England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London WC2A 2LL
		Date: 2 April 2004

Mr R Sheldon QC:

1. In this CPR Part 8 claim, the claimant, Vectone Entertainment Holding Limited ("Vectone"), seeks orders to convene a meeting of the company, South Entertainment Limited ("South"), pursuant to the Companies Act 1985, s 371 in its capacity as the majority shareholder in South.
2. The relief sought is as follows.

(a) That the court order that an extraordinary general meeting of South be convened for the purpose of considering and if thought fit passing as special resolutions (sic), the following resolutions:

(i) that the meeting of South ratifies the commencement and conduct of the proceedings numbered HQ03X00750 by it and Vectone Entertainment Holding Limited in the High Court of Justice against Middlesex Broadcasting Corporation Ltd on or about 7 March 2003;

(ii) that the meeting of South adopts and ratifies all acts of Mr Baskaran Allirajah on behalf of the company since 24 December 2002 and indemnifies him in respect of the said acts;

(iii) that the meeting of South adopts and ratifies all acts of Mr Vijeeyakumar Mahalingam on behalf of the company since 17 January 2003 and indemnifies him in respect of the said acts;

(iv) that the meeting of South adopts and ratifies all acts purportedly carried out by Mr Akin Oyolola and Mr Miguel Galve at any time in their capacity as legal advisers to it;

(v) that the meeting of South appoints Miguel Galve, Baskaran Allirajah and Vijeeyakumar Mahalingam as directors of the company.

(b) That the court give directions as to the manner in which the said meeting is to be called and conducted.

(c) That the court order that one member of the company present and personal by proxy be deemed to constitute a meeting.

Although the relief claimed refers to "special resolutions", the argument before me has proceeded on the basis that the resolutions sought are "ordinary" resolutions and I also proceed on this basis.

3. The relief sought by Vectone is resisted by the second and third defendants, respectively Middlesex Broadcasting Corporation Limited ("Middlesex") and Vinod Popat ("Mr Popat"). In view of the arguments raised on behalf of Middlesex and Mr Popat, it is necessary to set out in a little detail the convoluted background to the dispute.
4. South was incorporated as a private shelf company under the name of Endpace Limited on or about 8 November 2002. After the sale of the shelf company to the present members on or about 28 November 2002, South had two members who owned the entire issued share capital (being £100 in £1 shares) namely (1) Vectone (60 per cent) and (2) Middlesex (40 per cent). These shares were issued pursuant to paragraph 3 of a shareholders' agreement of 6 December 2002 (see below). This is still the shareholding position.
5. On incorporation, South had only one director, but on the sale of the shelf company to the present members on or about 28 November 2002 two directors were appointed: (1) Dr Jayabalan Murali Manohar ("Dr Murali"), said by Vectone to be its representative director (although I make no finding and place no reliance on this assertion) and (2) Mr Popat representing Middlesex. Mr Indraprakash Jegatheesan was appointed, and still is, the company's secretary. Dr Murali resigned on 9 December 2002.
6. Mr Baskaran Allirajah, a director of Vectone and of its parent company -Vectone Group Holding plc ("Vectone Holding"), was purportedly appointed as a director of South on 24 December 2002. Mr Vijeeyakumar Mahalingam, also a director of Vectone and Vectone Holding, was purportedly appointed as a director of South on 17 January 2003. Vectone purported to remove Mr Popat as a director of South on 29 July 2003. I use the word "purportedly" because it is now accepted by Vectone that these steps were invalid for reasons which appear below.
7. The background to the formation of South, and the breakdown of the relationship between the interested parties, is set out in the first witness statement of Mr Oyolola on behalf of Vectone and is largely accepted by Middlesex and Mr Popat.
8. Vectone is a private telecommunications company of which Mr Baskaran Allirajah is the principal. In late 1992 Vectone wished to expand its sphere of business operations into television, but had no expertise of its own to do so. Middlesex, Mr Popat and Dr Murali had extensive experience in television broadcasting and programming, Vectone wished to use that expertise, through the vehicle of South.
9. On 6 December 2002, a shareholders' agreement ('the shareholders' agreement") was executed by Mr Baskaran Allirajah on behalf of Vectone, by Mr Popat on behalf of Middlesex and by Dr Murali on behalf of South. The shareholders' agreement contained provisions to the effect that within three days of its execution steps would be taken by all concerned to enable a television broadcasting licence referred to as S4U, granted by the Independent Television Commission to be transferred from Middlesex to South.
10. Under the shareholders' agreement Middlesex agreed to subscribe for 40 ordinary shares by 6 December 2002 (clause 3.3) and Vectone agreed to subscribe for 59 ordinary shares (clause 3.2) in addition to the 1 share Vectone already had (Recital (A)). The shareholders' agreement further provided (clause 3.3) that no further shares would be issued by South until the completion of the matters referred to in clause 7, whereupon the parties would enter into a new shareholders' agreement dealing with shares and members' rights.
11. Clause 6.1 of the shareholders agreement provided for steps to be taken to enable the S4U licence to be transferred from Middlesex to South within three days after executing the agreement.
12. Clause 6.2 provided amongst other things that if the transfer of the S4U licence had not taken place as agreed, South might elect by ordinary resolution either to wind itself up or to carry out the steps in clause 7 as if the transfer had taken place.
13. Clause 7 of the shareholders' agreement provided for various steps to be taken after the S4U licence had been transferred to South, including the shareholders' procuration of the resignation of Mr Popat as a director and the appointment of a Vectone employee in his place, and the transfer by Middlesex of its 40 shares to Dr Murali and his wife in equal shares.
14. The transfer of the S4U licence did not occur because relations amongst the parties broke down very soon after the execution of the shareholders' agreement. As a result two sets of proceedings were commenced involving parties associated with those to the shareholders' agreement:

