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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Union Music Ltd. & Anor v Watson & Anor [2003] EWCA Civ 180 (31 January 2003) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2003/180.html Cite as: [2003] EWCA Civ 180, [2003] 1 BCLC 453, [2004] BCC 37

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IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
CHANCERY DIVISION
MANCHESTER DISTRICT REGISTRY
(HIS HONOUR JUDGE HOWARTH)

		Royal Courts of Justice Strand London, WC2
		31st January 2003

1. LORD JUSTICE PETER GIBSON: Section 371 of the Companies Act 1985 ("the Act") gives a power to the court to order a meeting in the following terms:

"(1) If for any reason it is impracticable to call a meeting of a company in any manner in which meetings of that company may be called, or to conduct the meeting in manner prescribed by the articles or this Act, the court may, either of its own motion or on the application-

(a) of any director of the company, or

(b) of any member of the company who would be entitled to vote at the meeting,

order a meeting to be called, held and conducted in any manner the court thinks fit.

(2) Where such an order is made, the court may give such ancillary or consequential directions as it thinks expedient; and these may include a direction that one member of the company present in person or by proxy be deemed to constitute a meeting.

(3) A meeting called, held and conducted in accordance with an order under subsection (1) is deemed for all purposes a meeting of the company duly called, held and conducted."

2. On this appeal the primary question is whether the lower court, when invited by a majority shareholder in a company to exercise the power under the section so that the meeting could consider whether to appoint an additional director, was correct to refuse to do so in circumstances where the minority and only other shareholder was threatening to render inquorate any general meeting of the company by his refusal to attend. It is an appeal from certain parts of the order made on 13th June 2002 by His Honour Judge Howarth, sitting as a judge of the High Court, in proceedings ("the main action") brought by the first claimant, Union Music Limited ("Union"), and the second claimant, Arias Limited ("Arias"), against the first defendant, Russell John Watson, and the second defendant, Blacknight Limited ("Blacknight"). Union in the course of those proceedings applied for an order under section 371. The judge, by his order of 13th June 2002, refused to make an order under section 371 and ordered Union and Arias to pay Mr Watson's costs. The judge refused permission to appeal. On application to this court Carnwath LJ gave permission.
3. Union, on 23rd January 2002, had also commenced proceedings ("the Part 8 proceedings") against Mr Watson and Arias, seeking the convening of an extraordinary general meeting of Arias pursuant to section 371 to appoint an additional director of Arias. The judge by a further order on 13th June dismissed with costs the Part 8 proceedings and ordered the payment out to Mr Watson of £15,000 paid into court by Union as security for costs. The judge again refused permission to appeal. Carnwath LJ adjourned that application to this court while expressing doubt as to whether there was sufficient ground for an appeal.
4. The background to the matters before us is somewhat complex. Mr Watson is a world-renowned singer of operatic arias. On 17th July 1998 Arias was incorporated as a vehicle for the promotion, management and exploitation of Mr Watson's career. It adopted Table A of the Act as its articles of association, save in so far as the regulations in table A were expressly excluded or varied. The relevant articles of Arias are the following. Regulation 40 of Table A was excluded, but the first sentence of that regulation, that no business shall be transacted at any meeting unless a quorum is present, is reproduced in article 5(3). The second sentence of regulation 40, providing for a quorum of two, is not in the articles, but article 5(E) provides that if Arias had only one member, that member, or his proxy or representative, should be a quorum.
5. Of the 100 issued shares, 51 are held by Union and 49 by Mr Watson. There were three directors appointed: Union, Mr Watson and his wife. In September 2001 Mrs Watson resigned and she has not been replaced. A shareholders' agreement ("the Agreement") dated 5th August 1998 was entered into between Union, Mr Watson and Arias for the purpose of regulating their relationship with each other, as was recited in recital C.
6. Clause 4.1 of the Agreement provided that:

"The maximum number of Directors holding office at any time shall be 4 unless otherwise expressly agreed in writing by each of the Shareholders."

Clause 4.3 provided that:

"The Chairman of the meeting of the Board shall not be entitled to a second or a casting vote."

