Unfair prejudice petition: High Court continues interim injunction replacing director who breached sanctions legislation

The High Court has granted a petitioner in an unfair prejudice petition interim relief by continuing an order which removed the first respondent as a director of the respondent companies: Garofalo v Crisp and others [2024] EWHC 1737 (Ch).

The High Court held that there was a "high degree of assurance" that: (i) the first respondent had knowingly caused the respondent companies to breach Russian sanctions; and (ii) the petitioner would successfully establish unfair prejudice at trial.

As a general rule, the English courts are reluctant to intervene in the internal management of UK companies on an interim basis. However, as this case demonstrates, there may be exceptional circumstances (here, breaches of sanctions relating to Russia) where the courts are prepared to depart from that position. Here the judge was satisfied that there was a high probability that the petitioner would ultimately succeed at trial. There was also compelling evidence before the court both of the first respondent's misconduct and of the risks to the business if he were reinstated as a director.

Background

Mr Crisp, the first respondent, was a director of the third to seventh respondents, which are a group of companies engaged in the manufacture, distribution and sale of perfume (the "Respondent Companies").

Mr Garofalo, the petitioner (the "Petitioner"), and Mr Crisp were shareholders in the third and fourth respondents and were parties to a relationship agreement which set out how the two shareholders would work together (the "Relationship Agreement").

Following Russia's invasion of Ukraine in February 2022, the Petitioner and Mr Crisp agreed that the Respondent Companies would cease supplying their perfume products to Russia. However, in June 2023, the Petitioner became aware that the business may have been continuing to export and sell products to Russia. The Petitioner investigated the matter and gathered evidence supporting his suspicions.

The Petitioner subsequently issued an unfair prejudice petition pursuant to s.994 of the Companies Act 2006. That section permits the court to grant a wide range of relief where the affairs of a company are being conducted in a manner which is unfairly prejudicial to the interests of its members generally, or some of the members.

Before issuing the petition, the Petitioner sought an ex parte injunction removing Mr Crisp as a director and the installation of new directors selected by the Petitioner (the "Change of Management Order"). This application was granted in October 2023. The Petitioner then issued the petition and applied to continue the Change of Management Order.

Decision

The High Court (Freedman J) ordered that the Change of Management Order should remain in place until trial or further order.

In his judgment, as new evidence had come to light since the original Change of Management Order, Freedman J stressed the importance of considering the case de novo. He then turned his mind to the following two issues:

1. Whether the court has the power to order the removal of a director from the day-to-day management of a company by way of interim relief; and
2. If so, whether the relevant test for granting an interim junction was satisfied.

Does the court have power to grant the relief sought?

Freedman J held that the court's power to remove a director from a Board arises under s.37 of the Senior Courts Act 1981. This gives the court the power to grant an interlocutory injunction where it is "just and convenient" to do so. He further referred to Re Premiere Care Holdings Ltd [2021] EWHC 1595, in which the court's power to remove directors by way of interim relief has been expressly recognised.

The judge acknowledged that, while that power exists where it is "just and convenient", the court should nevertheless keep intrusion in internal management of companies to a minimum and only to what it considers is strictly necessary and appropriate.

The test for granting an interim injunction

In exercising the discretion to grant interim injunctions, the court will apply the guidance set down in the case of American Cyanamid Co (No 1) v Ethicon Ltd [1975] UKHL 1. In accordance with this guidance, the court will consider the following questions:

1. Is there a serious issue to be tried?
2. Are damages an adequate alternative remedy?
3. Where does the balance of convenience lie?
4. Are there any special factors for or against granting the injunction.

Serious issue to be tried

As to the first question, Freedman J considered that a higher threshold was appropriate in this case – namely, that the court requires a "high degree of assurance that the applicant is likely to succeed at trial".

His reasons for imposing this higher threshold were that:

• granting the order would fundamentally change the day-to-day management of the business, having an immediate impact on the Relationship Agreement and on the business itself;
• there was even more need for caution because the original application was made without notice; and
• the order sought was analogous to a mandatory order because it carried a greater risk of injustice to Mr Crisp if it turned out to have been wrongly granted.

In Freedman J's view, the "high degree of assurance" test carried the least risk of injustice.

Based on the evidence before him, Freedman J was satisfied that there was a "high degree of assurance" that the Petitioner would succeed at trial. In this regard, he found that Mr Crisp had:

• knowingly caused the Respondent Companies to trade with Russia in breach of the Russia (Sanctions) (EU Exit) Regulations 2019 (the "Sanctions Regulations"); and
• acted in breach of the: (i) Relationship Agreement; (ii) his separate agreement with the Petitioner to cease trading with Russia; and (iii) his statutory duties to the Respondent Companies.

Further, Freedman J considered the nature of the relief that would ultimately be sought at trial. From the facts before the judge and on this interim basis, as between Mr Crisp and the Petitioner, the Petitioner was found to be the most suitable party to continue the business. The court followed the line of reasoning set out in Oak Investment Partners XII Ltd Partnership v Boughtwood [2009] 1 BCLC which held that the party who behaved much worse should be the party required to sell its stake in a business. There was also no evidence before the court that Mr Crisp had the financial means to buy out the Petitioner. Freedman J further said that the value of the business must be protected and preserved and the Change of Management Order was justified in light of that consideration.

With all of this in mind, Freedman J was satisfied that, at trial, a judge would likely order: (i) the removal of Mr Crisp from the Board; (ii) his replacement by directors selected by the Petitioner; (iii) the sale of Mr Crisp's interests in the Respondent Companies to the Petitioner.

As an aside, the judge did acknowledge the possibility that some of Mr Crisp's conduct may have amounted to negligence, rather than deliberate misconduct. In the judge's view, if that were found to be case at trial, it was unlikely that would justify granting the exceptional relief sought.

The balance of convenience

Freedman J held that the balance of convenience lay in favour of granting the relief for the following reasons:

1. If the Petitioner succeeded at trial, damages would not be an adequate remedy. If Mr Crisp continued as a director of the Respondent Companies and was involved in their day-to-day management, this would re-create an existential threat to the business. If that were to happen, and then at trial relief was ordered in favour of the Petitioner, that relief would have no value. There was also no suggestion that Mr Crisp had the funds to pay damages.
2. The Petitioner had given a cross-undertaking in damages and appeared to be "good for large sums of money." Therefore, Mr Crisp would be adequately compensated should it turn out at trial that the order was wrongly granted.
3. The Petitioner was at risk of suffering the greatest injustice because of the existential threat that Mr Crisp posed to the Respondent Companies, the reputational risk he posed to the business as a whole, and the strong prima facie case that Mr Crisp deliberately caused the Respondent Companies to breach Russian sanctions.

The judge noted that, in interim injunction cases, the courts usually have a desire to maintain the status quo pending determination of the issue at trial. However, maintenance of the status quo is only one factor to consider. The original ex parte injunction order removing Mr Crisp and replacing him with two new directors selected by the Petitioner had been made several months prior. Given the passage of time, the new Board was the new status quo and the Respondent Companies had thrived during that period. To reinstate Mr Crisp as a director of the Board and remove the other directors "…would lead to insuperable difficulties for the management of the companies in the immediate future." In the judge's view, this was a key factor in favour of the Change of Management Order remaining in place until trial.