Edwin John Prescott v Aristides George Potamianos

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
JudgeLord Justice McCombe,Lord Justice Leggatt,Lady Justice Rose
Judgment Date06 Jun 2019
Neutral Citation[2019] EWCA Civ 932
Docket NumberCase No: A3/2018/2504 and A3/2018/2517

[2019] EWCA Civ 932

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT,

BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES

INSOLVENCY AND COMPANIES LIST (ChD)

Mr Richard Spearman QC (sitting as a Deputy High Court Judge)

CR/2017/006788

AND

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT,

BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES

INSOLVENCY AND COMPANIES LIST (ChD)

Mr Richard Spearman QC (sitting as a Deputy High Court Judge)

CR/2017/006788

Royal Courts of Justice

Strand, London, WC2A 2LL

Before:

Lord Justice McCombe

Lord Justice Leggatt

and

Lady Justice Rose

Case No: A3/2018/2504 and A3/2018/2517

In the Matter of Sprintroom Limited

And in the Matter of the Companies Act 2006

Between:
Edwin John Prescott
Appellant
and
Aristides George Potamianos
1 st Respondent
Sprintroom Limited
2 nd Respondent
And Between:
Aristides George Potamianos
Appellant
and
Edwin John Prescott
1 st Respondent
Sprintroom Limited
2 nd Respondent

Rebecca Page (instructed by Moore Blatch LLP) for Mr Prescott

Anthony Pavlovich (instructed by Blake Morgan LLP) for Dr Potamianos

Hearing dates: 2–4 April 2019

Approved Judgment

Lady Justice Rose

Lord Justice McCombe, Lord Justice Leggatt and

1

This is the judgment of the court on the two appeals before us in the matter of Sprintroom Limited (“the Company”) to which all members of the court have contributed.

Introduction

2

The appeals are brought from the order of 28 September 2018 of Mr Richard Spearman QC (sitting as a Deputy Judge of the High Court) giving effect to his judgment of 30 July 2018 in two separate sets of proceedings involving these parties. Before saying more, we wish to pay tribute to the judge for the care and industry that he brought to the task of deciding these not altogether straightforward disputes on their facts. Fortunately for him and for us, the underlying principles of law are not complex and are well established.

3

The first action was a claim by Sprint Electric Limited (“SEL”), the wholly owned subsidiary of the Company, against Dr Aristides Potamianos (“Dr Potamianos”) and his “service company”, Buyer's Dream Limited (“BDL”) in respect of certain intellectual property rights in software created by Dr Potamianos (which we will call “the Source Code Claim”).

4

The second action was a petition by Dr Potamianos, as minority shareholder in the Company, under sections 994–996 of the Companies Act 2006, claiming that the affairs of the Company were being carried on by Mr Prescott, as majority shareholder, in a manner that was unfairly prejudicial to Dr Potamianos's interests. Dr Potamianos sought an order in those proceedings that Mr Prescott should buy out his minority shareholding at a reasonable price.

5

At the end of the proceedings below, the primary results of the two cases and the relief granted by the order of 28 September 2018 were as follows:

(1) SEL's claim to ownership of the source code succeeded and Dr Potamianos was ordered to facilitate its delivery up. This, we understand, has been done in compliance with the order and there is no appeal against that part of the judgment.

(2) On the s.994–996 petition, it was ordered that Dr Potamianos's 40% shareholding should be bought out at a price to be determined by the court. This was to be subject, however, to future determination of the question whether various offers made by Mr Prescott to buy the shares meant that there had, in fact, been no unfairly prejudicial conduct in the affairs of the Company, with the result that the petition should be dismissed. That question was left over to a further trial of matters relating to the quantification of such of Dr Potamianos's claims as might require expert evidence.

(3) Any purchase of Dr Potamianos's shares should be at full pro rata value, without discount for the fact that his is a minority holding in the Company.

(4) There was to be a “Balancing Payment” to be made by SEL to BDL to reflect payments received by Mr Prescott's service company, Sameaim Limited (“Sameaim”), after the exclusion of Dr Potamianos from management, which had not been matched by similar payments to Dr Potamianos's service company, BDL. The judge ordered that a Balancing Payment of £4 should be paid to Dr Potamianos's company for every £6 paid to Mr Prescott's company in the relevant period.

(5) Costs were reserved.

(6) The judge granted permission to Mr Prescott and to Dr Potamianos to appeal on most of the grounds upon which they now appeal. Permission to appeal on one further ground was granted in this court.

