Jesner v Jarrad Properties Ltd
| Jurisdiction | Scotland |
| Judgment Date | 16 July 1992 |
| Docket Number | No. 4 |
| Date | 16 July 1992 |
| Court | Court of Session (Inner House - Second Division) |
SECOND DIVISION
Company—Members—Rights of members—Whether company's affairs being conducted in manner unfairly prejudicial to interests of shareholders—Whether share purchase order be made—Companies Act 1985 (cap. 6), secs. 459 and 4611
Company—Quasi-partnership—Winding up—Management of company subject to interdict by minority shareholders—Whether just and equitable for company to be wound up—Insolvency Act 1986 (cap. 45), sec. 122 (1) (g)2
The pursuers each held a 14.2 per cent shareholding in a private family company ("A Ltd.") along with a 9.9 per cent shareholding in another private company ("B Ltd.") which was owned by members of the same family. The pursuers sought an order under Pt. XVII of the Companies Act 1985 regulating the affairs of A Ltd. by interdicting that company and the majority shareholders in it from (i) alienating or burdening any assets of the company; or (ii) obliging the company to do so; or (iii) applying the proceeds of any disposal of assets otherwise than by retaining them in the company for its members' benefit, except insofar as such conduct as was covered by (i) to (iii) was in the ordinary course of business with the consent of all of the members; or (iv) dealing with the company's assets other than in transactions at arm's length and for value. They also sought an order under sees. 459 (1) and 461 (2) (d) of the 1985 Act requiring both companies and four directors of A Ltd. to purchase their shares in A Ltd. Alternatively, they sought an order under sec. 122 (1) (g) of the Insolvency Act 1986 to wind up A Ltd. on the ground that it was just and equitable to do so.
The pursuers argued that unfair prejudice had been suffered by them in terms of sec. 459 of the 1985 Act because: (i) A Ltd. had granted a standard security over the trading overdraft of B Ltd. in 1986 and A Ltd. had granted interest-free loans to B Ltd. from 1979 onwards, in breach of A Ltd.'s memorandum and articles of association; (ii) an amendment to A Ltd.'s memorandum had been inserted at a purported extraordinary general meeting in 1986 which had in fact never taken place authorising the security arrangements for B Ltd.; and (iii) a threat had been made by a director of both companies in 1989 that he would put away the assets of A Ltd. to pay the debts of B Ltd. The sheriff concluded that in deciding whether or not there had been unfairly prejudicial conduct the court had to look at the whole background and history of dealing between the two companies. Prior to 1989 the companies had been run with total disregard for company law and the contents of the memorandum of association, the directors regarding the operation of both companies as, in effect, one family business. No formal meetings of shareholders were called and company accounts were never issued to shareholders. The directors had, however, acted bona fide throughout for the benefit of the family as a whole. So far as the standard security was concerned, the original security had been in respect of B Ltd.'s trading overdraft and the 1986 arrangement had had the effect of simply transferring one creditor for another. There had been a long history of intercompany loans which had saved substantial overdraft interest. The defenders accepted that no extraordinary meeting had been held to amend A Ltd.'s memorandum but that amendment had only been required for the purposes of the 1986 security. The defenders also accepted, after legal advice, that they could not act in the manner threatened with regard to A Ltd.'s assets and had granted an undertaking not to act in that way. The sheriff granted the interdict order but refused the order under sees. 459 and 461 of the 1985 Act. He also found that A Ltd. was a quasi-partnership but refused a winding-up order under sec. 122 (1) (g) of the 1986 Act for the same reasons as the refusal of the 1985 Act order. The pursuers thereafter appealed to the Court of Session.
Held (1) (of consent) that the test the sheriff had to apply in relation to sec. 459 (1) was an objective one; (2) that, applying that test, the sheriff had been entitled to take into account the prior relationship of the two companies and that those who made the arrangements had been acting bona fide and in what they conceived to be the best interests of the family; and, accordingly, (3) that there had been no unfair prejudice; but (4) that the sheriff had erred in applying the same reasons to his refusal to wind up A Ltd. for the statutory provisions allowing for the making of a share-purchase order were completely different from those governing a winding-up order on the just and equitable ground; (5) that, A Ltd. being a quasi-partnership, the pursuers need only establish that there had been a genuine breakdown in mutual confidence due to actings of the defenders for which the pursuers were not responsible; and (6) that that breakdown in confidence had been established on the evidence, the interdict in particular being inconsistent with the concept of trust upon which a quasi-partnership was founded so that it would be just and equitable to make a winding-up order; and appeal continued to allow parties to consider their position in light of the court's decision.
