Bonham v Crow & Ors [2001] EWCA Civ 1931 (13th December, 2001)

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England and Wales Court of Appeal (Civil Division) Decisions

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Cite as: [2001] EWCA Civ 1931

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Bonham v Crow & Ors [2001] EWCA Civ 1931 (13th December, 2001)

		Neutral Citation Number: [2001] EWCA Civ 1931
		Case No: B2/2001/1217

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CAMBRIDGE COUNTY
COURT (HIS HONOUR JUDGE O’BRIEN)

Royal Courts of Justice
Strand,
London, WC2A 2LL

13 December 2001

B e f o r e :

LORD JUSTICE CLARKE
and
LADY JUSTICE ARDEN
____________________

Stephen Bonham
And
Philip James Crow
James Hull
Bourn Golf Club Limited

Appellant

Respondents

____________________

(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)

____________________

Ms Ceri Bryant (instructed by the Bar Pro Bono Unit for the Appellant)
Mr Clive Jones (instructed by Hewitson Becke & Shaw for the Respondents)
____________________

HTML VERSION OF JUDGMENT
AS APPROVED BY THE COURT
____________________

Crown Copyright ©

Lady Justice Arden :

This is an appeal by Stephen Bonham against the order of His Honour Judge O’Brien in the Cambridge County Court dated 24 November 2000 whereby the judge dismissed a petition for relief under section 459 of the Companies Act 1985. In material part this section provides:

“(1) 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 act or proposed act or omission of the company, including an act or omission on its behalf, is or would be so prejudicial.”

Section 461 of the Companies Act 1985 deals with the relief which the court may grant on a petition under section 459 which the court finds to be well-founded:

“(1) If the court is satisfied that a petition under this Part is well founded, it may make such order as it thinks fit for giving relief in respect of the matters complained of.

(2) Without prejudice to the generality of subsection (1) the court’s order may …..

……

(d) provide for the purchase of the shares of any members of the company by other members or by the company itself and in the case of a purchase by the company itself, the reduction of the company’s capital accordingly.”

The background is as follows. The company, the third respondent, was incorporated on 11 February 1991. Its principal business was the provision of golf facilities. It runs a golf course. Its issued share capital was Ј150, provided in 100 ‘A’ shares of Ј1 each, held by the first and second respondents, and 50 ‘B’ shares of Ј1 each held by Mr Bonham, the petitioner. Mr Bonham is a golf professional. There was no dispute before the judge that the company was a quasi-partnership which had been set up to establish and develop a golf club. Originally there were three directors: Mr Crow, Mr Hull and Mr Bonham. In 1993, however, the parties fell out. The petitioner was dismissed as an executive and his claims arising out of that dismissal were settled in December 1993, but nothing was done about his shares. He resigned as a director on 13 December 1993.

Eventually, in July 1999, Mr Bonham presented a petition under section 459 of the Companies Act 1985. There were a large number of allegations in his petition. All, save two, were rejected by the judge. Those two were that the directors had paid themselves excessive remuneration in respect of the financial years ended August 1993 and 1994, totalling Ј151,000, and that remuneration of Ј15,000 was wrongly paid to the wife of one of the directors in the four financial years 1993 to 1996 (judgment, paragraphs 70 to 76).

There was a shareholders’ agreement between the parties dated 13 December 1991. Clause 1 provides:

“The Shareholders agree that in respect of any accounting year ending after 31 December 1994 in which [there are] net profits on ordinary activities of the Company after tax and as adjusted in clause 3 hereof for that year 50% of the net profit or such lesser amount as may be agreed by [all of] the Directors of the company [shall] be distributed in cash by way of dividend on the ‘A’ Ordinary Shares and the ‘B’ Ordinary Shares pari passu as if the same constituted one class of shares.”

Clause 3 defines “net profits” as:

“aggregate net profits or losses of the Company in respect of such accounting period as shown in or ascertained by an audited profit and loss account of the Company for such period prepared by the Auditors of the Company on a basis consistent with generally accepted and previously applied accounting principles (and so as to be consistent at all times as to the basis of recognising revenue) and in accordance with all relevant statutory requirements and statements of standard accounting practice…..”

Clause 1 does not read happily, but the substance of it appears to be that, in respect of any accounting period ending after 31 December 1994, each party to the agreement would have had the right to compel a distribution among the shareholders rateably of 50% of the net profits and that dividend would have to be paid in cash. Arithmetically that means that the petitioner would have been entitled to a maximum of one-third of 50% of the net profits or a profit of 16.7%. No dividends were in fact paid. Under the company’s articles, on a return of capital, surplus assets would be used to repay the issue price of the ‘B’ shares and then the issue price of the ‘A’ shares. Any further surplus assets would be distributed to the A and B shareholders according to the capital paid up on the nominal amounts of their shares.

The judge considered a large number of allegations of unfair prejudice. He rejected a large number of grounds on which it was said that the first and second respondents had conducted the affairs of the company incompetently. I will refer to two of these grounds in particular:

“10. Carried forward income – joining fees. Ј70,000

62. P [the petitioner] complains that joining fees for the golf club were initially not shown as income in the first year but spread over a period of 10 years. This was done in an unsuccessful attempt to persuade the Inland Revenue to defer taxation on this income. Eventually tax had to be paid on the full sum in the year of receipt. No loss was occasioned to R3 [the company] as a result of this unsuccessful attempt to save tax, as P agreed in cross-examination. This complaint is misconceived. There was no prejudice to any shareholder.

