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OUTER HOUSE, COURT OF SESSION
[2021] CSOH 109
P416/19
OPINION OF LORD CLARK
in the petition of
CHARLES MARTIN
Petitioner
against
(FIRST) THOMAS HUGHES
(SECOND) HENRY CLARK SEDDON
(THIRD) RAM 232 LIMITED
Respondents
Petitioner: Gillies Sol Adv; Pinsent Masons LLP
Respondents: MacColl QC, McKenzie; Wright, Johnston & Mackenzie LLP
26 October 2021
Introduction
[1]
The petitioner is a minority shareholder in a limited company which provides
accountancy services. It was previously named Gerber Landa and Gee Limited and is now
RAM 232 Limited ("the Company"). The business formerly operated as a partnership. The
petitioner seeks orders under sections 994 and 996 of the Companies Act 2006 on the
grounds that the affairs of the Company have been conducted in a manner that was and is
unfairly prejudicial to the interests of the members, including himself. He seeks relief in the
2
form of a compulsory purchase of his shares in the Company by the respondents. The
respondents deny any unfairly prejudicial conduct. The parties are also in dispute as to the
fair value of the petitioner's shares, based on the evidence of their respective experts, should
the shares require to be purchased. The case called before me for a proof before answer,
with six days of evidence followed by one day of oral submissions.
Background
[2]
On the evidence, and in part agreed by joint minute, the factual background is as
follows. The Company was incorporated on 18 April 2013. Its original directors and
shareholders were the petitioner, the first respondent (Mr Hughes), the second respondent
(Mr Seddon) and James Murphy. The petitioner, Mr Hughes and Mr Murphy each came to
hold 1500 shares and Mr Seddon held 500 shares. The four individuals were previously the
partners in the partnership, with the trading name of Gerber Landa & Gee. On
21 November 2013, shortly before the transfer of the business, assets and goodwill of the
partnership to the Company (which occurred on 1 December 2013) the directors and
shareholders of the Company entered into a Minute of Agreement. The Minute of
Agreement dealt primarily with the repayments of directors' loans which arose from the
disposal of the goodwill of the partnership to the Company. The goodwill figure was
£1,100,000 and the allocation of goodwill payments was £350,000 to the petitioner,
Mr Hughes and Mr Murphy and £50,000 to Mr Seddon. The Minute of Agreement states
that on exit, a departing director would be entitled to "repayment of his share value" in
addition to his loan account.
[3]
Incorporation of the Company had been under consideration for a period of time, but
the matter was brought to a head as a protective measure as a consequence of a police
3
investigation into the partnership. The investigation arose as a result of an entity described
as Mathon Finance going into administration. The partnership had been the auditor of two
companies related to that entity, Mathon plc and Bathon Limited. The police investigation
was a concern for the directors of the Company. Mr Murphy had been involved with the
auditing of these companies. The companies were associated with Heather Capital Ltd,
whose liquidators were involved in various actions against, among others, professional
advisors. Material was discovered which the other directors considered indicated
misconduct on the part of Mr Murphy. It was made clear to Mr Murphy by all of his fellow
directors that he required to resign from the Company immediately and that the balance due
on his director's loan account was subject to review in light of any adverse financial
consequences arising from the Mathon affair. Mr Hughes and Mr Seddon considered that
the Company remained exposed to a financial claim arising from Mr Murphy's conduct. On
20 March 2015 at a meeting between the original directors and shareholders Mr Murphy
resigned as a director of the Company and agreed that his shares could be transferred to the
other shareholders. The shareholding of the Company became 2,142 ordinary shares for the
petitioner and Mr Hughes and 716 ordinary shares for Mr Seddon. That remains the
position. Mr Murphy remained a creditor of the Company in terms of his director's loan
account. The debt continued to be paid to Mr Murphy from March 2015 until approximately
August 2017. The payments stopped after Mr Murphy was investigated by the Institute of
Chartered Accountants in Scotland ("ICAS") and the Investigation Committee determined
there was sufficient evidence to establish a charge of professional misconduct.