David Jesner and Philip Jesner brought an action against Jarrad Properties Limited, J. Jesner & Sons Limited, Isaac Jesner, Joseph Jesner, Louis Jesner, Rebecca Shields, Adrian Jesner and three others in the sheriffdom of Glasgow and Strathkelvin at Glasgow in which they craved the court: "To make an order requiring Jarrad Properties Ltd., Isaac Jesner, Joseph Jesner, Louis Jesner, Adrian Jesner and J. Jesner & Sons Ltd. or any one or more of them to purchase the shares of the pursuers at a price to be hereafter determined which represents, as at the date of the presentation of this application, that proportion of the value of the whole shares on issue which the nominal value of the pursuers' shares bears to the nominal value of the whole shares on issue such valuation to be carried out adding back the following: (1) The sum of £73,805.18 less such amount as was secured over the property at 384/402 Tantallon Road in favour of J. Jesner & Sons Ltd. as at 6th June 1964 and any accretions of interest on such amount with interest thereon at the rate of 15 per cent per annum from 27th January 1989 until payment or alternatively with interest thereon at such rate as may subsequent to 27th January 1989 have been obtained until the bringing of this application and thereafter at the judicial rate. (2) The whole interest-free loans of no fixed term made by Jarrad Properties Ltd. to J. Jesner & Sons Ltd. (3) The whole sums representing the interest which, but for the said loans by Jarrad Properties Ltd. to J. Jesner & Sons Ltd. having been interest free, would have been paid by J. Jesner & Sons Ltd. in borrowing from time to time funds of like amount on like terms but bearing interest in a transaction at arms length with a commercial lending source, and to allow the parties a proof relative to the valuation of the pursuers' interest and quantification of the said add backs."
The cause came to proof before the sheriff (B. A. Lockhart) who, at advising on 17th January 1990, pronounced decree for interdict butquoad ultra refused the pursuers' motions.
In the note annexed to the sheriffs interlocutor, the sheriff set forth,inter alia, that: "The company of J. Jesner & Sons Ltd. was formed in 1924. Three directors were Isaac, Louis and George Jesner. The brothers decided to purchase a company known as Lambert Engineering Ltd. in 1949. This company was run by George Jesner and J. Jesner & Sons Ltd. was run by Isaac and Louis Jesner until 1963 when the three brothers decided to sell Lambert Engineering Co. Ltd. The proceeds of the sale were divided into 13 portions. Each of the seven children of the brothers received one thirteenth, and the three brothers received two thirteenths each. George Jesner at that time returned to J. Jesner & Sons Ltd.
"In 1963 the three brothers set up a company, Jarrad Properties Ltd., investing initially their shares in the sale proceeds of Lambert Engineering Co. Ltd. The purpose of the new company was to provide money for the seven children of the three brothers when they grew up. The seven children, namely David, Philip and Jeffrey, the sons of George Jesner, Rosemary and Joseph, the daughter and son of Isaac Jesner, and Rebecca and Adrian, the daughter and son of Louis Jesner were each allocated 142 shares in the company. George, Isaac and Louis Jesner were allocated two shares each. Various heritable properties were purchased with the capital available. Income was received by Jarrad Properties Ltd. from leasing these heritable properties.
"Isaac Jesner personally purchased the land and then built on it the garage at 402 Tantallon Road, Glasgow, in 1939. This was occupied by J. Jesner & Sons Ltd. in connection with their garage business. Isaac Jesner transferred this property to Jarrad Properties Ltd. on 28th April 1964. Although the conveyance to Jarrad Properties Ltd. purported to record the transfer had been in respect of a sale at £10,000, in fact no sum was received by Isaac Jesner from the company.
"The Tantallon Road property had been conveyed by Isaac Jesner to the Clydesdale Bank before 1963 in security of the overdraft of J. Jesner & Sons. When the garage premises were transferred by Isaac Jesner to Jarrad Properties Ltd., the security which he had granted was discharged and Jarrad Properties Ltd. then granted an ex facieabsolute disposition in favour of the Clydesdale Bank, to continue the security of the overdraft of J. Jesner & Sons Ltd. The security deed was signed by the three brothers and recorded in the General Register of Sasines on 6th June 1964. A minute of agreement was entered into allowing J. Jesner & Sons Ltd. to occupy the property at Tantallon Road which was owned by Jarrad...
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