. Indeed, the parties have commendably, in my view, refrained from rehearsing, at least orally, the accusations and counter accusations which are the subject of the dispute. I would refuse the directorship injunction as well as a matter of the exercise of the court’s discretion.

Miss Newman submitted that the counterclaim disclosed no cause of action against her clients on the same grounds as those she relied on that there was no arguable case. I have held there to be an arguable case in relation to the personal Pulbrook claim. That claim provides a sufficient basis for their joinder.

Part 11 of the Companies Act 2006 has introduced new provisions concerning derivative claims, i.e. claims brought by a member of the company in respect of a cause of action vested in the company. These provisions were enacted so as to give effect to the Law Commission’s recommendation that the exceptions to the rule in Foss v Harbuckle should be codified. They go further and make changes to the law.

Sections 261 and 262 of the Act describe a two-stage process for the granting of permission to continue such an action which is given effect to by CPR 19.9(a). In the first stage, the court considers on paper whether there is a prima facie case for permission to be given. If so, a permission hearing is held on notice to the company; in this case the parties have sensibly agreed to combine the two parts of the process. Section 263 explains the basis on which the court is to consider the giving of permission. The relevant part here is section 263(2)(a):

“(2)

Permission (or leave) must be refused if the court is satisfied—

(a)

that a person acting in accordance with section 172 (duty to promote the success of the company) would not seek to continue the claim…”

This section is mandatory in character. If the relevant facts are established the court must refuse leave.

Section 263(3) sets out the discretionary consideration:

The section refers to a notional director considering whether to continue a claim. It is of course not the actual board of the company. I also have to consider the facts alleged by the Sinclairs in the pleaded case rather as on an application to strike out or amend a pleading.

Mr Collings and Miss Newman submitted that the derivative action merely duplicates the counterclaim and the Company’s action would serve no real purpose. They submitted that this case fitted exactly into section 263(3)(f) and that the acts and omissions in respect of which the claim is made are ones which the members could pursue in their own right. They go further and point out that the counterclaim in the Company’s action is one such way of pursuing the claim of the members, although there could be others such as an unfair prejudice petition under section 994 of the Act.

Mr Greenwood submitted that there were two important ways in which the derivative claim was both useful and not duplicative. (1) The derivative action is a different cause of action. It might succeed where the counterclaim fails. One example had been highlighted by Miss Newman’s ingenious argument about Pulbrook, and he mentioned others as well. In the derivative action the Company would be able to claim damages against the directors for the damage suffered by the Company as a result of the wrongful dismissal of the Sinclairs. Damages of that kind would not be available to the Sinclairs as shareholders.

It seems to me that if I was satisfied that the derivative action was purely duplicative of the counterclaim, I would be bound to refuse permission under section 263(2). Nobody brings a claim just for the sake of it. But that is not the case here for the twin reasons Mr Greenwood gives. So I must go on to consider the discretionary factors in section 263(3).

I am satisfied that the Sinclairs bring the action in good faith. Miss Newman’s suggestion to the contrary was really made on the back of the suggestion that the action was entirely duplicative and was simply an attempt by the Sinclairs to get the benefit of a costs indemnity. Once there is a real purpose in bringing the proceedings, that argument cannot be maintained.

Although I could not be satisfied that the notional section 172 director would not continue the claim, I do not believe that he would attach that much importance to it. Would a company which had wrongfully dismissed a director normally take action against those responsible for the damage that it has suffered? It would depend, but I suspect that the action it would take in preference would be to replace the directors. Moreover, on the evidence before me the damage the Company will suffer is somewhat speculative – another reason why the section 172 director would not attach great weight to it.

That deals with paragraphs (a) and (b) of section 263(3).

As to subparagraphs (c) and (d), the acts in question could be authorised by the company, both as to the past and the future, but I have already held that the evidence only leads me to speculate as to how likely that is. (e) is not really relevant here.

I am not satisfied that there is anything that the Sinclairs are seeking which could not be recovered by means of a section 994 unfair prejudice petition. In particular, as to the damage suffered by the Company – see Lowe v Fahey [1996] 1 BCLC 262, a decision of Mr Charles Aldous QC sitting as a Deputy Judge of the Chancery Division.

Taking into account all those factors rehearsed in section 263(3) and all the other circumstances of this case, I have come to the conclusion that I should refuse permission to continue the derivative claim. It follows that the question of a costs indemnity does not arise.

In the result, I dismiss the applications for injunctive relief. I refuse the application for leave to continue the derivative actions, but I allow joinder of the non-executives and Mr Phillips to the counterclaim in the Company’s action. I will hear counsel as to the form of order and the ancillary matters I referred to earlier.