O'Neill v Phillips
| Jurisdiction | UK Non-devolved |
| Judge | LORD HOFFMANN,LORD JAUNCEY OF TULLICHETTLE,LORD CLYDE,LORD HUTTON,LORD HOBHOUSE OF WOODBOROUGH |
| Judgment Date | 20 May 1999 |
| Judgment citation (vLex) | [1999] UKHL J0520-1 |
| Date | 20 May 1999 |
| Court | House of Lords |
and Another
and Others
[1999] UKHL J0520-1
Lord Hoffmann
Lord Jauncey of Tullichettle
Lord Clyde
Lord Hutton
Lord Hobhouse of Wood-borough
HOUSE OF LORDS
My Lords,
This appeal raises, for the first time in your Lordships' House, a question on the scope of the remedy which Part XVII (sections 459-461) of the Companies Act 1985 provides for a member of a company, typically holding a minority of the shares, who considers that the company's affairs are being conducted in a manner unfairly prejudicial to his interests.
1. The statute
Section 459(1) (as amended by the Companies Act 1989, Schedule 19, paragraph 11) reads:
"A member of a company may apply to the court by petition for an order under this Part on the ground that the company's affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members (including at least himself) or that any actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial."
Section 461(1) provides that if the court is satisfied that a petition under Part XVII is well founded, it may make "such order as it thinks fit for giving relief in respect of the matters complained of." Without prejudice to the generality of this jurisdiction, the court may make all or any of a number of orders specified in subsection (2). These include orders regulating the future conduct of the company's affairs, requiring the company to do or refrain from doing some act and, the remedy most commonly sought, an order under section 461(2)(d) providing for the purchase of the petitioner's shares by other members of the company or the company itself.
2. The facts
The issue in this appeal is whether the company's affairs were conducted in a manner "unfairly prejudicial" to the petitioner's interests within the meaning of section 459(1). Since on any view this must depend upon the particular facts of the case, I must start with a summary of the findings of Judge Paul Baker Q.C., who heard the petition.
Pectel Ltd. ("the company") operates in the construction industry, providing specialist services for stripping asbestos from buildings. In 1983 it employed the petitioner Mr. O'Neill as a manual worker. The respondent to the petition and appellant before your Lordships is Mr. Phillips, an accountant. In 1983, having bought out another shareholder, he held the entire issued share capital of 100 £1 shares. Mr. Phillips was impressed by Mr. O'Neill's energy and ability and advanced him rapidly to foreman, site supervisor and contracts manager. In January 1985 Mr. Phillips gave Mr. O'Neill 25 shares and appointed him a director. In May of that year they had an informal discussion at which Mr. Phillips expressed the hope that Mr. O'Neill would be able to take over fully the day-to-day running of the company. He also indicated that on that basis he would allow him to draw 50 per cent. of the company's profits.
Mr. O'Neill did take over the running of the business and on 30 December 1985 Mr. Phillips retired from the board, leaving Mr. O'Neill as sole director. Although not so described, he was in effect managing director. During the construction boom of the late 1980s, the company prospered. Mr. O'Neill was credited with half the profits, some of which he drew in the form of salary and dividends and some of which he left in the company. When a dividend was declared, Mr. Phillips would waive a third of his 75 per cent. entitlement in favour of Mr. O'Neill to produce equality. In 1988 £49,900 of retained profits, which partly represented Mr. O'Neill's undrawn entitlement, was capitalised by the issue of bonus shares to increase the company's issued share capital to £50,000. They were allotted in the same proportions as their existing holdings. In September 1990 another £50,000 was capitalised in the same way, except that this time non-voting shares were issued. Mr. O'Neill also guaranteed the company's bank account and he and his wife mortgaged their house in support of the guarantee. So that by 1990 Mr. O'Neill had put some of his own earnings into the capital of the company and was potentially liable to contribute more under the guarantee.