7. Clause 6 was entitled "Matters Requiring Consent of the Shareholders". Clause 6.1 provided:

"The Shareholders shall exercise all voting rights and other powers of control available to them in relation to the Company so as to procure (insofar as they are able by the exercise of such rights and powers) that the Company shall not without the prior written consent of both the shareholders:-"

There then follow 18 sub-paragraphs listing various actions or activities which are prohibited without the prior written consent of both shareholders. They include clause 6.1.1, appointment of an agent; clause 6.1.4, the borrowing of a sum in excess of £1,000; clause 6.1.8, entering into commitments over £1,000; clause 6.1.16, doing or permitting any act whereby Arias might be wound up; and then clause 6.1.18:

"Hold any meeting of Shareholders or purport to transact any business at any such meeting unless there shall be present duly authorised representatives or proxies for each of the shareholders."

8. Clause 10.1 provided:

"Each Shareholder undertakes with the other as follows:-.

10.1.1. to exercise all voting rights and powers of control available to it in relation to the Company so as to give full effect to the terms and conditions of this Agreement."

I need not read further from that clause.

9. Clause 24.1 provided that in the event of any ambiguity or conflict arising between the terms of the Agreement and those of Arias' memorandum and articles, the terms of the Agreement should prevail as between the shareholders.
10. Unhappily, Union and Mr Watson fell out in 1999. Union alleges that Mr Watson entered into contracts with Blacknight and Decca, cutting out Union and Arias. On 22nd December 2000 the main action was commenced in the Manchester District Registry. Arias purportedly acted by the same solicitors as were acting for Union, and was a claimant even though there had not been any vote sanctioning the commencement of the proceedings in any board meeting or any general meeting.
11. It was pleaded by the claimants in paragraph 9 of the particulars of claim that it was the wish of Union, as the majority shareholder in Arias, that Arias commence and continue the proceedings as against Mr Watson, that by its participation in the main action, Union authorised and ratified the commencement and continuation of the proceedings by Arias against Mr Watson, and that so far as necessary Union would seek directions from the court under section 371 for the holding of a meeting of Arias so that the commencement and continuation of the main action could be authorised by Arias in a general meeting. It was further pleaded that Mr Watson, as a director of Arias, owed fiduciary duties to it, and that he was in breach. A restitutionary claim was made to recover monies expended by Union and Arias on Mr Watson's career. The claim against Blacknight is no longer pursued and I need say nothing about it.
12. By his defence and counterclaim, Mr Watson said that it was served without prejudice to his case that (1) Union's solicitors had no authority to act on behalf of Arias, and he reserved the right to claim wasted costs against them; (2) the agreement was unenforceable as being in restraint of trade; (3) alternatively the agreement should be set aside by reason of undue influence and/or unconscionable bargain. Mr Watson denied that either or both Union and Arias was or were entitled to relief, and he counterclaimed for a declaration that the agreement was unenforceable, or alternatively should be set aside.
13. On 16th March 2001 Union and Arias served a part 18 request on Mr Watson. He was asked whether his position was that the proceedings brought by Arias were a nullity and incapable of being ratified in a general meeting. Mr Watson, in his response of 23rd May 2001, said that he did not contend that the claim form in the main action was a nullity; his position was that the solicitors had no authority to act for Arias and were personally liable for the costs of the proceedings.
14. A further request by Union and Arias was whether Mr Watson would be prepared to attend a properly convened general meeting of Arias so that consideration could be given by the members of Arias to whether or not they should ratify the commencement and continuation of the main action. The request also stated that if Mr Watson refused to co-operate, an application would be made under section 371. Mr Watson's response was that the relationship between him and the directors of Union had completely broken down to the extent that direct dialogue was unlikely to be constructive. He proposed that Mr Farnell of his then solicitors, Eversheds, should attend the meeting on his behalf as his duly appointed representative or proxy.
15. An attempt was made by Union by letter of 6th July 2001 to convene a board meeting on 16th July of that year. Neither Mr Watson nor Mr Farnell could attend that day. Mr Farnell asked for alternative dates. Union was reminded that Mr Watson was prepared for Mr Farnell to attend general meetings as his proxy. However, as Mr Sorrell of Wacks Caller, solicitors for Union, frankly conceded in paragraph 25 of his witness statement of 18th January 2002:

"Unfortunately, however, this is where matters were allowed to slip. For some reason which is difficult now to identify (probably inadvertence or breakdown in communication between my firm and Mrs Carruthers [the secretary of Arias] or a combination of both) Mr Farnell's offer ... was not taken up and no formal Board Meeting, or General Meeting, of Arias was ever arranged."

