Nowhere to go – Recent High Court case highlights roadblock to overcoming director deadlock

In the recent case of Rushbrooke UK Ltd v Designs Concept Ltd [2022] EWHC 1110 (Ch) Judge Paul Matthews held that a director (Director A, being one of two de jure directors) had no authority to instruct a firm of solicitors to act on behalf of a company in circumstances where the other director (Director B) did not consent to their appointment.

The case concerned an application made by Rushbrooke UK Ltd (Rushbrooke) for an injunction to restrain the presentation of a winding-up petition by the respondent company following service of a statutory demand. The application was brought in the name of Rushbrooke following instructions given by Director A to a firm of solicitors. Director B did not consent to the appointment of the solicitors; indeed, Directors A and B were in deadlock and Director B gave evidence in support of the winding-up petition. The question before the Court was whether Director A alone had authority to instruct solicitors on behalf of Rushbrooke.

The Judge held that Rushbrooke could only act by its directors in accordance with its articles of association which did not, in this case, permit such action to be taken by one director acting alone. The application was therefore struck out. The Judge did comment that in certain circumstances a company’s articles may allow for authority to be delegated to a managing director however this did not apply to the current case and, as such, Director A had no authority to give instructions nor make the application in Rushbrooke’s name.

Though the decision is unsurprising, it helpfully exposes the weaknesses in articles of association that make little or no provision for deadlock scenarios. In this case, the deadlock exposed Rushbrooke to legal action which it was unable to defend. 

Whilst this case focuses on an injunction to restrain a winding-up petition, the factual scenario is familiar to those in the restructuring space where board and shareholder deadlock is common. Insolvency practitioners instructed to act on behalf of a company must therefore satisfy themselves that the director(s) has the ability to give instructions on behalf of the company. Checking the company’s articles of association is critical and taking independent advice is recommended if in any doubt.