Harborne Road Nominees Ltd v Karvaski and another

Hearing dates: 11 July 2011

Introduction

On 11 July 2011 I heard an application by the respondents to the petition, seeking an order that it be struck out as an abuse of process or alternatively that summary judgment be granted in their favour. The ground relied on is that the first respondent, Mr Karvaski, has made an offer or offers to purchase the shares in the second respondent company ("Sitewatch" or "the company") beneficially owned by Mr Paul Morris, (who is the effective complainant) the refusal of which was unreasonable and that in consequence the continued prosecution of the petition is either an abuse or is bound to fail, for the reasons set out in the well-known judgment of Lord Hoffmannn in O'Neill v Phillips [1999] UKHL 24. At the end of the hearing I announced my conclusion that the application should be refused, for reasons which I would set out in a written judgment. This is that judgment.

Sitewatch is a private company limited by shares. All the shares are registered in the name of Harborne Road Nominees Ltd, but it is common ground that it holds 50% of the shares as nominee for Mr Morris and 50% as nominee for Mr Karvaski. The petition is brought at the instance of Mr Morris, and henceforth when I refer to "the Petitioner" I am referring to Mr Morris, as the parties have done for convenience.

The following summary of the facts is largely as contended for by Mr Morris. These facts are in dispute in many respects, but since this is the application of the respondents, I must proceed on the assumption that Mr Morris will make out the facts that he contends for at trial. It is not part of the application that he has no reasonable prospect of doing so.

Mr Morris has a business, P&R Morson & Company Ltd ("PRMC"), which trades as a general services building contractor. Mr Karvaski's specialist expertise is in the supply and installation of alarms and CCTV. PRMC has a requirement for such services to be supplied as a subcontractor on projects that it is working on, and may also be in a position to influence the choice of employers and architects engaged in such projects wishing to place separate direct contracts for those services. In 2001, Mr Morris and Mr Karvaski agreed to incorporate Sitewatch as a joint-venture company to provide those services, together with access control and security services.

Mr Karvaski became a director of the company. Mr Morris was not appointed a director, but it is his case that the company operated on the basis that the two were equal partners in it and would co-operate fully with each other and jointly participate in all the decision-making. On Mr Morris's evidence, regular bi—monthly meetings were held between the two men at which management decisions were taken, Mr Morris taking part as if he were a duly appointed director of the company. On Mr Morris's case, it was intended that, as the company became known in its field, customers or potential customers of PRMC for relevant work would be referred to it, or subcontracts would be placed with it, but it was recognised that there was no obligation to do so on an exclusive basis.

In particular, Mr Morris's case is that it was agreed between the two men

i) that the company would operate a specific dividend policy, i.e. that profits made would be divided into three parts, one third being distributed to each of them (up to a maximum of £100,000 in any year) and the balance being retained in the company as working capital,

ii) that the company's operating budget would be agreed by both of them, and

iii) that Mr Karvaski would receive remuneration by way of salary (including a salary paid to his wife); the amount of that remuneration, and the remuneration of other employees, being a matter to be agreed between the two of them. The amounts agreed rose over time. By about the beginning of 2010, Mr Morris and Mr Karvaski agreed a budget for the financial year 2010–2011 in which Mr Karvaski and his wife would be paid a combined annual salary of approximately £88,000. In addition, each of Mr Morris and Mr Karvaski was to receive a further amount of £10,000 by way of remuneration (later increased to £13,000), before the distribution of profits by way of dividend.

Mr Morris, although not a director, was a named signatory on the company's bank account, and had access to its bank statements and other financial information, in part because Sitewatch paid a fee to use the services of employees at PRMC to draw up its management accounts from the prime financial records and to manage its payroll. As well as attending board meetings himself, another director (Mr Roger Williams, an employee of PRMC) was appointed in part to act as Mr Morris's effective representative within the company. No cheque could be issued without the signature of either Mr Morris or Mr Williams.

The company was clearly anticipated to be highly profitable; the budget referred to predicted profits of approximately £474,000 for the year, out of which £200,000 would be applied in paying dividends in accordance with the agreed policy.

On Mr Morris's case, the company continued to be run in this manner until he received a letter dated 26 November 2010 written by Mr Karvaski's solicitors Harvey Ingram (bundle, p99). That letter referred to the establishment of the company, the equal beneficial ownership of shares, and the past payment of dividends as I have set out. It went on:

" In addition to the dividend payments, we understand that you have also received a further sum of £10,000 per annum (now increased to £13,000 per annum) from Sitewatch over the course of the past four years for which Sitewatch receives little or no benefit. We understand that this sum was paid to you, on your insistence, to match an increased salary amount that was paid to our client, and notwithstanding that you are not an employee of Sitewatch. Our client receives a salary of £67,000 per annum (including the additional payment of £13,000). Our view, and that of our client, is that this salary level is a very modest one and one which does not bear scrutiny when compared to market rates applicable to Managing Directors of similar companies to Sitewatch. This is especially so when the input our client gives to Sitewatch is taken into account.

Over the course of the last nine years (since the incorporation of Sitewatch) and more particularly over the course of the last three years, our client has been the person responsible for bringing in business to Sitewatch and has effectively been the sole driving force behind it. Without our client's input and his marketing/business development skills, Sitewatch would not be in the position that it presently is and, we believe, [it] is highly likely that it would in fact not be in existence any longer.

Our client accepts that you have added some value to the business over the last few years, and also provided valuable assistance in the first two years of the business. Whilst our client is grateful to you for this, the present position is that you have not,… for some time now, carried out an active role in the business. We understand that you no longer have any active involvement whatsoever in relation to Sitewatch.… The understanding between yourself and our client, when the shares were initially allocated, was that you would provide input to Sitewatch and act in its best interests. Part of that understanding was that you would promote Sitewatch's interests wherever possible and use your influence where appropriate to gain work for Sitewatch.

We understand that Sitewatch has paid significant sums of money over time to [PRMC]…these sums have been paid for various services, including the preparation of management accounts and dealing with the payment of wages to Sitewatch's staff. However our client has seen very little, if anything, by way of return business from [PRMC] despite your influence with that company. We understand that other competitors of Sitewatch have been favoured by [PRMC] even when you have been in a position to pass work to Sitewatch.

For the avoidance of doubt, Sitewatch will no longer be utilising the services of [PRMC] in relation to the preparation of management accounts, the payment of wages to Sitewatch's staff or any other services.

The purpose of this letter is also to inform you that Sitewatch is unlikely [to] declare any dividends during the current financial year and may not do so during the course of the next financial year. As you will be well aware, Sitewatch has no fixed dividend policy in any event and is considering the reinvestment of all of its profits (if any are available). In addition to that the Board of directors intends to resolve to increase our client is remuneration from the company by way of commission and/or an increase in salary and/or an appropriate bonus payment…

Our client believes that it would…be in the best interests of Sitewatch for you to no longer remain as a shareholder. … Our client would be willing to purchase your share holding in Sitewatch at a price to be agreed between you and our client or, in default of any agreement, to be determined by an independent expert jointly appointed …

We would be grateful to … hear from you as...