By Charlotte Bunn, senior associate
In Alphonse Fletcher JR v Solon Group Inc BVIHCMAP [2014/0005] the Court of Appeal endorses the principle that shareholders can exercise powers of directors in circumstances where no (or no effective) board of directors exists.
In September 2014 the Court of Appeal upheld an appeal against a summary judgment order made by Mr Justice Bannister in the BVI Commercial Court in this case. In doing so the Court of Appeal provided a modern endorsement of the principle established in Barron v Potter 1 Ch 895, that in circumstances where a board of directors is unwilling or unable to do act (because of failing communication or dispute), the company retains the power to do what would otherwise have been done.
In 2012, six companies incorporated and carrying on business as mutual funds under the laws of the British Virgin Islands (the “BVI Funds”) were experiencing financial and operational problems. Mr Fletcher who was, at the time, in control of the BVI Funds, sought the assistance of the respondent, Solon Group (“Solon”), which specialises in working with distressed funds. In order to facilitate the process, the boards of directors of all the BVI Funds were reorganized so that Solon was one of the two directors of each of the companies (the other being Mr Fletcher). The relationship started well but deteriorated rapidly and matters came to a head in June 2013 when two key events took place. On 12 June 2013, the sole voting member of the BVI Funds (“RCM”) purportedly passed resolutions removing Solon as a director of the BVI Funds. Due to the fact that neither the BVI Funds, nor RCM had functioning Boards, the resolutions were signed by Mr Fletcher who controlled RHI, the sole shareholder of RCM.
The following day, Solon purportedly passed resolutions of the boards of the BVI Funds removing Mr Fletcher as a director.
Solon commenced proceedings seeking declarations that it was the sole director of the BVI Funds (as well as injunctions restraining Mr Fletcher from acting or holding himself out as a director of the BVI Funds or dealing with their assets). Mr Fletcher filed a defence and a counterclaim seeking similar relief in respect of Solon. Solon applied for summary judgment.
Mr Justice Bannister granted summary judgment finding that the member’s resolutions passed by RCM were invalid and ineffective in removing Solon as a director since RHI had no authority to execute them on RCM’s behalf. He found that the fact that RHI was the sole owner of RCM did not make it RCM’s agent or give it authority to execute documents on its behalf (and there was no evidence of actual authority). The Judge also held that the resolutions passed by Solon were valid. Mr Fletcher appealed.
Court of Appeal
The Court of Appeal upheld Mr Fletcher’s appeal, finding that Mr Fletcher had a reasonable prospect of defending the validity of the member’s resolutions passed on 12 June 2013.
Robert Nader of Forbes Hare relied in argument on the principle established in Barron v Potter. The principle is usefully summarised in the following passage from the judgment of Warrington J:
“If directors having certain powers are unable or unwilling to exercise them – are in fact a non-existent body for the purpose – there must be some power in the company to do itself that which under the circumstances would otherwise be done.”
The Court of Appeal applied Barron v Potter and noted that the principle as described by Warrington J was not a principle grounded in the laws of agency and/or relying on actual or implied authority. The Court of Appeal found that all that the shareholders are in effect doing is exercising a right which the common law gives to them (in certain circumstances) to break a deadlock in a company’s board of directors by dealing with the company’s business directly.
Applying the principle, the Court of Appeal found that RCM as the owner of the voting shares in the BVI Funds had powers under its articles to remove a director of its subsidiaries but since RCM did not have a director in June 2013, RHI as the sole shareholder of RCM was entitled to exercise RCM’s right to remove directors of the BVI Funds. RHI was not relying on any authority conferred on it by RCM or otherwise. It was simply exercising its right as the voting shareholder of RCM to do something that RCM itself could not do.
Deterioration of relationships between directors is common in BVI companies and often the breakdown is so severe that the management of the company becomes impossible. As such and whilst this case was only an appeal against a summary judgment decision, the Judgment provides a useful recent endorsement from the Court of Appeal of the principle in Barron v Potter which practitioners should keep in mind when advising clients.