High Court injunction breaks deadlock between opposing directors

The High Court has intervened to break a boardroom stalemate between two equal blocs of directors and shareholders, ordering a company to circulate written resolutions that could lead to the appointment of an independent director.

Mark Aspin Director and Head of Dispute Resolution reports on this recent case.

The case arose from a long-running deadlock at ESMS Global Ltd, where Simon and Jennifer Webster on one side and Rajesh and Sarita Sood on the other each controlled 47.6% of the shares and held board positions. The remaining 4.8% was held by a trustee of an employee benefit trust, which did not ordinarily vote at general meetings. The judgment said the relationship between the two sides had “completely broken down”, leaving the board unable to function effectively.

Seeking to resolve the impasse, the Websters proposed the appointment of an independent director, Mr Andrew Chamberlain, and in March 2024 invoked their statutory right under section 292 of the Companies Act 2006 to require the company to circulate written shareholder resolutions to that effect. Written resolutions were significant because, following a decision of the Royal Court of Guernsey, the trustee shareholder could vote on them, potentially providing the swing vote needed to break the deadlock.

Although the Websters deposited money to cover the costs of circulation and provided the necessary documentation, the company did not circulate the resolutions. The judgment found that this was because the Soods, who opposed the appointment, refused to authorise circulation at board level. Proceedings were therefore brought seeking a declaration and an injunction compelling the company to act.

By the time of trial, the defendants accepted that, if the court had jurisdiction, the company was obliged under sections 292 and 293 of the 2006 Act to circulate the resolutions. The real dispute was whether the court had power to grant any civil remedy at all, given that the legislation provides criminal sanctions against directors for default but does not expressly give shareholders a right to seek an injunction.

His Honour Judge Cadwallader held that the court did have jurisdiction. He concluded that section 292 confers a statutory “right” on members to require circulation of resolutions, and that this right is “in the nature of a property right” attaching to their shareholding. The existence of criminal penalties for non-compliance did not mean that Parliament intended those penalties to be the only means of enforcement. On the contrary, the judge said, criminal prosecution of directors was an inadequate way of vindicating the private rights of members against the company.

The court therefore granted a declaration that the company was obliged to circulate the proposed resolutions and an injunction requiring it to do so. Given the “obdurate opposition” that had previously prevented compliance, the judge also held that the court had power to make an ancillary order authorising Mr Webster himself to circulate the resolutions if the company failed to act.

Please contact us if you would like more information about the issues raised in this article or any aspect of company law please contact Mark on 01228 516666 or click here to send him an email.