(a) Vectone and, ostensibly, South issued proceedings in the Queen's Bench Division against Middlesex in which orders were sought to transfer the S4U licence to South ("the broadcasting proceedings"). I use the word "ostensibly" because, for reasons which appear below, there is an issue as to whether these proceedings were validly constituted as regards South.

(b) Vectone Ltd (part of the Vectone Holding group) issued a winding up petition against Cee (I) TV Entertainment UK Ltd, an English company associated with Dr Murali, in respect of monies lent ("the insolvency proceedings").

15. The broadcasting proceedings were instituted on 7 March 2003. Specific performance and consequential relief was sought by South and Vectone against Middlesex pursuant to the shareholders' agreement for failing to honour its obligation to take steps to have the S4U licence transferred to South.
16. At the same time proceedings were issued, Vectone and South applied for an interim mandatory injunction requiring Middlesex to transfer the S4U licence to them. Middlesex did not file a defence but served witness statements from Mr Popat dated 14 and 30 April 2003 on behalf of Middlesex. The statements raised various defences including the allegation that "... South had no authority to issue proceedings....".
17. The interim mandatory injunction was eventually set down for hearing on 29 July 2003. The claimants elected not to proceed with the application, and it was dismissed on that date. The parties subsequently entered into a moratorium of the proceedings so that discussions could take place about the resolution of the dispute without further costs being run up. Such discussions did not come to fruition. I was told that, after the Part 8 claim was issued with which I am concerned, Middlesex issued an application to strike out the broadcasting proceedings, but the hearing of that application has been adjourned pending the hearing of this Part 8 claim.
18. The insolvency proceedings arose as follows. Whilst plans were on foot for Vectone to work with Dr Murali in television broadcasting, Vectone Ltd lent both Dr Murali and a company with which he was associated (Cee (I) TV Entertainment UK Ltd ("Cee (I)")) substantial amounts of money (£50,000 to Dr Murali personally and £41,750 to Cee (I)).
19. When relations broke down between the parties Vectone had difficulty in recovering the monies lent (although eventually it obtained repayment from both). In order to recover the monies lent to Cee (I), Vectone Ltd issued winding up proceedings against Cee (I) on 12 February 2003. Mr Popat gave witness statements dated 9 April 2003 and 2 June 2003 on behalf of Cee (I). The insolvency proceedings resulted in contested hearings before Mr Registrar Simmonds on 5 June 2003 (as a result of which Cee (I) was wound up), and an appeal from that decision which came before Mr Justice Hart on 16 October 2003. The appeal was dismissed. The winding up order against Cee (I) was rescinded on 19 November 2003 after the debt to Vectone Ltd was paid.
20. In the litigation I have referred to, Mr Popat and Middlesex aligned with Dr Murali and his wife against the Vectone interests. It is said by Vectone that this alignment has led to South no longer being able to function, because Middlesex, as minority shareholder and Mr Popat (who also is the chief executive officer of Middlesex) as South's director are hostile to Vectone's interests. Mr Popat gave evidence against Vectone's interests in both the broadcasting and insolvency proceedings.
21. There was some debate before me about the status of Mr Popat. Vectone suggested that he has in the past denied that he was a director of South. However, Mr Watson, who appeared for Mr Popat and Middlesex, told me that Mr Popat's position is that he was at the material times and remains a director of South, although he has in fact effectively been excluded from carrying out his functions as a result of Vectone's conduct. Before reverting to the current state of the governance of South, I need to complete the narrative of events.