For two years, between the beginning of 1989 and the end of 1990, there were discussions with a view to Mr. O'Neill obtaining a 50 per cent. shareholding. Solicitors, counsel and the company's accountants were consulted. Draft documents were prepared. By October 1990 negotiations had reached a point at which Mr. Phillips indicated that in principle he was willing to increase Mr. O'Neill's shareholding to 50 per cent. when the company's net asset value reached £500,000 and his voting rights to 50 per cent. when it reached £1,000,000. These figures were referred to as the targets. It was contemplated that a formal agreement would be drafted to embody these terms and any others which might be found desirable. But this did not happen. At that point, the negotiations stopped. The judge found that there was never any concluded agreement for the allocation of more shares to Mr. O'Neill.
1989-90 was the last good year before the construction boom came to an end. The retained profits were £158,759. The company extended its business to Germany. In 1991, however, the industry went into recession and the company was struggling. Mr. Phillips became alarmed about its financial position and concerned about Mr. O'Neill's management. At the beginning of August 1991 he decided, as controlling shareholder, to resume personal command. He gave Mr. O'Neill the option of managing, under him, the U.K. or the German branches of the business. Mr. O'Neill chose to go to Germany. Mr. Phillips became in effect managing director and assumed that title in November. Mr. O'Neill remained on the board as an ordinary director.
It is clear that Mr. Phillips was not as impressed with Mr. O'Neill's energy and commitment when times were bad as he had been when they were good. He was critical of his conduct of the German side of the business and matters came to a head at an acrimonious meeting on 4 November 1991. Mr. Phillips, as he himself put it in his evidence, "ranted and raved." He made his criticisms forcibly and pungently. He also told Mr. O'Neill that as he was no longer acting as managing director he would no longer receive 50 per cent. of the profits. He would be paid only his salary and any dividends payable upon his 25 per cent. holding. Mr. O'Neill made no comment. The meeting came to an end and he went back to his work in Germany.
Mr. Phillips heard no more on the subject from Mr. O'Neill until he received a letter dated 17 December 1991, which Mr. O'Neill had written after consultation with his sister, who is a solicitor. In the meanwhile, however, Mr. O'Neill had prepared to sever his links with the company. He gave notice to terminate his guarantee of the bank account, which was at the time in credit. He made arrangements with two other employees to set up a competing business in Germany. They negotiated for financial support from a bank. There was nothing wrong in this: Mr. O'Neill had not entered into any covenant with the company not to compete after he left its employment.
The letter of 17 December 1991 was in effect a letter before action. It said that Mr. Phillips had broken his promises to pay Mr. O'Neill 50 per cent. of the profits and to allot him (subject to reaching the targets) 50 per cent. of the shares. He had thereby reduced his position to that of an employee. He also made a number of allegations of financial abuse, amounting to dishonesty, on the part of Mr. Phillips and ended by saying that he had "no alternative but to seek legal advice and instigate the dissolution of our partnership." On 22 January 1992, without further correspondence, Mr. O'Neill issued a petition under section 459. He also issued a writ claiming damages for anticipatory breach of an alleged oral agreement to allot him more shares when the targets had been reached.
3. The petition.
The petition, like the letter of 17 December 1991, contained a number of allegations of financial impropriety on the part of Mr. Phillips. But these were abandoned at the hearing. Both shareholders gave evidence. The judge found that he much preferred the evidence of Mr. Phillips, which he said was careful and straightforward, to that of Mr. O'Neill, who was on some matters unsatisfactory and prevaricating. He was, the judge said, "inclined to see base motives in everything that Mr. Phillips did."
In the end, therefore, the allegations of unfairly prejudicial conduct came down to two complaints. The first was Mr. Phillips's termination of equal profit-sharing and the second was his repudiation of the alleged agreement for the allotment of more shares. The judge rejected these and dismissed the petition on two grounds. One was that it fails on the facts. Mr. Phillips had not committed himself permanently and unconditionally to an equal sharing of profits. Mr. Neill's expectation was to receive 50 per cent. while he acted as managing director. But if circumstances changed, Mr. Phillips was entitled as controlling shareholder to redraw his responsibilities and remuneration. He had made no commitment which made it unfair for him to exercise this power. Likewise in the case of the additional shares. The matter had never gone beyond negotiation and Mr. Phillips had made no promises. It was therefore not unfair for him to retain his majority holding. For the same reason, the judge dismissed the claim to damages in the writ action but made by consent an order for an account of undrawn profits. An appeal against the judgment...
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