11. Negligent course maintenance – mismanagement. Ј140,000.

63. P complains that R1 [Mr Crow] and R2 [Mr Hull] failed to maintain or arrange the maintenance of the course properly so that the greens became compacted, would not drain properly and permitted extraneous coarse grasses to intrude. The greens had to be rebuilt in 1998 at a cost originally stated to be Ј140,000 but which rose to Ј200,000. In his evidence, P arrived at the sum of Ј140,000 as the cost of 7 years’ maintenance of the greens at Ј20,000 p.a. P agreed that he was involved in the process of laying out the golf course and constructing the greens. …. It is common ground that the greens were not satisfactory. The soil compacted. The drainage was inadequate. The compacted soil hindered the growth of the good quality grass originally provided and this allowed the infiltration of coarser grasses from the rough and fairways ……

65. R2 says that it was in 1995 that the greens began to deteriorate. He agrees that some members left because of the poor state of the greens. He says that contrary to an assertion of Mr Herrington, the greens were always regularly composted and top-dressed. I accept his evidence. He says that there was a regular programme of green maintenance which included spiking. Again, I prefer his evidence to that of Mr Herrington. He accepts that there were times when the spiking machine broke down. He also said that any rolling of the greens, which might compound the compacted soil problem, was with a roller which exerted less pressure than the mower which had to be used to mow the greens. Dr Lodge, an expert in golf course construction and maintenance, was asked by Rs to advise on maintenance and construction work on the greens in July 1998. On the basis of his report it was decided to reconstruct the greens. This was done under Dr Lodge’s guidance. It is his expert opinion that the problems with the greens were not due to negligent maintenance but to the inappropriate method of their original construction. He said that as far as he had been able to tell on his inspection in 1998, the greens were being maintained satisfactorily. Dr Lodge was an impressive and knowledgeable witness and I unhesitatingly accept his evidence.

66. P cannot complain of the original defective construction firstly because, however reluctantly, he agreed to it and secondly, because he purchased his shares with full knowledge of the method of construction. I accept the evidence that it was the method of construction and not the subsequent maintenance that caused the loss of members, loss of revenue and the expenditure to re-build the greens. Insofar as criticisms can be made of the maintenance, for example the spiking machine breaking down or the lack of an experienced green keeper until 1995, it seems to me that these matters are a very long way from amounting to the sort of “serious mismanagement of a company’s business” which could be said to be “prejudicial to the interests of minority shareholders” as envisaged by Warner J in Re Elgindata (above). This complaint is ill founded.”

As to the allegation of unfair prejudice which were upheld, the judge found that Ј120,000 had been paid to the first two respondents by way of directors’ remuneration in the year ended 31 August 1993 and Ј53,750 in the year ended 31 August 1994. The petitioner’s remuneration was only Ј15,000 annually under his service contract. The second respondent was not even full-time. I understand that neither the first nor the second respondent had a service contract. The judge also found that excessive remuneration had been paid to Mrs Crow, the wife of the first respondent, in the sum of Ј60,000.

The judge held that if the remuneration had not been paid to the first and second respondents, the company would have to have paid corporation tax on its profits but would have been better off to the tune of Ј90,000 in respect of the financial year ended 31 August 1993, and Ј40,312 in respect of the subsequent year.

The judge then moved to the second stage, namely the valuation on the petitioner’s shares because the relief which the petitioner was seeking was that his shares should be bought out.

The judge relied on the evidence of Mr Stephen Lygo, the expert on share valuation called by the first and second respondents. He also referred to a preliminary report of Mr Bligh of Touche Ross adduced by the petitioner but he held that the evidence of Mr Bligh did not undermine that of Mr Lygo. The judge held that the relevant date was 20 July 1999, the date of the presentation of the petition, and that the nearest figures were the draft figures of 30 August 1999. He was told they had since been finalised. They showed a deficit of Ј276,683. The judge added back the difference between the book value and the current market value of the company’s real property, and then he added back the remuneration which had been taken out, but without interest, on the grounds that the cash had stayed in the company. When he made that write back, he did it in the year ended 31 August 1999 i.e. not in the years in respect of which remuneration was taken, and he made the adjustment not in the total amount of the directors’ remuneration, but in the aggregate sum of Ј130,312, being the sum of figures of Ј90,000 and Ј40,312 to which I have already referred. He also added back Ј82,000 in respect of Mrs Crow’s salary and interest.

The judge then found that the shareholders’ funds were still in deficit to the tune of Ј121,732. At paragraph 89 of his judgment, the judge accepted a submission by the respondents that

“there is no practical point in making an Order for the purchase of the shares by the Respondents.”

He then referred to an offer which the respondents had made (as I understand it, in the course of counsel’s closing address) to submit to an order to purchase the shares in the sum of Ј5,000. The judge decided not to make that order because the petitioner did not wish to dispose of his shares for that amount.

In paragraph 90 of his judgment, the judge considered the impact of various offers that had been made during the currency of the petition for the petitioner’s shares. He held that he was not satisfied that they were fair offers at the time they were made, except that the offer of Ј5,000 to which I have just referred, appeared to the judge to be fair, although not acceptable to the petitioner.

