John Cusack (Petitioner) v James Holdsworth and Another
| Jurisdiction | England & Wales |
| Judge | Mr. Registrar Briggs |
| Judgment Date | 29 November 2016 |
| Neutral Citation | [2016] EWHC 3084 (Ch) |
| Docket Number | Case No: 4827 of 2015 |
| Court | Chancery Division |
| Date | 29 November 2016 |
[2016] EWHC 3084 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
IN THE MATTER OF QUANTUM SURVEY MANAGEMENT LIMITED
AND IN THE MATTER OF THE COMPANIES ACT 2006
Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL
Mr. Registrar Briggs
Case No: 4827 of 2015
Mr Alexander Brown (instructed by Birketts LLP) for the Petitioner
Mr Newington Bridges (instructed by Porter Dodson) for the Respondents
Hearing dates: 7–11 November 2016
Introduction
Quantum Survey Management Limited ("Quantum" or the "Company") is a small company limited by shares. It provides design, project and management services to the construction industry generally, but specialises within the insurance reinstatement market. Mr Cusack and Mr Holdsworth are co-directors and equal shareholders.
Mr Cusack presents a petition for relief from unfair prejudice under s 994 of the Companies Act 2006. He asks for an order that he buy out Mr Holdsworth's 50% shareholding and that Mr Holdsworth pay compensation or damages to Quantum for alleged wrongdoing. The Court is asked to determine whether or not the activities of Mr Holdsworth are unfair and prejudicial and if so to make appropriate orders.
Background facts
Mr Cusack and Mr Holdsworth met in 2010. At that time Mr Cusack was the Managing Director of Nationwide Surveying Services Limited based in Doncaster, South Yorkshire. Mr Holdsworth was the managing director of a company known as Property Consortium Limited and a consultant to Nationwide Surveying Services. They had a common desire to control their work-life destiny through their own business, and set about forming, promoting and incorporating Quantum on 16 August 2011. Some staff from Nationwide Surveying Services joined the new enterprise. Mr Cusack's role was to manage staff, develop the business, control the finances, provide technical support and act as a key client contact. Mr Holdsworth was appointed as Commercial Director and his primary functions were client development, marketing, sales and business development.
Initially the Company had three shareholders: David Hargreaves held 10% of the share capital and the remainder was divided equally between Mr Holdsworth and Mr Cusack. In October 2011 the shareholders engaged Mr Phillips of Dixon Phillips Solicitors to produce a shareholder agreement ("SHA") to regulate the relationship of members. The significance of SHA is an issue between the parties.
Mr Cusack and Mr Holdsworth each purchased 5% of Mr Hargreaves shares in June 2014 following a dispute in 2012. Mr Hargreaves plays no part in these proceedings.
The business operation of Quantum is common ground. A property owner will have the benefit of an insurance policy. The insurer indemnifies the property owner for works that need to be undertaken as a result of an insurable event. Quantum invoices the property owner for the time spent or on the basis of a percentage of the contract value. As is usual in the trade there is a defect liability period following practical completion during which a retention is held. That sum is paid to the contractor at the end of the period. The invoices raised by Quantum are paid indirectly by the insurance company.
The business grew fast. In the first seven-month accounting period it had a turnover of £168,166 and by the year ending 31 March 2014 it had reached £884,027. Profits before tax climbed from £30,000 to £420,000. The parties had a different view as to how or whether to reduce corporation tax. This difference was a trigger to a complete break-down in their relationship.
Quantum started trading from its registered office in Sheffield, but by the end of 2013 it had developed a client base in the South-West of England. The Sheffield office is run by Mr Cusack. To assist with serving the client base in the South-West, Mr Holdsworth ran an office from his home near Bridgewater in Somerset. If an employee of Quantum worked on a job in the South-West they would, more often than not, stay at Mr Holdsworth's home. Mr Holdsworth said in evidence that this arrangement saved money. Mr Cusack would also travel to Bridgewater for meetings and to attend functions. Again he would stay with Mr Holdsworth and his partner Ms Daisy Cheng. Ms Cheng worked as Quantum's book keeper. More staff were required as the business grew. Mr Matthew Dearing joined the Company and was assigned to the South-West in 2014. He was a trainee surveyor and Mr Holdsworth says that the Company offered to pay his university fees to undertake a part time masters degree in building surveying. Mr Cusack challenges the agreement that Quantum would pay the university fees and in particular challenges the payment of fees paid by Quantum on behalf of Mr Holdsworth. He classifies the payments as unauthorised.