[4]
In 2017 the petitioner, Mr Hughes and Mr Seddon were attempting to implement a
succession plan which had been under consideration for a few years. The succession plan
envisaged a management buyout ("MBO") with the three directors remaining as consultants
4
for a period. In or around April 2017, the relationship between the petitioner and
Mr Hughes deteriorated. Around this time Mr Hughes wished to provide additional
compensation to Mr Seddon for his work. The petitioner indicated he would give it
consideration. In July 2017 Mr Hughes again raised the subject and suggested a bonus of
£90,000 to Mr Seddon. The petitioner disagreed with that suggestion and it was not taken
forward.
[5]
In July 2017 the Company approached David Thompson, advocate, for advice on the
issues with Mr Murphy and the director's loan account payments to him. Counsel produced
his opinion and met with the petitioner, Mr Hughes and Mr Seddon on 4 August 2017.
Given that the Company had continued to make payments to Mr Murphy throughout the
period of having been aware of Mr Murphy's wrongdoing, counsel raised the issue of
personal bar in the event of a claim by the Company against Mr Murphy. Counsel advised
that further payments to Mr Murphy would be prejudicial to the Company. Counsel did not
expressly advise against trying to extra-judicially resolve the dispute between the Company
and Mr Murphy. Following the meeting with counsel there was a difference of opinion
between the petitioner and Mr Hughes and Mr Seddon as to how to deal with the matter.
The petitioner met with Mr Murphy. During their discussions Mr Murphy explained that
his financial position was not good. They discussed whether matters could be settled. The
petitioner made an offer personally to pay money to Mr Murphy. Mr Hughes and
Mr Seddon, when informed of the petitioner's approach to Mr Murphy, considered this was
contrary to the board's strategy and counsel's advice. The relationship between Mr Hughes
and the petitioner deteriorated further.
[6]
In early August 2017, the petitioner desired that the Company should follow the
usual policy of payment of dividends when there were funds available, and in particular
5
due to reduction in a corporation tax provision. He wrote to Mr Hughes referring to the fact
that the Company was on target for this year's budget and the cash position was positive.
Mr Hughes did not agree and stated that he wished to set aside a substantial sum of money
to fund any defence and counterclaim in the event of a claim for payment from Mr Murphy.
[7]
On 26 September 2017 Mr Hughes and Mr Seddon served a special notice of the
intention to remove the petitioner as a director at an extraordinary general meeting
("EGM"). The meeting was to take place on 14 November 2017. The petitioner decided to
resign. He worked for the Company until 28 September 2017. The petitioner then cleared
his desk that weekend and posted his resignation to the Company on the afternoon of
Friday 29 September 2017, which took effect on Sunday 1 October 2017. After his
resignation, two major clients left the Company and the petitioner took on consultancy work
involving existing clients of the Company. This was separate from audit, accounting and
taxation-compliance services. He performed advisory and consultancy services under
mandates to twenty-nine clients.
[8]
In terms of service agreements entered into between the Company and the
individuals after the resignation of the petitioner, the remuneration of Mr Hughes was
£96,000 per annum and Mr Seddon's remuneration was £60,000 per annum. Under the
agreements, they were also allowed a bonus from time to time taking into account the
Company's profits and cash position on a quarterly basis. A valuation instructed by the
board of the Company and prepared by Milne Craig in October 2017 ("the October
Valuation") following the petitioner's resignation valued the goodwill in the Company at
£710,000. This included provision of £72,000 for the loss of certain of the largest clients of the
Company after the petitioner's resignation. Shortly thereafter, two individuals who had
done work for the petitioner within the Company accepted voluntary redundancy. A
6
revised valuation prepared by Milne Craig in November 2017 ("the November Valuation")
reduced the value of the goodwill of the Company to £545,000. This included a revised
provision of £102,000 for the loss of clients. The petitioner's share of goodwill was valued at
£230,000 after excluding his consultancy income and the effect of the lost clients. The
Company's other assets, less its liabilities, were valued at £847,818. Mr Hughes and
Mr Seddon called an EGM on 12 December 2017 to consider a resolution to grant floating
charges in their favour by the Company. The petitioner appeared by proxy and voted
against the resolution which was passed with a majority on the votes of Mr Hughes and
Mr Seddon.
