7
May 1997
COSTELLO
P:
THE
FACTS
Phoenix
Shannon plc is a public limited company and was incorporated in the State on 11
November 1985. It carries on business manufacturing and distributing dental
products. In March of 1996 Mr George Wolfe (sixth named Defendant) was co-opted
onto the board of directors of the company. He was the President of Nen Dental
Incorporated (an American wholly owned subsidiary of the company). On 21
October 1996 Mr Harold Purkey, Mr Keith Hartley, Mr Philip Platek, Mr Nico
Pronk and Mr Benjamin Swirsky (first to fifth named Defendants) were co-opted
as directors of the company. They had been nominated to act as directors by the
company's merchant bankers, Noble Investment Bankers, and a United States
Corporation, Forum Capital Markets, which had been instrumental in raising
$20,000,000 by way of a bond for the company. It is common case that the
company was then in serious financial difficulties. At the time of the second
co-option all but three of the existing directors resigned, except for Mr Ola
Johansson, Mr Brian Boland and Mr Keith Westrich. In December of 1996 Mr
Westrich resigned. These three are now the second, third and fourth named
Plaintiffs in these proceedings. This action arises from serious disputes
between the six directors co-opted in 1996 and the three other directors to
whom I have referred.
The
last annual general meeting of the company was held on 30 November 1995. By
s
131 of the
Companies Act 1963 (as well as by article 52) the company was
required to hold its annual general meeting at intervals of no more than 15
months and the Plaintiffs' contention is that the annual general meeting for
the year 1996 should, at the latest, have been held on 28 February 1997. In
fact no meeting was held for 1996. The reason for the failure to convene it is
a matter of dispute, the Defendants claiming that it was not possible to
finalise the audit of the company's accounts for presentation to the meeting
because of the lack of co-operation of Mr Johansson. Mr Johansson is the major
shareholder in the company, owning 39% of its issued share capital. He and Mr
Boland (his co-Plaintiff) control 42% of the shares of the company. It is
relevant to note that both agreed to the co-options which took place last year.
It
is agreed that on 26 March 1997 Mr Johansson and Mr Boland decided that because
the annual general meeting had not been held by 28 February 1997 all the
directors co-opted as required in 1996 under article 92 (that is the six
Defendants) had automatically vacated office on that day. They accepted that Mr
Johansson was also deemed to have vacated office because of his obligation to
retire by rotation at the annual general meeting which should have been held in
1996. He had been the company's managing director and as such he would not have
been liable to retire by rotation but he had been dismissed by the company as
its managing director by the new board. For the avoidance of doubts Mr
Johansson was prepared, for the purposes of the steps then to be taken, to
accept that although continuing as director he was not the company's managing
director and accordingly he also automatically vacated office because of the
failure to hold the annual general meeting. Mr Johansson and Mr Boland
concluded that the company had only one director, namely Mr Boland, arising
from the aforesaid failure.
Mr
Boland then purported to exercise the powers conferred on him by article 106 of
the company's articles of association. This provides as follows:
The
continuing director or directors may at any time act notwithstanding any
vacancy in their body but if the directors shall at any time be reduced in a
number of less than the minimum number fixed by or in accordance with these
articles, the continuing director or directors may act for the purpose of
appointing an additional director or directors to make up such minimum, or for
summoning a general meeting of the company, but for no other purpose.
The
quorum necessary for the transaction of the business of directors was two
(article 105) but Mr Boland as the only continuing director firstly appointed
Mr Johansson as a director. Under article 106 Mr Boland and Mr Johansson then
co-opted Mr Westrich as a director (who, it will be recalled, had resigned in
December of 1996). These three persons then co-opted three additional
directors, Mr Jason Fensterstock, Mr George Skakel and Mr Hugh Regan. These six
gentlemen now claim that they constitute the board of directors of the company
and on their authority the company is joined as a Plaintiff in this action.
This claim is hotly contested by the six Defendants who say that the steps
taken by Messrs Johansson and Boland were invalid and who claim that they are
members of the company's board.
THE
PROCEEDINGS
Mr
Johansson commenced proceedings against the company in December of 1996
challenging his dismissal as managing director. Mr Boland also instituted
proceedings against the company challenging his dismissal as an executive of
the company (a dismissal which did not affect his position as a director of the
company) and on 18 April 1997 he was granted interlocutory relief. The third
set of proceedings arising from the internal disputes in this company is the
present one. In these the Plaintiffs have claimed various reliefs including an
injunction restraining the Defendants from acting as directors of the company.
Interlocutory relief was refused to the Plaintiffs by order of 1 March 1997 but
by agreement between the parties the court has now been asked to determine two
issues as follows:
1.
