Alan Baxter Wilson V. Jaymarke Estates Limited+james Shaw
| Jurisdiction | Scotland |
| Judge | Lord President,Lord Hamilton,Lord Clarke |
| Date | 25 November 2005 |
| Docket Number | XA164/02 |
| Court | Court of Session |
| Published date | 25 November 2005 |
| FIRST DIVISION, INNER HOUSE, COURT OF SESSION | |
| Lord President Lord Hamilton Lord Clarke
| [2005CSIH84] XA164/02 OPINION OF THE COURT delivered by THE LORD PRESIDENT in APPEAL From the Sheriffdom of Grampian Highland and Islands at Aberdeen In PETITION under the Companies Act 1985 by ALAN BAXTER WILSON Petitioner and Respondent; against JAYMARKE ESTATES LIMITED First Respondent and Appellant; and JAMES SHAW Second Respondent and Appellant: _______ |
Act: Scott, Q.C., Robertson; Brodies (Clarke & Wallace, Aberdeen) (Petitioner and Respondent)
Alt:; Davidson, Q.C., MacColl; Blacklock Thorley (Raeburn Christie, Aberdeen) (Respondents and Appellants)
25 November 2005
[1]The respondents have appealed against an interlocutor of the sheriff in which she found and declared that the affairs of the first respondent ("Estates") had been conducted in a manner which was unfairly prejudicial to the interests of the petitioner, and ordained the second respondent to purchase the petitioner's shareholding in the company.
Introduction
[2]The petitioner's application to the sheriff court invoked the provisions of Part XVII of the Companies Act 1985. Section 459 provides that a member of a company may apply to the court for an order under that Part on the grounds that the company's affairs have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or some part of its members (including at least himself). Section 461 provides by subsection (1) that, if the court is satisfied that a petition under that Part of the Act is well founded, it may make such order as it thinks fit for giving relief in respect of the matters complained of. Subsection (2) states, inter alia, that the court may order the purchase of the shares of any members of the company by other members.
[3]Estates was incorporated in 1991, 30% of its shares being issued to the petitioner and 70% to the second respondent. From 1981 the petitioner had been employed by Jaymarke Investments Ltd ("Investments"), later Jaymarke (Northern) Ltd ("Northern"), which provided management services to various Jaymarke companies which had been set up by the second respondent. In the late 1980s the petitioner had acquired a 30% shareholding in certain of the Jaymarke companies. Along with the second respondent he had been involved throughout the 1980s in management decisions in respect of the companies. The sheriff described the petitioner as the director who took responsibility for the financial records, whereas the second respondent thought of himself as "the ideas man, the entrepreneur". From 1991 they were the directors of Estates. However, Estates did not carry on business until the financial year to 30 September 1995 when it became concerned with a single project, at Bucksburn. The petitioner provided his services to Estates and other companies through Wilson Property Management Services (WPMS), a partnership between him and his wife. At the stage when the Bucksburn development began to move forward, the second respondent was not involved in the day-to-day running of Estates. On 8 February 1996 the petitioner resigned as a director of Estates, retaining ownership of his shares in it. The involvement of Estates in the Bucksburn development was brought to a conclusion shortly after that date. Since that time Estates has not done anything of significant value. The petitioner made his application to the sheriff court in 1997.
The sheriff's decision
[4]The sheriff found in fact and in law that Estates was conducted by the petitioner and the second respondent as a quasi partnership. She noted that, although they had very different roles, they worked together on development projects with a view to generating profit in which they would participate. They were from its incorporation the only directors and shareholders of Estates.
