Rosemary Burr (Petitioner) v Alan Howard Harrison and Others
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE WAITE,LORD JUSTICE NEILL |
| Judgment Date | 25 March 1994 |
| Judgment citation (vLex) | [1994] EWCA Civ J0325-5 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | No. CHANI 92/0960B |
| Date | 25 March 1994 |
[1994] EWCA Civ J0325-5
Appeal of Appellant from Order of the Hon. Mr Justice Vinelott
Before: Lord Justice Neill Lord Justice Hoffmann and Lord Justice Waite
No. CHANI 92/0960B
IN THE SUPREME COURT OF JUDICATURE,
COURT OF APPEAL (CIVIL DIVISION),
ON APPEAL FROM THE HIGH COURT OF JUSTICE, CHANCERY DIVISION
MR. CHARLES PURLE Q.C. and MR. PETER GRIFFITHS (MR. I. MCDONALD Q.C. on 25.3.94.) (instructed by Messrs. Nabarro Nathanson, 50 Stratton Street, W1X 5FL) appeared on behalf of the Petitioner (Appellant).
MR. DANIEL SEROTA Q.C. and MR. JOHN BRISBY (MR. R. JAY on 25.3.94.) (instructed by Messrs. Wallace & Partners, 9 Great James Street, WC1N 4DA) appeared on behalf of the Respondents.
Friday 25th March 1994.
HOFFMANN L.J: This is an appeal from an order of Vinelott J. striking out as an abuse of process a contributory's petition for an order under section 459 of the Companies Act 1985 and to wind up on the just and equitable ground.
1. The Company
The company was formed in 1947 to take over the business founded by the petitioner's great-grandfather in 1891 and subsequently carried on by four of his sons. Its original and until recently main business was the manufacture and sale of industrial cleaning and wiping cloths made from waste textiles. But it also sells Johnson & Johnson J-Cloths and wiping products made from paper and it sorts and sells second-hand clothing (mainly for export to Africa).
For many years the company owned a factory called the Stronghold Works in West Ham. In December 1989 London Regional Transport promoted a bill in Parliament for the extension of the Jubilee Line which included a power compulsorily to purchase the Stronghold Works. The company negotiated with London Regional Transport in advance of the passage of the bill, and in October 1990 it entered into an agreement to sell the Stronghold Works for £2,750,000 and at the same time bought new premises in Hackney for the same price. The move to Hackney was completed in October 1991.
In 1960 the company's shares were reorganised into three classes. There are 30 A shares, 174,300 B shares and 825,670 C shares. The A shares carry votes but no right to dividend. The B and C shares carry no votes but are entitled to a dividend, with the B shareholders entitled to 10% before payment to the C shareholders. For the purpose of avoiding estate duty, most of the C shares were allotted to or in trust for the grandchildren of Saul Harrison's sons, including the petitioner. But the A shares were allotted to the three surviving sons of the founder, including the petitioner's grandfather Alfred. They have since devolved upon the petitioner's aunt Marion and her second cousin Alan. The petitioner's 87,563 C shares represent 8.76% of the issued share capital of the company, all of which is still held by or on trust for members of the family. At the time of the hearing before Vinelott J. the directors were Alan, his son Stephen and the petitioner's first cousin David.
2. The Allegations
The essence of the petitioner's complaint is that although the company has substantial net assets, the prospects for its business have for some years been so poor that by the time the petition was presented any reasonable board would have closed it down and distributed the assets to the shareholders. Instead, the directors have allowed the assets to be dissipated in losses in order to preserve their own inflated salaries and perquisites. The petitioner relies in particular upon the purchase of new premises in 1990. She says that any reasonable board would have regarded the proposed compulsory purchase by London Regional Transport as a golden opportunity to realise the company's principal asset and cease trading. The decision to buy new premises to continue a loss-making trade could not have been bona fide.
In addition to these central allegations the petition also complains that the directors have caused the company to pay substantial salaries and benefits to their wives for little or no consideration. The accounts are said to be deficient; first, because the Stronghold Works were shown until sale at historic cost (£456,000) when they were plainly worth a great deal more, and secondly, because proper particulars of the directors' remuneration were not given. Finally, it is said that the accounts for periods up to 31st March 1989 were qualified because the directors did not keep proper accounting records.
