Anderson v Hogg
| Jurisdiction | Scotland |
| Judgment Date | 14 December 2001 |
| Date | 14 December 2001 |
| Docket Number | No 18 |
| Court | Court of Session (Inner House - Extra Division) |
EXTRA DIVISION
Company law—Unfair prejudice—Recovery of unlawful payment—Whether unfair prejudice remedies available where derivative action available—Whether in ascertaining whether actings were “unfair” court should apply broad approach or established equitable principles—Companies Act 1985 (cap 6) secs 459 and 4611
Section 459 of the Companies Act 1985 provides that any member of a company can apply to the court by petition for an order on the grounds that the company's affairs are being conducted in a manner which is “unfairly prejudicial” to the interests of its members. Section 461 provides that if the court is satisfied that such a petition is well founded it may make such order as it thinks fit for giving relief in respect of the matters complained of.
In 1983 a company was established to take over part of a business which the petitioner and the respondent had previously operated in partnership. Fifty per cent of the shares were held by the petitioner and his wife and 50 per cent by the respondent and his wife and sister-in-law. The petitioner and the respondent were the only directors. The company was run informally. In February 1989, the petitioner, while formally remaining a director, ceased to take an active part in the business. thereafter the shareholders agreed that the business should be run down and the assets sold off. Meetings to progress this were held in 1991 and 1992. In 1996 the petitioner petitioned the court seeking an order for the respondent to repay to the company (1) unauthorised salary increases and bonus payments (2) an unauthorised pension contribution of £1,000 (3) loan interest of £1,894 and (4) a redundancy payment of £50,000 and value of a car of £10,000. The Lord Ordinary decided against the petitioner on all four issues and held that even if conduct was unlawful it did not follow that the petitioner had ben treated unfairly. The petitioner appealed in respect only of the redundancy payment. The Lord Ordinary's finding that the respondent had acted in good faith was not challenged on appeal.
The petitioner argued that (1) the Lord Ordinary had been wrong in holding that the company's affairs had not been conducted in an unfairly prejudicial manner and had wrongly applied guidance in House of Lords decisions as to the application of the law to a company run in an informal way and (2) the Lord Ordinary was wrong in refusing a remedy under sec 461 if there was unfairly prejudicial conduct. The respondent argued that (1) under sec 459 fairness was always a substantive question and the equities favoured the respondent and (2) the appropriate remedy was at the discretion of the Lord Ordinary and there was no ground for holding that he had erred in treating the derivative action as the appropriate remedy in this case.
Held (per Lord Coulsfield and Lord Hamilton,diss Lord Prosser) that (1) on the evidence, the petitioner consented to a payment of £30,000 and the issue in the case related only to the excess of £20,000 (p 196F); (2) the Lord Ordinary's view that a derivative action was available and that it was inappropriate in principle to rely on sec 459 when a remedy could be obtained in such an action, should be discounted as there was authority that where the facts warrant a derivative action a sec 459 petition is not barred and the petition had proceeded to proof before answer without challenge on that ground (pp 196G–197A, 200B–C); (3) the payment represented an unauthorised expenditure of the company's funds and the respondent could not resist a
demand by the company to repay that sum (p 1978B–E); (4) in order to justify a refusal of a complaint on the basis that the action complained of was, while unlawful, not unfair, it would be necessary to show that the petitioner, as a shareholder claiming on the basis of a legal right, was restrained by principles of equity from insisting on the right to require repayment (p 198F–H); and (5) a broad approach to unfairness which failed to give due weight to the relevant context and background was inappropriate: for the purposes of sec 459 the relevant context and background were the existence of an association of persons for an economic purpose regulated by agreed rules and the application of established equitable principles (p 201C–D); andorder made for respondent to pay £20,000 to the company.Opinion (per Lord Prosser) that (1) this was not a case in which recourse to sec 459 was appropriate: if the petitioner considered the payment was unlawful he should have attempted to have proceedings brought by the company for recovery of it (p 202B); (2) it was not useful to attempt to apply any generalised view of the interrelation between lawfulness, agreement and fairness; and while a court's conclusion as to fairness could be described as “subjective” if no “objective” criterion was relied upon, in Scotland the courts had never found it necessary or possible to categorise fairness or reasonableness in such neat pigeon-holes (p 204B–C); (3) in the circumstances, with the petitioner and respondent parting on the basis that the respondent was to finalise the matter, after a meeting at which neither had raised the issue of quantum which the petitioner had been considering, the petitioner had not established any unfairness in what the respondent then did (p 204C–D).
