Introduction

In Garofalo v Crisp [2024] EWHC 1737 (Ch), the High Court of England and Wales continued an ex parte injunction which resulted in the removal of Mr Crisp, a director on the board of various companies within the Valorem group of companies (Relevant Companies), and the appointment of new directors, thereby altering the status quo of the companies at the time, on the basis that there was "high degree of assurance" that the petitioner, Mr Garofalo, would succeed at trial of an unfair prejudice petition and the balance of convenience was in favour of continuing the order.

In this article, we examine the Court's reasoning with an eye on the possible impact this decision may have in the offshore jurisdictions.

Brief facts

This was an ex parte interim application ancillary to an unfair prejudice petition presented by Mr Garofalo[1]. The Relevant Companies were in the business of, inter alia,  the sale of luxury perfumes. Mr Garofalo and Mr Crisp were both shareholders and equal partners and entered into a Relationship Agreement pursuant to which it was agreed that Mr Crisp had free rein to run the business.

Following Russia's invasion of Ukraine, the UK imposed sanctions on the trade of luxury goods with Russia, and Mr Garofalo and Mr Crisp agreed that the Relevant Companies would cease supplying products to Russia.

Thereafter, Mr Garofalo discovered that, in breach of their agreement and UK sanctions regulations, Mr Crisp was causing the Relevant Companies to continue fulfilling orders from Russia. Mr Crisp attempted to conceal such sales by recording them in the "Rest of the World" category in management accounts, with management accounts in this form being provided to Mr Garofalo. Mr Crisp also stopped referring to sales to Russian in email correspondence to conceal the truth and made misrepresentations to the Relevant Companies' in-house lawyer that there were no trades with Russia.

Mr Garofalo therefore commenced proceedings and sought, inter alia, an ex parte injunction to remove Mr Crisp as a director and to install new directors selected by him.

At the first hearing of Mr Garofalo's ex parte application, the Deputy Judge, applying the "strong prima facie case" test, granted the injunction on the basis that Mr Crisp's removal was the only way to mitigate the threat of the reputational damage to the Relevant Companies and ultimately to their viability arising from the breaches of the relevant sanctions regulations.

The power to make a change of management order

The Court has jurisdiction under section 37 of the Supreme Court Act 1981 to grant interim relief in support of an unfair prejudice petition, and the removal of directors by way of interim relief is recognised as relief that is capable of being granted[2]. The test was whether it was just and convenient to grant such an order, although in the ordinary case, intrusion should be kept to the minimum of what the Court considered necessary and appropriate[3].

The Court noted that such an order had been made in Hong Kong[4] where it was described as an exceptional one. This was particularly so in an ex parte application.

Further, in an unfair prejudice petition, generally, it was desirable to preserve the status quo, or not change it more than absolutely necessary, if a change in the status quo would "affect the remedy which may be available"[5].

The test for granting such relief: serious issue to be tried or high assurance that the applicant will succeed at trial?

The "high degree of assurance" test was found to be appropriate for the following reasons:

1. Given the weighty starting point of not intruding into the management of a company, this was an exceptional order that would change that status quo. It also had an immediate impact on the relationship of the parties to the Relationship Agreement. 
2. The need for caution was particularly great given the unusual application was made without notice. 
3. Whilst not a mandatory order, it was analogous to one as the order was one which "may well carry a greater risk of injustice if it turns out to have been wrongly made than an order which merely prohibits action." 
4. In certain circumstances, notwithstanding that as a matter of form, the order was an interim prohibitory one, a high degree of assurance might be required. 
5. There was a need to be guided more by the injustice that would arise from the Court making the wrong decision, rather than the form of the order. 
6. Whilst this was not the grant of substantially what was sought a trial by way of an interim order, it was an injunction that was taking Mr Crisp significantly further along the path to a buy-out than an injunction simply holding the ring to trial. 

Therefore, a high degree of assurance was necessary because the fulfilment of this test resonated with the desire to ensure the order carried with it the least risk of injustice.

As the Deputy Judge who first made the order applied a different test, the "strong prima facie case" test, the Court also considered it because, if the Court did not, in its de novo assessment, agree with the Deputy Judge's conclusions, the Petitioner would have had an unfair advantage by reason of the first order.

On the evidence before the Court, the Court found the enhanced threshold test was satisfied, whether it was one that was simply higher than the "serious issue to be tried" test, or the "higher degree of assurance" test, or that Mr Garofalo had a strong prima facie case.

Balance of convenience

Bearing in mind that maintaining the status quo is usually desired in an interim injunction and an invasive order would not be made unless there were strong reasons to do so, the time period between the original injunction and the return date becomes a key factor in considering if the balance of convenience is in favour of making the order.

Where that period is short (e.g., 10-14 days), the conventional approach is to consider the balance of convenience on the basis of the status quo before the wrong or before proceedings are commenced. There are two qualifications to this approach:

1. Where the period is protracted (e.g.,  6 months), a new status quo may have eventuated such that it would be unrealistic for the status quo to be treated as what it was prior to the commencement of proceedings. 
2. Status quo is not a decisive matter, otherwise there would be no scope in an exceptional or unusual situation to have an invasive order. 

The seven-month delay in Mr Crisp returning to Court was a significant factor as there was now a new status quo in place. Restoring Mr Crisp's role, with or without removing the new directors, would lead to the likelihood of insuperable difficulties for the management of the companies in the immediate future. The possibility of reversing what had been done in the intervening period and leaving the parties to it made no commercial sense: the earlier order could not simply be undone without major problems. 

As for appointing receivers or independent third parties pending trial, that was not a satisfactory solution as:

1. Independent directors would not be able to run the Relevant Companies straight away, rather, they would need time to figure out how to do so;
2. If Court-appointed receivers were in place, that may create a perception of the Relevant Companies having solvency issues, thereby adversely affecting the business; and 
3. The costs involved would be significant and prohibitive, whereas the business transition plan started by the without notice injunction was more satisfactory. 

The Court therefore found that the overall balance of convenience lay with continuing the injunction.

Comments

This decision illustrates the wide powers available in exceptional circumstances to grant ex parte interim relief in unfair prejudice applications which result in alterations to the status quo.

Whilst the possibility of reconstituting a board through such an application may, at first blush, seem appealing, it bears remembering the high threshold to be met and the very specific and extraordinary facts of the case which led to the continuation of such an order. 

English decisions are persuasive in the Cayman Islands, British Virgin Islands and Bermuda, and it remains to be seen if the offshore Courts will arrive at a similar conclusion should a similar strategy be deployed in an appropriate case.