Section 303 Companies Act 2006: when is a resolution vexatious or ineffective

Managing agents will be familiar with the different “hats” that individuals wear, depending on whether those individuals are acting in their capacity as a member of a management company, or in their capacity as leaseholder.

Those capacities are separate, and the rights that individuals have are different depending on whether they’re wearing their member “hat” or their leaseholder “hat”.

It’s worth remembering that:-

• Rights of members arise under Articles of Association.

• Rights of leaseholders arise under the Lease.

And of course we’re dealing with two different areas of law, with landlord and tenant law largely applying to leaseholders, and company law applying to the company and its members.

 

Rights of members of a company to requisition a meeting

Directors of a company are empowered to call a general meeting of the company at any time.

Under Section 303 of the Companies Act 2006, members of a company have the power to require directors to call a general meeting of the company.

Section 303 sets out the circumstances in which directors are required to call the meeting. A Section 303 request:-

a. Must state the general nature of the business to be dealt with at the meeting; and

b. May include the text of a resolution that may properly be moved and is intended to be moved at the meeting.

A resolution may properly be moved at a meeting unless:-

a. It would, if passed, be ineffective;

b. It is defamatory of any person; or

c. It is frivolous or vexatious.

Where directors are required under Section 303 to call a general meeting, they must do so within 21 days. The meeting itself must be held not more than 28 days after the notice convening the meeting.

Under Section 306, the Court has power to order a meeting to be called, held and conducted in any manner the Court thinks fit.

But what is “frivolous or vexatious” for these purposes? And when should the directors make the call on whether the Section 303 request is valid?

This, amongst other things, was under consideration by the High Court in the matter of Kaye and anr v Oxford House (Wimbledon) Management Company Limited and ors [2019] EWHC 2181 (Ch).

 

Relevant facts

Oxford House (Wimbledon) Management Company Limited is the management company for a block of 18 flats known as Oxford House. Each leaseholder is a shareholder in the management company.

Comment was made by the High Court that “members of the [management] company have been used to litigation being brought by the company against its leaseholders”.

Reference is made in the judgment to litigation in 2013 against a leaseholder for having a cat in breach of the lease. There was also much discussion about “the patio litigation” which appears to derive from the lessees of one flat placing a table and chairs on the patio.

The failure on the part of the leaseholders to remove the garden furniture resulted in proceedings being brought. Those leaseholders defended the proceedings and issued a counterclaim. The company’s cost budget for the patio litigation was revealed as being in excess of £112,000.

Over recent years, there has been somewhat of a veritable merry go round of directors, with various appointments and resignations.

As at April 2019, the management company had three directors. This included the leaseholder who was on the other side of the patio litigation.

Concerns on the part of a number of the residents (who, of course, are also shareholders in the company) led to a requisition on 11 April 2019 for a general meeting of the company to be called under Section 303 of the Companies Act 2006. The section 303 requisition listed ten resolutions which, collectively, sought the removal of the directors, and the appointment of alternative directors.

On 2 May 2019 (this being the 21st day after the meeting had been requisitioned and therefore the last day for compliance), the directors called a general meeting to take place on Saturday 1 June.

The notice of meeting sent to all shareholders included an agenda and a proxy form.

In the intervening period, advice was taken by the directors on whether the proposed resolutions were vexatious in accordance with section 303(5)(c) of the Companies Act 2006. It is fair to say that the instructions given to counsel were far from impartial.

 

Meeting on 1 June

The meeting on 1 June went ahead, and the minutes show that 16 of the 18 shareholders were present in person or by proxy.

After the meeting was declared open, a prepared statement was read by the director (who’d appointed himself as chair). He stated that the proposed resolutions were vexatious, and refused therefore to put any of those resolutions to the meeting.

The meeting was then declared closed without any further discussion.

The remaining shareholders proceeded to hold their own meeting, agreeing that the general meeting should continue, and that they should vote on the resolutions.

Each of the resolutions was then put to the meeting, and each voted on and passed.

The upshot of the meeting is that the old directors were removed, and six new directors appointed forthwith.