John Farquhar Anderson brought a petition against Ruaraigh Hogg seeking payment of certain sums under sec 461 of the Companies Act 1985. After proof before answer, the Lord Ordinary refused the petition. The petitioner reclaimed.
The arguments of the parties are sufficiently set forth in the opinions of their Lordships.
Cases referred to:
Antoniades v WongUNK [1997] 2 BCLC 419
Barrett v DuckettUNK [1995] 1 BCLC 243
Charnely Davies Ltd (No 2) (Re)UNK [1990] BCLC 760
Guidezone Limited (Re)UNK [2000] 2 BCLC 321
Jesner v Jarrad Properties LimitedSC 1993 SC 34
Little Olympian Each-Ways Limited (Re)UNK [1994] 2 BCLC 420
Lowe v FaheyUNK [1996] 1 BCLC 262
O'Neill v PhillipsWLR [1999] 1 WLR 1092
Saul C Harrison plc (In re)UNK [1995] 1 BCLC 14
Textbooks etc referred to:
Gore Brown Companies secs 28.13.3 and 28.13.7
The cause called before an Extra Division, comprising Lord Coulsfield, Lord Hamilton and Lord Prosser for a hearing on the summar roll.
At advising on 18 December 2001,
LORD COULSFIELD—[1] This is a petition under sec 459 of the Companies Act 1985 at the instance of a director and shareholder in T Anderson &Company (Potato Traders) Limited (“the company”). The petition was presented in 1996. The only person to whom the petition was intimated was the respondent, who is also a director and shareholder in the company. The interlocutor ordering service of the petition also granted a motion for interdict against the respondent convening a shareholders' meeting until after the petition had been disposed of. No attempt has been made to have the interdict recalled. It does not appear that much happened in the process until March 1999 when it was ordered that a record should be made up on the petition and answers for the respondent and a proof was allowed. In due course, a proof took place. The respondent represented himself at the proof and, although he did so, as the Lord Ordinary says, with courtesy and dignity, the Lord Ordinary did not have the benefit of legal argument from him. As will be seen, the factual background to the petition is somewhat uncertain, because the company was always run in an informal manner, without regard to the procedure required by company law. The Lord Ordinary, however, managed, with some success, to sort out the history of the company. On 28 January 2000, the Lord Ordinary sustained the second and fourth pleas for the respondent and refused the petition. The petitioner now reclaims.
[2] The company was established in 1983 to take over a part of a business which had previously been operated by the petitioner and the respondent in partnership. Simultaneously, another company took over another part of that business. The petitioner and his wife hold 80,000 shares in the company and the remaining 80,000 issued shares are held by the respondent, his wife and his sister-in-law. The petitioner and the respondent were the only directors. As has been said, the company was always run informally, decisions being taken by discussion among the members and directors. In February 1989, the petitioner, while formally remaining a director of the company, ceased to take an active part in the business. The respondent continued in the actual running of the company and its business. Not long afterwards, the two sides (that is the petitioner and his wife on the one hand and the respondent and his wife and sister-in-law on the other) agreed that the business should be run down and the assets sold off. This was done, the employees of the company being made redundant. Meetings to progress the process of running down were held in 1991 and 1992. At these meetings, a number of issues emerged which later figured in the petition. It is not clear from the narrative why, so far as appears, little happened in connection with these issues between 1992 and 1996. In 1996, however, there were attempts to remove the petitioner as a director and to wind up the company: these presumably explain why the petition was raised. In any event, when it was ultimately raised, the petition drew attention to four issues, namely (1) alleged unauthorised salary increases and bonus payments made to the respondents, totalling £28,612.40: (2) an unauthorised pension contribution of £1,000: (3) interest foregone on a bridging loan in favour of the respondent and his wife amounting to £1,894: and (4) a payment, described as a redundancy payment, made to the respondent amounting to £50,000, together with the value of a car which was taken at £10,000. The order sought in the petition was an order for the respondent to repay the relevant sums to the...
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