Arrow Trading and Investments Est 1920 and another v Edwardian Group Ltd and Others
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE BLACKBURNE |
| Judgment Date | 25 May 2004 |
| Neutral Citation | [2004] EWHC 1319 (Ch) |
| Docket Number | No: 5325 of 2003 |
| Court | Chancery Division |
| Date | 25 May 2004 |
[2004] EWHC 1319 (Ch)
Mr Justice Blackburne
No: 5325 of 2003
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
MR DANIEL LIGHTMAN (Instructed by Messrs Bird & Bird) appeared on behalf of the Petitioners/Applicants
MR MATTHEW COLLINGS (Instructed by Messrs Howard Kennedy) appeared on behalf of the First Respondent
MISS ROSALIND NICHOLSON (Instructed by Messrs Baker & McKenzie) appeared on behalf of the Second to Eleventh Respondents
Tuesday, 25 May 2004
These applications, principally for full disclosure and further information, arise in the course of a section 459 petition which relates to a private company called Edwardian Group Limited ("the Company"), the first respondent. It carries on the business of owning and running hotels. Although a private company, it is a substantial concern. According to its accounts for the year ended 31 December 2002, it had a turnover in excess of £70 million, an operating profit of £13 million or so and a net profit of around £4 million. The Company has two classes of shares, ordinary shares of 50p each and deferred shares also of 50p each. Its paid up capital is a little short of £5 million. Between them the petitioners hold about 10 per cent of the ordinary shares and a little over 20 per cent of the deferred shares, amounting in all to £590,000 or so. The remainder of the shares are held by the second to eleventh respondents, who are either members of the Singh family or else close associates of that family, or in some cases trustees for members of the Singh family or their associates.
The driving force behind the company appears to be the third respondent, Jasminder Singh, who holds shares with a paid up value of £423,000 odd. He is also a joint holder with the fourth respondent of further paid up shares of £154,000 odd. Jasminder Singh has been chairman of the company since July 1977.
The petitioners' interests in the company have been represented by Mr Gulhati. He is a director and shareholder of the second petitioner and a beneficiary under a discretionary trust of the first petitioner's shareholdings in the company. Prior to July 2002, the directors of the company included Mr Gulhati, Mr Jasminder Singh, other members of the Singh family and two persons who are not shareholders, a Mr Morley and a Mr Hart. Mr Morley became a director of the company in 1999 having previously been with HSBC. Mr Hart became a director of the company in June 2001, having previously been a partner in the firm of Baker & McKenzie who acted as solicitors for the company and also I think Mr Jasminder Singh. Baker & McKenzie act in these proceedings for the shareholder respondents.
Although with the exception of a period in the early 1990s the company appears to have been highly prosperous, it has seldom paid a dividend. As I understand matters, it did so in 1998 and 1999 in connection with a capital rearrangement, and did so again in 1998 and 1999 in connection with a similar exercise. Otherwise no dividends have been paid. The company has, however, paid very substantial remuneration to its directions, particularly to Mr Jasminder Singh.
In 2001, inclusive of pension contributions, Mr Jasminder Singh received £1,065,000. In 2002, the corresponding figure was just over £1 million. In 1998 he appears to have received £1.85 million. The petitioners say that the remuneration paid has been well in excess of the market value of the services provided by the recipients to the company and that, to the extent of the excess, the payments have been an indirect means of distributing the company's profits.
Until July 2002, Mr Gulhati was likewise in receipt of very substantial remuneration so he could not complain and did not complain about the level of remuneration that was being paid out. In July 2002, however, the company, either by its directors or by recommendation of its directors endorsed in general meeting, reduced Mr Gulhati's remuneration and also, it appears, the remuneration of one or more of the Singh directors. In August 2002 Mr Gulhati was removed from his directorship since when he has received no remuneration. On the other hand, the remuneration of Mr Jasminder Singh and of other Singh directors has continued, it would seem, at much the same rate as previously.