In those circumstances the judge held that the petition failed. He went on to deal with the costs. He said that he had already heard certain arguments on costs and ruled that the petitioner must pay the respondents’ costs, subject to a detailed assessment. It is not clear what argument the judge heard on the costs issue. But in any event he held that the petition failed and that the petitioner must pay all the costs. He did not give reasons.

Pursuant to an order made on 21 June 2001 (Tuckey and Arden LJJ) permission to appeal is limited to:

the write back of remuneration found to be unfairly prejudicial into the accounts for the years in which it was paid;

the treatment of joining fees;

interest on directors’ drawings and

costs.

All these grounds of appeal other than the fourth relate to the valuation of the shares of the petitioner.

Appellant’s Submissions

The petitioner was not represented below. On this appeal he is represented by Ms Ceri Bryant. Ms Bryant criticises the judge’s treatment for valuation purposes of the joining fees and remuneration found to be excessive and submits that had the judge approached these matters and the date of valuation correctly he would have concluded that the shares had considerable value.

She submits the judge failed to take account of the effect of including joining fees in the company’s balance sheets under “creditors” instead of under “assets”. These joining fees were paid by individuals who became members of the club and, on Ms Bryant’s submission, such fees are not refundable in any circumstances and therefore could all have been taken as income in the years in which they were earned. They were not so taken for tax reasons. Ms Bryant submits the judge had evidence on the point. Further, she submits that if the sum of Ј99,925 (representing the amount of joining fees as at the end of the 1996 financial year not already credited to profit and loss account) should be credited to the company’s profit and loss account for 1996, as the company stopped charging joining fees in that year. The judge should have considered whether the joining fees were more appropriately treated as an asset than a liability for the purpose of valuing the petitioner’s shares.

Ms Bryant also submits that the judge failed to add the excessive remuneration back into the accounts for the year in which the respective payment was made. If he had done so the company’s distributable reserves would have increased. Moreover, the dividend arrangements in the shareholders’ agreement would have been applicable. In addition, the judge failed to add back interest on the directors’ remuneration (as opposed to Mrs Crow’s remuneration) notwithstanding that only some of the excessive remuneration had remained in the company.

Ms Bryant also submits that the judge ought to have taken into account in his valuation his finding (judgment paragraph 87) that the appellant’s shares at least had value “to R1 and R2 to enable them to end P’s involvement in the Company”. However, Ms Bryant places no figure on this.

Ms Bryant submits that the argument that remuneration should be written back in the years in which it was voted to be paid was raised at the trial by paragraph 5 (m) of the amended petition. Ms Bryant submits that no new evidence is required for this argument.

Ms Bryant submits that under the shareholders’ agreement dividends are automatically payable. That agreement was enforceable because it was made between the shareholders, not the directors: compare Russell v Northern Bank Development Corporation Ltd (1992) BCC 578. Indeed, she also submits that there are circumstances in which directors can make a contract which fetters their discretion in any event: Fulham Football Club Ltd v Cabra Estates plc (1992) BCC 863. In the circumstances evidence as to whether the directors would have resolve to pay dividends to any year was irrelevant.

Under the proviso to clause l of the shareholders’ agreement, the directors can agree a lower rate of dividend than 50%. However, Ms Bryant submits that in valuing shares for the purposes of section 461 it should be assumed that the respondents would not have exploited the fact that the petitioner was no longer a director.

Ms Bryant then turns to the effect of the write back of remuneration and the treatment of joining fees as assets. Ms Bryant submits that the judge was right to value the petitioner’s shares on a net asset basis. However, the shares ought not to be valued on the basis of the balance sheet and the annual accounts for the years ended August 1999. It is to be noted that in that year the company incurred costs of Ј270,773 in 1999 in respect of “course maintenance”, an increase of Ј128,876 on the corresponding amount for 1998.

Ms Bryant submits that the shares should have been valued as at a date earlier than the date of the judge’s judgment for the following reasons. Although as a general proposition the date of the order for the purchase of shares would be the starting point for determining the date of valuation the overriding requirement is that the petitioners’ shares should be valued at a date which is a fair on the facts of the particular case: ProFinance Trust SA v Gladstone [2001] EWCA Civ 1031. The practical consequence of their being very many cases in which fairness requires the shareholders’ shares to be valued at an earlier date is that there is no rule at all: see Re London School of Electronics Ltd [1986] Ch. 211. In addition, in order to show that fairness requires that shares be valued at an earlier date, it is not necessary to show that the circumstances meet one or more of the criteria set out in ProFinance because the list of examples of circumstances where it has been accepted that it is fair to value shares at a date earlier than the date of the order for share purchase is not exclusive.

In the present case Ms Bryant submits that it is fair to value the petitioner’s shares at the date of the presentation of the petition on the ground that it was at that point that the petitioner elected to be bought out of the company: London School of Economics [1986] Ch. 211. Alternatively, it is fair to value the shares at the date of the presentation of the petition if the unfairly prejudicial conduct of the respondents makes it unfair for the petitioner to suffer a drop in the value of the shares even if that fall is attributable to circumstances outside the control of the respondents: re Cumana Ltd (1986) BCC 99, 495. In the present case, however, the 1999 draft accounts would not then have been available to the petitioner and so to carry out a valuation at the date of presentation the judge should have used the 1998 accounts.