Whether the Defendants as persons co-opted onto the board of directors of
Phoenix Shannon plc in 1996 are deemed to have retired as directors on 28
February 1997, the last annual general meeting of the company having taken
place on 30 November 1995.
2.
If so, was the third named Plaintiff Mr Brian Boland, as a continuing director
entitled to exercise the powers of co-option construed in article 92 of the
articles of association to co-opt onto the board of directors Messrs Ola
Johansson and Keith Westrich, the second and fourth named Plaintiffs.
THE
PLAINTIFFS' SUBMISSIONS
I
can summarise the Plaintiffs' submissions on the first issue as follows.
S 131
of the
Companies Act 1963 provides that every company shall in each year hold a
general meeting and not more than 15 months shall elapse between the date of
one annual general meeting of a company and that of the next. This is
replicated in article 52. Article 92 provides as follows:
92.
The directors may from time to time and at any time appoint any person to be a
director either to fill a casual vacancy or as an additional director provided
that the total number of directors shall not exceed the maximum number fixed by
or in accordance with these articles. Subject to the provisions of the Acts, a
director so appointed shall hold office only until the commencement of the
annual general meeting following next after his appointment, when he shall
retire. A director who retires under this article shall be eligible for
re-appointment at the meeting at which he retires.
Article
82 provides that unless otherwise determined by the company the number of the
directors shall not be less than three and not more than ten and article 87
that 'one-third of the directors for the time being (other than a managing
director . . . or a director holding an executive office with the company') or,
if their number is not three or a multiple of three then the number nearest to,
but not exceeding, one-third shall retire from office at each annual general
meeting . . .'
The
Plaintiffs submit that the clear meaning of article 92 is that the directors
co-opted under this article (as all the Defendants were) are required to retire
pursuant to its provisions, that this is a mandatory requirement insofar as it
provides that a director so appointed 'shall hold office only until the
commencement of the annual general meeting following next after his
appointment' and by providing that such director 'shall retire'. The obligation
to retire must be read in conjunction with article 52 and
s 131 of the 1963 Act
which oblige the directors to convene annually an annual general meeting in
accordance with their terms. It follows therefore that the 'annual general
meeting following next' referred to in article 92 after a co-option must mean
that which should be held in accordance with those provisions. The Plaintiffs
then submit that should the directors fail to comply with these provisions and
neglect to convene an annual general meeting then those directors who should
have resigned will be deemed to have vacated their office on the last day on
which the 'next annual meeting' should lawfully have been held. In this case
the annual general meeting for 1996 should have been held on or before 28
February 1997 and so it is claimed that after that all the directors co-opted
in 1996 vacated office on that day.
In
support of this submission the Plaintiffs refer to In re Consolidated Nickel
Mines Ltd
[1914] 1 Ch 883 and a number of subsequent decisions of the English
courts. It is agreed that there is no decision in the Irish courts on the issue
which I now have to determine. In the first instance I propose to consider the
Plaintiffs' construction of the articles and the relevant statutory provisions
without reference to the authorities to which I have been referred. I will then
examine those conclusions in the light of those authorities.
CONCLUSIONS
It
is clear that the company is required to hold an annual general meeting every
year and that not more than 15 months may elapse between the date of one annual
general meeting and that of the next annual general meeting (see article 52 and
s 131 of the 1963 Act). I agree that the 'annual general meeting next
following' the date of co-option referred to in article 92 must refer to the
annual general meeting which should be held under article 52 and
s 131. But the
article is silent as to what is to happen if the directors fail in their duty
to convene the meeting. In effect the Plaintiffs require the court to imply a
provision in article 92 to the effect that should the directors fail to convene
an annual general meeting as required by the article the co-opted directors
will automatically vacate office on the last day on which the meeting should
lawfully have been held.
There
are two reasons why I think the court should not imply the suggested provision.
(a)
S 131(3) of the 1963 Act makes express provision as to what is to happen should
the directors default in convening an annual general meeting.
It
provides that:
The
minister may, on the application of any member of the company, call or direct
the calling of a general meeting of the company and give such ancillary or
consequential directions as the minister thinks expedient, including directions
modifying or supplementing in relation to the calling, holding and conducting
of the meeting, the operation of the company's articles, and it is hereby
declared that the directions which may be given under this subsection include a
direction that one member of the company present in person or by proxy shall be
deemed to constitute a meeting.
The
next subsection, subs (4) provides that a general meeting held in pursuance of
subs 3 shall:
be
deemed to be an annual general meeting of the company but, where a meeting so
held is not held in the year in which the default in holding the company's
annual general meeting occurred, the meeting so held shall not be treated as
the annual general meeting for the year in which it is held unless at that
meeting the company resolves that it shall be so treated.
