Ian Andrew Fowler V. Mark Gruber For An Order Under Section 459 Of The Companies Act 1985

JudgeLord Menzies
Neutral Citation[2009] CSOH 36
CourtCourt of Session
Published date10 March 2009
Docket NumberP1881/07
Date10 March 2009


[2009] CSOH 36



in the petition of







An Order under Section 459 of the Companies Act 1985


Petitioner: Gillies, Solicitor Advocate; McGrigors, LLP

Respondent: Sandison; Maclay Murray & Spens

10 March 2009


[1] The petitioner seeks an order under sections 459 and 461 of the Companies Act 1985. The petitioner owns 28.57% of the issued share capital in Completion Products Limited ("the company"). The respondent is the sole director of the company and owns 57.15% of the issued share capital in it. The other shareholders are Charles Moncur (who owns 9.52% of the issued share capital) and Aberdeen City Council (which owns 4.76% of the issued share capital). The petitioner avers that the respondent has conducted, and is conducting, the company's affairs in a manner which is unfairly prejudicial to the interests of the company's members, and in particular to the interests of the petitioner. (The statutory provisions on which this petition is based have now been superseded by sections 994 and 996 of the Companies Act 2006). The company was incorporated on 3 August 2000.

[2] By way of background, the petitioner and the respondent were each, together with Iain Murray, employed by Lasalle Engineering Limited ("Lasalle") for a period of some years during the late 1980s and early 1990s. Lasalle was engaged in inter alia the manufacture of cable protectors for use in the oil exploration and extraction industry. In about 1993 the petitioner left Lasalle to form his own company Well Management Systems Limited. In about 1996 the petitioner set up Cable Protection Systems Limited ("CPS"); CPS was established to manufacture cable protectors in direct competition with Lasalle. The respondent and Iain Murray each left Lasalle and joined CPS. The petitioner worked as managing director of CPS and was primarily concerned with management and sales; the respondent had design expertise and was primarily involved in designing specific products for customers; and Iain Murray was the operations manager, with responsibility for purchasing and production. The petitioner owned 30% of the issued share capital of CPS, as did Charles Moncur, and the respondent and Iain Murray each owned 20%.

[3] CPS was subsequently absorbed into the Polymer Holdings group of companies under a share exchange agreement, under the overall management of a Mr Graeme Speirs. By late 1999 the petitioner became dissatisfied at the way in which central overheads and running costs of the Polymer Group were being allocated to CPS. The petitioner found it increasingly difficult to work with Mr Speirs, and in about mid-1999 the petitioner began to put together plans to form the company. What ensued was the subject of some dispute in the evidence. What is clear however, is that the petitioner was the subject of a restrictive covenant in his contract of employment with CPS, which prevented him from being directly involved for a period of one year in a competitive business. Nonetheless, he involved himself in the planning of the new entity, whether by way of management buy out or formation of a new company. He left the employment of CPS, and subsequently persuaded the respondent and Iain Murray to leave CPS also and to join the company. Initially, before Iain Murray and the respondent left their jobs with CPS, there had been discussions in which it had been suggested that the petitioner, the respondent and Mr Murray should each own one third of the issued share capital of the company. The authorised share capital of the company was £100,000, made up of 200,000 ordinary shares of 50 pence each. In the event, the petitioner became the beneficial owner of 40,000 ordinary shares, and the respondent and Iain Murray each became the beneficial owners of 30,000 ordinary shares. Each man obtained a personal loan in order to purchase their shareholding. The respondent held the petitioner's shares as his nominee as the petitioner was concerned about the existence of the restrictive covenant in his contract of employment with CPS. For the same reason, the petitioner did not with to become a director of the company. Initially, Iain Murray became the managing (and sole) director of the company, but he did not wish to hold this position, and after a very short time the respondent became the sole director of the company. In December 2000 the petitioner sold 25% of his shareholding to Charles Moncur. Subsequently an additional 5000 ordinary shares in the company were issued and allocated to Aberdeen City Council as part of a loan agreement between Aberdeen City Council and the company. In August 2003 the respondent acquired the whole of Iain Murray's shareholding in the company. He funded the acquisition of these shares by means of a loan from the company which was subsequently written off. (The respondent has since repaid this loan to the company, together with interest thereon.)

