#8 Unfairly Prejudicial Remedy and Winding Up

Question 1

Requirements for the Petition of Unfair Prejudice (s994)

Answer 1

(i) Conduct of the company’s affairs/an act or omission of the company proposed or actual
(ii) Prejudice to the petitioner’s interests as a member
(iii) Unfairness

Question 2

Ebrahimi v Westbourne Galleries

Answer 2

Facts: company was owned by E and N, 50% shares each, with restrictions in place to prevent E from selling his shares. N’s son joined the business and got 10% shares, subsequently voted to remove E as a director and excluded him from the management of the business

Held: inequitable – this is a quasi-partnership, there’s close personal relationship – need to wind the company up and give E his money

Question 3

O’Neill v Phillips

Answer 3

Facts: O has 25% shares of a company and was promised by P 50% shares eventually, and was started being paid 50% profit. In an economic downturn, P got worried and returned to the company, whilst demoting O. and reduced his profit to 25%.

Held: failed - P never actually agreed to transfer O the shares of the company
- Two-stage test for unfair prejudice
 (i) Breach of the terms of how the affairs of the company should be conducted (articles/collateral agreement/fiduciary duty of directors/formal or informal promise or understanding which forms the basis of the agreement as to how the company’s affairs should be conducted); and
• This is the starting point per Re Saul D Harrison
 (ii) Unfair (due to equitable considerations) for those conducting the affairs of the company to rely on their strict legal powers under the constitution of the company

Question 4

Re Saul D Harrison & Sons Plc

Answer 4

Facts: petitioner alleged that the directors (her cousins) had unfairly kept running the business just so they could pay themselves cushy salaries – arguing that they should have closed down the business and distributed the assets to the shareholders

Held: no unfairly prejudicial conduct – board of directors were bound to manage the company in accordance with their fiduciary obligations, the articles of association and the Companies Act - no legitimate expectation for more than the duties discharged

Need to examine for the purpose of unfairness - (i) commercial relationship; (ii) articles of association as the contractual terms that govern relationships of shareholders with the company and each other

Question 5

Scottish Cooperative Wholesale Society v Meyer

Answer 5

whenever a subsidiary is formed as in this case with an independent minority of shareholders the parent company must, if it is engaged in the same class of business, accept as a result of having formed such a subsidiary an obligation to conduct what are in a sense its own affairs as to deal fairly with its subsidiary

Question 6

Unfair Prejudice: Requirement of Conduct of the Company’s Affairs/An Act or Omission of the Company Proposed or Actual (s994(1))

Answer 6

Encompass all matters which come before the board for consideration

Actions/omissions in compliance with/in contravention of the articles may/may not constitute conduct of the company’s affairs – depends on the precise facts

Breach of a pre-emption agreement (right to buy) would not in itself constitute conduct of a company’s affairs – since buying/selling shares is not effected by or on behalf of the company
 Unless rewards are taken in the form of dividends – since it impacts on how the company remunerates its directors/members (Graham v Every)

Actions taken by a parent company or majority shareholder in relation to a subsidiary can amount to relevant conduct of the subsidiary company’s affairs (Scottish Cooperative Wholesale Society v Myer; Re City Branch Group Ltd)

EXCLUDES shareholders’ personal actions

Question 7

Unfair Prejudice Requirement - Petitioner’s Interests as Members

Answer 7

Usually expressed in the way of reduction in the value of shareholding

Includes expulsion from the board in a small company due to expectation of return on investment in the form of directors’ fees OR a board position monitors and protects the member’s investment (Re A Company)

Most of the members’ interests are the rights exhaustively stated under the articles of association and the Companies Act, with the exception of three equitable considerations
• (i) personal relationship of mutual confidence
• (ii) agreement that some or all should participate in the management
• (iii) restrictions on the transfer of shares which would prevent a member from realizing his investment

