Grace v Biagioli and Others

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
JudgeMr Justice Patten
Judgment Date04 November 2005
Neutral Citation[2005] EWCA Civ 1222
Date04 November 2005
Docket NumberCase No: A3/2005/0083

[2005] EWCA Civ 1222

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

CHANCERY DIVISION COMPANIES COURT

BRISTOL DISTRICT REGISTRY

Royal Courts of Justice

Strand, London, WC2A 2LL

Before

Lord Justice Mummery

Lord Justice Mance and

Mr Justice Patten

Case No: A3/2005/0083

Between
Mr Lawrie Grace
Appellant
and
(1) Marcello Biagioli
(2) Stephen Van Loggerenberg
(3) Cathleen Johannessen
(4) Titanium Electrode Products Limited
Respondents

MR MARK HUBBARD (instructed by Brethertons of Rugby) for the Appellant

MR MALCOLM D WARNER (instructed by Wards of Bristol) for the Respondents

Mr Justice Patten

Introduction

1

This is the judgment of the Court. The Petitioner, Mr Lawrie Grace, appeals against the judgment of His Honour Judge Weeks Q.C. (sitting as a Judge of the High Court) given on 30 September 2004 on the hearing of a petition under section 459 of the Companies Act 1985, which relates to the fourth named Respondent, Titanium Electrode Products Limited ("Telpro UK"). Telpro UK has an authorised share capital of £1000 divided into 1000 shares of £1 each. Of these, 100 shares have been issued and are fully paid up. The Appellant and the First- Third Respondents (whom I will refer to as "the Respondents") each hold 25 shares. Until May 2003, the Appellant (along with the Respondents) was also a director of the company.

2

At an AGM of Telpro UK held in December 2002, it was agreed that there should be a dividend of £80k declared and paid in respect of the year ending 31 December 2002, which would be distributed to the four shareholders in equal shares. Mr Grace alleges that on 3 April 2003, the Respondents decided without his knowledge or consent and contrary to what had been agreed in December 2002 that the distributable profits of Telpro UK for the year ending 31 December 2002 should be distributed to the Respondents alone. The judge found that the profits were wrongly stated in the Company's accounts for 2002 and that the Respondents had received the profits which would otherwise have been available to meet the dividends as what he described as unearned management and other fees.

3

On 9 May 2003 at an EGM of the company the Respondents also purported to remove the Appellant as a director.

4

On 15 August 2003, the Appellant presented a petition in which he relied on the non-payment of the dividend and his removal as a director, as instances in which the affairs of Telpro UK have been conducted in a manner which was unfairly prejudicial to him as a member of the company. He sought an order requiring the Respondents to purchase his shares in the company at a price to be determined by the Court. The petition alleged in terms that agreements had been made between him and the Respondents prior to the formation of Telpro UK that they would go into business together and would become directors and shareholders in a company which would be conducted as a joint venture or quasi –partnership. It was agreed that each of them should have a 25% shareholding and would be a director, but that the First Respondent (Mr Biagioli) would manage Telpro UK and control its day to day administration. The initial funding for the company's operations was to be provided by Mr Biagioli through his company, Biagioli Ltd, which would supply goods and services to Telpro UK at cost plus 10%. Each of the shareholders would indemnify Mr Biagioli against losses up to a limit of $25,000, but the salary paid to Mr Biagioli and any other material payments would, like the payment of dividends, require the unanimous agreement of all shareholders.

5

On the basis of this agreement, Mr Grace subscribed for 25 shares in Telpro UK and gave the indemnity referred to. Similar arrangements were put into effect in relation to the formation of a US company, Titanium Electrode Products Inc ("Telpro Inc") and a French company, Titanium Electrode Products SARL ("Telpro SARL"). Telpro Inc was set up and managed by the Third Respondent Mrs Johannessen. The Appellant subscribed for 250 shares in this company and advanced to it the sum of $25,000. Later in 2001, he left his former employment in Singapore and set up Telpro SARL in France. He was a 25% shareholder in this company which he managed and supplied with goods and services through Helm Services SARL, ("HELM") a company which he owned and controlled.