16. Mr Watson changed solicitors, and on 27th November 2001 his new solicitors applied on his behalf to strike out Arias from the main action. Among the points taken for him was that Arias would not be able to ratify the commencement of the proceedings because of provisions of the Agreement (clauses 6.1.1, 6.1.4, 6.1.8, 6.1.16 and 10.1.1), and that even if a general meeting were called by Union, Mr Watson would not attend such a meeting and the meeting would be inquorate: see paragraphs 15 to 18 of the second witness statement of Robert Nicholls of Mr Watson's solicitors. Arias was said to be insolvent.
17. Union's response to Mr Watson's application was to take the point that Mr Watson was both trying to deny the validity of the Agreement in the main action and also to rely on it in the application to strike out. Union argued that Mr Watson had to elect between accepting or denying the validity of the Agreement. It contended that ratification by the members of Arias would be possible, and that if that wish were obvious, there would be no need to call a general meeting. On that basis, it claimed, ratification had already occurred.
18. On 3rd December 2001 the application to strike out came on for hearing before the judge. He ruled that Mr Watson should be put to his election before proceeding further with the application. The judge stayed the main action until the determination of Mr Watson's appeal from the judge's ruling. That appeal was dismissed by this court (Robert Walker LJ and Carnwath LJ) on 29th April 2002, when the stay was lifted.
19. On 13th June 2002 Mr Watson elected to deny the validity of the Agreement. He could therefore no longer rely on the Agreement in his application to strike out. By consent that application was dismissed. In the meantime, in the main action, Union applied to the court on 30th November 2001 for an order under section 371, calling an extraordinary general meeting of Arias, and a direction that if Union was present at that meeting, such meeting should be treated as a valid meeting. The purpose of the meeting was said to be to consider the ratification of the main action or, alternatively, the appointment of a further director. By then Mrs Watson had ceased to be a director, and so there were only two directors of Arias, with no possibility of the chairman out-voting the other director.
20. On 3rd January 2002 by letter of that date, Union made a requisition under section 368 of the Act on Arias to convene an extraordinary general meeting. The object of the meeting was to be the appointment of a further director. On 23rd January 2002 Union commenced the Part 8 proceedings in the Companies Court in London at a time when the main action was stayed. It was contemplated that on the appointment of a new director, the board would consider ratifying the main action, but undertakings were offered by Union that ratification would not occur without Mr Watson being given 14 days' notice.
21. On 12th February 2002 the Part 8 proceedings were transferred to the Manchester District Registry, where the main action already was proceeding. On 27th May 2002, after the Court of Appeal's ruling on the election point, the judge directed that all outstanding matters in respect of the litigation between the parties were to be heard by him on 12th and 13th June.
22. The judge gave judgment at the end of the hearing. In his judgment he dealt with two points: (1) whether he should order a section 371 meeting, and (2) what to do about the Part 8 proceedings. On the first point the judge said that during the hearing he asked counsel for Union, Mr Bartley-Jones QC, whether he was dealing with the section 371 application in the context of the application made in the main proceedings, or whether he was proceeding for the relief sought in the Part 8 proceedings. Mr Bartley-Jones said he preferred the latter, but the judge pointed out that Mr Watson had proceeded on the footing that the application in the main proceedings was also live. The judge said on the main point relating to section 371 that the case had caused him "not some little trouble" and that his mind had vacillated even while he was giving judgment. He said that he had to perform a balancing exercise when exercising his discretion under section 371. He found that the test of impracticability was satisfied because the probability must be that the general meeting which Union wanted would not be able to take place because there would not be a quorum. He also said that if there was a directors' meeting, any proposed resolution opposed by the other director would not be carried.
23. The judge considered the quorum provisions of article 5 and pointed out that unless there was only one registered member, any company meeting must be attended by at least two members. He said at page 12 of his judgment:

"Now the parties have got themselves, it seems to me, into a position where deadlock is inevitable if they fall out. And the question really is should the Court come to the rescue of one of those parties by the means which have been suggested by the claimants, in other words proceeding to exercise the discretion vested in the Court under and by virtue of section 371."

