Christopher Croly (Petitioner) v Robert Good and Others
| Jurisdiction | England & Wales |
| Judge | HHJ David Cooke |
| Judgment Date | 08 January 2010 |
| Neutral Citation | [2010] EWHC 1 (Ch) |
| Docket Number | Case No: 5334/08 |
| Court | Chancery Division |
| Date | 08 January 2010 |
[2010] EWHC 1 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Before: HHJ David Cooke
Case No: 5334/08
Edward Davies (instructed by Withers) for the Petitioner
Stuart Adair (instructed by Thomas Eggar) for the First and Second Respondents
Hearing dates: 21–23 and 26–27 October 2009
HHJ David Cooke:
Introduction
By his petition presented on 30 June 2008 Mr Croly seeks relief under s 994 Companies Act 2006, alleging that the affairs of the third respondent company FP Mailing (Windsor) Ltd (which I will call “the Company”) have been conducted in a manner unfairly prejudicial to his interests as a member. He seeks an order that the first and/ or second respondents should buy out his shares at a value determined as at November 2007, being the date when he says he was excluded from management of the Company. The retrospective valuation is material because since that date the Company's fortunes have declined to the point where on 11 August 2009, some two months before the trial, it was put into administration by Mr Good, who was then the sole director, for the purposes of implementing a pre-pack sale of its assets to a new company which is owned by Mr & Mrs Good. The Company is a nominal respondent to the petition and its administrator has consented to the continuation of the proceedings for that purpose.
The issued share capital of the Company throughout has been 100 Ordinary shares of £1 each, of which 75 are designated A shares and 25 B shares. The Articles provide that the two classes rank pari passu but that shareholders may declare different dividends on them. At present Mr Croly is the registered holder of 30 A shares. The balance of the A shares, and all the B shares, are held between Mr & Mrs Good. Mr Croly thus holds 40% of the A shares and 30% of the entire issued capital. Mrs Good has played no part in these proceedings, and it is clear from the evidence that she played little active part in the affairs of the Company. Her shares are effectively under Mr Good's control so that he and Mr Croly may be regarded for practical purposes as the two shareholders.
Mr Croly alleges that although he was not initially a shareholder, at some point after he acquired shares the Company became a quasi partnership between himself and Mr Good, that it was agreed he would be entitled to participate in managing the Company, and that they reached an agreement to divide the profit it made equally between them and to draw equal amounts of cash as remuneration, of which a large proportion in his case (and substantially all in Mr Good's case) would be payments on account of dividends to be declared at the year end. In November 2007 however he alleges he was excluded from the Company's premises and any effective role in it. By that date, no dividends had in fact been declared on the A shares he held, and a balance of over £200,000 had accrued on his loan account (part of which he disputes) in respect of the payments received on account of dividend and other matters.
Since that date, Mr Good has continued to run the Company and draw large amounts of cash from it, notionally on account of future dividends. Mr Croly alleges that Mr Good's drawings both before and after his expulsion exceeded the amount agreed between them, and (to that extent at least) are in any event breaches of Mr Good's duties as director. He alleges unfair prejudice in a number of matters, principally (i) his expulsion (ii) the excessive drawings and (iii) the failure to finalise accounts and declare a dividend that would have at least reduced the amount of his director's loan account.
Section 994(1) provides as follows:
“(1) A member of a company may apply to the court by petition for an order under this Part on the ground—
“(a) that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or
(b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.”
In order to succeed, the petitioner must establish that the conduct complained of is both prejudicial to his interests and unfair. Further, the necessary element of prejudice must be suffered in his capacity as member rather than in any other capacity, such as employee. The element of unfairness is generally established by reference to a breach of the basis upon which he agreed that the affairs of the company would be conducted. In establishing what that basis is, the starting point is that the company is a separate legal entity established under and required to be operated in accordance with the Companies Acts and its constitution, most particularly its Articles of Association which formed the basis of the contract between the members.