Ms Bryant submits that whether or not it would be fair to value as at the date of the order can depend on whether irregularities in the accounts have been corrected: re Elgindata Ltd (1991) BCLC 959 at 1005 – 6. In this instance because a petitioner is no longer a director and the accounts are unaudited there is no scope for scrutiny of the accounts. The petitioner is concerned about the treatment of the item “course maintenance”. Moreover, the judge’s factual findings about the reconstruction of the greens were made by reference to the 1998 accounts, not the 1999 account.

On interest, Ms Bryant submits that in principle interest should be credited on amounts drawn on the basis of the excessive remuneration. The evidence in the trial bundle indicates that the directors debited some Ј41,000 against that remuneration to or for their own benefit in 1994. Alternatively, the petitioner should have interest on the distributions he ought to have received under the shareholders’ agreement.

On costs, Ms Bryant submits that the petitioner acted reasonably in refusing the respondent’s offers made prior to the presentation of the petition because they were not offers to purchase the petitioner’s shares at their fair value pursuant to the company’s articles (dealing with pre-emption) because they provided for the petitioner’s shares to be valued by an independent firm of accountants on the basis there set out and because further unfairly prejudicial conduct occurred after the date on which the offers were made. Ms Bryant submits that the offer of Ј70,000 made in October 1995 compares badly with the maintainable dividend valuation as at that date of Ј83, 184 and the net asset valuation at that date of Ј131,804.

In any event the petitioner did not have the information necessary to ascertain whether they were fair offers: see ProFinance, above, at paragraph 57 and O’Neill v Phillips [1999] 1 WLR 1092 at 1107. There has to be an equality of arms with both parties having the same right of access to information about the company which bears on the value of the shares and in the case of a valuation both parties having the right to make submissions to the experts.

The respondents’ offers were made prior to the presentation of the petition are not material to whether or not the petition was properly pursued. There was no application to strike out the petition based on the offers to the petitioner. Nor were these offers repeated after the presentation of the petition.

Ms Bryant submits that the judge’s decision in relation to the offer of Ј5,000 made in the course of the closing address was wrong. The offer came too late to have any bearing on whether the petition was rightly presented or rightly maintained.

Ms Bryant submits that the petitioner should have had his costs of the petition since he established that the company’s affairs had been conducted in a manner which was unfairly prejudicial to him on two very substantial grounds. Alternatively, an order for costs which reflects his success on those issues should be made.

Respondents’ Submissions

Mr Clive Jones, for the first and second respondents, submits that at trial the petitioner made no challenge to the judge’s valuation of his shares on a net asset basis, nor to the valuation date selected by the judge.

Mr Jones submits that the issues on this appeal are whether the decision of the lower court was wrong because the trial judge did not value the shares on a maintainable dividend basis and therefore did not make the adjustments now contended for and whether such adjustments if and to the extent that they ought to have been made would result in his decision being wrong. Mr Jones submits that the judge was not wrong because he was not asked to value the shares on a maintainable dividend basis and in any event found that that the company was insolvent (judgment, paragraph 87) with the result that there could not be a maintainable dividend with or without adjustments. He submits that the claimant should not be permitted to contend a different basis of valuation for the first time after judgment. He further submits that even if the adjustments are made and a maintainable dividend valuation applied the accounts of the company for 1998 and 1999 would quite clearly show that the company could not pay dividends and would not be able to do so in the foreseeable future with the result that the appeal has no practical foundations.

The respondents have produced their own figures showing the effect of adding back the directors’ remuneration and including joining fees as receipts. They submit, on the basis of these figures, that there is no maintainable dividend and thus that the shares have no value on that basis. Accordingly, they submit that it makes no difference whether a net asset valuation or maintainable dividend basis of valuation is used.

The fact that the judge could have chosen a maintainable dividends basis of valuation does not mean that the basis which he chose, net asset valuation, was wrong. The basis now advanced is a new basis. There is no expert evidence advanced in support of it at trial and no expert’s report disclosed in accordance with the directions of the court. At trial the petitioner referred to a preliminary report of Mr Bligh of Touche Ross dated May 1995 but this was not for the purpose of valuation of the shares.

The court ought to make an allowance for the fact the second respondent had effectively worked full-time for the company from its incorporation and therefore some payment to the second respondent might have been justified. In addition, the judge found that the first respondent had worked a few hours a week for the company from its incorporation and that the first and second respondents and their wives and connected companies had not charged interest in respect of their respective loans to the company.

As regards joining fees, Mr Jones submits that the treatment which the company adopted was acceptable because the funds should be available for the benefit of the golf club over the period during which a member might be expected to continue his membership (in this case 10 years) as opposed to allowing shareholders to take out the subscriptions for their own personal benefit as and when they are received. In any event, the point that joining fees should have been included as a receipt was not made to the judge.

Mr Jones submits that even if the adjustments were made, dividends would not have been declared. The directors could not fetter their discretionary powers to distribute profits in advance and the shareholders’ agreement must be construed subject to that principle or implied term. The first and second respondents would have been entitled to take into account the future performance of the company and the anticipated liabilities when deciding whether or not and in what amount dividends should be declared. Moreover, the first and second respondents would have been entitled to file evidence, both expert and factual, concerning the declaration of dividends had the petitioner contended before or during trial that a maintainable dividend valuation should be used. Mr Jones accepts that the judge did not take the shareholders’ agreement into account when he performed his share valuation. However, on Mr Jones’ submission, it was not necessary for him to do so, because the expert evidence identified the appropriate methodology and type of adjustments. There was no right or wrong way of valuing the shares. It was a matter for the judge’s discretion. He took into account the expert evidence and submissions and the fact that the company was only kept going through loans made by the respondents. He also held that the company was incapable of making a profit even if the membership was increased to the maximum of 450 persons.