22. On 26 March 2003 Newman Treon, who had been instructed for Middlesex in the broadcasting proceedings, wrote to Vectone asking if South had passed an appropriate board resolution authorising the commencement of the broadcasting proceedings, and if there had been a similar board resolution in respect of Mr Allirajah's appointment as a director on 24 December 2002. There had not in fact been such board resolutions. Vectone sought to convene a company meeting of South at which it could ratify the appointments of Mr Allirajah and Mr Mahalingam to South's board, and the commencement of the broadcasting proceedings against Middlesex. Vectone wrote to Mr Popat on 11 April 2003 requiring him to convene an extraordinary general meeting of South as soon as possible so that South could pass the relevant resolutions. The requisition appears to have been made pursuant to the Companies Act 1985 s 368.
23. Mr Pop at (who by then, or very shortly afterwards, gave witness statements hostile to Vectone's interests in the litigation referred to above) failed and/or refused to call the extraordinary general meeting which had been requisitioned. Vectone, apparently pursuant to the Companies Act 1985 s 368(4), pressed ahead with a notice dated 14 May 2003 of an extraordinary general meeting of South to be held on 30 May 2003.
24. On 30 May 2003 a further notice, purporting to be a notice of extraordinary general meeting, purportedly adjourned the extraordinary general meeting held on 30 May 2003 to the same place and time on Friday 6 June 2003 for the purpose of passing the resolutions which had been the subject of the meeting on 30 May.
25. At the purportedly adjourned meeting on 6 June 2003, South's company secretary and Vectone as majority shareholder were in attendance, but not Middlesex or Mr Popat. Resolutions passed as ordinary resolutions purported to:

(a) ratify the appointment as Mr Allirajah as a director on 24 December 2002;

(b) ratify the appointment of Mr Mahalingam as a director on 17 January 2003;

(c) ratify South's institution of legal proceedings.

26. On 17 June 2003 at a meeting attended by Mr Allirajah and Mr Mahalingam which purported to be a board meeting of South, a resolution was purportedly passed to approve the appointment of Mr Miguel Galve as company lawyer. Mr Galve is head of Vectone Holdings' legal department.
27. On 27 June 2003 Vectone gave a purported notice of extraordinary general meeting for 10 am on Tuesday 29 July 2003 for the purpose of passing a resolution removing Mr Popat as a director of South.
28. On 16 July 2003 Vectone gave notice of a board meeting of the company on Tuesday 29 July 2003 to ratify the previous appointment of Mr Oyolola as legal counsel to South, and to remove Mr Popat as a director. Notice of the meeting was given to Mr Popat.
29. On 29 July 2003 South purportedly held an extraordinary general meeting which was not attended by either Mr Popat or Middlesex. Mr Allirajah and Mr Mahalingam (in their purported capacity as directors of South) and Vectone were present and purported to pass an ordinary resolution removing Mr Popat as a director. At a board meeting held on the same day a resolution was purportedly passed ratifying the appointment of Mr Oyolola as legal counsel for South throughout the period of his appointment.
30. As Vectone now accepts, the extraordinary general meetings at which ordinary resolutions were purportedly passed as described above were inquorate. Article 9(d) of South's articles of association provides:

"The Company shall not transact any business at any General Meeting unless a quorum is present and a quorum shall comprise of two persons entitled to attend and vote upon the business to be transacted, each such person being an actual member of the Company..."