[5]The sheriff found that the petitioner had been unfairly prejudiced by the manner in which the affairs of Estates were conducted in a number of respects. The first was that in December 1995 the second respondent withdrew £88,125 from Estates' bank account, and through agents paid it to Lodestar Management Ltd ("Lodestar"), a company with motor racing interests of which his son Mark was a director. The funds of Estates were normally transferred only on the joint instructions of the petitioner and the second respondent. However, this payment had not been instructed by, or discussed with, the petitioner. The petitioner first became aware of a payment of that amount in January 1996 when he saw a bank statement in which it was shown; at that stage he did not know the ultimate destination of the payment. The transfer was in due course shown in the accounts of Estates as a loan. In the accounts of Lodestar it was shown as interest free. It was not a normal part of the business of Estates to lend to other companies. At that time Lodestar was not in a sound financial position. It appeared to the sheriff that there was never any likelihood of repayment. She considered that members of Estates could legitimately expect that its funds would not be distributed to a company such as Lodestar without at least the potential for benefit to Estates. However, this payment, which had not been properly authorised, was of no benefit to Estates. She rejected the suggestion that advertising the Jaymarke name on the side of a motor racing car was of benefit to Estates. She commented that the payment represented nothing more or less than the second respondent using Estates as a banker for his son's motor racing interests. It was "exactly the sort of cavalier conduct by a majority shareholder from which the minority is entitled to be protected". The sheriff observed that the circumstances in which the petitioner resigned were indicative of unfair prejudice in the conduct of the affairs of the Estates. He had been excluded from the decision-making process, and was effectively put in a position vis-à-vis Estates "in which he had no option but to resign".
[6]The second respect in which the sheriff held that the petitioner had been unfairly prejudiced was the levying on Estates of management charges in favour of Northern (£150,000) and another Jaymarke company, Jaymarke Developments Limited ("Developments") (£85,000) in the financial years to September1995 and 1996 respectively. It was not in dispute that, during the period in which the petitioner was a shareholder in, and a director of, certain Jaymarke companies, such charges had been used by the companies, inter alia, to minimise liability to corporation tax, and that the petitioner was aware of that practice. However, the sheriff found that no management services were provided to Estates by either Northern or Developments, and no payments were due by Estates to either company for management charges. Northern, which was wholly owned by the second respondent and his wife, had then no employees, with the possible exception of a company secretary, and was not engaged in any business activity. Such work as was done in the year to 30 September 1995 to advance Estates' development at Bucksburn was carried out by the petitioner through WPMS. The sheriff concluded that there was no commercial reality underlying the charges, which were levied for the benefit of the Jaymarke companies as a whole and could not be said to be in the interests of shareholders who were not shareholders in all the other companies. There was no basis for the suggestion that the management charges had been made to remunerate the second respondent. The fact that the charges were levied to regulate the tax liabilities of the companies as a whole explained why they were not calculated until all other accounting procedures were completed and the accounts were on the point of being signed off. Given that the charges were levied for the benefit of the companies as a whole, and that "fundamentally, Jaymarke is James Shaw", the benefit to him was far greater than to the petitioner. It was conduct from which the petitioner, as a member of Estates, was entitled to be protected. She remarked that "it amounted to nothing more than James Shaw treating the whole companies as his creatures without consideration of the interests of the minority".
[7]The third respect in which the sheriff considered that there had been unfair prejudice was the failure to hold annual general meetings of Estates, and the failure to lodge annual returns for Estates. No such meetings were held after the petitioner's resignation as a director of Estates. The annual accounts for Estates for the years to 30 September 1995, 1996 and 1997 were signed off on 24 June 1997, and 2 April and 14 April 1998. It seemed to the sheriff that these failures were unfairly prejudicial to the minority in Estates. The meetings provided an opportunity for a minority to discuss and question the running of the company. Annual returns were the only means by which the minority could be informed about the financial health of the company and how its business was being conducted.
[8]The sheriff was satisfied that the prejudice which the petitioner had suffered was in his capacity as a member of Estates, since the interests of the shareholders were prejudiced by the diminution of the funds available for distribution to its members. In these circumstances the sheriff concluded that the petitioner was entitled to be bought out of his shareholding. It was not in dispute that the valuation of his shares should be as at 30 September 1996. The loan to Lodestar required to be treated as an asset of the Estates as at that date. The management charges should be added back for the purpose of valuation of the shares. Since Estates operated as a quasi partnership the petitioner's shares should be valued as a proportion of the net asset value of Estates, without discount for the fact that he held only a minority shareholding.
Sections 459 and 461
[9]From the decisions to which the...
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