These
provisions not only provide a practical remedy should the directors fail to
convene an annual general meeting but also a means by which the default can be
legally rectified. In this case this means that any member could request the
holding of a meeting after 28 February 1997 and that meeting could be treated
as the 1996 annual meeting at which the co-opted directors would be required to
resign. In the light of this express statutory provision should default occur I
do not think the court should imply into the article the suggested provision of
automatic resignations.
(b)
There is another reason, derived from the articles themselves, which suggests
that no provision should be implied. Article 93 provides:
The
office of a director shall be vacated forthwith;
(a)
If a receiving order be made against him, or he makes any arrangement or
composition with his creditors generally;
(b)
If he becomes of unsound mind;
(c)
If he ceases to be a director, or be prohibited from being a director by any
order made under the provisions of the Acts;
(d)
If he is absent from meetings of the directors for six successive months
without leave and his alternative director (if any) shall not during such
period have attended instead of him and the directors resolve that his office
be vacated;
(e)
If he (not being a director holding an executive office in his capacity as a
director) resigns his office by notice in writing to the company; or
(f)
If he be required in writing by all his co-directors, not being less than two
in number, to resign they having shown cause for such resignation.
It
is submitted by the Defendants, and it is a submission with which I find myself
in agreement, that had it been intended that the failure to hold an annual
general meeting as contemplated by article 92 would result in the automatic
vacation of office by co-opted directors that such a provision would have been
made in article 93. It seems to me that the failure to make such an express
provision in article 93 is a compelling reason why the court should not imply
one in article 92.
I
think the same arguments apply to the provisions of article 87 relating to the
resignation of directors by rotation. At 'each annual general meeting'
one-third are required to retire from office, but I do not think that the court
should imply a provision into their article to the effect that should the
company fail to hold an annual general meeting the directors whose turn it is
to retire should be deemed automatically to have vacated office.
THE
UNITED KINGDOM AUTHORITIES
The
judgments of the courts of the United Kingdom have, of course, persuasive
authority in this jurisdiction and I will now turn to examine those relied on
by the Plaintiffs with a view to considering whether I should alter the
conclusions which, in the absence of authority, I have reached on the
Plaintiffs' construction of the articles.
The
first, and indeed the authority which forms the basis of the Plaintiffs'
contentions, is In re Consolidated Nickel Mines Ltd
[1914] 1 Ch 883, a case
relating to a claim in the liquidation of a company for arrears of remuneration
by persons claiming to have been directors of the company. The liquidator
denied the claims contending that by virtue of the company's articles the
directors had vacated office and accordingly no remuneration was payable. The
court upheld the liquidator's contention. It is, however, important to note
that the relevant article which the court construed was significantly different
to that in the present case. Consolidated Nickel Mines Ltd had been
incorporated on 25 June 1903 and article 101 provided:
101.
At the ordinary meeting in 1906 all the directors and in every subsequent year
one-third of all the directors shall retire from office. A retiring director
shall retain office until the dissolution of the meeting at which his successor
is elected.
No
general meetings of the company were called in 1906 or in 1907 but two persons,
Mr Steele and Mr Phillips continued to act as directors. The court held that
'the meaning of article 101 is that the holding of the office of director was
only to last until the end of 1906, or until the earlier date on which the
ordinary meeting for that year was held . . . The duty of the directors was to
call a meeting in 1906 and 1907, and they cannot take advantage of their own
default in that respect and say that they still remain as director . . . Steel
and Phillips are therefore not entitled to any remuneration for the period
between December of 1906 and August of 1930, when Steel was again a director'
(pp 888-889).
I
will accept for present purposes that this construction of article 101 is
correct. The court decided that the ordinary and natural meaning of the words
used in the article was that, having specified the year in which the directors
were to resign, vacation of office would occur at the end of that year even if
the company failed to hold an annual general meeting at which the resignations
would formally take place. The construction does not assist the court in
construing an entirely different clause, one which provides for the resignation
of co-opted directors not in a specified year but at the happening of a future
event, the 'annual general meeting next following' their appointment. In
Consolidated Nickel Mines the court construed the article in accordance with
the words used -- in this case the court is required to imply a provision into
the relevant article, and for this purpose the decision in Consolidated Nickel
Mines affords no assistance. I am satisfied that the views which I have
expressed on article 92 of Phoenix Shannon plc need not be qualified in any way
by this authority.