31. It follows that, as Vectone now accepts, the ordinary resolutions purportedly passed at the Extraordinary General Meetings referred to above were not valid. Vectone also accepts that the purported appointments of Mr Allirajah and Mr Mahalingam as directors of South were not valid. It follows that the resolutions purportedly passed by them as directors of South were also not valid. By this application, Vectone in substance seeks to put in train a procedure which would enable the invalidly passed resolutions to be put to, and passed by, a properly constituted meeting of South.

Applicable legal principles

32. Against this background, I turn to the relevant principles to be applied, which were not in dispute. They are to be derived from two recent cases: Union Music Ltd v Watson [2003] EWCA Civ 180, [2003] 1 BCLC 453 and Re Woven Rugs Ltd [2002] 1 BCLC 324. I derive the following principles from the Union Music case:

(a) section 371 of the Companies Act 1985 is a procedural section intended to enable company business which needs to be conducted at a general meeting to be so conducted. A company should be allowed to get on with managing its affairs without being frustrated by the impracticability of calling or conducting a general meeting in the manner prescribed by the articles and the Act;

(b) where there is a majority shareholder and no class rights attaching to particular classes of shares which the convening of a general meeting is designed to override, the court in exercising its discretion under s 371 will consider whether the company is in a position to manage its affairs properly and will also take into account the ordinary right of the majority shareholder to remove or appoint a director in exercise of his majority voting power;

(c) the fact that quorum provisions in the articles require two members' attendance is not in itself sufficient to prevent the court making an order under s 371 to break a deadlock in favour of a majority shareholder who is seeking a proper order, such as the appointment of a director, which he has the right to procure in ordinary circumstances;

(d) section 371 is a procedural section not designed to affect substantive voting rights or to shift the balance of power between shareholders in a case where they had agreed that power should be shared equally and where the potential deadlock is something which must be taken to have been agreed for the protection of each shareholder. However, a quorum provision is not of itself sufficient to constitute such an agreement.

33. I also refer to the Woven Rugs case where Mr Anthony Mann QC approved the following main principles (citations omitted), which were not in dispute in that case:

(a) section 371 gives the court a discretion. An applicant for an order is not entitled to an order as of right; nor is the respondent entitled to resist the order as of right;

(b) the effect of s 303 of the Companies Act 1985 is to give a majority shareholder a right to remove and appoint directors. That has to be borne in mind in considering the exercise of the discretion;

(c) the quorum provisions in the articles cannot be regarded as conferring on a member some form of veto in relation to company business;

(d) the existence of a concurrent s 459 petition is not necessarily a bar to the grant of an order under s 371; nor is the fact that the results of the proposed meeting would be likely to generate further such litigation;

(e) if there is an arrangement which effectively gives a right in the nature of a class right to the respondent shareholder, then the court will not make an order if the result of that order would be to infringe that class right;

(f) it is open to the court, in the exercise of its jurisdiction, to impose conditions or other restrictions when making an order if it is necessary to do so in order to achieve justice in the case.

Grounds for the application

34. The grounds for the relief sought were summarised by Mr McLinden, who appeared for Vectone, as follows:

i) Middlesex (South's minority shareholder) is frustrating South's proper governance by refusing or failing to attend meetings of the company.

ii) Mr Popat (South's sole director) (a) has refused a requisition from the Vectone to call an extraordinary general meeting of South; (b) has failed and/or refused to attend numerous meetings of South during 2003. It is also said by Vectone that Mr Popat has denied (or been ambivalent) that he was a director of South after 29 July 2003. However, as I have said above, it is Mr Popat's case that he is still a director, but that he has been effectively unable to function as such because he has been excluded by the actions of Vectone.

iii) Vectone as the majority shareholder of South should be entitled to exercise its rights to direct the company in accordance with its wishes.

