Wilson v Jaymarke Estates Ltd

JurisdictionEngland & Wales
JudgeLORD CARSWELL,LORD WALKER OF GESTINGTHORPE,LORD RODGER OF EARLSFERRY,LORD HOFFMANN,LORD HOPE OF CRAIGHEAD
Judgment Date20 June 2007
Neutral Citation[2007] UKHL 29
Docket NumberNo 8
Date20 June 2007
CourtHouse of Lords

[2007] UKHL 29

HOUSE OF LORDS

Appellate Committee

Lord Hoffmann

Lord Hope of Craighead

Lord Rodger of Earlsferry

Lord Walker of Gestingthorpe

Lord Carswell

Wilson
(Respondent)
and
Jaymarke Estates Limited

and another

(Appellants)

Appellants:

David Sellar QC

Gavin MacColl

(Instructed by Russel + Aitken LLP)

Respondents:

Malcolm Scott QC

Eric Robertson

(Instructed by Brodies LLP)

LORD HOFFMANN

My Lords,

1

Jaymarke Estates Ltd ("Estates") was incorporated in Scotland in 1991 but remained dormant until towards the end of 1994, when it was used by its two shareholders and directors, Mr Shaw and Mr Wilson, to carry out a property development near Aberdeen. In early 1996, shortly before the development was completed, the directors fell out with each other and Mr Wilson resigned. Mr Shaw, who held 70% of the issued share capital, continued as sole director. In November 1997 Mr Wilson, who held the remaining 30%, presented a petition under section 459 of the Companies Act 1985, claiming that the company's affairs had been conducted in a manner unfairly prejudicial to the interests of a part of its members, namely, himself.

2

After a nine day hearing the sheriff at Aberdeen declared herself satisfied that the petition was well founded. The unfairly prejudicial conduct upon which she relied was (a) an irrecoverable loan of £88,125 to a company of which Mr Shaw's son was a director (b) a payment of £150,000 purporting to be management charges in respect of the year ended 30 September 1995 to Jaymarke (Northern) Ltd ("Northern"), a company wholly owned by Mr Shaw and his wife (c) a payment of £85,000 purporting to be management charges in respect of the year to 30 September 1996 to Jaymarke Developments Ltd ("Developments"), a company in which Mr Shaw held 63% of the issued shares, Mr Wilson 27% and a third party 10% (d) the company's failure to hold annual meetings or lodge annual returns. Pursuant to section 461(2)(d) of the Act she ordered Mr Shaw to buy Mr Wilson's 30% interest for 30% of the net asset value of the company as at 30 September 1996, which, after hearing valuation evidence, she fixed at £49,345. For the purposes of the valuation she deemed the sums paid as management charges to be assets of the company.

3

On appeal the Inner House adhered to the sheriff's interlocutor. The appeal to your Lordships' House does not challenge the finding of unfair prejudicial conduct based upon the £88,125 loan or the failure to hold meetings or make returns. Nor is there in principle any objection to the exercise of the statutory power to order Mr Shaw to buy Mr Wilson's shares. But Mr Shaw says that the sheriff was wrong to treat the payment of management charges as unfairly prejudicial and that they should therefore not have been added back. Without this adjustment, Mr Wilson's shares would have been worthless and Mr Shaw should therefore have been ordered or allowed to buy them for a nominal consideration. In the alternative, he submits that there should be a discount to allow for the fact that Mr Wilson has a 27% interest in Developments, the company to which £85,000 was paid in respect of the year ended 30 September 1996.

4

The reason why the sheriff found that the payment of the management charges was unfairly prejudicial was that neither Northern nor Developments had done anything for Estates by way of management or anything else. There had been no contract for management, express or implied, between them and Estates. They were simply amounts transferred out of Estates at the time when the accounts were signed off, a considerable time after the end of the accounting years to which they related, in the interest of minimising the tax liabilities of the Jaymarke companies as a whole. They had, said the sheriff, no commercial reality. The payments were therefore not in the interests of Estates and a breach of fiduciary duty by Mr Shaw as director. Mr Wilson was not consulted about them and the sheriff therefore concluded that the improper depletion of the company's assets by £235,000 was unfairly prejudicial to his interests as a shareholder.

5

None of these findings of fact are challenged by the appellant. But he submits that the payments were not unfair because Mr Wilson, although not consulted at the time, must be taken to have consented to them in advance. The basis for this argument was that up to 1993, Mr Shaw and Mr Wilson had been together involved in a number of developments carried out by various companies in which they held shares in varying proportions. For most of the time Northern, previously called Jaymarke Investments Ltd, had acted as treasurer, borrowing funds from the bank and paying the interest, and as employer of the staff working on all the projects. It reimbursed itself for these payments by charging the other companies for management. But the amounts charged against each company were agreed each year when its accounts had been drawn up and were not fixed by reference to the services rendered but in order to secure the most favourable taxation treatment.

6

Although under section 32 of the Court of Session Act 1988 the House has no need to go to the underlying evidence, I note that Mr Wilson explained the procedure in his evidence, which was accepted as "credible and reliable" by the sheriff:

"Q. Now, can you tell us this, Mr Wilson. What was the process whereby these management charges were agreed and fixed?

A. On the basis of minimising corporation tax for the group of companies as a whole.

Q. At what time would management fees be looked at for any given tax year?

A. They could only be calculated when the accounts had been taken to final draft stage and the corporation tax computation could be prepared for each company.

Q. Was there any benefit being obtained by the company against whom the management charges were being applied?

A. If we look at [Northern] in particular, which carried the payroll for most, if not all, employees then [Northern] generally charged management charges which at that time would reflect to a degree the work that [Northern] had undertaken on behalf of other companies. But the overriding principle was that there was no distinct calculation of the value of the services. To a degree it is reflected in the management charge but the management charge predominantly was fixed on the basis of the corporation tax payable."

7

In 1992, however, there was down-turn in the market and a crisis of liquidity. The companies were unable to repay the bank facility but the bank chose a run-off by the directors rather than receivership and allowed them to realise the assets. No further developments were undertaken by the existing companies. Mr Wilson was asked what effect that had upon the practice of making management charges:

"A. Well, it left these companies in a situation where any future development was going to be placed in newly formed companies for the purpose of that particular development. In effect, [Northern…was] barely trading other than attempting to realise the assets [it] had."

8

The position therefore was that the practice of providing associated companies with finance or services through a hub or flagship company ceased in 1993 when the...

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4 cases
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    ...conscious knowledge that this was unfair to the petitioner or acted in bad faith. I was also referred to Wilson v Jaymarke Estates Ltd 2007 SC(HL) 135, [2007] UKHL 29, and in particular to the report of that case when it was before the First Division at 2006 SCCR 510 (particularly at paragr......
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