24. The judge then turned to the authorities. He referred to Re El Sombrero Ltd [1958] Ch.900 on the meaning of "impracticable" in section 371. He also referred, but only briefly, to another decision of the High Court, Re Opera Photographic Ltd [1989] 1 WLR 634, as a very similar case. He said that he accepted that he had the power to order an extraordinary general meeting and to direct that a meeting by one member should be deemed to constitute a valid meeting, but he said that the difficulty he had was whether he should exercise that power.
25. He then referred to two other decisions as being of some help. The first was Harman v BML Group Ltd [1994] 1 WLR 893. The other was Ross v Telford [1998] 1 BCLC 82. Both were decisions of this court. The judge said that not to convene a meeting would leave Union's solicitors subject to the danger of a wasted costs order over their heads, whereas a meeting, if convened, would take place in breach of clause 6.1.18 of the Agreement, though he acknowledged that there would be no breach if Mr Watson, or a proxy or representative for him, attended. But he posed the question why Mr Watson should attend and assist Union, with whom he had fallen out, to comply with the provisions of the Agreement by which he claimed not to be bound.
26. The judge noted that if Mr Watson sought on the basis of the provisions of the Agreement to restrain the passing of a resolution to ratify the commencement and continuation by Arias of the main action, he would be said to have approbated the Agreement. He said that if he made the order, he would put Union and Arias in a position of advantage. He considered what other proceedings might be brought. He referred to Union being able to bring a derivative action under the exception to the rule in Foss v Harbottle, on the ground that Arias could not act as a result of Mr Watson's behaviour. He also referred to the possibility of a petition under section 459 of the Act seeking an order regulating the conduct of the affairs of Arias. He acknowledged that taking either course would add to the considerable costs already incurred.
27. The judge then concluded in this way:

"Ultimately it seems to me that in this case these claimants have chosen the wrong means to acheive their objective. I do not think in the light of what was said by the Court of Appeal both in Harman v BML and Ross v Telford that it is a proper exercise of discretion under section 371 for me to intervene to try to cut a Gordian knot of the parties own making under the terms of a shareholders agreement which at least the applicant in this case asserts is valid and binds both of the parties to assist the applicant, to deliberately do things which must inevitably in my view lead to a breach of the provisions of that agreement. It seems to me regrettable and I do so with the greatest of reluctance, but it seems to me that the authorities drive me to that conclusion, that I have to say that if the ratification is wanted it has to be achieved by a different route and that different route is eithher by means of a derivative action, in which case ratification doesn't apply, or by means of a petition under section 459 of the Companies Act where an order might be made regulating the conduct of the company's affairs and thus giving ratification to somebody to continue these proceedings in the name of Arias Limited. But I do not think that the right way is to do it by means of an order under section 371. As I have said, I have power to make that order, that did not trouble me at all; it is a question of whether it is right as a matter of discretion for me to make such an order and inevitably, even if the principles set out by the Court of Appeal in the two cases I have mentioned do not necessarily apply, if at the end of the day I am at a situation where it seems to me that there may be as much harm done in the excerise of a discretion as in the refusal to exercise it, the proper course on a judicial matter which has to proceed on a balance of probabilities is that the Judge should refuse in that case to exercise his discretion. That is the second ground on which I make this decision. Thus I am going to dismiss these two applications."

