Rogue directors and unfair prejudice petitions: case update and tips for a board of directors

A recent case presents an interesting example of a strike out application used to dismiss aspects of the defence to an unfair prejudice petition. The application resulted in summary judgment being entered on the claim in favour of the petitioner. The decision is valuable not only in understanding the context of unfair prejudice petitions but also in exploring the reasons that will justify a director's removal from the board.

In our earlier article we discussed the common shareholder disputes which can arise, highlighting in particular unfair prejudice petitions and the circumstances in which they can be brought. In this piece, we consider a recent case (Willoughby v Cole and another) which examines the defence of the board of directors to an unfair prejudice petition brought by a former director and shareholder.

How to remove a rogue director?

Firstly, this is a good opportunity to be reminded of the ways a company director can be removed:

1. The statutory procedure under Section 168 of the Companies Act: the members of a company may remove a director by ordinary resolution at a general meeting. (Note that special notice must be given and the resolution cannot be passed as a written resolution.)
2. Where the company's articles of association allow, a director may be removed by the board. (Though note a special provision will need to be provided; the 2008 Model Articles only permit a director's removal in very narrow circumstances.)
3. A final (and often simpler) option would be to persuade the director to resign.

It is worth flagging that an executive director who is removed from their position may also have a claim for compensation in employment law by unfair or wrongful dismissal.

Willoughby v Cole and Another

This case concerned an unfair prejudice petition brought by a former director and shareholder, Mr Willoughby, under Section 994 of the Companies Act 2006. The petitioner's claim was that the two remaining directors, Cole and Evans, had sought to exclude him from company management and ultimately remove him as a director, making no fair offer in exchange for his shares. The respondent directors contended in their defence that Willoughby's misconduct over the course of the business justified his removal as a director, such that even if his removal was prejudicial to him as a shareholder, it was not unfair.

Willoughby brought an application for strike out of those aspects of the defence which related to his historic conduct as a director on the basis that these were irrelevant. He argued that without those aspects the claim was sure to fail, and so summary judgment should be entered because the defence had no reasonable prospect of success.

The key message from the court is that a director's removal should be based on material misconduct that is relevant, recent and has been properly notified to the director. Dismissing a director without proper grounds can result – as in this case – in a successful unfair prejudice petition. Though not an issue in this case, it is also worth noting that the historic conduct of directors may be treated as waived by the majority of shareholders if it was known to them.

The facts

The Company, Simply Naturals Limited, was a producer and retailer of health supplements established by Mr Willoughby. In 2011 Mr Cole and Mr Evans joined him as shareholders and co-directors. Mr Willoughby was removed as a director in July 2023. He then brought an unfair prejudice petition in 2023, claiming that Cole and Evans had sought to exclude him from company affairs, ultimately removing him as a director without making a fair offer as to his shares.

Evans and Cole made several allegations about Mr Willoughby in their defence to the petition:

Misrepresentations made by Mr Willoughby:

• That the US side of Simply Naturals was a financial success;
• That he owned a share in the mine where the raw materials were mined for the products; and
• That the products were compliant with UK Health and Safety regulations and authorised for sale in the UK.

Poor performance as a director:

• He failed to settle a long-standing dispute which exposed the Company to financial and reputational damage;
• He permitted the Company to sell health supplements despite them not being properly licenced for sale in the UK causing the Company to lose revenue, customers and goodwill;
• He was routinely late for work and often preoccupied with personal matters; and
• He removed the Company's CCTV cameras in 2023.

That Mr Willoughby breached his duties as a director.

Judgment

Mr Willoughby applied for strike out of the defence and summary judgment on the claim. He argued that the allegations of misrepresentation were irrelevant and historic and so clearly had not led to his removal as a director. Willoughby also applied for summary judgment on the claim arguing that the remaining allegations (such as breach of duty) did not give sufficient justification for his removal and so the directors had no reasonable prospect of successfully defending the petition.

The court agreed with the petitioner that the historic allegations were discovered by the directors some 7 – 10 years prior and they did not seek Willoughby's removal at the time. Therefore the allegations could not be relevant to his removal after so much time had elapsed. The court considered that the breach of duty allegations were unparticularised, vague and incoherent. Without these aspects of the defence, the allegations of misconduct by Willoughby were not sufficient to justify his removal as a director. Summary judgment was therefore entered on this issue.

How can disputes of this kind be avoided?

Although each set of facts is different, we consider there are some takeaways from this case for our clients who act as directors and may be faced with the difficulties posed by a rogue director. In these circumstances, we suggest that where a board is considering the removal of a director, they should:

• Act swiftly in response to actions which justify a directors' removal: do not expect to be able to rely on historic or cumulative instances of misconduct.
• Document all complaints of misconduct by a director contemporaneously.
• Ensure that the director concerned is notified of all complaints in writing.

On the other hand, a board of directors may also face an unfair prejudice petition or derivative action under the Companies Act as discussed in our previous article. A company facing an unfair prejudice petition should take note of the outcome in Willoughby v Cole and make sure that contemporaneous evidence stacks up with any justifications as to why the company's actions did not cause prejudice to the shareholder concerned, or that said prejudice was not unfair.

Contact our experts for advice

Our disputes team has extensive experience dealing with shareholder and director disputes and are happy to assist you in understanding the circumstances of your business. Please reach out to our key contacts below if you have any questions or concerns that we can help with.