Injunctions to remove Directors from office in s994 petitions

In the recent decision of Garofalo v Crisp [2024] EWHC 1737 (Ch), the High Court has continued an ex parte injunction to remove a company director (and CEO) from his position at a luxury perfume group, due to a high degree of assurance that he had caused the group to continue to trade with Russia in breach of sanctions. The decision demonstrates the Court’s powers to grant interim relief in an unfair prejudice application and sheds light on how the Court can, and indeed will, intervene when directors of companies breach sanctions.

Background

The Petitioner (Mr Garofalo) and the First Respondent (Mr Crisp), both shareholders and directors of a group of companies (the Companies) involved in the sale of perfume, entered into an agreement (the Agreement) on 4 January 2016 which set out their business relationship. This agreement required the parties to exercise reasonable endeavours to promote the success of the business and gave Mr Crisp free rein in managing the business.

Following Russia’s invasion of Ukraine, from April 2022, the trade of luxury perfumes was prohibited under the Russia (Sanctions) (EU Exit) Regulations 2019 reg.46B (the Regulations). Both Mr Garofalo and Mr Crisp agreed that the Companies would cease any trade with Russia. However, in 2023, after Mr Garofalo’s suspicions were aroused that the Companies were still trading with Russia, he instructed a private investigator. The findings were staggering - allegedly without the knowledge or consent of Mr Garofalo, Mr Crisp had caused the Companies to continue trading with Russia, therefore breaching the Regulations.

The investigations revealed that Mr Crisp had made statements about the Companies’ Russian market doing well and that he had blatantly ignored ‘government edicts’ not to trade there. Furthermore, whilst Russian sales had previously been recorded in their own category, management accounts were now found to have recorded Russian sales in the ‘rest of the world’ category.

These findings resulted in Mr Garofalo issuing an unfair prejudice petition against Mr Crisp under section 994 of the Companies Act 2006 (s.994) and applying without notice for an ex parte injunction for Mr Crisp’s removal as a director from the Companies and the installation of new directors.

The injunction (the Order), along with numerous ancillary orders, was granted on 9 October 2023. On 5 July 2024, Mr Justice Freedman held that the Order would only be continued if the high degree of assurance test was satisfied and if the balance of convenience fell in favour of this continuation. He concluded that it was appropriate to continue the Order and that it should remain in force until trial or earlier order and would not be discharged. The tests and the decision are discussed in further detail below.

Decision

Threshold Test

Mr Justice Freedman determined that the Court could remove Mr Crisp as director and replace him with new directors by way of interim relief in support of an unfair prejudice petition. The relevant test is usually whether there is a serious issue to be tried and, if so, whether it is just and convenient to grant an order. However, in this case it was appropriate to apply an enhanced threshold. This was due to two reasons. Firstly, the Order was exceptional (essentially, changing the status quo of the day-to-day management of the Companies); and secondly, the Order was analogous to a mandatory order, which courts are more cautious about granting due to carrying a greater risk of injustice if incorrectly made.

The Court applied the enhanced, ‘high degree of assurance’ test, namely that Mr Garofalo would succeed at trial. In applying this test, Mr Justice Freedman found there was a high degree of assurance that: there had been unfair conduct within the meaning of s.994; that Mr Crisp knowingly breached the Regulations; Mr Crisp’s conduct breached his fiduciary and statutory duties, and the Agreement; and that prejudice was caused to the Companies as a result.

Mr Justice Freedman held that it was an exceptional case, requiring a change in management at the interim stage. This was due to: the gravity of the breach of the Regulations; the reputational consequences for the Companies unless Mr Crisp was removed as director; the strong prima facie evidence of Mr Crisp’s concealment of trading; and, a high degree of assurance that a trial or a cross-examination of Mr Crisp would lead the Court to reject the case that there had been no deliberate breach of Regulations on Mr Crisp’s part.

Balance of Convenience

The Court held that the balance of convenience lay in favour of continuing the Order, since in the unusual circumstances the Order was necessary and was not more than was absolutely necessary to preserve the goodwill of the Companies.

The Court confirmed that, if reinstated as director, Mr Crisp would pose an ‘existential threat’ to the Companies, so an award of damages would not compensate Mr Garofalo, and there was a greater risk of injustice if there was no injunction.

The Companies’ successful operation under the newly-appointed management team was also taken into consideration, as well as the fact that it made no commercial sense at this stage to reverse what had been done and to abandon the parties to their own devices.

Conclusion 

There is no suggestion that this relief will become ordinarily available to petitioners. The facts in this case were remarkable. Nevertheless, the decision represents a groundbreaking development in the nature of injunctive relief that the court is prepared to grant to protect the rights of minority shareholders in s.994 petitions. The court not only changed the constitution of the board by way of interim relief to remove and install Mr Garofalo’s management team as directors, it did so on a without notice application. The effect of this was that Mr Crisp, who had a contractual entitlement to act as sole executive director, was removed from office without even having the opportunity to address the court.

The decision serves to enforce the ongoing trend seen in injunctive relief as a whole that the court will do what is necessary on the facts of the case.