28. The judge then turned to the Part 8 proceedings. He noted that it was the same relief being sought by these proceedings as in the main action. He said that it was an abuse to seek from the court in two actions in two different locations the same substantive relief on substantially the same grounds. He said that Union could have applied for the stay of the main action to be lifted. The judge noted the absence of any satisfactory explanation. He said that he could not express too strongly his disapproval. He dismissed the Part 8 proceedings as an abuse, and ordered Union to pay costs.
29. Since that judgment, Union has sought and obtained an order that there be a preliminary issue to determine whether Union, as 51 per cent shareholder, had the power to authorise and ratify the commencement and continuation of the main action by Arias, notwithstanding that no general meeting had been held, and whether Union had exercised that power. That argument, which is reflected in the preliminary issue, has been regarded by Union as its primary claim.
30. Union's appeal against the judge's refusal to grant relief under section 371 is based on a submission that the judge exercised his discretion wrongly, particularly by his reliance on the Harman and Ross decisions as guiding him in the exercise of his discretion on the facts of the present case. Secondly, it is said that the judge erred in construing clause 6.1.18 as a veto against, rather than a right to attend, a general meeting. Thirdly, Union says, the judge wrongly failed to take into account certain relevant matters, and gave excessive weight to others.
31. Mr Watson's position on this appeal is governed by his understandable anxiety not to be seen to rely on the agreement in case that should be held against him. Mr Freedman QC, appearing with Mr Flynn, has confined himself to making submissions for the assistance of the court on the law, and to supporting the judge's conclusion. He submitted that the judge was right to find guidance in the Harman and Ross cases applicable to the issues in the present case.
32. I venture to make a few preliminary observations about section 371. It is a procedural section plainly intended to enable company business which needs to be conducted at a general meeting of the company to be so conducted. No doubt the thinking behind it is that a company should be allowed to get on with managing its affairs, and that should not be frustrated by the impracticability of calling or conducting a general meeting in the manner prescribed by the articles and the Act.
33. One situation Parliament envisaged where section 371 might be utilised can be seen from section 371(2), allowing the court to direct that a meeting attended by only one member should suffice. That suggests that Parliament had in mind a situation where there was a quorum provision requiring the attendance of more than one member, such as is contained in regulation 40 of Table A. Save for the condition of impracticability, no other express conditions are imposed on the ability of a director or member to call for a meeting, or on the ability of the court to exercise its power. But the power confers on the court a discretion and, like all discretions, it must be exercised properly having regard to the relevant circumstances. The authorities provide examples of cases where the power has been exercised and where it has not. The fact that there are quorum provisions in Table A requiring two members' attendance will not in itself be sufficient to prevent the court making an order under section 371, where the applicant is seeking a proper order such as the appointment of a director, something which a majority shareholder would have the right to procure in ordinary circumstances.
34. In this context it is to be borne in mind that by section 14(1) of the Act, the memorandum and articles bind the company and its members to the same extent as if they respectively had been signed and sealed by each member, and contained covenants on the part of each member to observe all the provisions of the memorandum and articles. For my part, I have difficulty in seeing how an agreement constituted by the statutory deeming provision is to be treated in any way differently from an express agreement, such as a shareholders' agreement, containing a quorum provision. Both have effect as contractual agreements as between the shareholders.
35. The first case, El Sombrero, like the Opera Photographic case, establishes that the contract between the members of a company as created by the articles can be overridden by the court ordering a meeting under section 371, and that a right in a member to choose whether or not to attend a meeting does not amount to a right of veto, or to a right to frustrate the wishes of the majority. In the Opera Photographic case Morritt J referred at [1989] 1 WLR at page 636 to the decision of Brightman J in Re H.R. Paul & Son Ltd (1974) 118 SJ 166. Brightman J is recorded as saying:

"The jurisdiction conferred by the section was discretionary and his Lordship was therefore not bound to make an order. But to refuse B Ltd's application would deprive a majority shareholder of the right to alter the articles of association, and confer on a minority a right of veto not commensurate with their shareholding. His Lordship did not accept that the quorum provisions should be regarded as a right vested in the minority to frustrate the wishes of the majority, and he would therefore grant the relief sought."

36. Morritt J continued on page 636:

"The plain fact of this matter is that deadlock exists between the two individuals which has to be resolved one way or another. It is either capable of being resolved by ordering a meeting, at which no doubt Mr Martin will be removed [Mr Martin was a minority holder and director], and which will then no doubt result either in him exercising the pre-emption rights under the articles of selling his shares, or presenting a petition for the winding-up of the company or presenting a petition under section 459 of the Act of 1985 based on unfair prejudice to him. Equally, if no order is made the deadlock will continue because no meetings can be conducted which are going effectively to manage or procure the management of this company, and if that persists for any length of time then no doubt one or other of the individuals will again be presenting a petition based on that deadlock in order to provide some form of resolution.

In the circumstances I do not think that the distinction which Mr Instone seeks to draw is a valid one. The point still remains that the applicant, as the 51 per cent shareholder, has the statutory right under the Companies Act 1985 to remove the second respondent as a director. As Brightman J's decision in re H.R. Paul & Son Ltd, 118 SJ 166 shows, the quorum provisions cannot be regarded as conferring upon the second respondent some form of veto as being his entitlement. If he is, as no doubt he will be, removed if I make the order sought it may well be that further proceedings will have to be undertaken by one side or another to procure the purchase of the other's shares, but that seems to me to be inevitable in any event. It would be in those proceedings that the wrongfulness or otherwise of the conduct of either of the individuals would have to be determined in order to decide what order to make and what form the relief should be.

In those circumstances I see no reason not to exercise the discretion which it is accepted exists in this case and I will accordingly make the order sought."

