Paul John Murrell (Petitioner) v James Ernest Swallow and Others
| Jurisdiction | England & Wales |
| Judge | Mr R Hollington |
| Judgment Date | 29 July 2014 |
| Neutral Citation | [2014] EWHC 2680 (Ch) |
| Docket Number | Petition No: 008880/2008 |
| Court | Chancery Division |
| Date | 29 July 2014 |
[2014] EWHC 2680 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
IN THE MATTER OF BLUE INDEX LIMITED
AND IN THE MATTER OF THE COMPANIES ACT 2006
Mr R Hollington QC sitting as a Deputy Judge of the High Court
Petition No: 008880/2008
Mr. Peter Knox QC, instructed by St John Legal, appeared for the Petitioner
Mr. Mallin, instructed by Irwin Mitchell, appeared for the 1 st and 2 nd Respondents
Hearing dates: 9–11, 14–16 July 2014
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.
In the late 1990s the Petitioner (Mr. Murrell) and the 1st and 2nd Respondents, Mr. Swallow and Mr. Sanders, got to know each other well whilst working together as traders at a firm called Everetts in the City of London. Everetts specialised in trading "penny shares", i.e. companies with very small market capitalisations, on behalf of clients. They were young men, aged respectively 29, 23 and 24 in 1998. And they earned a considerable amount of money, particularly at the height of the internet technology boom, which began dropping off in 2000.
Mr. Sanders and Mr. Swallow left Everetts in June 2000 in order to set up their own brokering business together, so as to enable clients to deal in what are called "contracts for differences", or CFDs for short. Dealing in CFDs is different from the ordinary business of investment by way of buying and selling quoted stocks and shares and other commodities and financial instruments. A CFD is a derivative product which enables a client to go "long" or "short" in a stock or financial instrument, i.e. speculating that the price of a particular stock will go up (long) or down (short). Furthermore, partly it appears because the holding of a CFD will invariably be short-term, facilities are made available to the client enabling it to "leverage" its position, i.e. giving the client access to capital beyond the capital ventured by the client from its own resources. Thus, it was a high-stakes and high-risk business for the client who needed to be highly sophisticated and knowledgeable, and, I would add, who should be able to afford losing a lot of money very quickly. And a risk-averse client could always "hedge" its position, thus limiting the risk. Mr. Murrell described this form of speculation as the equivalent of on-line gambling, but I think that probably goes too far. Dealing in CFDs was just a particularly sophisticated, high risk, high stakes version of investment. I suppose it was also a useful get-rich quick mode of investment for the unscrupulous who might think they had inside information. In any event, it was a regulated form of investment.
The business that Mr. Sanders and Mr. Swallow set up was Blue Index Limited, which I will refer to as "the Company". It was an introducing broker. It had arrangements with CFD market-makers which enabled its clients to deal in CFDs. The Company's income would be derived principally from the commissions payable by its clients on deals. And it was to be a ruthless selling business: its traders were remunerated solely by way of commissions they earned on the commissions they earned for the Company. The traders' job was to attract as many clients as possible and to get them to deal as much as possible. And, obviously, the more money they made for their clients, the more successful they would be. It was a beautifully simple, and potentially highly lucrative, business model. None of its key personnel, that is to say its traders, would earn anything so mundane or as secure as a monthly salary. But, also obviously, it required effective management and leadership.
The Company was established with an issued share capital of 75,000 ordinary shares of £1 each, held equally by Mr. Sanders and Mr. Swallow, who were its directors.
Mr. Murrell, having left Everetts in 2001, joined the Company's staff and became a shareholder in the Company on 29 April 2002. The Company had barely started to trade by that date and its future prospects were wholly uncertain. Its liabilities almost certainly exceeded its assets. The circumstances in which he did so constitute the key issue in this case, to which I will return. But suffice to say for the present introductory purposes, Mr. Sanders and Mr. Swallow each sold him 1,125 shares, making him a 3% shareholder, and Mr. Sanders and Mr. Swallow each thereafter held 48.5% of the shares. In theory, therefore, there was thereafter no majority shareholder. In the documentation which accompanied the share sale to Mr. Murrell, the purchase price was recorded as £2,250, i.e. par. In fact, Mr. Murrell paid Mr. Sanders and Mr. Swallow the agreed sum of £45,000, plus a small additional sum in respect of stamp duty on the transfers. The parties gave different accounts, to which I will return, of why the recorded share purchase price was par.
