Rackind and Others v Gross and Others
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE KEENE,Sir Martin Nourse,SIR MARTIN NOURSE,LORD JUSTICE JACOB |
| Judgment Date | 21 May 2004 |
| Neutral Citation | [2004] EWCA Civ 815 |
| Docket Number | A3/03/2710 |
| Court | Court of Appeal (Civil Division) |
| Date | 21 May 2004 |
[2004] EWCA Civ 815
Lord Justice Keene
Lord Justice Jacob
Sir Martin Nourse
A3/03/2710
IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION — COMMERCIAL COURT DIVISION
(HIS HONOUR JUDGE WEEKS QC (SITTING AS A DEPUTY HIGH COURT JUDGE))
Royal Courts of Justice
Strand
London, WC2A 2LL
MR DAVID OLIVER QC AND MS ROSALIND NICHOLSON (instructed by Messrs Halliwell Landau, London, EC4N 7BE) appeared on behalf of the Appellants
MR ROBIN POTTS QC AND MR ANDREW THOMPSON (instructed by Messrs S J Berwin, London, WC1X 8XF) appeared on behalf of the Respondents
I will ask Sir Martin Nourse to give the first judgment.
Section 459(1) of the Companies Act 1985 provides:
"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."
Broadly stated, the main question arising on this appeal is whether an order may be made under that provision in relation to a holding company where, first, it is the affairs of its wholly owned subsidiary that are being or have been conducted in an unfairly prejudicial manner and, secondly, the directors of the holding company are also directors of the subsidiary.
The question arises on an application by the holders of 50 per cent of the shares in a company called Citybranch Group Limited ("the company") to strike out a petition presented under section 459 by the holders of the remaining 50 per cent of the shares. On 11 December 2003 His Honour Judge Weeks QC, sitting as a judge of the Chancery Division, declined to strike out the petition and, with his leave, the respondents now appeal to this court.
The petitioners (collectively "the Gross family") are Raymond Malcolm Victor Gross ("Mr Gross"), his brother Gerald Gross and Mr Gross' s children, Adam Gross and Laura Pittal. They hold 25 per cent, 14.5 per cent, 5.25 per cent and 5.25 per cent of the shares respectively. The respondents (collectively "the Rackind family") are Peter Elliott Rackind ("Mr Rackind") and his children, Julia Pactor and Robert Rackind, who hold 39.5 per cent, 5.25 per cent and 5.25 per cent of the shares respectively. The company was incorporated on 5 October 2001 and Mr Gross and Mr Rackind have been its only directors.
The company has two wholly owned subsidiaries, Citybranch Limited ("Citybranch") and Blaneland Limited, ("Blaneland") . Citybranch was incorporated on 5 October 1982 and since 28 April 2000 its directors have been Mr Gross, Mr Gerald Gross and Mr Peter Rackind. Blaneland was incorporated on 27 April 1999 and its only directors have been Mr Rackind and Mr Gross. Before 11 December 2001, the shares in Citybranch and Blaneland were held as to 50 per cent each by the Gross family and the Rackind family. On that date they exchanged their shares in Citybranch and Blaneland for shares in the company, whereupon Citybranch and Blaneland became wholly owned subsidiaries of the company. Citybranch has a wholly owned subsidiary, Manchester Syndicates Limited, which was incorporated on 1 September 1989. Mr Rackind and Mr Gross were the directors of Manchester Syndicates Limited until 20 June 2003 when Mr Gerald Gross was appointed as an additional director. Manchester Syndicates Limited plays no part in the subsequent history of the case.
The business of the group has been conducted through the three subsidiaries. It consists of investment in property in the north or north west of England. It is common ground that all four companies were quasi partnership companies based on a quasi partnership between Mr Rackind and Mr Gross and/or Mr Gerald Gross, and that that state of affairs continued until July 2003, when the personal relationship of trust and confidence which formed the basis of the quasi partnership irrevocably broke down. On 14 July 2003 the Rackind family presented a petition to wind up the company under section 122(1) (g) of the Insolvency Act 1986, on the ground that it was just and equitable to do so: cf Re Westbourne Galleries Limited [1973] AC 360. The Gross family did not want the company to be wound up and countered by presenting their section 459 petition on 23 August 2003.