37. The Harman case turned on the fact that there was a class right attached to a class of shares, which the convening of a general meeting was designed to override. That, this court held, could not be done. I add the comment that that is hardly surprising in view of the elaborate provisions in Chapter II of Part V of the Act prescribing the procedures and conditions for varying any class rights. The company in question had a share capital consisting of 290,000 A shares and 210,000 B shares. There were four A shareholders but only one B shareholder, a Mr Blumenthal. A shareholders' agreement provided that Mr Blumenthal should be entitled to remain in office as director so long as he, or any family company of his, should be the owner of the B shares, and that a general meeting should be inquorate unless the B shareholder, or his proxy or representative, attended.
38. Dillon LJ, giving a judgment with which Leggatt and Henry LJJ agreed, said that the provision requiring the B shareholder to be present was essential to entrench Mr Blumenthal's right to remain a director and was a special provision to secure his directorship. Dillon LJ also said at page 898:

"Class rights have to be respected and I regard the right of Mr Blumenthal, as the holder of the B shares, to be present in the quorum as a class right for his protection which is not to be overridden by this [section 371] machinery."

He made it clear that it was not for the court to make a new shareholders' agreement and impose it on the parties.

39. The present case is not one with entrenched or any class rights, as it seems to me. There is nothing in the Agreement or in the memorandum and articles of Arias which confers any right on Mr Watson as shareholder which is not also conferred on Union as shareholder. There are simply no classes of shares: there is but a single class. I would add at this point that we were taken by Mr Freedman to Cumbrian Newspapers Group Ltd v Cumberland & Westmorland Herald Newspaper & Printing Company Ltd [1987] Ch.1 for the proposition that a class right could exist even though there was only one type of share in issue and the rights of the shareholders were the same. In my judgment, nothing that was said by Scott J in the Cumbrian case supports so broad, and indeed astonishing, a proposition. There is, in my view, no assistance from the Cumbrian case towards resolving the dispute in the present case.
40. The Ross case was a case where a husband and wife were the only two directors of each of two companies. They were equal shareholders of one of the companies. The shareholders of the second company were the husband and the first company. In an acrimonious divorce the district judge had directed that the net proceeds arising out of the liquidation or sale of either company should be divided equally. An action had been brought by the second company against a bank, alleging that the wife had forged the husband's signature on cheques. The husband wanted a meeting to be called under section 371 to ratify the second company's action, with a nominee chosen by him representing the first company shareholder. Thus, the deadlock would have been broken if the order had been made. Judge Howarth, at first instance, made an order under section 371, but on appeal this court reversed his decision. Nourse LJ, with whom Roch and Phillips LJJ agreed, said that neither the El Sombrero case nor the Opera Photographic case was authority for the proposition that section 371 enabled the court to break a deadlock between two equal shareholders, and that that was confirmed by the Harman decision. In so holding, this court accepted submissions from the wife that the court cannot make an order under the section so as to permit a 50 per cent shareholder to override the wishes of the other 50 per cent shareholder, that section 371 was a procedural section not designed to affect substantive voting rights or to shift the balance of power between shareholders in a case where they had agreed that power should be shared equally, and where the potential deadlock is something which must be taken to have been agreed for the protection of each shareholder.
41. In the present case the shareholdings were not equal. The Agreement was not designed to ensure that power should be shared equally. Initially, as I have noted, Mr and Mrs Watson, who might be expected to have been in one camp, were the majority on the board, with the majority shareholder left as the minority on the board. The deadlock happens to have been caused by Mrs Watson ceasing to be a director. Union, as the majority shareholder, could be expected to be able to remove or appoint a director. I do not agree with the judge's suggestion that the parties had contracted for a situation of deadlock. What the parties had contracted for, I accept, was that if Mr Watson chose not to attend or be represented at a general meeting, then there could be no general meeting.
42. Clause 6.1.18, however, seems to me more in the nature of a quorum provision than a provision for a class right, which it plainly was not, or a substantive right. Thus, the present case, as it seems to me, is one which is distinguishable from both the Harman and the Ross cases. The position is similar to that in the Opera Photographic case.
43. For completeness I should also mention that we were taken by Mr Freedman to a further case, Re Woven Rugs Ltd, an unreported decision of Mr Anthony Mann QC on 3rd December 2001. In that case there was little dispute as to the relevant law, and the parties were agreed as to the principles to be applied. Those principles included:

"(e) If there is an arrangement which effectively gives a right in the nature of a class right to the respondent shareholder, then the court will not make an order if the result of that order would be to infringe that class right."

Harman is given as the authority for that.