6

At the conclusion of a four day trial during which Mr Grace and the Respondents were extensively cross-examined the judge held that unfair prejudice had been established in respect of the failure to pay the dividend in accordance with what had been agreed in December 2002. He rejected the other complaint holding that the Respondents had sufficient cause to justify the Appellant's removal as a director because he had been negotiating to acquire a company dealing in the same line of business as Telpro UK and had therefore put himself in a position of actual or potential conflict with his duties as a director. The judge also declined to make an order requiring the Respondents to purchase the Appellant's shares. He held that the appropriate relief or the non-payment of the dividend was to order Telpro UK (not the Respondents) to pay the Appellant the sum of £20k with interest from 5 April 2003.

7

There are two principal challenges to the judgment contained in the amended grounds of appeal. First, it is said that the judge was wrong to conclude that the removal of the Appellant as a director of Telpro UK was not unfair to him within the meaning of s.459(1) as a member of Telpro UK. His removal, he submits, was the culmination of a series of repeated breaches by the Respondents of agreements made between the shareholders referred to in the petition which related both to Telpro UK and to the French and US companies. Telpro SARL which was set up by the Appellant as part of the joint venture with the Respondents, provided the Appellant with his principal source of income after 2001. His conduct in seeking an alternative living from the purchase of a company with a similar business was on his case the direct consequence of the Respondents' attempts to close down the business of Telpro SARL. It has, he says, to be viewed in that wider context. In any event, it is said that his negotiations for the purchase of the other company did not in fact compromise his position as a director.

8

The second main ground of the appeal relates to the remedy which the judge granted. Although the judge found that the non-payment of the dividend did amount to unfair prejudice, it is contended that he took far too narrow a view of the underlying reasons for it and of the seriousness of what was in fact done. As in the case of his removal as a director, Mr Grace contends that the non-payment of the dividend was not an isolated incident, but was part of a wider decision taken by the Respondents to exclude him from participating in Telpro UK or from deriving any benefit from the company as a shareholder. The non-payment of the dividend not only contravened the decision taken at the AGM in December 2002. It also represented he says, a repudiation of the basic agreements made between him and the Respondents prior to the formation of the English company. He therefore contends that the non-payment of the dividend and its distribution amongst the three other shareholders is symptomatic of a complete breakdown in relations between them and indicates that the Respondents will never willingly allow him to obtain any further benefit from his shareholding in Telpro UK. The accounts for 2002 were drawn up so as to deliberately conceal the existence of distributable profits and it was submitted to us that the 2003 accounts also indicate that the distributable profits have been reduced by unusually high overheads.

9

It is therefore said that the judge was wrong to conclude that the non-payment of the 2002 dividend was an isolated incident which was unlikely to be repeated and that this characterization of it led him into error when exercising his discretion as to remedy. The Appellant submits that there were no circumstances which justified the judge in his refusal to make the buy-out order sought and that the remedy he granted was not only wrong in principle, but also failed to take account of the wider picture and the seriousness of the Respondents' conduct.

10

The appeal therefore represents a challenge both to the judge's findings of fact and to the basis on which he came to exercise his discretion in relation to the remedy he granted. It is therefore necessary to begin by outlining the background to the events which gave rise to the petition.

The Background Facts

11

It was common ground before the judge that the formation of Telpro UK and subsequently Telpro Inc. and Telpro SARL arose out of a meeting between the Respondents and Mr Grace which took place in 1998 in Bristol over the August Bank holiday weekend. What linked the four were their connections to and experience in what the judge referred to as the CP industry. CP stands for Cathodic Protection, which is a technique to prevent steel from rusting by the use of electrical currents. As an applied process, CP utilises titanium anodes which are coated with mixed metal oxides (commonly iridium or platinum) in order to prevent their degeneration caused by the electrochemical reaction from the electrical current. This generates by-products in the form of acidity and gases which would otherwise corrode the anode. The mixed metal oxides also assist in passing the electrical current from the anode to an electrolyte.

12

The evidence before the judge was that Telpro UK's expertise lay in applying the mixed metal oxide...

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