Stainer v Lee & others
| Jurisdiction | England & Wales |
| Judge | Mr Justice Roth |
| Judgment Date | 29 June 2010 |
| Neutral Citation | [2010] EWHC 1539 (Ch) |
| Docket Number | Case No: HC09C04660 |
| Court | Chancery Division |
| Date | 29 June 2010 |
[2010] EWHC 1539 (Ch)
Before: The Hon Mr Justice Roth
Case No: HC09C04660
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Mr Edward Davies (instructed by Clapham & Collinge) for the Applicant
Mr Barry Isaacs (instructed by Jaswal Johnston) for the First and Second Respondents
Mr Tom Sprange (instructed by Steptoe and Johnson) for the Third Respondent
Hearing dates: 9 June 2010
Mr Justice Roth :
This is an application under section 261 of the Companies Act 2006 (“the Act”) for permission to continue a derivative claim seeking relief on behalf of Kerrington Limited (“the Company”) against its two directors, Mr Gerard Lee and Mr Enrique Elliott, and Eldington Holdings Limited (“Eldington”). The application is brought by Mr Robin Stainer (“the Applicant”) who has a small shareholding amounting to about 0.08% of the Company's issued share capital. On 15 December 2009, I made an order on the papers under section 261(3) for the application to be served on the Respondents and the Company and on 8 March 2010 directions were given by consent for the service of evidence. This is accordingly the substantive hearing of the application under section 261(4).
In summary, the Applicant contends that the two directors are in breach of their duties by reason of the circumstances surrounding the lending of very substantial sums of money by the Company to Eldington, a company of which Mr Lee is the sole shareholder and director. Mr Lee, directly and through Eldington, now owns some 87% of the issued shares of the Company. The complaints concern the terms on which those loans were made and, as regards part of the monies, the fact that the loans were made at all. As regards the lending that is subject to the latter complaint, on the basis that the knowledge of Mr Lee is attributable to Eldington, it is alleged that Eldington holds that money as constructive trustee for the Company and so should repay it to the Company.
Background
The Company was incorporated in November 1985 and its business is property investment and development. Mr Lee has been a director throughout, and is described as the moving force behind the Company. Mr Elliott has been a director since 11 December 2000. In about 1988, the Company made an offer of shares to raise finance as a business expansion scheme, which offer attracted over 100 small investors. By about December 2000, the total issued share capital was 12,757,642 ordinary 50p shares, of which about 20% were held by Mr Lee.
On 27 November 2000, an offer was made by Eldington to acquire all the shares in the Company, other than those already held by Mr Lee, at a price of 90p per share. Eldington was incorporated on 19 September 2000 and was described by its solicitor, Mr Sprange, in the hearing as a special purpose vehicle, effectively established for the purpose of this acquisition. As mentioned above, it has been owned and controlled throughout by Mr Lee. As a result of acceptances of its offer, Eldington acquired 62.69% of the issued share capital by 31 March 2001, and subsequent acquisitions took its shareholding as at 31 March 2002 up to 65.58%. As a result, the combined holding of Eldington and Mr Lee was then a little over 85% of the issued share capital of the Company.
In order to fund its offer, as stated in the offer document, Eldington arranged a facility with the Royal Bank of Scotland plc (“RBS”) of up to £6.2 million. Interest was payable on monies borrowed under the facility at a rate of 2% per annum over the RBS base rate. As at 31 March 2001, the amount borrowed by Eldington from RBS appears to have been £4,345,379, and there may have been (the position is unclear on the evidence on this application) further drawing on the facility in the following year of some £300,000. However, by 31 March 2002, Eldington's liability to RBS was entirely, or almost entirely, discharged, since its total bank borrowing, including under the facility, is shown in its accounts as reduced to £5000.
