In unfair prejudice proceedings under s.994 Companies Act 2006, the court has a wide discretion on the relief it can order. In Garofalo v Crisp & Ors [2024] EWHC 1737 (Ch), the High Court demonstrated that, in the correct circumstances, it is prepared to grant highly interventionist relief, in this instance continuing a without notice interim order to remove and replace a company director. The Court found that there was a high degree of assurance that the respondent director had caused the relevant companies to trade with Russia in breach of UK sanctions and that the petitioning shareholder-director would establish unfair prejudice at trial.
Background
The Petitioner (Mr Garofalo) and the First Respondent (Mr Crisp) were both directors and shareholders of a group of companies involved in the manufacture, distribution and sale of luxury perfumes (the Respondent Companies), which had high-profile corporate customers.
Mr Garofalo became concerned that Mr Crisp was knowingly causing the Respondent Companies to export perfume to Russia in breach of sanctions and contrary to an agreement between them to cease to supply products to Russia.
Mr Garofalo instructed a private investigator to conduct surveillance on Mr Crisp. The investigator obtained a covert recording of Mr Crisp stating that the Respondent Companies were "doing really well" in Russia, that "We ignore government edicts" and that the Companies' business in Russia had not changed between 2020 and 2023.
Based on these findings, Mr Garofalo brought an unfair prejudice petition under s.994 Companies Act 2006 (the "Act"). Such petitions provide a mechanism whereby shareholders can petition for relief from the court if their interests are being unfairly prejudiced. The relief which can be granted is wide-ranging and the court has broad discretion as to the order it can make. Alongside his petition, Mr Garofalo also applied for a without notice interim injunction to remove Mr Crisp as a director and to install new directors of Mr Garofalo's choosing, (as well as imaging orders, orders for delivery up of the Respondent Companies' books and records and an order for Mr Crisp to deliver up his passport (as it was submitted he was a flight risk)). The removal of Mr Crisp was said to be the only way to mitigate the threat of reputational damage to the Respondent Companies and ultimately to their viability arising from the breach of sanctions regulations.
The injunctions and other ancillary orders were granted on 9 October 2023. In May 2024, the High Court considered whether the change of management order should remain in force until trial or until final relief.
Interim relief - the power to make a change of management order
The Judge confirmed that the High Court's power to grant interim relief in support of an unfair prejudice petition is derived from s.37 Senior Courts Act 1981. The removal of directors by way of interim relief is capable of being granted in certain circumstances.
The Judge confirmed that the test is whether it is just and convenient to grant an order, bearing in mind that, generally, intrusion should be kept to the minimum of what the court considers necessary and appropriate.
The appropriate threshold
The Court was not referred to any prior case in which the interim removal of a director in the context of an unfair prejudice petition had previously been ordered in England & Wales.
The Judge noted that such an order is exceptional and analogous to a mandatory order. Therefore, the court must be alive to the potential greater risk of injustice if the order turns out to have been wrongly made. The need for caution is particularly great when, as in this case, the application was made on a without notice basis.
The Judge considered that the context demanded a higher threshold than the standard American Cyanamid "serious issue to be tried" test. The Court considered whether there was a "high degree of assurance" that Mr Garofalo would succeed at trial as well as, in the alternative, considering whether there was a strong prima facie case. The balance of convenience must also lie in favour of continuing the order.
The decision
Based on the available evidence, the Court found that there was a high degree of assurance that there had been unfair conduct within the meaning of s.994 of the Act. The evidence before the Court demonstrated that Mr Crisp was knowingly in breach of sanctions, his relationship agreement with Mr Garofalo, the agreement not to trade in Russia, his fiduciary duties and his statutory duties as a director. The Court was satisfied, therefore, that the enhanced threshold was met and that Mr Garofalo would succeed in establishing unfair prejudice at trial.
The Court further considered that failing to take immediate steps following Mr Crisp's actions, despite the strong prima facie case against him, posed an "existential threat" to the Respondent Companies if the sanctions breaches became public and they had not done anything. When considering the balance of convenience, the balance lay in favour of continuing the order. The greater risk of injustice would be to Mr Garofalo in the event that the injunction was discharged.
Commentary
On the whole, in unfair prejudice proceedings English courts are generally reluctant to interfere with the internal management of a company, preferring to preserve the status quo until trial where it is possible to do so.
However, this case demonstrates that, where it is necessary, the court will intervene with robust interim measures to protect companies. The decision also showcases the flexibility of relief which can be obtained in unfair prejudice proceedings; the court has powerful tools at its disposal which it is prepared to deploy if required to do so and the relevant threshold tests are met.
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