There are some companies however, usually referred to as quasi partnership companies, in which additional equitable considerations arise by virtue of the nature of the relationship which the parties have entered into with a view to carrying on business through the company. In O'Neill v Phillips [1999] 1 WLR 1092, Lord Hoffmann said this, referring to section 459 of the Companies Act 1985, which is the statutory predecessor of the present section 994:
“This approach to the concept of unfairness in section 459 runs parallel to that which your Lordships' House, in In re Westbourne Galleries Ltd. [1973] A.C. 360, adopted in giving content to the concept of “just and equitable” as a ground for winding up. After referring to cases on the equitable jurisdiction to require partners to exercise their powers in good faith, Lord Wilberforce said, at p. 379:
“The words ['just and equitable'] are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act [1948] and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The 'just and equitable' provision does not, as the respondents [the company] suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.”
I would apply the same reasoning to the concept of unfairness in section 459.”
If it is found that the company falls into this quasi partnership category, the court is more likely to conclude that it is unfair to fail to give effect to, or bring to an end, arrangements which have been made on an informal basis, even though they do not give rise to legal entitlements, or to exclude a participator from the management or conduct of the company's business, if it was part of the arrangement that he should take part in it. Furthermore, the most commonly sought remedy in unfair prejudice petitions is an order that the petitioner's shares should be bought out by one or more of the respondents, and the establishment of a quasi partnership is normally a precondition for the court to find that such a buyout should be made without a minority discount.
As to which companies fall into the quasi partnership category, there is no universal definition. Although the concept has developed from partnership law, it does not require that the company is entered into, or run, as if it were a partnership, or that the members regard themselves as being partners. In the Westbourne Galleries case itself, Lord Wilberforce said this (at page 379):
“ it would be impossible, and wholly undesirable, to define the circumstances in which these [ equitable ] considerations may arise. Certainly the fact that the company is a small one, or a private company, is not enough. There are very many of these where the association is a purely commercial one, and in which it can safely be said that the basis of association is adequately and exhaustively laid down in the articles. The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence-this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be “sleeping” members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members' interest in the company-so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere. “
It is an important part of Mr Croly's case that the Company falls into this quasi partnership category.
Witness evidence
There are many areas of factual dispute between the parties, and before dealing with the facts in detail, I give my overall impression of the main witnesses and the way in which Mr Good and Mr Croly approached the Company and each other.
Mr Good presented himself as...
To continue reading
Request your trial
-
Apex Global Management Ltd (Petitioner) v Fi Call Ltd and Others
...[2012] EWHC 917 at paragraphs 71–2 (where there is also some support for an implied duty of good faith between members), Croly v. Good [2010] EWHC 1 (Ch) at paragraph 91, Holman v. Adams Securities Limited [2010] EWHC 2421 at paragraphs 124 In a lengthy judgment in F & C Alternative Invest......
-
John Seneschall v Trisant Foods Ltd
... ... : John Seneschall Petitioner and 1. Trisant Foods Limited ... process was not conducted fairly, or in good faith. Furthermore, following his suspension in ... extremely wide and flexible, although as Robert Walker LJ (as he then was) said in Profinance ... ] EWHC 2375 at [150] per Proudman J, and Croly v Good [2011] BCC 105 , at [113] per HHJ ... to develop her knowledge or learn from others, “ talked a good talk, but actually wasn't as ... ...
-
Keith Pinfold (Petitioner) v Bryan Charles Ansell and Others
...nor has it been changed in a way that excites suspicion that it may be being deliberately run down to defeat his claim (cf Croly v Good [2010] EWHC 1 (Ch), referred to by Mr Gunstone). Nevertheless it represents a "sea change" in conduct, to use an expression that appears in a number of the......
-
Shepherd v Williamson and Another
...on the basis that it is unfair for the petitioner to assume the burden of the risk: see Re OC Transport. In Croly v. Good and Others [2010] EWHC 1 (Ch) His Honour Judge Cooke (sitting as a deputy Judge of this Division) fixed the date of valuation as the date of expulsion, although that was......