Example of non-member’s interests
• Re JE Cade & Son Ltd: shareholder’s grievance arose in his capacity as a freeholder of land occupied by the company under a protected agricultural tenancy, who was seeking possession of the farm

There can be no objection if the remedy also affects the petitioner in a non-investor capacity e.g. as a creditor (Gamlestaden v Baltic Partners Ltd) - i.e. the qua-member rule is not strictly interpreted

Question 8

Unfair Prejudice - NO need of clean hands

Answer 8

Re London School of Electronics: petitioner was removed from the company, but then set up his own institution bringing students from the original company
 Held: no requirement of clean hands, but may affect the relief granted

Grace v Biagioli: the petitioner, although removed from directorship contrary to agreement, was denied relief because he had put himself in a position of conflict by seeking to purchase a competing company, thereby justifying his removal – i.e. prejudice to the petitioner could not be said to be unfair to him

Question 9

Unfair Prejudice - Excludes negligence in the form of commercial misjudgment and management errors

Answer 9

Negligence in the Form of Commercial Misjudgments and Management Errors
o Unless there’s significant and serious mismanagement amounting to breach of director’s duty of care (s174 CA 2006)
 Re Macro (Ipswich) Ltd: family company, one of the sons was a manager but was absolutely hopeless. There were complaints and failed standard, and this was not a single act of misjudgement – was negligence in the sense that the rest of the board failed to remove him from the job which he clearly is incapable

Question 10

Example of Unfair Prejudice - Re a Company

Answer 10

• Misappropriation of assets by majority shareholder

- Breach of the duty not to mislead shareholders

Question 11

Example of Unfair Prejudice - Irvine v Irvine (No. 1)

Answer 11

• Directors taking excessive remuneration

Question 12

Example of Unfair Prejudice - Wilkinson v West Coast Capital

Answer 12

• Diversion of a corporate opportunity by directors

Question 13

Example of Unfair Prejudice - Re Allied Business

Answer 13

• Failure to account for profits from a property transaction diverted to a new company part owned by the respondents, being a breach of the “no conflict” and “no profit” rules

Question 14

Example of Unfair Prejudice - Re CF Booth Ltd

Answer 14

• Not paying dividends to non-working members

- no dividend for 35 years

Question 15

Example of Unfair Prejudice - Re Abbington Hotel Ltd

Answer 15

• Seeking to sell a company asset contrary to agreement and creating a false board minute for that purpose

Question 16

Example of Unfair Prejudice - VB Football Assets v Blackpool Football Club

Answer 16

• Making improper payments in the form of alleged loans (£2.5m) and disguised dividends (£24.3m) to the majority shareholder from the company’s funds, without the knowledge or consent of the petitioner who had been excluded from the decisions to make such payments and from information

Question 17

• Cool Seas (Seafood) Ltd v Interfish Ltd

Answer 17

Majority’s claim
held: petitioner was not precluded from petition despite being a majority shareholder because the ‘reserved matters’ clause in a shareholders’ agreement provided that the consent of the respondent (minority shareholder) was required for the commencement of the proceedings by the company

Minority’s claim
Held: the company was not a quasi-partnership, since the set up (with heavy documentation) showed otherwise. No legitimate expectation that the senior executive can remain as director – no pre-existing personal relationship, and the transaction documented the relationship. The exclusion as justified by the misconduct – hence no s994. Respondents (majority shareholder) cross-petitioned, the position was that they couldn’t ratify the conduct of the senior executive. It was also held that they’ve been misled into the shareholding by fraudulent misrepresentation of the account.

