In an exceptional decision, the English Court continued an ex parte injunction which reconstituted the board of directors of a company in an ex parte interim application ancillary to an unfair prejudice petition.
The Facts – Shortly Stated
The Petitioner (“Mr Garofalo”) and the 1st Respondent (“Mr Crisp”) were directors and shareholders of a group of companies who was in the business of luxury perfumes (“Companies”). They had entered into some sort of a “shareholders’ agreement” in which Mr Crisp was allowed free rein to develop and promote the business of the Companies without undue interference.
In 2023, Mr Garofalo discovered that Mr Crisp had caused the Companies to continue to fulfil orders placed from Russia in breach of the sanctions imposed by the Russia (Sanctions) (EU Exit) Regulations 2019 (“Sanctions Regulations”) ([20]). Furthermore, Mr Crisp recorded none of the Russian income in the company’s management accounts, an apparent attempt to conceal the trade ([21]).
On 9 October 2023, on Mr Garofalo’s ex parte application, the Court granted an injunction removing Mr Crisp as a director and appointing two new directors to the board (“New Management”). At the same time, the Court also granted a number of wide-ranging ancillary orders, including (i) an imaging order in respect of electronic documents of Mr Crisp and his wife, (ii) an order for the delivery up of books and records of the companies, (iii) an order for Mr Crisp to deliver up his passport, and (iv) an order preventing Mr and Mrs Crisp from contacting staff of the Companies or attending within 100 metres of the premises of the Companies.
Seven months after they were first granted, the injunctions were continued by Freedman J. In this Article, José-Antonio Maurellet, SC and Michael Lok discuss a number of key aspects of the judgment.
Jurisdiction
Freedman J affirmed that the Court has the power to remove Mr Crisp as director of the Companies and appoint the New Management in his place at the interim stage ([117]). The test is whether it is just and convenient to grant an order, although in the ordinary case intrusion should be kept to the minimum of what the court considers necessary and appropriate ([118]).
Threshold
The Court considered that the high degree of assurance threshold, namely that Mr Garofalo would succeed at trial, should be applied ([134]). This is because the order sought was an exceptional order which was going to change the status quo of the person who was in day-to-day charge of the companies and was having an immediate impact on the relationship of the parties in the shareholder’s agreement ([133(i)]). It was analogous to a mandatory order as it may carry out a greater risk of injustice if it turns out to be wrongly granted ([133(iii)]).
Is the Threshold Met in that case?
Despite adopting a higher threshold, Freedman J considered that there was a high degree of assurance that Mr Crisp had knowingly breached the Sanctions Regulations and deliberately concealed it in the management accounts ([137]-[141]). Such conduct was found to be unfair, in breach of the shareholders’ agreement, in breach of Mr Crisp’s statutory and fiduciary duties, and caused prejudice to the Companies as a result ([142]).
The Court considered that there was a high degree of assurance that the Court may order the reconstitution of the Companies’ board of directors as final relief or make the relief ancillary to the relief sought of a buy-out of Mr Crisp’s shares ([149]). Freedman J further accepted that this was an exceptional case requiring a change of management at the interim stage noting, amongst others, (i) the serious reputational consequences faced by the Companies if Mr Crisp was not removed, (ii) the gravity of the breach of the Sanctions Regulations and the opprobrium attached to trading with Russia, and (iii) the strong prima facie evidence of Mr Crisp’s concealment of evidence ([157]).
Balance of Convenience
In light of the “existential threat” faced by the Companies, the Court considered that an award of damages would not compensate Mr Garofalo and that the greater risk of injustice would be to Mr Garofalo in the absence of an injunction ([158], [160]).
Freedman J also considered that after 7 months of operation under the New Management, a new status quo had effectively been created ([169]). It was in the interest of the Companies that the New Management remained in control and the reinstatement of Mr Crisp would likely cause difficulties for the management of the Companies ([170]). This points to preserving the injunction until trial ([171]).
Postscript
This case demonstrates the Court’s wide powers to grant interim relief in an unfair prejudice application. It has helpfully clarified the test to be applied and provided useful guidance as to when the Court would intervene urgently to reconstitute the board. Such a remedy is undoubtedly intrusive, but in some exceptional cases perhaps indispensable to preserve the value of the company pending trial.
This article is co-authored by José-Antonio Maurellet, SC (Des Voeux Chambers; Associate Member, 3 Verulam Buildings) and Michael Lok (Des Voeux Chambers; Associate Member, South Square).