 

What happened next

There then ensued disagreement between the old directors and new directors as to who actually was appointed as directors of the company. The new directors considered that they had been validly appointment. The old directors considered that they remained in office, and that no new directors had actually been appointed.

 

The arguments

The new directors argued that:-

a. Section 303(5) is a very limited carve out to the circumstances in which the directors are obliged to call the meeting which has been requisitioned; however

b. Once the meeting has been called, section 303(5) has no further application and matters then lie in the hands of the members; accordingly

c. Once the meeting has been called, if the chairman purports to close the meeting without conducting the business for which it was convened, such an action would be invalid; and therefore

d. It is open to the members present to continue the meeting to consider the business for which the meeting was called.

The old directors argued:

a. The chair was entitled to declare the meeting closed; because

b. He had taken advice from counsel that the resolutions were vexatious or ineffective; therefore

c. He believed (in reliance on that advice) that there were no resolutions that could properly be put to the meeting; and

d. It wasn’t possible for the meeting to be continued after it had been closed; therefore

e. The purported passing of the nine resolutions by the remaining shareholders were of no effect; so that

f. The directors purportedly appointed were not validly appointed and are not directors of the company.

 

Decision on Appeal

The High Court considered the purpose of the scheme and sections 303 and 304, and held:-

“The purpose of the scheme is to allow the requisite percentage of members of a company to serve notice requiring the directors…to call a general meeting to consider business of the company, the general nature of which they must identify. The members are also permitted to set out the particular resolutions that they wished to be considered”.

Once a request is received, directors have 21 days to decide whether or not to call a meeting. The purpose of that 21 day period is, in the view of the High Court, for the directors to consider the proposed business and text of particular resolutions. If a particular resolution would be ineffective, is defamatory or is frivolous or vexatious, the directors are not required to call a meeting.

As commented, the purpose of section 303(5) is to offer some protection to companies from activities of what might be described as “the lunatic fringe”.

If the requisitioner is dissatisfied with a decision of the directors not to call the meeting, then they have the ability to challenge that decision by bringing an application to the Court to order that the meeting be called.

However, once the meeting has been called, it’s out of the hands of the directors, and the only people who can then consider the proposed resolutions are the members of the company. As the High Court put it,

“There is no residual power remaining in the directors further to consider section 303(5) and determine that any particular resolution or resolutions should not be put before the members in general meeting. Rather, the directors have performed their role and what happens next is down to the members”.

Accordingly, there was no power on the part of the directors to seek to postpone or cancel the meeting.

The High Court reminded itself that chairmen do not run general meetings for their own benefit, but for the benefit of the company as a whole. They must act, at all times, in good faith and for proper purposes, “remembering at all times that the authority to preside over the meeting does not confer dictatorial power”.

On that basis, the High Court held that refusing to allow resolutions to be put to the meeting and closing the meeting was not within the power of the chairman.

It followed that it was then open to the members to appoint a new chairman (which they did) and to continue with the meeting to conduct the business for which the meeting had been called.

This meant that the members were entitled to continue the meeting, and that the resolutions they passed were valid.

 

What’s “vexatious”?

Although such comments were strictly obiter, the High Court has given some insight into how “vexatious” should be interpreted.

In this context, “vexatious” means a resolution “which has the characteristics of being troublesome, burdensome or is proposed for no proper purpose connected to the company, provided that one interprets troublesome or burdensome from the standpoint of the company, as opposed to directors of the company”.

Interestingly, the High Court did not see how a resolution by members to remove directors and appoint new directors (which is a fundamental right of members) could be described as burdensome or troublesome, or being for no proper purpose connected to the company.

Therefore, in summary, the resolutions to remove the old directors were validly cast, as were the resolutions to appoint the six new directors.

 

 

Cassandra Zanelli

Widely recognised for her expertise in the industry, and listed among the 100 most influential people in residential leasehold management, Cass heads the team at PM Legal Services. Passionate about education and sharing knowledge, she's a regular speaker at conferences, events and seminars, having worked with leading organisations in the property management industry.

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