The discharge of Eldington's liability to RBS was achieved by a loan made by the Company to Eldington. On 5 March 2001, Mr Lee wrote to the shareholders in the Company referring to the Eldington offer and informing them that the Company will enter into a loan agreement with Eldington and that, as this would constitute the giving of financial assistance for the acquisition of shares in the Company, this would require approval by special resolution at a general meeting. Although neither a copy of the notice calling such a general meeting nor the minutes of the meeting were in evidence, it appears (and is not a subject of challenge by the Applicant) that such a meeting took place and that the so-called “whitewash” procedure of the Act was duly followed. What is material is the form of loan agreement that was approved. This appears from Mr Lee's statutory declaration filed on 9 May 2001 on Form 155(6)a, which refers to the loan agreement between the Company and Eldington and states:
“The rate of interest applicable to the loans shall be the rate of interest agreed between the Company and [Eldington] or, in the absence of such agreement, the rate payable by [Eldington] under a facility letter between [Eldington] and the Royal Bank of Scotland plc.”
Mr Lee's declaration also states that the amount of cash to be transferred to Eldington is up to £7 million.
One of several curious features of this case is that, despite making three witness statements, Mr Lee has not produced a copy of this agreement (“the Original Loan Agreement”). However, Mr Lee states that on 9 July 2001, Eldington borrowed £4,679,901 from the Company and it is common ground that such borrowing was pursuant to the Original Loan Agreement.
Subsequently, the Company and/or its subsidiaries advanced substantial further sums to Eldington such that the total lending as shown by the accounts as at 31 March each year has been as follows:
| Date | Total owed by Eldington to the Company and/or its subsidiaries |
| 31 March 2002 | £4,863,206 |
| 31 March 2003 | £6,534,924 |
| 31 March 2004 | £6,834,642 |
| 31 March 2005 | £6,950,482 |
| 31 March 2006 | £8,075,607 |
| 31 March 2007 | £8,101,322 |
| 31 March 2008 | £8,105,725 |
However, prior to the commencement of these proceedings, no interest was ever paid by Eldington on this borrowing. Indeed, the annual accounts of the Company for the years 2002/03 through to 2007/08 included a statement as regards the loan to Eldington that: “The loan is repayable on demand and is interest free.” That prompted a query from one of the minority shareholders (a Mr Woolfe) addressed to Mr Lee on 1 December 2003:
“At present I find it difficult to understand how such a loan can be in the interests of the shareholders of Kerrington Limited. I note that you are the sole shareholder of Eldington Limited, and it would appear that the loan benefits you in your capacity as that shareholder, rather than the 34% minority holders of shares in Kerrington Limited.
I shall be glad if you will let me know the circumstances of the loan, and what factors were taken into account in making that loan.”
Mr Lee replied on 4 December 2003:
“It was clearly stated in Eldington's offer document in December 2000 that monies would be lent to Eldington interest free. Obviously the necessary EGM's were called and resolutions passed. Shareholders were advised in the offer document by the independent director to accept the offer, especially if it went unconditional, to avoid being a minority shareholder in a private company.
However, the board has decided for future years interest will be accrued on outstanding monies loaned to Eldington.”
In fact, the offer document makes no reference to the loan being interest free. Moreover, the accounts for the years following this letter do not accrue interest but continue, as I have mentioned, to state simply that the loan (in increasing amounts) is interest free.
Some four years later, on 3 March 2008, the Applicant wrote to Mr Elliott, referring to the increasing size of the interest-free loan to Eldington as set out in the accounts and to Mr Lee's interests in Eldington. The letter asked:
“I would be grateful if you would explain the business rationale for this interest free loan. In particular, I would like to know why the interests of the minority shareholders are better served by continuing with the loan, rather than demanding that it be repaid.”
The reply came from Mr Lee, by letter dated 12 May 2008 in which he stated:
“We have consulted our auditors prior to replying to you, and we have been advised that we should not enter into discussions regarding the company's accounts with individual shareholders.”
There followed correspondence in which the Applicant raised the prospect that there appears to have been a fraud on the minority but asked for an explanation as to why that view may be mistaken; alternatively he asked if Mr Lee wanted to make an offer for his shares. The response was simply an offer to buy the Applicant's shares at 40p, which led to a brief exchange of letters from the Applicant as to why the price should be higher and from Mr Lee declining to increase his offer.
It was against that background and following a detailed solicitors' letter that the Applicant commenced these proceedings. The original Particulars of Claim contended, in outline, that the directors were in breach of their duties to the Company (a) in allowing the lending to Eldington to be on an interest-free basis and (b) in lending further sums to Eldington after 31 March 2002 (“the additional lending”) for some purpose other than discharging or reducing liability incurred for the...
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