Question 18

• Re Sprintroom Ltd

Answer 18

Assessment of ‘reasonable offer’ –> no bright-line rules for assessing ‘reasonable offers’ certain factors will usually be relevant
 Value offered
 Ability of the offeree to satisfy himself to the reasonableness of the offer
 Likelihood of the offeror being able to implement the offer
 Timing of the offer relative to the unfairly prejudicial conduct

Question 19

Unfair Prejudice: Petitioner

Answer 19

s994(1)&(2): the petitioner must be (i) a member of the company, or (ii) a person to whom shares have been transferred (but not yet registered), or (iii) a person to whom shares have been transmitted by operation of law, or (iv) the Secretary of State (s995)

Even the majority shareholder can petition, provided that there’s no alternative remedy (Cool Seas (Seafood) Ltd v Interfish Ltd)

Question 20

Unfair Prejudice: Respondent

Answer 20

Majority Shareholders

Directors

Others – create companies, former members, independent shareholders
o Re Little Olympian Each-ways Ltd (No. 3): petitioner must join as respondents any person who will be affected by an order made by the court under s996

Company (will always be a respondent)
o Required to disclose documents

In the case of a private company: all the other shareholders will also be joined as a respondent

Question 21

Unfair Prejudice - Remedies - Court’s Discretionary Power

Answer 21

What it considers is fair and equitable in all the circumstances in order to right and cure for the future the unfair prejudice which the petitioner has suffered at the hands of the other shareholders of the company (Re Bird Precision Bellows Ltd)

Petitioner may not get what he asked for
- Re Full Cup International Trading Ltd: unfair prejudice had been found but declined to make an order on the petition as formulated on the ground that the proper remedy would be a winding up of the company rather than any of the orders sought

Question 22

Unfair Prejudice - Remedies under s996(2)

Answer 22

s996(2)(a): regulation of the conduct of the company’s affairs in the future

s996(2)(b): requiring the company to refrain from doing or to do a particular act
o Re A Company: granted an interim injunction to restrain the company from holding a meeting to approve a rights issue, where the meeting had been convened after presentation of a petition on grounds of exclusion from management

s996(2)(c): authorizing civil proceedings on behalf of the company

s996(2)(d): requiring the company not to make any or any specified alterations in its articles without leave of the court

s996(2)(e): Buy Out Order – purchase of the share of any of the members either by other members or by the company itself

Question 23

Unfair Prejudice - Assessment of Value in Buy Out Order

Answer 23

Re Bird Precision Bellows Ltd
• The overriding objective was to achieve a fair price
• In a quasi-partnership, the presumption is that non-discounted (i.e. pro-rata0 valuation is used
• If the shareholding is acquired by way of an investment, a discount may in the circumstances be fair so as to reflect the fact that the petitioner has little control over the company’s management

Cf Re Blue Index Ltd: the real test was not whether the company was a quasi-partnership but whether the unfairly prejudiced shareholder had acquired their shares at a discount

Question 24

Unfair Prejudice - Assessment of Value in Buy Out Order - Quasi-Partnership

Answer 24

Establishing quasi-partnership: Ebrahimi v Westbourne Galleries Ltd
• An association formed or continued on the basis of a personal relationship involving mutual confidence
• An agreement that all or some of the shareholders (there may be sleeping members) will be involved in the conduct of the business
• Restrictions on the transfer of a member’s interest (i.e. on disposal of shares)
• NOTE: these are cumulative preconditions and the presence of one or more of these factors may suffice (Khoshkhou v Cooper)

Quasi-partnership could develop during a relationship, in the sense that it might be acquired after the formation of the company (Strahan v Wilcock)

NOTE that quasi-partnership does not guarantee a buy-out order, e.g. Re Phoenix Office Supplies Ltd – where the director left at his own volition and there’s no contractual right to force the other shareholders

Question 25

Unfair Prejudice - Date of Value in Buy Out Order

Answer 25

Profinance Trust SA v Gladstone • (1) Where the company is a going concern prima facie the shares should be valued at the date on which they are ordered to be purchased but fairness may require the court to adopt a different date • (2) Where a company has been deprived of business an early valuation date and compensating adjustments may be required in fairness to the petitioner • (3) Where a company has been reconstructed or its business has changed significantly so that it has a new economic identity an early valuation date may be required in fairness to both parties. But an improper alteration in the company’s capital may not have that outcome • (4) Where a minority shareholder starts a petition and there is a general fall in the market the court may order the shares to be valued at an early date so that he does not suffer, especially if it disapproves of the majority shareholder’s conduct • (5) But the court will not direct an early valuation just to give the petitioner the best possible outcome and the most advantageous exit • (6) These points are heavily influenced by the parties conduct in making and accepting or rejecting offers either before or during the course of the proceedings

