When will the Courts Remove a Director?
In a very recent case (19 August 2024), the English High Court continued a petitioner’s ex parte injunction to remove a director under section 994 of the Companies Act 2006. The High Court found strong evidence that the respondent had breached sanctions by causing the companies to trade with Russia, giving a high degree of assurance that the petitioner would prove unfair prejudice at trial. This was an exceptional case but would likely be followed in the BVI.
Background
In a case involving a petition under the Companies Act 2006, s.994, the petitioner sought the removal of the first respondent (C) as a director of several companies that manufactured and sold luxury perfumes. Both the petitioner and C owned approximately 41% of the shares in the parent company, with C managing the business.
Following the 2022 Russian invasion of Ukraine, they agreed to stop supplying products to Russia, complying with the sanctions under the Russia (Sanctions) (EU Exit) Regulations 2019. However, in 2023, the petitioner suspected that the companies were still trading with Russia and hired a private investigator, who recorded C admitting that they continued trading with Russia despite government sanctions. This led to an investigation by HMRC, which found that Russian sales were being concealed within a “rest of the world” category in management accounts.
A crisis communications expert recommended C’s removal to prevent potential reputational damage and customer loss if the sanctions breaches became public. Consequently, the petitioner filed the s.994 petition in October 2023, seeking an order to buy out C’s shares. He also made a without notice application for C’s immediate removal as a director and related orders for the preservation of evidence. The petitioner’s application was granted, and the subsequent judgment was issued following a return hearing.
The Decision
The High Court granted the application for the removal of C as a director.
Breaches of sanctions: C claimed his statements to a private investigator were unguarded and intended to entrap him. However, the High Court found the evidence reliable, showing a high likelihood that C knowingly breached sanctions by trading with Russia and concealing this in the company’s accounts. C had been aware of the sanctions but failed to seek legal advice, indicating a strong prima facie case against him.
Necessity of without notice relief: The application was justified without notice to C, as there was a risk he might not have returned to the UK or could have destroyed company records, hampering the investigation.
Proportionality of ancillary orders: Although C argued the orders were disproportionate, the High Court deferred ruling on this issue. The documents had already been delivered and imaged, and the High Court retained discretion to address the matter later.
Threshold for injunction: The removal of a director via interim relief is possible when it is just and convenient. The High Court applied a stringent test, requiring a high degree of assurance that the petitioner would succeed at trial, given the seriousness of the order. The evidence strongly indicated that C’s actions would lead to significant reputational damage to the companies if not addressed.
American Cyanamid principles: The High Court applied these principles by analogy, finding that damages would not suffice to compensate the petitioner if C remained in control, risking the companies’ destruction. The balance of convenience favoured the petitioner, as the potential harm to the companies outweighed the potential injustice to C.
Comment
The High Court’s decision to grant interim relief in this case is groundbreaking but not indicative of a broader trend. The relief, which included removing and replacing directors on a without notice basis, reflects the High Court’s willingness to protect minority shareholders’ rights under extraordinary circumstances. However, it is unlikely that such relief will become common in s.994 petitions.
Case: Garofalo v Crisp [2024] EWHC 1737 (Ch).
