O'Donnell v Shanahan
| Jurisdiction | England & Wales |
| Judge | Lord Justice Rimer,Lord Justice Aikens,Lord Justice Waller |
| Judgment Date | 22 July 2009 |
| Neutral Citation | [2009] EWCA Civ 751 |
| Docket Number | Case No: A3/2008/2229 |
| Court | Court of Appeal (Civil Division) |
| Date | 22 July 2009 |
[2009] EWCA Civ 751
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Mr Richard Sheldon QC (sitting as a Deputy High Court Judge)
Before: Lord Justice Waller
Lord Justice Rimer and
Lord Justice Aikens
Case No: A3/2008/2229
Mr Andrew Clutterbuck (instructed by Cripps Harries Hall LLP) for the Appellant
Mr Max Mallin (instructed by Butcher Burns) for the Respondents
Hearing date: 31 March 2009
Lord Justice Rimer:
Introduction
This appeal, by Mary O'Donnell, is against an order dated 7 August 2008 made by Richard Sheldon QC sitting as a Deputy High Court Judge in the Chancery Division. He thereby dismissed the petition presented by Ms O'Donnell under section 459 of the Companies Act 1985 (now section 994 of the Companies Act 2006) for an order that the respondents, John Shanahan and James Leonard, buy her shares in Allied Business & Financial Consultants Limited ('the company') at a fair value. That value was one that she said should be calculated on the basis that certain diversions of company income and business opportunity and other alleged wrongdoing had not occurred or that the company should be treated as having their benefit. Ms O'Donnell and the two respondents are shareholders and directors of the company. The petition claimed that the respondents' conduct of the affairs of the company had unfairly prejudiced Ms O'Donnell's interests as a member.
The petition raised five allegations of unfairly prejudicial conduct of which four were pursued at the trial. They all failed and on this appeal, brought with the permission of the judge, Ms O'Donnell seeks to make good just one of them. It is the allegation that Ms O'Donnell was unfairly prejudiced by the respondents' acquisition in 1999 of an investment property called Aria House through another company in which they were together 50% shareholders. It is said that they acquired it in breach of their duties as directors of the company.
On the appeal, as below, Mr Clutterbuck represented Ms O'Donnell and Mr Mallin represented the respondents. Three issues were argued on the appeal: (i) whether the respondents were in breach of the 'no profit' rule applicable to a company's directors in taking up the Aria House opportunity, the assumption for the purposes of the appeal being that the opportunity was a profitable one; (ii) whether, in taking it up, they were in breach of the 'no conflict' rule; (iii) whether, if the respondents were in breach of either rule, Ms O'Donnell was entitled to relief under section 459: the arguments there centred on whether she had acquiesced in the breaches and on whether, if she had not, she had proved 'unfair prejudice'.
Following an 11-day trial, the judge delivered a meticulous judgment that was a model of care and thoroughness (now reported at [2009] 1 BLC 328). He made clear findings of fact, which have made our task easier, and dealt with difficult questions of law. To deal with the issues raised by the appeal and the respondents' notice, it is necessary to summarise the facts he found in relation to the background in general and the Aria House transaction in particular. The judge was concerned only to decide whether the company's affairs had been conducted in a manner prejudicial to the interests of Ms O'Donnell as a member. Had he decided that issue in Ms O'Donnell's favour, the relief to which she was entitled was to be decided at a subsequent hearing.
The facts
A. General background
In the 1980s Ms O'Donnell, Mr Shanahan, Mr Leonard and Paul Murtagh were each branch managers with the Bank of Ireland. During 1988 and 1989 they all left the bank to devote themselves to the affairs of the company, which was incorporated in 1988. By October 1989 all four were shareholders, each owning 25 shares with a nominal value of £1 each. All were also directors. The company's business was to provide clients with financial advice and assistance, including arranging bank loans, mortgages and insurance. Its memorandum of association empowered it to carry on 'the business of financiers, bankers, financial agents' and like activities and to carry on 'any other trade or business which can, in the opinion of the Board of Directors, be advantageously carried on by the Company ….' It operated as a quasi-partnership company on the basis of a relationship of trust and confidence between the shareholders. The judge found that there was an implicit understanding that they would work substantially full time for it; but he also found that there was a flexibility in its operations such that nobody would have cause to complain if time off was occasionally taken, or non-competitive business activities were engaged in, provided the work required for the company's business was done.