I
was referred to three later cases which considered the effect of a failure of
directors to convene annual general meetings on articles which required a
proportion of directors to resign by rotation at such meetings. In each of
these cases it was (a) assumed without argument that the construction of
article 101 of Consolidated Nickel Mines Ltd established a principle which
applied to a differently drafted provision relating to resignations by rotation
and (b) it was accepted without argument that a failure to hold an annual
general meeting as required by the articles (and the law) resulted in the
automatic vacation of office of the directors who should have resigned. In a
fourth case an article relating to the resignation of co-opted directors
similar to article 92 Phoenix Shannon plc was considered and the same comments
I have just made apply to the decision in that case.
The
consequences of a failure to hold an annual general meeting on the operation of
article 93 in Table A to the Companies Act 1929 was considered in Kannsen v
Rialto (West End) Ltd [1944] Ch 346. This article (amended in the company's
articles in a way not relevant for present purposes) dealt with the rotation of
directors and provided that at the first general meeting of the company all the
directors would retire and at 'the ordinary meeting in every subsequent year
one-third of the directors for the time being, or, if their number is not three
or a multiple of three, then the number nearest one-third shall retire from
office'. It was established that an annual general meeting at which a Mr Cromie
should have retired was not held in the year 1941 and the Master of the Rolls
held (p 352) that 'Mr Cromie had been a director but he had vacated office on
31 December 1941 by reason of article 73 of the company's articles of
association; (see In re Consolidated Nickel Mines Ltd).' The effect of the
distinction between article 73 of Rialto (West End) Ltd and article 101 of
Consolidated Nickel Mines was not discussed, nor was it considered in the House
of Lords (see [1946] AC 459) in which it was pointed out (p 467) that it was
admitted in the course of the trial and before the House of Lords that the
effect of article 73 was that Cromie had not been a director since the end of
1941.
The
same situation occurred in Alexander Ward & Co Ltd v Samyang Navigation Co
Ltd. In that case (as appears from p 80 of the Scots Law Times, 1973) the
defenders submitted that that company had ceased to have any directors because
its articles provided that all the directors should retire at the annual
general meeting which was held in each calendar year. No such meeting was held
in 1969 nor in 1968. The report went on:
After
hearing evidence Lord Brand held that no meeting of the company was held in
1968 or 1969 and that accordingly when the action was raised on 5 November
1970, there was no person capable of giving instructions on behalf of the
company.
In
the House of Lords ([1975] 2 All ER 424) the finding that there were no
directors at the relevant time and no relevant general meeting was not
challenged (see pp 427, 428).
Re
Zinotty Properties Ltd [1984] 3 All ER 754 was another case in which the effect
of a failure to hold annual general meetings was considered in relation to an
article dealing with the rotation of directors. The company adapted article 89
of Table A to the Companies Act 1948 (as adapted) with the result that the
company's articles provided that 'at the first annual general meeting and at
the annual general meeting in every subsequent year one-third of the directors
for the time being, or, if their number is not three or a multiple of three,
then the number nearest one-third, shall retire from office'. The court held
without discussions that as no annual general meetings were held this fact
coupled with article 89 meant that the original directors 'must both be deemed
to have retired by 1970' (p 783).
The
final case to which I was referred was In re New Cedos Engineering Co Ltd
[1994] BCLC 797. This was a case in which one of the issues turned on the
operation of clause 95 of the company's articles which contains provisions
relating to the appointment of directors to fill casual vacancies similar to
those in the present and a similar provision to the effect that a director so
appointed shall hold office 'until the next following annual general meeting'.
The court held that a Mr NJ Green, who had been co-opted under clause 95 was
bound to retire at the next annual general meeting, that a meeting called on 27
November 1972 was a nullity and so either this was no meeting at all, in which
case Mr Greene and another director who was due to retire by rotation retired
under the principle of Re Consolidated Nickel Mines Ltd or if the so-called
meeting was effective at all it was effective to bring about the retirement of
the directors but was ineffective to re-appoint them (p 810).
As
the issues raised in the proceedings before me were not considered in the cases
to which I have referred they do not afford any compelling reasons for
departing from the conclusions which I reached on an examination of the
relevant articles without their assistance.
FINAL
CONCLUSIONS
I
must hold therefore that the construction placed by the Plaintiffs on the
articles is incorrect, that the failure to hold an annual general meeting on or
before 28 February 1997 did not mean either that the six directors co-opted in
1996 had vacated office or that Mr Johansson (who was due to resign by
rotation) had vacated office. Accordingly, since the resignation of Mr Keith
Westrich in December of 1996 the directors of the company have been and still
are the six Defendants namely Mr Purkey, Mr Hartley, Mr Platek, Mr Pronk, Mr
Swirsky, and Mr Wolfe, together with Mr Johansson and Mr Boland (the second and
third named Plaintiffs). I will answer the question raised in the first issue
'no' and because of the views I have expressed on that issue it is not
necessary to express any on the second.
