When does the removal of a director and shareholder constitute unfair prejudice?

In a recent case a director was removed from office and excluded from management. The court had to consider whether the conduct was unfairly prejudicial for the purposes of section 994 of the Companies Act 2006.

Background

Mr Hashmi, Mr Gilbert and Mr Lorimer-Wing were co-directors of Fore Fitness Investment Holdings Limited (“Fore”). Mr Hashmi and Mr Lorimer-Wing were also shareholders. Mr Hashmi was also carrying out consultancy work pursuant to a consultancy agreement.

On 26 February 2021, Fore allegedly passed a resolution at a board meeting terminating Mr Hashmi from office. Mr Lorimer-Wing locked Mr Hashmi out of Fore’s IT systems and terminated the consultancy agreement.

Mr Hashmi argued he had no prior knowledge of the proposal to remove him as director and that Mr Lorimer-Wing had acted in a manner that was unfairly prejudicial to Mr Hashmi’s interests as a shareholder of Fore.

Mr Hashmi issued an unfair prejudice petition. He said Mr Lorimer-Wing’s conduct was unfair because (a) he failed to convene a meeting in accordance with Fore’s articles of association and (b) he excluded Mr Hashmi from management despite an understanding between them that all major decisions would be made jointly.

Mr Lorimer-Wing argued that Mr Hashmi had voluntarily withdrawn from Fore and consented to his removal as director.

Decision

The court found that Mr Lorimer-Wing’s conduct was unfairly prejudicial and that Mr Hashmi had not been removed as a director because the proper process for doing so had not been followed.

It concluded that Mr Lorimer-Wing’s motive was to acquire Mr Hashmi’s shares at a lower value as a “bad leaver”.

Key takeaways

1. Pay careful attention to your company’s articles of association and ensure that you comply with them when managing a company. We routinely see instances where company directors and shareholders feel they can “do what they like” when it comes to managing the company because it is “their company”. That is not the case. You must regulate your company in accordance with the Companies Act 2006 and with the company’s articles of association, especially where there are other shareholders to consider. Failure to comply with the company’s articles is likely to constitute unfair conduct.

2. Keep proper company books and records of meetings and decisions. If you properly convene a board meeting you might as well keep an adequate record of it too. 

3. Instruct solicitors that you trust. Whilst giving evidence at trial, Mr Lorimer-Wing resorted to arguing that inconvenient points in his evidence were there because his solicitors had drafted his witness statement, not him. The argument did not work. Ensure you instruct solicitors that you trust to get your witness evidence right, but always remember that the evidence is yours and it is you who signs it.

If you are making an important management decision and are concerned about the consequences, or if you think a company is not being properly managed in line with your interests as a shareholder, please contact our corporate disputes solicitors, George Gwynn (0121 269 5851/ ggwynn@georgegreen.co.uk) and Morgan Rees (0121 269 5855 / mrees@georgegreen.co.uk)