Question 26

Unfair Prejudice - Striking Out Petitions - CPR

Answer 26

Application of CPR Part 3.4 allows striking out of a petition where it makes claims which are untenable or disclose no case to answer (no reasonable grounds for bringing the claim) or is an abuse of the process of the court o Re A Company, Re XYZ Ltd: the petitioner ought first to have exhausted his rights under the company’s articles by having his shares valued under the company’s pre-emption article and then transferred, before applying to the court

Question 27

Unfair Prejudice - Striking Out Petitions - Reasonable Offer

Answer 27

Petitioner could not be said to have been unfairly prejudiced by the respondent’s conduct if a reasonable offer to buy out was made – factors of reasonableness (Re Sprintroom Ltd) o (i) the value offered or the means of arriving at that value o (ii) the ability of the petitioner to satisfy himself that the figure offered is reasonable before he has to decide whether to accept or reject the offer o (iii) disputes between the parties over issues which will materially affect the valuation of the company e.g. how to assess the alleged diversion of corporate assets, what assumptions will be made o (iv) the likelihood of the majority shareholder being able to implement the offer that has been made  An offer made “subject to affordability” will not be sufficient o (v) the proximity of the offer to the unfairly prejudicial conduct complained of  An offer made prior to the event, e.g. before the relationship has broken down, may be rejected by a petitioner who legitimately hopes that relations can be restored, and the business got back on track or the business sold to a third party for a higher value than that offered. o (vi) the reasonableness of offers should in most cases be considered by the judge at the liability trial

Question 28

Winding Up - Petitioner

Answer 28

(i) Must be “contributory” (s124(2)): i.e. liable to the assets of a company in the event of its being wound up (ii) Petitioner must be able to show company is solvent or he will obtain some advantage or other tangible benefit from a winding up order (Re Rica Gold Washing Co) o Exceptions are allowed – at least in part, on the failure of the company to supply accounts and information, and the petitioner therefore lacks the information to tell whether or not there will be a surplus of assets available for the contributories (Re Newman & Howard Ltd) (iii) The company has fewer than 2 members, or the petitioner must be an original allottee of the shares, or be able to show that he satisfies the minimum period for holding shares, or that the shares devolved to him on death (s124(2) IA 1986)

Question 29

Winding Up - Grounds - Failure of the Company's Substratum

Answer 29

Re Perfectair Holdings: the company should be wound up where its sole remaining purpose was to get in its assets and wind up affairs – winding-up was the function of a liquidator, not the directors

Question 30

Winding Up - Grounds - Fraud

Answer 30

Re Thomas Edward Brinsmead & Sons: a company was formed to make pianos which were to be passed off as made by another company. By way of promotion fraud, the public had subscribed for shares – held: just and equitable to wind up the company

Question 31

Winding Up - Grounds - Dealock

Answer 31

As the result of the shareholders and directors refusing to speak or co-operate with each other Deadlock requires at least an impasse in the corporate decision-making process  *** Re Yenidje Tobacco Ltd; Re Brand & Harding Ltd: there were two equal shareholders and directors. Relations between them had broken down to such an extent that they were in continuous argument and would not speak to each other. Court ordered the company to be wound up Note that deadlock alone does not amount to unfairly prejudicial conduct to satisfy the requirements of s994, so winding up may be the only remedy in such cases (Hawkes v Cuddy)

Question 32

Winding Up - Grounds - Justifiable Loss of Confidence in the Company's Management