[4] Since its formation the respondent has effectively been solely responsible for the conduct of the company's affairs. The petitioner avers that this has been unfairly prejudicial to his interests. He avers that his rights as a member of the company are governed primarily by the agreement among the Founders and secondly by the Articles of Association of the company.

[5] The petitioner avers that the respondent's conduct of the company's affairs was unfairly prejudicial to his interests in several distinct respects, as follows:-

(i) Contrary to the Founders' Agreement, the petitioner has been wholly excluded from the management of the company. This is also averred to be contrary to the terms of the trust in which the respondent held the petitioner's shares in the company. In addition, it is averred that the respondent has not co-operated with the petitioner's attempts to determine the true financial position of the company; that the respondent has failed to consult with the petitioner in terms of the Trust Deed in favour of the petitioner, and by excluding the petitioner's input, the respondent has acted in violation of his obligation as director of the company to operate it in the best interests of its shareholders.

(ii) In August 2003 the respondent borrowed £20,000 from the company (which loan the respondent caused the company to write off in October 2004 without any capital or interest having been repaid). This loan was in breach of sections 151, 330 and 342 of the Companies Act 1985. At the time that this loan was made, the company had only £2,053 in cash in its bank account and its net current assets were minus £95,070. No dividends had been paid (nor have they ever been paid). The purpose of this loan was to enable the respondent to purchase Iain Murray's 30,000 shares in the company, which gave him control over the company and fundamentally altered the original voting structure of the company agreed between the Founders. The petitioner avers that in taking this loan in order to control the company and in writing it off, the respondent endangered the already vulnerable finances of the company, in violation of his obligation to operate the company in the best interests of its shareholders such as the petitioner.

(iii) Between 2001 and 2005 the company met legal and administrative costs incurred by the respondent in connection with court proceedings against him by Polymer Holdings Limited totalling about £95,000. This litigation did not relate to the respondent's discharge of his duties as director of the company nor was it litigation for company purposes. The company did not record any profit in any of the years ending September 2001, 2002 or 2003. The payment of these costs is averred to have been contrary to sections 330 and 342 of the Companies Act 1995 and furthermore endangered the vulnerable finances of the company, contrary to the respondent's duty to operate the company in the best interests of the shareholders.

(iv) In the financial years ending September 2003 and September 2004 the company made payment into the respondent's pension scheme of £5,430 and £6,360 respectively. In the financial years ending September 2005 and 2006 these payments increased to £159,672 and £137,956 respectively. No dividends were declared. The payment in the year to September 2005 is averred to be disproportionate and excessive given the financial position of the company. Furthermore, the company's accounts for the year ended September 2005 stated that the director's emoluments amounted to £69,405 whereas they were in fact £229,077, which error was liable to mislead any party reading the accounts and in particular the petitioner. These payments endangered the finances of the company contrary to the respondent's duty to operate the company in the best interests of the shareholders. Furthermore, the respondent's remuneration for the 19 month period ended 30 April 2007 totalled £438,000, which was excessive and took up sums which might otherwise have been available for the declaration of dividends.

(v) In 2005 the company purchased a car valued at £36,736 for the respondent's exclusive use. In that year the company recorded a retained profit of £137,956 and declared no dividends. It is averred that the purchase of this vehicle was excessive and disproportionate and that this endangered the finances of the company contrary to the respondent's duty to operate the company in the best interests of the shareholders.

(vi) In the financial year ending September 2006 the respondent borrowed a further £10,000 from the company in breach of sections 330 and 342 of the Companies Act 1985.

(vii) In around May 2007 the respondent issued additional share capital in the company for £400,000 for the purpose of his purchasing a property and in any event with the intention of diluting the petitioner's interest in the business. In around November...

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