Although little evidence was given on the issue, the Company made a successful take-over of another surveying practice, Surveying Management Services Limited ("SMS"). The client base and work of SMS was quickly absorbed by Quantum following which SMS was placed into liquidation. The financial statements (but not the filed accounts) show an investment of £200,000 in the year ending 2014, but the sum was later written-off. The only expert called to give evidence, Ms Fiona Hotston Moore, explained the write off as representing the cost of investing in the take-over of SMS and its subsequent liquidation.
Disputes and division
Mr Cusack gave evidence that his engagement with Mr Holdsworth decreased as the business grew. This was mostly due to their different working locations. Mr Cusack complains that "recording of work to the Company and within the designated Company systems became less frequent until, by December 2014, James had stopped accounting to the Company for his time and work. From December 2014 onwards, he did not report to the Company for the work he was carrying out." Mr Holdsworth does not disagree but explains that the claim volume of new instructions received by Quantum was reducing in Sheffield but increasing in the South-West during 2014. His unchallenged evidence on this point is that in the period March 2014 to April 2015, 75% of all new instructions related to business in the South-West.
Mr Holdsworth's evidence is that the work differential between the two geographical locations forced the directors to consider staffing levels: to increase staff in the South-West and possible redundancies in Sheffield. This was an issue over which the directors disagreed. Mr Cusack's oral evidence was that there was never any need for redundancies in Sheffield. As it happens two members of staff resigned reducing the overheads of the Company in the Northern office.
Mr Holdsworth and Mr Cusack met in January 2015 for the purpose of discussing targets for fee income in the Sheffield office. Mr Holdsworth says they agreed that the office should have a target for new work. In February 2015 he became concerned about the viability of the Company as no new work had been procured by the Sheffield office. It is common ground that on 26 February 2015 Mr Holdsworth incorporated a new company with a similar name: Quantum Survey and Project Management Limited ("Project"). Project's registered address at that time was the home of Mr Holdsworth and Ms Cheng. It is agreed between the parties that the incorporation of Project was done without the prior approval or knowledge of Mr Cusack.
Mr Holdsworth met with Mr Cusack the next day. Mr Holdsworth says that this was the occasion when they first discussed dividing the Company: one in each of the existing geographical locations. Mr Cusack says that "there has never been any suggestion by me of creating two companies based on the "North and South Offices". Mr Holdsworth says that the meeting was strained, they discussed targets and he suggested that he should purchase an office in the Bridgewater area with funds provided through his pension.
Ms Cheng instructed an ex colleague, Mr Lewis, who worked at accountants Dixon Walsh to advise on various issues including pension contributions. Mr Lewis was provided with the sage accounts, filed Company accounts and he asked for further information regarding the current level of pension payments. In an e-mail dated 17 March 2015 Ms Cheng wrote "[b]oth John [Cusack] and James [Holdsworth] are looking to pay £120,000 each into their pension". On 18 March Mr Cusack responded to Mr Holdsworth to say that he had taken tax advice from "a very senior Tax partner from Deloitte and explained the situation and our current predicament". Mr Cusack advised Mr Holdsworth that "based on recent events and the state of the business I think the proposal to pay £120k into each of our pensions and then loan money back to the business is reckless and short sighted. Therefore, I do not agree to any payments to our pensions unless agreed in writing…". On 20 March Mr Holdsworth and Mr Cusack attended a meeting with Mr Lewis to discuss further the benefits of making such a large payments by way of pension contributions.
Mr Lewis gave evidence about the meeting. He recalled it was a Friday afternoon, and he gave free advice for an hour. He remembers feeling a tension between the two, that they discussed how to mitigate the tax exposure of Quantum, extending the accounting period by three months and how to divide the Company on the basis that they were going to go their separate ways. He advised that tax contributions would be a tax efficient method of reducing corporation tax.
Mr Lewis says "at the meeting they mentioned that they may well be going their separate ways. I advised that the easiest and cheapest way to do so would be to liquidate Quantum and to claim...
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