Milad Makram Morgan Shehata v Mansfield Hotel Ltd

Hearing dates: 22, 23, 24, 25 February and 1 March 2021

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

Chief ICC Judge

Introduction

By an amended petition Milad Makram Morgan Shehata (“Mr Shehata”) seeks an order that the second to fourth Respondents buy his shares. He claims that their conduct has been unfair and prejudicial to his interests as a member of Mansfield Hotel Limited (the “Company”).

As the name suggests, the Company's business is the operation of a hotel. The Company has the benefit of a lease of St Mark Hotel at 4 Barkston Gardens, Earls Court, London (“the Hotel”). The lease was renewed on 25 April 2019 for a term of 20 years at a passing rent of £96,000 per annum. Due to the pandemic, the Hotel is unable to open its door to guests. It is not currently able to produce an income.

Background

Mr Shehata identifies as an Orthodox Coptic Christian. In or about 2005, he started importing fruit and vegetables from the Middle East for wholesale. The business, later transferred into a limited company, Middle East Fruit and Vegetable Products Ltd (“MEFV”). MEFV operated throughout the period to which these events relate.

It was at his place of worship in Kensington that he forged a relationship with the second to fourth Respondents. In his written evidence Mr Shehata explains that he has now known “Hany, Raouf and Ramses for nearly 20 years. They are all Egyptians like myself and Coptic Christians and we and our families go to the same church in Kensington and on occasions would have lunch together. It was through one of our mutual friends that we were introduced to the best of my recollection some time in or about 2000 in London.” I shall refer to Raouf Meshreky as “Mr Meshreky”; Hany Shaker as “Mr Shaker”, Ramses Andraous as “Mr Andraous” and together as the “Respondent directors” (to exclude the first respondent). Mr Shehata viewed his new friends as “wealthy individuals in their own right but who had also built up their business interests together on several occasions.” They had been involved in property development, and had experience of owning and running hotels such as the Holland Inn Hotel Ltd and The York Hotel Ltd.

There is some disagreement about Mr Meshreky's involvement in MEFV but it is not disputed that he was a director until 2008 and provided a personal guarantee securing an overdraft facility provided by the bankers to MEFV. He was released from the guarantee in 2010.

Mr Shehata states that he and the Respondent directors “decided to go into the hotel business together” in 2005. Although this represents a brief account, and there is little other detail, it is not inconsistent with the account provided by the Respondent directors. They accept that the business relationship was borne of friendship. Mr Meshreky says: “Ramses and I had found a hotel to lease [Mansfield] and Milad suggested joining us on this enterprise as he said he had money to afford his share.”

Mr Shehata did not have sufficient funds to purchase an equal shareholding in the Company. It is common ground that a loan was provided to him by the Respondent directors which he repaid and as such became “an equal partner”. The loan bore no interest: “we always wanted him to prosper and make a better future for himself and his family.” This account is consistent with that provided by Mr Shehata. He says that he “had managed to get a further £70,000 together by the completion date but I was still short by £85,000”. He explains: “this was to cover my quarter share and Raouf, Hany and Ramses agreed that they would fill the gap for me temporarily and therefore the other directors loaned to me £85,000 towards my share of the purchase.” The loan was interest free. He rather uncharitably adds “I suspect, that Raouf, Hany and Ramses could afford to be generous” which provides a small flavour of the current state of their friendship.

Once the Company was formed and capitalised, Mr Shehata and the Respondent directors were each issued with three shares.

Mr Shehata claims that there was an agreement at the “outset of the business” that they would take it in turns to receive “a lump sum of the net profits of the Hotel rather than smaller equal draws on a regular basis”. In his written evidence he said that each director would receive £46,000 per annum but in oral evidence he revised that figure up to £60,000. It appears that this agreement, acknowledged in part by the Respondent directors, arose out of the need for Mr Shehata to repay the loan to purchase his 25% shareholding. No evidence was advanced that the agreement would endure after repayment of the loan.

It is common ground that the Company banked with Natwest and all had access to the online account. Mr Shehata was to be the director in charge of the hotel. A manager was employed. There is an issue at to the extent of Mr Shehata's involvement in the day-to-day operations and the delineation of responsibility between the duties of the hotel manager and Mr Shehata's role. There are no board minutes and few written records concerning the governance of the Company.

The issue of who made and kept accounting records has some bearing on this case. This is not because the identity of the record keeper matters in and of itself, but because it is said by the Respondent directors that some year-end unaudited accounts are incorrect. There is little doubt in my mind there was a lack of director engagement with respect to the accounts. The evidence I heard leads me to conclude that they often relied on a director other than themselves to read and agree the accounts, with little evidence of independent critical analysis. Mr Andraous was the director who had most involvement. This is explained partly because each director had other business interests and partly due to their faith in one another to do what was in the best interests of all.

Mr Shehata says “I trusted them implicitly”. His case is that he started an excel spreadsheet in 2010 “to keep a record of all the monies that were paid to each of us”, but he was never involved in the accounts: “I never went to any meetings with the accountants and was never asked to attend although they would almost certainly have relied on the Spreadsheet (sic).” He accepts that some of the accounts bear his name. He seeks to distance himself as a person who had any responsibility for the accounts notwithstanding he is a director of the Company: “I was never formally or even informally asked to approve or sign the accounts.”

Mr Shehata's case is that the loan he received from the Respondent directors to invest in the Company had been repaid from drawings by 2014. In fact it was earlier. He has no complaint about the corporate governance or the Respondent directors decision making, actions or inactions up to this point in time. He mentions that by 2013 he was “able to devote more time to other business” and was paid a salary by Mr Meshreky to run a restaurant under Kings Cross Hotel. He became involved in another hotel project with Mr Shaker in 2015 purchasing a hotel in Eastbourne called the Afton Hotel which he says he managed. In January 2016 Mr Shehata agreed to buy another hotel with a third party. This required his time and energy. He was unable to devote as much time, or as it would turn out, anytime to the Hotel.

In early 2017 Mr Shehata accepted an offer made by Mr Shaker and sold to him his shareholding in the Afton Hotel enterprise. Mr Shehata says that the sale price/sum he received for his shares represented the same amount as his investment. He does not expressly state that the shares were worth more or less but does say that he sold his shares under duress. There was an agreement to use one of the priests at their church to act as an intermediary. Mr Shehata says that the priest had “already been primed by Hany” suggesting that the priest could not be trusted to be impartial. That claim does not form part of these proceedings but contextually Mr Shehata says that this was a cause of the breakdown in relations between him and the Respondents directors.

It is agreed that “payments” were made from the Company to Mr Shehata until April 2017. Mr Shehata says that the payments received were of a lesser amount, and arrived with less frequency, after February 2016. He says that it had become obvious “to all of us that our business relationship was over” from mid-2016. The reason for receiving less after February 2016 is that he had taken more before that date. There was a policy of equality between members: members would suffer the detriments and reap the benefits equally. The Respondent directors needed to “catch-up” with the payments made to Mr Shehata to maintain the equal treatment policy.

Mr Shehata contends that he was excluded from the management of the Company for two and a half years before issuing proceedings. He rejects the notion that he was invited to attend meetings and...