The Company's articles of association contained standard pre-emption provisions, obliging any shareholder desirous of transferring his shares to a non-member to offer them to existing shareholders at a price determined by the auditors as their "fair value".
In June 2002, unknown and without reference to Mr. Murrell, Mr. Sanders and Mr. Swallow caused a further 1,000 shares to be issued to themselves. It appears that this arose out of a need to raise further capital to satisfy a regulatory requirement.
The parties fell out very rapidly and Mr. Murrell was summarily dismissed on 24 October 2002. Negotiations for the sale back of his shares commenced but they did not progress with any speed.
In June 2003 Mr. Sanders and Mr. Swallow, again without reference to Mr. Murrell, caused the articles of association of the Company to be changed, which appeared to have the effect of converting Mr. Murrell's shares into non-voting shares and cutting him out of the benefit of the pre-emption provisions in the event that Mr. Sanders and Mr. Swallow wished to sell their shares. At the same time they executed a Shareholders Agreement between themselves dated 4 June 2003.
To cut a long story short, Mr. Murrell eventually presented this petition, seeking an order for the purchase of his shares, in November 2008. It appears that the Financial Services Authority arrested Mr. Sanders and Mr. Swallow on suspicion of insider dealing offences and closed the Company down in May 2009. They pleaded guilty to these offences in June 2012 and were sentenced to terms of imprisonment. The Company was dissolved on 23 July 2013.
Mr. Knox QC, Counsel for Mr. Murrell, submitted that I should take this criminal conduct into account in assessing the credibility of Mr. Sanders and Mr. Swallow as witnesses. I decline to do so. In my view, since I know very little about these offences, it would be wholly unfair for me to take them into account. Furthermore, all these events occurred after the agreed date of valuation, namely 1st November 2006. I will ignore them completely.
Mr. Mallin, Counsel for Mr. Sanders and Mr. Swallow, submitted that I should take into account in the valuation the fact that the Company had ceased to trade in May 2009, so that there would in fact in this case be no unjust enrichment of Mr. Sanders and Mr. Swallow if a discount for a minority shareholding were applied in this case. I will return to this point below.
It has already been ordered, by paragraph 1 of the order of Registrar Derrett dated 9 July 2009, that Mr. Sanders and Mr. Swallow do purchase Mr. Murrell's shares at a price to be determined by the Court. That paragraph 1 provided as follows: "There be judgment for the petitioner on the first and second claims at paragraphs 15 to 31 of the Petition; …". As Mr. Mallin rightly accepted, this meant that the averments made in those paragraphs of the Petition must be treated as having been established to the satisfaction of this Court. Thus, I proceed on the following basis:
(1) The issue of 1,000 shares in 2002 to Mr. Sanders and Mr. Swallow entailed a "deliberate" breach of their fiduciary duties as directors.
(2) The change to the articles of association in 2003 was "intended" by them to be prejudicial to Mr. Murrell's interests. Further, they were "motivated by a desire to destroy the value of [Mr. Murrell's] shareholding".
(3) No AGM has ever taken place, contrary to section 366 of the Companies Act 1985.
(4) "[T]he Petitioner cannot reasonably be expected to remain a member of the Company given the deliberately hostile nature of the unfairly prejudicial conduct [of Mr. Sanders and Mr. Swallow].."
It has also been agreed that the date of valuation of Mr. Murrell's shares shall be 1 st November 2006. I am not therefore concerned with events after that date, save so far as it is proper to take them into account under ordinary valuation principles.
The issues in this case
The principal issue that I therefore have to determine is the fair and appropriate value to place on Mr. Murrell's shares as at 1st November 2006. It is common ground that for this purpose I should proceed on the basis that Mr. Murrell holds 3% of the Company's issued share capital.
It is Mr. Murrell's case that his shares should be valued without any discount for a minority shareholding. Mr. Sanders and Mr. Swallow submit that such a discount should be applied. I heard a great deal of evidence and lengthy submissions from the parties on this issue.
The parties have each adduced evidence from share valuation experts. As is unfortunately common in cases such as this, and this may well be due at least in part to a degree of uncertainty as to the legal principles which govern issues of share...
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