44. Mr Freedman also referred us to the fact that the majority shareholder in that case accepted that if, as had been contended by one side, there was an agreement in the nature of a shareholders' agreement between the parties to the effect that each side should have one director on the board, and that if such an agreement was established, it would be wrong to order a shareholders' meeting at which it was intended to propose a resolution which contravened that agreement. Thus, the points for which that case was cited to us were conceded and, as I have noted, it related to rights in the nature of a class right. For the reasons I have already given, I cannot see that any right in the nature of a class right is involved in the present case.
45. I conclude that the judge was wrong in thinking, as he appears to have done, that Harman and Ross constrained him not to exercise the power under section 371 in this case. The judge also treated the Agreement as containing a provision which would be contravened if the judge were to order a meeting to be held in accordance with section 371. There would be, of course, no contravention if the meeting were called and Mr Watson chose to attend the meeting. However, realistically, I acknowledge that it may well be that Mr Watson would choose to abstain from attending the meeting, as indicated in his solicitor's witness statement. The judge felt that he could not in the circumstances exercise his discretion to cause not only a meeting to be held, but business to be conducted.
46. There is no doubt that if, as one would expect, Union exercises its voting rights at a meeting not attended by Mr Watson or his proxy, it would be doing so in contravention of clause 6.1.18. For the reasons which I have already given, I do not see that as being an insuperable obstacle in the way of the court making an order under section 371. The court should consider whether the company is in a position to manage its affairs properly. It ought also to take into account the ordinary right of a majority shareholder to remove or appoint a director in exercise of his majority voting power. A meeting would be limited to the single act of enabling the appointment of a new director to be considered and voted on. Taking the view that I do that clause 6.1.18 is in the nature of a quorum provision rather than a provision confirming a substantive right, it seems to me that the judge was wrong to rely on that provision to refuse to order the meeting.
47. I would add that I also disagree with the judge's view that Union had chosen the wrong means in view of the possibilities of a derivative action or a section 459 petition. I see no reason why a shareholder in the position of Union should not utilise the simple means afforded by section 371 rather than incur the greater difficulties and expense of the other possibilities. It is unnecessary to consider the other points which were taken by Mr Bartley-Jones as to why the judge erred in relation to section 371.
48. If my Lords are in agreement thus far, it follows that the judge's order cannot stand, and this court should consider whether it should exercise the power under section 371. On that, as it seems to me, the answer is plain. I can see no sufficient reason why the order should not be made so that the deadlock in the board can be broken. Of course, I acknowledge that that means that the majority shareholder will have his way by the appointment of a director of its choice, save where the parties have agreed to complete equality. One side or the other has to prevail, and I cannot see that the contractual provisions in the Agreement provide a sufficient reason why the power should not be exercised. Companies should have effective boards able to take decisions. I would therefore be prepared to make an order for the calling of a meeting to consider the question of the appointment of a further director and to allow the voting on that, even though only one member is present at that meeting.
49. I turn now to the application for permission to appeal in respect of the Part 8 claim. Mr Bartley-Jones submits that the judge was wrong to say that the commencement and continuation of the Part 8 proceedings were an abuse of the process of the court. He told us that the application under section 371 in the main action was issued merely in response to the strike out application as a protective measure against the possibility of the other arguments deployed against the strike out application failing. He told us further that it was decided that the Part 8 proceedings should be brought in the Companies Court in London simply because it was desired to have a quick resolution of the point. He also told us that the section 371 application in the main action was never moved, and that at the hearing before the judge, the point on section 371 was, so far as he was concerned, taken in the Part 8 proceedings. He submitted that if the application under section 371 in the main action had not been lodged, there could be no question of any abuse.
50. I am wholly unpersuaded by these arguments. I accept Mr Freedman's submissions that the Part 8 proceedings were an abuse, particularly as they were commenced, not in the Manchester District Registry, where the stayed main action was, but in a different court in London. It seems to me plain that if Union wanted a decision on the section 371 point as some sort of answer to the application to strike out, then that should have been raised in the main action and dealt with at the same time as the strike out application. It would have been possible for Union to ask for the stay to be lifted. But that was not done, and, in my judgment, an error was made by those advising Union. Mr Bartley-Jones has, very properly, tendered his apologies, acknowledging his own fault in the matter. For my part, I cannot see that his argument on this issue has any real prospect of success, and accordingly I would refuse permission to appeal in respect of the Part 8 proceedings, subject only to the question of costs.