In 1998 and 1999, the company needed substantial capital in order to reconstruct its greens and this was only available through the accommodation offered by the first and second respondents. The petitioner did not present his petition until 20 July 1999. The court should take into account all financial information relevant at that date, even if the accounts to the nearest practicable date were not then available.

The judge was entitled to reach his decision that the shares were valueless. Moreover, the appeal is academic because the company cannot pay dividends either now or in the foreseeable future.

As to the judge’s order as to costs, the petitioner has succeeded on only two out of thirteen grounds argued at trial. He failed to obtain any relief and had, therefore, lost. The issues on which he succeeded occupied at most 1Ѕ days out of a 5 day trial.

Mr Jones submits that it was a matter for the trial judge’s discretion whether to award all the costs of the respondents or to make some apportionment to take into account the fact that the petitioner had established unfair prejudice. The judge exercised that discretion from a position of being able to assess the overall conduct and process of the trial. He was entitled to reach his conclusion.

As to the offers made before the petition, the judge wrongly held that he should not take those into account because the petitioner did not have evidence that the value was fair at those dates. The judge ought to have taken into account those offers and the further offers made on 24 November 1997 (Ј80,000) and the second made on 2 May 2000 (Ј10,000) in favour of the first and second respondents. The question was not whether they were fair offers at the time but whether the petitioner’s decision to reject them, delay, present a petition and cause the first and second respondents to incur costs resulted in him achieving a better or worse result than he would have achieved by accepting the offers. Mr Jones submits that the judge did not take the Ј5,000 offer into account on costs. It was not presented as an argument on costs.

Conclusions

The judge was faced with a complex dispute and there is no challenge to his factual findings. His crucial finding was that the affairs of the company had been conducted in a manner which was unfairly prejudicial to the petitioner with respect to the payment of remuneration to the directors in 1993 and 1994 and to Mrs Crow in the years 1993, 1994, 1995 and 1996. However, by the time of the presentation of the petition, the company had ceased to be profitable because of the very heavy investment it had had to make in reconstituting the greens. Indeed, on the judge’s findings the company at that date had a deficiency of assets.

The power conferred on the court under section 461 of the Companies Act 1985 is to make “such order as it thinks fit for giving relief in respect of the matters complained of”. The specific form of relief sought by the petitioner was an order that the first and second respondents should buy his shares. The courts have commonly made orders for the purchase of the shares of successful petitioners on terms which take account of the loss which they have suffered through the wrongful acts of the respondents (see for example Scottish Co-operative Wholesale Society v Meyer [1959] AC 324, a case under the predecessor section in the Companies Act 1948). The judge, having found unfair prejudice in the respects mentioned, gave no relief. The form of relief under section 461 is discretionary and on an appeal as to the judge’s choice of remedy or relief it has to be shown that his order was outside the generous ambit within which disagreement is possible or is otherwise reviewable on the grounds of which an exercise of discretion can be reviewed on appeal: see per Mummery LJ in Re Full Cup Trading Ltd [1998] BCC 58. So too here the judge must be shown to be plainly wrong. However, in my judgment that test would be met if the judge failed to take into account matters which should be taken into account in the valuation of the petitioner’s shares under section 461 to compensate him for the unfairly prejudicial conduct found by the judge and which would produce a positive value for those shares.

As Mr Jones is constrained to accept, when the judge reached his conclusion on the appropriate form of relief, he did not consider the provisions of the shareholders’ agreement. Under clause 1, if the company made a profit as shown by its audited annual accounts for any year following 31 December 1994, 50% of those profits would have to be distributed to the shareholders unless the directors otherwise agreed. Moreover, the judge found that the expectation was that 50% of the profits would be distributed unless not only the first and second respondents (the remaining directors) but also the petitioner agreed to some lesser distribution (judgment paragraph 71).

The position was that if the remuneration which the judge held was unfairly prejudicial had not been drawn the company would have had profits in 1995, 1996 and 1997 to make distributions. Using the figures found by the judge, there would have been credits after tax of Ј90,000 in 1993 and Ј40,312 in 1994. These sums, if added back to the profit and loss account reserves as at the end of those years, would have eliminated the debit balance on those reserves which were substantially caused by the remuneration improperly drawn. Moreover, if remuneration of Ј15,000 had not been paid to Mrs Crow in 1993 to 1996, the company’s profit and loss account would have been enlarged in each of those years. The judge found that the relevant figure, with interest, was Ј82,000. A quarter of this sum too would have formed part of the result shown by the profit and loss account of the company for the relevant year if it had not been paid out.

