Re Belfield Furnishings Ltd; Isaacs and another v Belfield Furnishings Ltd and Others

Hearing dates: 1 st,2 nd,5 th, 9 th,14 th & 16 th December 2005

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.

The Deputy Judge:

Introduction

There are 2 principal applications before me in a Petition under section 459 of the Companies Act 1985 that was presented on the 19 ^th August 2004 in relation to the affairs of Belfield Furnishings Limited ("the Company").

The first, issued on the 12 ^th September 2005 on behalf of Paul Isaacs and Peter Harrisson ("the Petitioners") seeks the continuation of an interim injunction —presently in force by virtue of an order made by Mann J on the 18 ^th October 2005 —restraining the Respondents to the Petition from executing any share transfers on the Petitioners' behalf or otherwise recording any changes regarding their shareholding in the Company's register of members.

The second, issued on the 14 ^th October 2005 on behalf of the individual Respondents to the petition, seeks to strike out the Petition on the ground that its continued prosecution is an abuse of process in the light of offers to purchase the Petitioners' shares in the Company that have been made both before and after the presentation of the Petition.

I propose to deal with the strike out application first —not least because if I decide the Petition should go to trial, it follows that the Petitioners will be entitled to a continuation of the interim injunction that has been in force to date. This is necessary to preserve their locus standi as members of the Company pending the hearing of the Petition.

The strike out jurisdiction

It is common ground between the parties that the jurisdiction to strike out is one to be exercised sparingly and only in plain and obvious cases.

Mr Downes who appeared with Ms Lee for the Petitioners reminded me that in Copeland v Craddock [1997] BCC 294—a case that concerned a petition seeking relief under s.459 and a just and equitable winding up in the alternative — Bingham LJ had this to say about the Court's jurisdiction at p.300:

"It has been often and rightly said that the court's jurisdiction to strike out a claim advanced by a plaintiff or a claimant or a petitioner is to be exercised very sparingly and only where the clearest grounds are shown for doing so. The reason for this practice is clear. Although a court may at a preliminary stage regard a claim as tenuous and having a negligible chance of success, the claimant is none the less entitled to the court's adjudication on it on the merits unless it is a claim which the court is satisfied cannot succeed. In this case, the judge clearly regarded the plaintiff's claim to wind up this company as one which was unlikely to succeed, but he did not feel that the claim was so manifestly unarguable as to justify him in striking it out. Having heard Mr Snowden's very clear and well presented argument, I share the judge's view that this claim is unlikely to succeed. I am indeed persuaded that the case is very close to the borderline where striking out would be appropriate. But I am not persuaded that the claim is unarguable whatever comes out relevant to the petition on discovery and in the course of oral evidence."

Like Bingham LJ, I too have been troubled by the fact that the Petition in the case before me is thin, if not close to the borderline where striking out would be appropriate. Nonetheless, I accept that the Petitioners are entitled to the Court's adjudication on the merits of their Petition at trial unless the Respondents are able to demonstrate that the claims made in it could never succeed, and that as a result, the continued prosecution of the Petition constitutes an abuse of process. The onus on the Respondents in this regard is a heavy one.

Background to the proceedings

The Company was incorporated on the 15 ^th April 2002 and commenced doing business, in the furniture industry, in the summer of that year.

On 12 ^th August 2002 —the same day as the Second Respondent ("Mr Millership") signed a special resolution adopting revised Articles of Association ("the Articles of Association") —the shares in the Company were allocated as follows:

(a) 6,749 "A" Ordinary Shares to Mr Millership;

(b) 800 Ordinary Shares to the Fifth Respondent ("Mr Stone");

(c) 550 Ordinary Shares to the Third Respondent ("Mr Brandt");

(d) 600 Ordinary Shares to the Fourth Respondent ("Mr Keely ")

(e) 400 Ordinary Shares to the Second Petitioner ("Mr Harrisson"); and

(f) 400 Ordinary Shares to the First Petitioner ("Mr Isaacs").

The "A" Ordinary Shares held by Mr Millership carried enhanced voting rights for the purposes specified in Regulations 4.3 and 5 of the Articles of Association.

Each of the Petitioners paid £50,000 for their package of 400 shares in the Company.

The Petitioners were involved, as were the Individual Respondents, from the outset of the venture and they assisted, in particular, in the raising of finance. However, whilst it was always intended that the Individual Respondents would be executive directors and involved in the day to day running of the Company, the Petitioners' role was always going to be that of non-executive directors and part time consultants.

The terms upon which the Petitioners would be employed by the Company were contained in written Consultancy Agreements, also executed on the 12 ^th August 2002. Although it is the Petitioners' case that they decided to invest in the Company on the basis of an understanding (engendered by statements from Mr Millership to that effect) that they would be allowed to participate in its management for at least 3 to 5 years, and that they would be offered an opportunity of buying out Mr Millership and Mr Keely within that period, any such understanding was not reflected in the documentation that the parties executed on the 12 ^th August. Indeed, clause 9 of each of the Petitioners' Consultancy Agreements states:

"Your provision of Consultancy Services pursuant to paragraph 7 will terminate immediately upon either you or the Company giving notice in writing to the other."

and clause 10 states:

"If you cease to be a Consultant of the Company for whatever reason, you must upon the request of the Company resign without claim for compensation for loss of office as a Director of the Company and, in the event of your failure so to do, the Company is irrevocably authorised by you to appoint some person in your name and on your behalf to execute any documents and do all things requisite to give effect to this paragraph."

The contractual provisions requiring the Petitioners to resign as directors of the Company without compensation in the event they ceased for any reason to be employed as consultants were bolstered by other provisions set out in the revised Articles of Association adopted on the 12 ^th August 2002 —the same day as the Consultancy Agreements were executed. In this regard, Regulation of the Articles provides so far as material:

"12.1 Cessation of Employment

Whenever any Employee Shareholder ceases to be an employee or director or consultant of the Company or its subsidiaries (for whatever reason including death) a Transfer Notice shall be deemed to have been served upon such cessation in respect of all shares held by the Employee Shareholder … Any Transfer Notice deemed to be given under this Article 12.1 shall be deemed also:

12.1.1 to incorporate a term that the sale price for the relevant shares shall be, in the case of a Good Leaver, the Market Value …

12.1.2 to incorporate a Total Transfer Condition; and

12.1.3 … to be irrevocable …"

On such cessation the holders of all such shares shall cease to be entitled to receive notice of, attend or vote at general meetings or participate in any pre-emption rights on the transfer or issue of shares until the expiry of the procedure set out in Article 10."

Regulation 10 of the Company's Articles of Association in turn provides:

"Pre-emption rights

10.1 Any person proposing to transfer any interest in any shares ("a Retiring Shareholder") … shall give to the Company notice in writing (a "Transfer Notice"). The Transfer Notice shall be deemed to appoint the Directors as the agent of the Retiring Shareholder for the sale of shares specified in it (the "Sale Shares") at the price agreed in writing by the Retiring Shareholder and the Directors or, failing agreement within twenty eight (28) days of the Transfer Notice being given or deemed to be given, at the Market Value. A Transfer Notice may provide that unless all the sale shares are sold by the Company, none shall be sold (a "Total Transfer Condition").

10.2 The "Market Value" shall be the price certified by the Auditors to be in their opinion the fair value of the Sale Shares on a going concern basis as between a willing seller and a willing buyer ignoring any discount which may otherwise be appropriate because the Sale Shares constitute a minority interest in the Company and disregarding the provisions of Articles 4.3.2, 12.3 and 22 and on the assumption that...