51. The judge, when making his order as to costs, made an order for indemnity costs in respect of the hearing in the Companies Court in London, but otherwise gave costs on the standard basis to Mr Watson. At the hearing before the judge the section 371 point could have been dealt with in either the application in the main action, that application being before the judge, or in the Part 8 proceedings. Plainly, as it seems to me, the costs of that hearing in respect of the section 371 point would have to be paid by Mr Watson. To the extent that costs have been wasted through the Part 8 proceedings being brought, Mr Watson is entitled to keep the benefit of the order made by the judge. The costs of the hearing in London, including Mr Watson's costs in preparing for that hearing, should be left as the judge has ordered, to be paid by Union on the indemnity basis. But in respect of the remainder of the costs of the hearing in Manchester, Mr Watson will have to pay the costs of the successful party, Union.
52. I would urge that the parties try to reach agreement as to costs in relation to those matters. Both sides have sensible leading counsel acting for them, and I would urge that every effort be made to resolve questions as to costs out of court. But if agreement cannot be reached, then I would propose that the apportionment of the costs of the hearing in Manchester, or the proportion of the overall costs payable by Mr Watson, if that is the more sensible way of dealing with the matter, be remitted to the judge, who will have a far better knowledge than this court as to the appropriate amounts that should be attributed to the particular issues.
53. LORD JUSTICE BUXTON: I agree. Although we are differing from the judge on the main matter that was before us, I add only a very few words of my own.
54. The judge was careful to say at one stage of his judgment that both the case of Harman and the case of Ross v Telford were merely guidelines, based upon their own facts, as to the exercise of the court's discretion under section 371. But it is clear to me that by the end of his judgment he had permitted himself to be overinfluenced by those cases and by his assumption that they were relevant to the discharge of his discretion. That, I think, is clear from the passage that my Lord has set out at pages 23 and 24 of the judge's judgment, including his expression of regret at page 23F as to the course that he felt himself driven to, and his conclusion that he was driven to it by those two cases. That, with respect, was not a correct assessment of the position. As my Lord has demonstrated, Harman was a case of class rights, which this case clearly is not, and Ross v Telford was a case of deadlock in the shareholding, which manifestly this case is not either. Neither of those cases, therefore, provide a clear guide to the way in which the judge should have approached this matter, and for that reason in particular it falls to this court to consider the matter afresh.
55. Mr Freedman argued that whatever the position was as to the correct analysis of the shareholding in this case, either the judge should, or this court could, view the case as one that in practical terms involved a situation of deadlock. That is because of the terms of the shareholder's agreement, and in particular clause 6 thereof, which provides that a large range of things should not occur without the prior consent of both of the shareholders. That, said Mr Freedman, demonstrated that it was the intention of the parties that, if they could not agree, nothing could be done. That was not quite the way in which he put it, but that was the substance of his submissions. If, therefore, they could not agree on a meeting being called within the requirements of them both being present, no such meeting could take place, and the judge, in exercising his discretion under section 371, should respect that position.
56. I fear I cannot agree. What the parties have chosen to do in this case is to create a company structure through which they operate their business. They did not have to do that. They did not have to operate through a medium of a company at all, but that is what they have chosen to do. The way in which they set that company up was not, unlike Ross v Telford, one of deadlock or balance, it was one in which there were unequal shareholdings. In those circumstances there is no obligation on the court, when exercising its powers under section 371, to assume that the parties have intended that the company shall in fact operate in the way that Mr Freedman suggested. That is clearly borne out, in my judgment, by two important authorities that my Lord has drawn attention to, the judgment of Brightman J in Re H.R. Paul & Son Ltd, and the judgment of Morritt J in Re Opera Photographic Ltd, where both of those judges made it clear that, in a situation of unequal shareholding, the court will not assume that veto is intended on the part of either shareholder, and much less on the part of the minority shareholder.
57. Clause 6.1.18 has to be read in the context of those assumptions. It certainly gives protection against meetings being called without the other party knowing about them. But in my judgment it is not proper to read it as giving one party a veto over the calling of any meeting all, and in so far as the judge so regarded it he was, in my respectful judgment, wrong. In exercising the section 371 powers we could, and I would, approach that section of the agreement in that spirit rather than, as Mr Freedman argued, assuming that we were bound to follow what he said was the intention of the parties in the shareholders's agreement, though not in the structure of company, that the minority should in fact have a veto over its affairs.
58. That is merely a footnote to what my Lord has said about the section 371 point. In respect of the part 8 point, I entirely agree with what he says, and in particular with his observations about the implications for costs.
59. MR JUSTICE MORLAND: I agree with both judgments.
ORDER: Meeting to be called to appoint a new director. Permission to appeal in respect of the part 8 proceedings refused, subject to the question of costs.