Mr Jones submits that the balances on the profit and loss account would have not been available to be dealt with in accordance with the shareholders’ agreement on the ground that the directors would inevitably have had to create a reserve to deal with the deteriorating state of the greens. The fact, however, is that they did not do this and that none of the accounts in the relevant years – 1995, 1996 and 1997 - make any provision in respect of this matter or refer to it. The judge’s findings suggest that the directors probably only realised the full extent of the loss when Dr Lodge made his report in July 1998. I do not think anything for this purpose turns on the statement in the directors’ report for 1996 that the directors do not recommend the payment of a dividend as by then remuneration of nearly Ј200,000 had been wrongly charged to the company. Mr Jones also submits that the judge failed to make any allowance for the respondents’ own remuneration in this period. However, it is clear that the reason why the judge made no such allowance is that there was no evidence as to what remuneration would be justified. Mr Jones replies that if this argument had been put at trial the respondents would have led evidence about this. The answer to that point is twofold. First, reference was made in the amended petition to the fact that various acts of the respondents prevented the distribution provisions of the shareholders’ agreement from being operated. Second, the question of what remuneration was justified for the respondents was directly in issue because of the petitioner’s allegation that the remuneration was excessive. On this the judge’s findings were wholly in the petitioner’s favour.

I accept that in pursuance of their fiduciary duty the directors would have to have considered whether or not the interests of the company required them to agree some lower limit. But when the time for making distributions under the shareholders’ agreement arrived, the petitioner had ceased to be a director. The judge held that his agreement was necessary and in the circumstances he had no obligation to withhold it on the basis that he had a fiduciary duty to the company. It is not suggested that the company could not lawfully have paid the distributions. Moreover, the first and second respondents would not have to withdraw their share of any distribution: they could have left the money in the company. Given the amount drawn on account of the directors’ (wrongful) remuneration, I do not accept that the company could not have found the funds to pay the petitioner’s share of distributions.

The dilemma which faced the judge was this. The clear effect of his findings was that the first and second respondents had taken remuneration improperly and thereby denied the petitioner the opportunity of receiving distributions in accordance with the terms of the shareholders’ agreement. If the profits available for distribution by way of dividend had not been reduced before the valuation date he could simply have calculated the amount of distribution to which he would have been entitled and taken that sum into account in his valuation. However, the fact of the matter was that by the time of the valuation date the company no longer had distributable reserves. There was indeed a deficit on shareholders’ funds. That is not to say, however, that the shares had no intrinsic value since the judge found they had value to the first and second respondents in enabling them to end the petitioner’s involvement with the company. In addition, the company continues to trade as a golf club. This suggests that the judge’s conclusion that the company was incapable of making a profit on a commercial basis, even if the membership increased to the maximum of 450, was unduly pessimistic. Although there is no evidence as to the value of the company it is apparent that the company must have some intrinsic value or some internally generated goodwill, which cannot be shown on the balance sheet.

The judge quotes Mr Lygo as saying that the company only continues in business through interest free loans from the directors, but so far as can be seen from the accounts which were in evidence those loans are the result of the remuneration improperly drawn remaining undrawn although related undertakings (i.e. undertakings related to the directors) are also shown as creditors of the company, but this is stated to be as a result of terms agreed at arm’s length.

The judge’s valuation process is not capable of being disturbed unless it was plainly wrong or omitted to take account of some relevant consideration. In my judgment, the judge failed to take into account the effect of the shareholders’ agreement and his failure to do so vitiated the exercise of his discretion. He should, in my judgment, have concluded in all the circumstances that in order to grant “relief in respect of the matters complained of” and upheld by him, the remuneration wrongly withdrawn would have to be recredited to the company’s accounts in the years in which it was paid, a calculation then made as to the distributions which the petitioner could then have required to be made in his favour and the sum so determined added to the price to be paid pursuant to an order for the purchase of the petitioner’s shares. This would compensate the petitioner for the share of profits he had lost. Moreover, such an order would not be unfair to the first and second respondents, even though the company’s shares were found to have no value at the valuation date. On the contrary, in my judgment, it is unjust if by reason of that fact the first and second respondents could altogether avoid their obligations under the shareholders’ agreement.

To take any other course would be to fail to stand back and appreciate that the result of the petition was that although the petitioner had established substantial unfair prejudice and the shareholders’ agreement had not been observed he had wholly failed to obtain any relief. The petitioner was entitled to be put in the position he would have been in if the first and second respondents had fulfilled their obligations under the shareholders’ agreement. As I have said, the fact that the shares were (on the judge’s findings) of no significant present value by the date of the petition did not prevent this conclusion. There had after all been no application to strike out the petition on the basis that no value could attach to the shares on an order under section 461(2)(d).

It is said that the judge would have been wrong to take the approach to the shareholders’ agreement which I have preferred above. It is said that the petitioner was thereby able to take advantage of the fact that the respondents had financed the company in the meantime. However, there is no evidence to suggest that the petitioner deliberately delayed in bringing his petition in order to take advantage of the work which the respondents had done. Moreover, it was on the judge’s findings the fault of the first and second respondents that the petitioner had not received the distributions due to him under the shareholders’ agreement.

Mr Jones submits that the petitioner should have pursued his claim under the shareholders’ agreement by way of a separate action. However, he did not go so far as to submit that his complaint about breach of this agreement could not be brought under section 459. In my judgment, it would have been inconvenient in practice for him to start separate proceedings in respect of this element of his claim, and thus nothing turns on the availability of the separate remedy. He could not have obtained a buy out order in an action for breach of contract.

The judge added an (unparticularised) amount for interest into his valuation on Mrs Crow’s remuneration which was obviously drawn, but failed to do so in respect of the Ј41,000 drawn on the directors’ remuneration in 1994. In my judgment, he ought consistently to have added interest on those drawings and it was plainly wrong for him not to do so. We do not know what rate he used, but provisionally I consider that it would not be unreasonable to add 7% per annum by way of simple interest as from 1 September 1994. This is compensation for the company. It does not, therefore, exclude interest on any distribution that ought to have been made to the petitioner. However, Counsel may make submissions on the rate of interest if they wish. In my calculations I have used the rate of 7% p.a.