Answer 32

Where the petitioner can prove that the persons managing the company’s affairs lack honesty or probity to such an extent that it is unreasonable to expose the petitioner’s investment in the company to their machinations There must be a justifiable lack of confidence in the conduct and management of the company’s affairs *** Loch v John Blackwood: majority shareholder was attempting to buy out the minority shareholders, who were not directors, at an undervalue. Further, the board failed to hold general meetings or render accounts or declare a dividend.  Held: there was a justifiable lack of confidence in the probity of the minority shareholder and ordered the company to be wound up

Question 33

Winding Up - Grounds - Exclusions

Answer 33

Exclusion from Participation in a Small Private Company where there was a Relationship based on Mutual Confidence (Re Westbourne Galleries Ltd) Exclusion from Participation where there’s agreement that the Petitioner would be Consulted on All Major Decisions (Re R A Noble & Sons (Clothing) Ltd) Deprivation of Real Return on Investment (ex parte Glossop)

Question 34

Winding Up - Clean Hands

Answer 34

IS a requirement BUT the petitioner does not need to show that he has been entirely blameless in relation to the problems that have overtaken the company, as long as the conduct of those in control has been the “substantial cause” of the destruction of the mutual trust and confidence between the parties (Re Noble & Sons (Clothing) Ltd)

Question 35

Winding Up - Practice Direction 49B – Curtailing the Practice of Raising Both Winding Up and Unfair Prejudice

Answer 35

A winding up order may only be applied if (a) that is the remedy that the petitioner prefers, or (b) if it is thought that it may be the only remedy to which the petitioner is entitled

Question 36

Winding Up - Impact of the Petition on the Company

Answer 36

``` Applications to Restrain Advertisement (Insolvency Rule 4.23(1)(c)) o Winding up petitions in this form do not concern the company’s creditors, at least at this preliminary stage, as it is a pre-condition of presentation of the petition that the company is solvent and can pay its debts o Advertising (breach of the rule) may amount to an abuse of process and if shown to have been done deliberately it may lead to the petition being struck out and removed from the court file ``` Application to Restrain Presentation of a Petition

Question 37

Winding Up - Validation Order

Answer 37

s127 IA 1986 invalidates any disposition of the company’s property or assets, any transfer of shares or alteration of the status of members made after the commencement of the winding up Banks would freeze the company’s accounts pending an application to the court by the company for what is known as a “validation order” for relief under s127 o Standard Form of the “Validation Order” validates…  (1) payments made into or out of the bank accounts of the company in the ordinary course of business of the company and  (2) dispositions of the property of the company made in the ordinary course of its business for proper value between the date of the presentation of the petition and the date of judgment on the petition or further order in the meantime Court may refuse to make a s127 order if it considers that the company is in some financial difficulty and there are serious doubts as to its solvency, even if the petitioner has argued that it is solvent (in order to bring the petition)

Question 38

Winding Up - Interim Relief

Answer 38

Provisional Liquidator (s135 IA) Special Manager Appointed by the Provisional Liquidator (s177 IA) Court-Appointed Receiver as an Alternative to a Provisional Liquidator (s37 SCA)

Question 39

Winding Up - Striking Out Petition

Answer 39

s125(2) IA: if the court thinks the petitioner is entitled to relief either by winding up the company or by some other means and that in the absence of some other remedy it would be just and equitable that the company should be wound up, it should make the order

Question 40

Arbitration as Alternative to Legal Proceedings

Answer 40

A Prior Arbitration Clause Either in the Company’s Articles or a Shareholder’s Agreement CAN take away the Statutory Right to Petition for Relief under s994 (Fulham Football Club (1987) Ltd v Richards)

Question 41

Can court order corporate remedy under s994?

Answer 41

NO: Re Charnley Davies Yes: Bhullar v Bhullar Middle Ground: Kung v Kou (HK case) - might be able to get a direct corporate remedy if and only if you could establish that you would meet all of the criteria for bringing a derivative claim – i.e. s263 CA 2006, and obviously the substance of the conduct was in breach of duty