35. It is clear to me that South's corporate governance is in a most unsatisfactory position. Middlesex has failed to attend meetings of the company and the evidence suggests that, in the light of the disputes between the parties, it has no intention of doing so in the future. South's only validly appointed director, Mr Popat, is on his own case excluded from carrying out his functions and on Vectone's case refusing to act as a director. The unsatisfactory position of South's corporate governance was not seriously disputed by Middlesex and Mr Popat, but they blame Vectone for bringing about this state of affairs. They accept that the relief sought is of a kind that would normally find favour with the court on an application under section 371, and that the present claim superficially appears to have much in common with the authorities to which I have referred. However, they resist the claim on the bases, in summary, that (a) the relief sought would, if granted, allow Vectone to breach the shareholders' agreement and infringe Middlesex's rights thereunder; and (b) in the exercise of its discretion the court should decline to grant the relief sought because it would in all the circumstances be unfair to do so, because these proceedings are brought for ulterior and improper motives and the use of section 371 to obtain the resolutions which are sought to be passed amounts to an abuse of process.
36. As the authorities to which I have referred show, although section 371 is a procedural section, the court will not allow the procedure to be used to override class rights or substantive rights conferred on a shareholder. Mr Watson argued that the effect of the shareholders' agreement was to provide for equal representation on the board and that to change the composition of the board would be in breach of the shareholders' agreement. He accepted that this was not established by the express terminology of the agreement but said that it arose by necessary implication. He referred me to clause 4.1 which provided that Dr Murali and Mr Popat be appointed directors by the date of the agreement. He also referred me to clauses 6 and 7 (which I have summarised above): these provisions, he said, clearly sets out how the agreement was to be carried forward under an agreed structure to reflect the fact that South was a joint venture. Mr Watson also referred me to the evidence of Dr Murali in the insolvency proceedings.
37. Having looked at that evidence, the terms of the shareholders' agreement and the circumstances in which the shareholders' agreement was entered into (at least to the extent these circumstances are not in dispute), I find that Middlesex (and Mr Popat) have not established that a provision to the effect contended for arises by necessary implication. To the contrary:

(a) there is nothing in the shareholders' agreement which gives a right to Middlesex to have equal board representation;

(b) there is nothing in the shareholders' agreement which conflicts with Article 2(c) of South's articles of association, namely:

The Company by way of passing of an ordinary resolution in general meeting may determine the maximum number of directors that may be appointed. Unless and until such time as otherwise determined, there shall be no maximum number.

The shareholders of South thus retain the right to appoint additional directors.

(c) The shareholders' agreement is silent as to what would happen in the event of Dr Murali's resignation. There is nothing in the shareholders' agreement which would prevent the shareholder parties to the agreement from replacing him or which restricts the identity or representative status of his replacement. Under the shareholders' agreement, there was nothing entrenched in Dr Murali's position as a director.

(d) Under the shareholders' agreement, Vectone was to become the 60 per cent majority shareholder of South. Prima facie, it held the balance of power in South by virtue of its majority voting rights. Against this background, if Middlesex was to have had an equal right to board representation or exercise control or a right of veto as to the composition of the board, the shareholders' agreement could have provided for this, but it did not do so. There is no relevant provision which restricts Vectone from exercising its rights as a majority shareholder to appoint new directors.