The petition claims an order regulating the future management of the affairs of the company and the subsidiaries, an order that the Rackind family, alternatively Mr Rackind alone, should sell their or his shares to Mr Gross and ancillary relief. Mr Oliver QC, for the Rackind family, has submitted that the relief sought is very unusual and in that he may be right. However, he has been unable to persuade me that that is a relevant consideration for today's purposes.
No evidence has been filed and since this is a strike out application we must accept the facts as stated in the petition. They include the following. The purpose of the quasi partnership was to generate profits and capital value in the long term by the acquisition of property with investment potential and the enhancement and realisation of the value in that property in the long term. The properties held by the group were acquired and held in accordance with that purpose; all had or have investment potential and value which would be best realised by the group over the long term.
In paragraph 59 of the petition the allegedly unfairly prejudicial conduct is summarised in five subparagraphs. In each case it is said, first, that the conduct was the conduct of Mr Rackind; secondly, that the conduct was both individually and collectively conduct of the affairs of the company (and/or one or more of its subsidiaries which amounted also to conduct of the affairs of the company) ; thirdly, that the conduct was unfairly prejudicial to the interests of the Gross family and each of them as members of the company.
I will refer to each of the five allegations in turn, in three cases supplementing them by reference to the more detailed allegations made earlier in the petition. First, it is said that Mr Rackind caused, or substantially caused, an irrevocable breakdown in the relationship of trust and confidence between himself and Mr Gross and/or Mr Gerald Gross which formed the basis of their quasi partnership association through the company and the other companies in the group. Secondly, it is said that Mr Rackind threatened a winding up of the company by the court in order to put pressure on Mr Gross and the other Gross family shareholders to agree to Mr Rackind's demands for control or a purchase of the Gross family's shares, despite the fact that there was (and remains) no basis for the company being wound up on the petition of Mr Rackind. Thirdly, it is said that Mr Rackind breached his fiduciary duties owed to the company and/or to Blaneland by refusing to agree to and/or obstructing attempts to finance a payment by Blaneland of corporation tax due from it, in order to put pressure on Mr Gross and the other Gross family shareholders to agree to Mr Rackind's demands for control or a purchase of the Gross family's shares.
In relation to the third allegation, paragraphs 37 and 38 identify the claim for corporation tax due from Blaneland as being originally made in January 2002. In November 2002 it was quantified by the Inland Revenue, after negotiations, at £434,707 plus interest of £31,837. At that stage the Inland Revenue said that they would accept an interim payment of £100,000 by 29 November 2002 and payment of the balance by 31 January 2003. But it is alleged that at a meeting between Mr Rackind and Mr Gross on 25 November 2002 Mr Rackind threatened that, if Mr Gross did not agree to Mr Rackind's demands for control of the company or a purchase of the Gross family shares, Mr Rackind would allow Blaneland to be put into liquidation by the Inland Revenue and would himself force the company into liquidation.
In the result, the Inland Revenue's offer was not accepted. On 6 January 2003 they obtained judgment against Blaneland in the sum of £471,059 in respect of the unpaid corporation tax and interest. On 20 February 2003 Mr Rackind finally agreed that Blaneland should accept a facility offered by the Bank of Scotland in order to allow that liability to be discharged. There has been some discussion as to whether we should proceed on the assumption that the cost incurred by Blaneland in relation to that claim was greater than it would have been if the Inland Revenue's offer of November 2002 had been accepted. We certainly cannot proceed on an assumption that the cost was greater. Conversely, it appears to be a real possibility that it was. On that footing the third allegation can be treated as an allegation of unfairly prejudicial conduct by Mr Rackind of the affairs of Blaneland.
The fourth allegation made in paragraph 59 is that Mr Rackind continued to use Citybranch's office at 8, The Square, Hale Barnes and continued to draw a consultancy fee, or a full consultancy fee, in each case despite not working full-time for the group. In relation to that allegation, it is said in paragraphs 39 and 40 that, in about...
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