I now turn to my calculations of the amounts available to make distributions under the shareholders’ agreement to the petitioner if the remuneration wrongly authorised and/or paid had not been so authorised or paid. I take 1993 and 1994 together as the shareholders’ agreement would apply only to the profits made in the financial years after those years. I go no further that 1997 because of the company’s losses after that date (1998: Ј75,263 loss for the year after tax). I use the judge’s figures for the amounts that ought to be restored to the company save that I have reduced his figure for the total cost of Mrs Crow’s remuneration which was Ј20,500 (annualised) to Ј18,000 to allow for corporation tax. This is not an allowance for corporation tax at the full rate but the effective rate is similar to that used by the judge on the directors’ remuneration and there is evidence that the company could have reduced its tax bill by utilising losses or deferred tax provisions. I have rounded fractions to the nearest whole Ј.

Accordingly, on these calculations, if the unfair prejudice had not occurred, the petitioner would have been able to claim distributions of Ј12,391 under the shareholders’ agreement. For the reasons given above, this sum should form part of the valuation of the petitioner’s shares for the purposes of the buy out order. That leads to the question of the value to be placed on the petitioner’s shares as at 20 July 1999. It would, I think, be offensive to any notion of justice to place a nil value on them. They clearly have some value: see the level of profits made in 1996 and 1997. Moreover, the company still trades. In addition the judge held that there was a value to the first and second respondents in ending the petitioner’s involvement with the company. This was so notwithstanding the size of the deficit he found there to be. On the information available, a scientific valuation of the company’s capacity to make profits in future (thus giving a figure for internally generated goodwill to be added to net assets) is not possible. The court must do the best it can to find the appropriate value on the evidence available and the judge was wrong not to do so. The first and second respondents made two offers to acquire the shares in the course of these proceedings. I bear in mind the circumstances in which these offers were made. By the time these offers were made the first and second respondents had incurred costs and the first offer (Ј10,000) was expressed to be “a ‘nuisance’ offer made in the circumstances of our clients endeavouring to end this expensive litigation”. The second offer (Ј5,000) made during closing speeches, possibly in an endeavour to cut to gordian knot. Nonetheless it seems to me that these offers provide adequate evidence as to the value of the shares to first and second respondents for the purposes of the court’s valuation as at the petition date. They were offers to acquire the petitioner’s shares, not just for the withdrawal of the proceedings, and the shares could still have a value to the first and second respondents even if the company had negative net assets at the valuation date. As between the two offers, it can be argued that the figure of Ј10,000 should be taken as being the nearest to July 1999. Taking into account all these factors, and doing the best I can to achieve a valuation on a broad and equitable basis, it seems to me right to take a figure halfway between these two figures, namely Ј7,500, making a total price for the shares of Ј19,891 exclusive of interest on the unpaid distributions.

In the normal way dividends declared by the company but unpaid would not carry interest (see regulation 107 of Table A which applies to this company). However, dividends were never declared and given that the exercise is one of giving relief in respect of the improper authorisation of remuneration and the failure to make distributions in accordance with the shareholders’ agreement, the proper result in my judgment would be to add interest on the distributions which ought to have been made at a commercial rate down to the date of payment. In my view it would be reasonable to direct that interest should run from the expiry of five months after the relative year end. The accounts for 1995, 1996 and 1997 were not, in fact, signed until much later, but I do not consider it would be fair to use this date. Subject to any submissions Counsel wish to make, I would direct that the appropriate rate of interest is 7% per annum (simple).

The joining fees, however, stand on a different footing. According to its annual accounts, the company had adopted the following accounting policy: “Joining fees are credited to the profit and loss account over a period of 10 years to reflect the membership rights and average period of membership. When memberships are cancelled the relevant joining fees, in so far as they have not already been credited to the profit and loss account, are recognised in full as income in the year of cancellation”.

This policy was adopted in the hopes of favourable Revenue treatment which was not obtained. The joining fees were not refundable and were not charged after 1996. However, there is no evidence at trial that this policy was not one which could properly be adopted as a matter of accounting and thus the joining fees cannot in my judgment be written back into the 1996 accounts as the petitioner wishes. Ms Bryant sought to adduce new evidence which could have been adduced below and I would, therefore, not permit it to be adduced on appeal. On the other hand, the evidence before the judge showed that there was no liability in respect of these fees. Mr Hulme, a partner in the company of auditors, said in his witness statement that they were “one off payments for the privilege of belonging to the club for years.” There was also evidence before the judge that they were a source of financing for the development of the golf course and club house. In those circumstances, the judge ought, in my judgment, to have credited the amount of joining fees shown as creditors in the company’s accounts against the deficit on shareholders’ funds. This was not inconsistent with his holding that the policy was not unfairly prejudicial but would have been a recognition that the fees were equivalent to cash at bank so far as the company was concerned. However, on the assumption that the appropriate figure is that of Ј99,925 given above, even if he had done this and added seven years’ interest on the directors’ drawings (Ј20,090) it would not have turned the deficit on shareholders’ equity into a credit. He would also have to have deducted distributions payable under the shareholders’ agreement (Ј31,598). On net asset basis, the shares did not have any present value as at the date selected for valuation. However, the deficit would have been of the order of Ј32,000, an amount significantly less than the judge’s figure (Ј121,732).