On these grounds the petitioner says that the affairs of the company have been conducted in a manner unfairly prejudicial to the C shareholders, including herself, within the meaning of section 459 of the Companies Act 1985 and that it is just and equitable that the company should be wound up.
3. "Unfairly prejudicial" and "just and equitable"
What must a petitioner show in order to justify an order under section 459 or an order to wind up? The grounds for winding up are that it is "just and equitable" to do so. The grounds for an order under section 459 are 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 the members (including at least [the petitioner]". If these grounds are made out, the court has a discretion to make such order as it thinks fit for giving relief in respect of the matters complained of, including in particular the relief sought in this case, which is an order that other members or the company itself buy the petitioner's shares: see section 461(2)(d).
"Unfairly prejudicial" is deliberately imprecise language which was chosen by Parliament because its earlier attempt in section 210 of the Companies Act 1948 to provide a similar remedy had been too restrictively construed. The earlier section had used the word "oppressive", which the House of Lords in Meyer v. Scottish Textile and Manufacturing Co. Ltd [1957] A.C. 324 said meant "burdensome, harsh and wrongful." This gave rise to some uncertainty as to whether "wrongful" required actual illegality or invasion of legal rights. The Jenkins Committee on Company Law, which reported in 1962, thought that it should not. To make this clear, it recommended the use of the term "unfairly prejudicial", which Parliament somewhat tardily adopted in section 75 of the Companies Act 1980. This section is reproduced (with minor amendment) in the present section 459 of the Companies Act 1985.
Mr Purle, who appeared for the petitioner, said that the only test of unfairness was whether a reasonable bystander would think that the conduct in question was unfair. This is correct, so far as it goes, and has some support in the cases. Its merit is to emphasise that the court is applying an objective standard of fairness. But I do not think that it is the most illuminating way of putting the matter. For one thing, the standard of fairness must necessarily be laid down by the court. In explaining how the court sets about deciding what is fair in the context of company management, I do not think that it helps a great deal to add the reasonable company watcher to the already substantial cast of imaginary characters which the law uses to personify its standards of justice in different situations. An appeal to the views of an imaginary third party makes the concept seem more vague than it really is. It is more useful to examine the factors which the law actually takes into account in setting the standard.
In deciding what is fair or unfair for the purposes of section 459, it is important to have in mind that fairness is being used in the context of a commercial relationship. The articles of association are just what their name implies: the contractual terms which govern the relationships of the shareholders with the company and each other. They determine the powers of the board and the company in general meeting and everyone who becomes a member of a company is taken to have agreed to them. Since keeping promises and honouring agreements is probably the most important element of commercial fairness, the starting point in any case under section 459 will be to ask whether the conduct of which the shareholder complains was in accordance with the articles of association.
The answer to this question often turns on the fact that the powers which the shareholders have entrusted to the board are fiduciary powers, which must be exercised for the benefit of the company as a whole. If the board act for some ulterior purpose, they step outside the terms of the bargain between the shareholders and the company. As a matter of ordinary company law, this may or may not entitle the individual shareholder to a remedy. It depends upon whether he can bring himself within one of the exceptions to the rule in Foss v. Harbottle (1843) 2 Hare 461. But the fact that the board are protected by the principle of majority rule does not necessarily prevent their conduct from being unfair within the meaning of section 459. Enabling the court in an appropriate case to outflank the rule in Foss v. Harbottle was one of the purposes of the section. So in Re a Company, ex parte Glossop [1988] 1 W.L.R. 1068, where the complaint was of a consistent refusal by the board to recommend payment of a dividend, Harman J. said that such conduct could make it just and equitable to wind up the company. He did so by reference to the seminal judgment of Lord Wilberforce in Howard Smith Ltd v. Ampol Petroleum Ltd [1974] A.C. 821 on the principles by which the court decides whether the board has acted within its fiduciary powers and...
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