38. Accordingly, the first ground of resistance fails. There is nothing in the nature of a class right or substantive right conferred on Middlesex by the shareholders agreement which would be overridden by the court in granting the relief sought under section 371.
39. I then turn to the other matters raised on behalf of Middlesex and Mr Popat. Mr Watson contended that the reasons for the resolutions were simply retrospectively to ratify and adopt past actions, that Vectone had no intention of continuing any business of South and intended, once the resolutions had been passed, to abandon the broadcasting proceedings and put South into liquidation. He referred to a draft deed of compromise produced by Vectone on 2 October 2003 (which was exhibited to Mr Oyolola's witness statement) which, he said, bore out some of these matters. Various licences were said to have been obtained by Vectone directly which meant that the rationale for South's existence no longer existed. It is said that Vectone have every intention of abandoning the broadcasting proceedings. The purposes of this application are said to be improper and an abuse of process because they have nothing to do with the continuance of South or the prosecution of the broadcasting proceedings, but are simply attempts to cure past evils.
40. Many of these contentions are disputed by Vectone. The draft deed of compromise remained just that and was not executed by the parties. I was told that Vectone has not decided to abandon the broadcasting proceedings but is keeping its options open. It is to be noted that damages are claimed by South in those proceedings as well as orders for specific performance. If the broadcasting proceedings are to be pursued, South will need to continue in existence. Mr McLinden submitted that, in any event, there was nothing improper in the company seeking to adopt and ratify past unauthorised acts if that was what the company by its members wanted to do (see eg Alexander Ward & Co Ltd v Samyang Navigation Co Ltd [1975] 1 WLR 673). He also directed my attention to correspondence from Middlesex's solicitors raising the spectre of further claims arising from the invalid appointments of Mr Allirajah and Mr Mahalingam which, it was said, might require South to continue in existence.
41. These contentions are redolent of the types of issues which typically arise on petitions brought under section 459 of the Companies Act 1985. Mr Watson accepted that Middlesex could bring such a petition but said that under the current regime and objectives of the CPR, the court should be prepared to dig into the underlying facts. I would accept that if a clear case of oppression or unfairly prejudicial conduct could be made out, the court would take due account of this in the exercise of its discretion under s 371. But in cases such as the present one, where the facts are in dispute, and where the evidence is incomplete, an application under s 371, which is a procedural section, is not in my view the appropriate forum to adjudicate on these issues. On a s 459 petition the court is able to determine the position on full evidence, including cross-examination if appropriate, and the remedies available are far more flexible. In this regard, I would refer to the remarks of Mr Anthony Mann QC in Woven Rugs at p 335 a - e. Similarly, in relation to the assertion that the rationale for South's continued existence has gone, the appropriate forum to determine this type of issue, other than in a clear case which this is not, is on a petition to wind up on the just and equitable ground and not on an application under s 371.
42. To the extent that I was invited to consider issues which arise in the broadcasting proceedings, I decline the invitation. I am not in position to decide on issues in dispute in those proceedings on this application on the basis of the incomplete evidence before me. Those issues are matters which are the subject of and to be determined in those separate proceedings. I am therefore not in position on this application to decide whether, in all the circumstances, the proposed resolution ratifying and adopting what was done in the name of South in the broadcasting proceedings would be oppressive or unfairly prejudicial to the interests of Middlesex as a shareholder or is being put forward for improper motives or is otherwise an abuse of s 371. No clear case to this effect has been made out by Middlesex. If these contentions are to be pursued, they must be pursued in other proceedings.
43. Mr Watson submitted that if I were minded to grant the relief sought I should do so on the basis that the resolutions to be put to the company should be subject to the following conditions:

(a) the resolution in relation to the broadcasting proceedings should be conditional on Vectone agreeing to pay Middlesex's costs of those proceedings from inception to the date of the passing of the resolution; and

(b) the other resolutions should be conditional on Mr Popat receiving a complete indemnity in respect of acts done in the name of South since his effective exclusion as a director.

44. Although I have jurisdiction to make an order under s 371 subject to conditions (see Woven Rugs supra), I decline to impose the conditions sought. As for the first, it seems to me that this is a matter to be decided in the broadcasting proceedings. If these proceedings have been brought and pursued in the name of South without the requisite authority, this is a matter which the judge in those proceedings can take into account in the exercise of his discretion on costs even if the effect of the proposed resolutions, if passed, is to ratify and adopt the steps taken in the name of South in those proceedings.
45. As for the second condition sought to be imposed, I consider it inappropriate for me to impose such a condition on the basis of the incomplete evidence before me. It is said on Mr Popat's behalf that he should be protected in respect of acts done by others in the name of South, and in particular by Mr Allirajah and Mr Mahalingam, over which he had no control. There are, however, numerous criticisms levelled by Vectone against the conduct of Mr Popat. I am unable to say on the basis of the materials before me whether or not they are justified. Mr Popat's concerns may to some extent be ameliorated by the power of the court to grant relief under s 727 of the Companies Act 1985. In the circumstances I decline to impose the condition sought by Mr Popat.
46. It follows that Vectone is entitled to the relief which it seeks. I shall hear counsel on the directions which are to be given as to the manner in which the meeting is to be called and conducted.