As to the date of valuation, this was a matter for the discretion of the judge. He is criticised for using the 1999 accounts and not the 1998 accounts which were those which would have been available to the petitioner when he presented his petition in July 1999. On the other hand, the accounts on which he used, the draft accounts to 31 August 1999, were those drawn to the nearest accounting date to his valuation. (Indeed they are also the latest accounts available to the judge or this court). No objection is taken to the 1999 accounts on the basis that they are draft accounts. It is argued instead that he failed to appreciate that there had been an increase of approximately Ј100,000 in the course maintenance costs in this year to the detriment of the petitioner. However, in my judgment, this must have been apparent to the judge since he had a full set of the accounts in front of him. The fact that he made his findings of fact by reference to the 1998 accounts does not, in my judgment, mean that it was not appropriate to use the 1999 accounts for valuation purposes. His findings were that the petitioner had agreed to the original defective construction of the greens and purchased his shares with knowledge of the method of construction. He also found that it was the method of construction and not the subsequent maintenance which caused this further exceptional expenditure. In any event, if the 1998 figures had been used, there would have to have been some adjustment to them for the then known liability to repair the greens to produce a fair valuation. The judge’s finding was that the company received expert advice on this in about July 1998. In all the circumstances, it cannot, in my judgment, be said that the judge was plainly wrong to use the petition date or the company’s 1999 figures in seeking to value the petitioner’s shares as at that date.

Ms Bryant submitted that the ‘A’ shares of the first and second respondents were not paid up because the judge found that they would pay up their shares and a premium on them equalling the petitioner’s contribution of Ј60,000 by carrying out construction work on the golf course. The accounts showed that the nominal amount had been paid up but not the premium. Ms Bryant submits that no part of the shares should, therefore, be taken to be paid up. In the event, I do not think this point matters. There is no evidence to suggest that the ‘A’ shares were not paid up as to the nominal amount. The question whether or not the first and second respondents’ failure to provide the premium was unfairly prejudicial or should be taken into account in the valuation is not before us. Moreover, under the articles the rights of the shareholders to surplus assets after repayment of the amount paid up and (in the petitioner’s case) premium are not affected by whether or not this premium has been paid.

I am satisfied that the question of the writing back of the directors’ remuneration, the treatment of joining fees, interest on the directors’ drawings and the appropriate date for valuation of the petitioner’s shares are all matters which can properly be raised by the appellant on this appeal. They involve consideration of points of law or evidence before the judge and do not involve prejudice to the first and second respondents.

Accordingly, in my judgment the appeal should be allowed and an order made for the purchase of the petitioner’s shares in consideration of the sum of Ј19,891 plus interest as described above. This is far less than the petitioner hoped to receive when he began these proceedings. Likewise, it is far less than the first and second respondents originally offered to him. However, the proposed order would in my judgment meet the provisions of section 461(1) that the order should “give relief in respect of the matters complained of” which were upheld by the judge on the basis of the findings which he made and the evidence available to him.

In O’Neill v Phillips (above), the House of Lords gave form and definition to the concept of unfair prejudice for the purposes of section 459 of the Companies Act 1985. It is a comparatively narrow definition, but respect to excessive remuneration the judge’s findings clearly bought this case within it. The power to provide relief conferred by section 461 is an important element in our company law: a kingpost of the Companies Acts and a provision which is essential for a competitive economy, in which small businesses play a vital part. It would undermine the value of minority shareholders’ rights and the policy behind sections 459 to 461 if the court were not to provide some remedy in this case.

If the petitioner so requests. I would provisionally further direct that the order on this appeal should lie in the Court of Appeal Office until 12 noon on Monday, 17 December 2001 to give the petitioner an opportunity to consider whether he wishes to withdraw his proceedings in the light of the proposed order. If he did so, it would have to be on terms as to costs. Accordingly, consequential orders will be necessary if this course is taken.

That leaves the question of costs on the basis of the proposed order. In the light of my conclusion that the appeal should be allowed, the question whether the judge’s order as to costs was plainly wrong in any event and does not now arise. There will have to be further argument as to the appropriate orders to be made here and below. Such argument should reflect the fact that the petitioner lost on a substantial number of issues below and the fact that the appeal is allowed. As argument has already been advanced as to the effect on costs of the offers made by the first and second respondents to buy the petitioner’s shares, I will state my views on that question.

Certain offers were made before the litigation began and offers of Ј10,000 and Ј5,000 were made in the course of litigation. As regards the offers made before the proceedings were started, these were not offers to submit to an independent valuation in accordance with the articles and the judge found that it was not possible for the petitioner to know whether or not the offers were fair. Mr Jones has not sought to disturb the judge’s finding on fairness but rather to rely on the fact that the earlier offers exceeded what the petitioner ultimately obtained by litigation, but as I see it, Mr Jones cannot succeed on that point unless he can show it was reasonable for the petitioner to accept them. Accordingly, those offers should be disregarded. There were two offers made in the course of the litigation as set out above, one of Ј10,000 and one of Ј5,000. These offers are not relevant because they are exceeded by the valuation which this court has placed on the petitioner’s shares and in any event they made no provision for the petitioner’s costs.

Lord Justice Clarke:

I agree.

© 2001 Crown Copyright

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