The company originally operated from an office in Penge in south east London but in October 1989 it moved to an office in 25 North Audley Street, London W1. In the 1990s it operated for a time from Suite 3, Scott's Sufferance Wharf, 1 Mill Street, London SE1. In about 1997 it moved its office to a space above the Charles Dickens pub at 160 Union Street, London SE1, from which it then operated at all times. It rented that office from a separate property partnership carried on by Mr Shanahan and Mr Leonard.
Mr Shanahan and Mr Leonard originally concentrated their corporate efforts in arranging commercial loans although they also arranged some residential mortgages. They spent much time out of the office getting in clients. Ms O'Donnell was responsible for administration, residential mortgages and insurance queries. Mr Murtagh wrote life and term assurance in connection with loan proposals but he resigned in 1990 in acrimonious circumstances, following which Ms O'Donnell took over his work. He had no further involvement in the company's affairs. He did, however, retain his 25 shares, which is why he was a respondent to the petition, although he took no part in the proceedings other than as a witness for Ms O'Donnell. The judge, however, found his evidence to be largely irrelevant and coloured by a manifest vindictiveness against Mr Leonard, apparently fuelled by the latter's refusal to give him a reference when he left the company. In September 1990 the company issued 2,500 further shares to each of the three other shareholders. During the following decade its activities diversified into arranging the purchase and sale of businesses, acting as agents for banks and building societies, placing investments and deposits for clients and providing advice on financial and business restructuring. These activities were mainly handled by Mr Shanahan and Mr Leonard.
Between 1990 and 2007 the company's annual turnover ranged from £79,538 to £57,903, the peak figure being £204,577 in 2001 and being in most years between £100,000 and £200,000. Following Mr Murtagh's departure, its profits were shared equally between Ms O'Donnell, Mr Shanahan and Mr Leonard and they were usually shared out when made. In addition to their drawings as directors' remuneration, the three would on occasion divide up cash payments received by the company without passing it through its books. The company never built up any material capital. Its business declined from about 2002 onwards. Once the current dispute between the shareholders broke out, word of it spread quickly around the close knit Irish community with the result that the business effectively dried up. In 2006 Ms O'Donnell found employment elsewhere and the company is now insolvent and dormant.
The judge was required to consider four transactions in which Mr Shanahan and Mr Leonard engaged that were said by Ms O'Donnell to amount to unfairly prejudicial conduct. Each was said to have been in breach of the understanding formed between the parties when the company was established, in breach of the respondents' duties as directors and a betrayal of the relationship of trust and confidence. All allegations were denied by the respondents, who also claimed that Ms O'Donnell had acquiesced in the matters of which she complained.
The judge made some general comments about the witnesses. Their evidence, often relating to matters happening years ago, was greatly influenced by the documents, which they had used to reconstitute their claimed knowledge in the light most favourable to them. There was considerable bitterness between them, which was particularly apparent in Ms O'Donnell's evidence. Her complaint was that she had left her secure job with the bank in 1989 to take up the prospect of a better future with the company, but she now claimed to be in a financially worse position than if she had stayed with the bank. She found it galling that Mr Shanahan and Mr Leonard had, by contrast, emerged with secure financial futures. Her evidence was full of recrimination against them, attributing their financial wellbeing to wrongs committed against her. The judge said she had staked her limited wealth on the petition; it was, he said, so far as her financial future was concerned, 'the last roll of the dice'. He accepted that there was some truth in the assertion that Mr Shanahan and Mr Leonard were dominant personalities, which went some way to explaining why Ms O'Donnell did not complain at an earlier stage of the activities challenged in the petition. But, said the judge:
'[19] … at the same time I need to bear in mind that [Ms O'Donnell] clearly...
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