It was this course of action, the reduction in Mr Gulhati's remuneration and his subsequent removal as a director coupled with the continued payment to some of the Singh directors, and in particular to Mr Jasminder Singh, of high levels of remuneration containing, it is alleged, a substantial element of disguised distribution, that has led to this petition which was presented to the court on 19 August 2003.
The central complaint concerns the continued payment by the company of high levels of remuneration containing this element of disguised profits distribution. As it is put in Mr Lightman's skeleton argument on behalf of the petition, the petitioners did not consider the policy followed by the company of paying remuneration to Singh family directors at a level significantly higher than a market rate for their services to be prejudicial to their (the petitioners') interests to the extent that the company also operated this policy fairly between shareholders, and in particular matched the element of distribution to the Singh family directors with a correspondingly high level of remuneration to Mr Gulhati, the director connected with the petitioners. However, a large reduction in the level of remuneration awarded to Mr Gulhati, decided upon by the board as from 1 July 2002 and his subsequent removal as a director in August 2002, changed the balance between the majority shareholders and the petitioner minority shareholders. Its effect has been that the minority shareholders are no longer receiving any kind of effective distribution referable to their shareholding through the remuneration paid to a person connected with them. By contrast, the Singh family directors, and therefore, in effect, the majority shareholders, continued to receive very large effective distribution through the remuneration paid to Jasminder Singh and the other Singh family directors. Accordingly, it has been and is prejudicial to the interests of the petitioners, for the substantial levels of effective dividend built into the remuneration of Jasminder Singh and the Singh family directors to continue, following the large reduction in Mr Gulhati's remuneration and its termination altogether by his removal as a director of the company. That, as I say, is the central allegation.
It appears that at a directions hearing before the Registrar on 12 September Mr Collings, appearing then as now for the company, sought the Registrar's permission to file points of defence. The Registrar refused to permit the company to do so but said that if it wished to it could apply at a further directions hearing the following month but would need to support any such application with evidence and a draft of proposed points of defence.
The matter was then taken up in correspondence between Bird & Bird representing the petitioners and Howard Kennedy for the company. The petitioners' stance was that the company should adopt a neutral position, as is customary in petitions of this kind. The company's stance through Howard Kennedy was that it had a position on the issue of remuneration which it wished to place before the court, led by its independent directors, namely Mr Hart and Mr Morley, for the purpose of justifying its remuneration policy. Relevant to this has been the establishment of a remuneration committee consisting of, or at any rate including, Mr Hart and Mr Morley, which recommends what the remuneration should be, although the actual decisions on remuneration are taken by the board of directors and subsequently by the company in general meeting.
Fearing that the company was spending or planning to spend its resources in furtherance of its wish to participate in the petition on the central issue of remuneration, and believing that such participation and therefore such expenditure would be wrongful, the petitioners applied on 6 October last for an order restraining the company from doing so. The matter eventually came before Sir Francis Ferris on 3 November 2003. The company opposed the petitioners' application.
Following a contested hearing, Sir Francis granted the petitioners a permanent injunction restraining the company from expending its moneys and actively participating in the petition in the manner in which it had indicated its wish to do. He expressed the view that what the so-called independent directors, namely Mr Hart and Morley, wished to do was to defend the company's remuneration position and thus, in substance if not in intention, support the position of the shareholder respondent.
Sir Francis went on to express the view that although Messrs Hart and Morley might have a view on the issue of levels of remuneration, the company did not have a separate and independent position and that it was inexpedient that the company should be allowed to take an active part in the proceedings simply for the purpose of putting before the court the evidence of Mr Hart and Mr Morley in the manner in which they preferred, that is to say without appearing to align themselves with either the petitioners or the shareholder respondent . He therefore granted an injunction to restrain the company from spending its funds on participating in the litigation for those purposes.
This unsuccessful attempt on the part...
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