6

There are, therefore, two appeals before us from the judge's order on the unfair prejudice petition. We return below to the detail of the grounds of appeal advanced by each party.

Background Facts

7

The fuller facts of the case can be found in the judge's judgment below [2018] EWHC 1924 (Ch). It is necessary, however, to set out a shorter summary (mostly taken gratefully by us from the judge's judgment) to introduce the issues on the appeals.

8

SEL was incorporated on 2 September 1987 by Mr Prescott and his previous business associate, Mr David Van Der Wee. Its business was in making small direct current motor drives, called “controllers”. This later expanded to include the making of higher power products. Some ten years later, Dr Potamianos, who is a specialist software creator, came to work for SEL, providing his services to SEL through BDL. Dr Potamianos had written a PhD thesis on digital drives and was recruited to help SEL acquire appropriate digital motor expertise. He became a director of SEL in 1999 with the title of Research and Development Director.

9

Both Mr Prescott and Mr Van Der Wee had provided their services to SEL via “service companies” to achieve fiscal advantages to them. When Dr Potamianos joined, Mr Prescott recommended that he too should operate through a similar service company arrangement. BDL was incorporated for this purpose on 11 March 1997. Thereafter, BDL entered into three service agreements with SEL on 8 May 1997, 27 March 2000 and 10 November 2015. Describing the arrangements between the parties at the beginning of his judgment, the judge said this (at paragraph 6):

“6. …it is clear that the parties were motivated by tax avoidance objectives when they entered into a number of key written agreements which are at the heart of these proceedings. Perhaps unsurprisingly, neither side suggested that the Court's approach to any of these agreements should be coloured by this consideration. However, it is impossible to ignore. Quite apart from any question of whether any of these agreements are tainted or ought not to be enforced according to their terms on these grounds, there is an element of artificiality concerning agreements of this kind which makes it difficult to construe them as if they were not geared to fiscal objectives.”

At paragraphs 22 and 23, the judge added:

“22. Both Mr Prescott and Dr Potamianos state that Dr Potamianos “joined SEL in 1997”. That form of words appears to recognise that SEL recruited Dr Potamianos personally.

23. Mr Prescott further states: “Being a small company we had difficulty competing financially with large corporations when recruiting high level technical people and the personal service company was a tool to enhance the tax efficiency of our remuneration package. The relationship between us was governed by the contracts and [Dr Potamianos] adhered to them”. That language, also, appears to recognise that Dr Potamianos was recruited personally, and that the utilisation of a service company was a mere tool for tax purposes, although it also asserts that the contracts were genuine.”

10

In 2007, Mr Van Der Wee was looking to retire and thoughts were given to selling SEL's business to an outside buyer. However, in the end, SEL bought back Mr Van Der Wee's shares for £600,000 and Dr Potamianos then bought a 40% holding in SEL for £400,000, leaving Mr Prescott holding the 60% majority.

11

At the same time as these share arrangements were made, Mr Prescott and Dr Potamianos entered into a Shareholders Agreement concerning their participation in the business of SEL. Under this agreement, there was provision for each of the participants to appoint one director for each part of his shareholding that represented at least 20% of the nominal value of the issued share capital of SEL. There was also a provision governing procedure in the event of deadlock arising from equality of votes at either board or shareholders meetings. We mention this because when disputes arose later, Dr Potamianos sought to invoke this deadlock procedure.

12

In 2012, the Company was incorporated as a holding company for SEL and also for the freehold of SEL's business premises at Arundel, a property known as “Peregrine House”. Mr Prescott and Dr Potamianos transferred their shares in SEL to the Company, receiving in return 60% and 40% shareholdings in the Company respectively. Both became directors of the Company.

13

In the meantime, in separate developments, on 2 March 2009 Mr Gary Keen was appointed a director of SEL with responsibility for sales. In April 2013, Dr Mark Gardiner was appointed technical operations manager at SEL. He became a director of SEL in June 2014 and of the Company, in circumstances to which we will return, in 2017. In 2013, Mr Prescott explained the move to Dr Potamianos as “…building the succession team”.

14

The judge found that, for practical purposes, Dr Potamianos was SEL's sole programmer, but he worked in conjunction with Mr Prescott, Mr Van Der Wee and other members of SEL's staff. The judge has described in detail the nature of Dr Potamianos's work and how he carried it out in developing SEL's product and the underlying software. This analysis was essential to the resolution of the Source Code Claim. However, while that claim forms important background to the unfair...

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