[9]
On 3 January 2018, a senior person in the MBO team, Lorna Gray, wrote to
Mr Seddon indicating that the team would only purchase certain assets of the Company,
and not the shares, due to ongoing legal issues. The proposed purchase was at a price of
£475,000 paid over three years (with an initial payment of £175,000 and 12 quarterly
payments of £25,000) with a retention of £75,000 and an additional £1,000 for fixtures and
fittings and computer equipment. On 3 January 2018, Mr Hughes sent the offer to Craig
Butler of Milne Craig to consider it as confidential to the board only and specifically not to
be disclosed to the petitioner as a shareholder. Mr Hughes asked for confirmation that a
deal at that price "would not be unreasonable". On 5 January 2018 Craig Butler responded
that it "appears reasonable given ongoing uncertainty around client retention" citing "the
extent to which clients have been mandated by [the petitioner] has increased" and that "as
such it is not unreasonable to expect that the goodwill associated with the practice has fallen
since our report was issued". Milne Craig were not asked to prepare a revised valuation.
The effect of the reduction in the price was to reduce the petitioner's share of goodwill at the
sale date from £230,000 to £5,000 due to the reduction of £100,000, a retention of £75,000 and
7
a client loss claim of £50,000 agreed by Mr Hughes and Mr Seddon. The Company's annual
turnover recorded in the November valuation was £719,774 before deductions for
consultancy and client losses of £99,825 and £102,000 respectively, leaving recurring fees at
£518,489. Mr Hughes and Mr Seddon agreed to progress the without prejudice staff buyout
offer set out in the letter of 3 January 2018. Mr Hughes and Mr Seddon also agreed to award
themselves discretionary payments in terms of Clause 9.1 of their service agreements.
Mr Hughes was paid £50,000 through a consultancy company of his and £20,000 into a
pension scheme for him. Mr Seddon received £10,000 and £20,000 into a pension scheme for
him.
[10]
On 8 March 2018 Mr Hughes and Mr Seddon again unanimously agreed to award
themselves discretionary payments in terms of Clause 9.1 of their service agreements.
Mr Hughes received £55,000 and Mr Seddon £30,000 to be paid when cash flow permitted.
Their total salary for the same six month period from the date of the resignation of the
petitioner to 31 March 2018 was £78,000 (£48,000 for Mr Hughes and £30,000 for Mr Seddon).
On or around March 2018, the loan amount due to Mr Murphy (£82,000) was "re-allocated"
to Mr Seddon, said to have been done on independent accounting advice. The company's
accounts for 2018 stated that the balance due to the petitioner in respect of his director's loan
was "in dispute". The director's loans of Mr Hughes and Mr Seddon are not said to be in
dispute. There have been no payments to the petitioner from his director's loan account
since 29 August 2018.
[11]
Mr Hughes and Mr Seddon on behalf of the Company entered into the Sale
Agreement with a company incorporated by the MBO team ("NewCo") on 3 April 2018 with
a completion date the same day. This related to the accountancy business and certain assets
of the Company, leaving other assets and liabilities with the Company. The same day the
8
Company changed its name to RAM 232 Limited and NewCo changed its name to Gerber
Landa & Gee Limited. The purchase price was £594,000 including goodwill of £475,000
(which has subsequently been reduced to £350,000 due to retention and claims clauses
inserted in the sale agreement), £118,000 of WIP and £1,000 of various other items. The
petitioner was advised of the sale on 4 April 2018.
[12]
On 12 April 2017 the directors of the Company had declared that an interim
dividend of £70,000 would be paid to the shareholders as at that date. The petitioner was to
receive the sum of £29,988 and received a tax voucher signed by Mr Hughes confirming this.
This was not paid to the petitioner. On 9 May 2018 he demanded payment. No payment
was received from the Company. Mr Hughes and Mr Seddon on behalf of the Company
entered into a consultancy agreement with NewCo whereby the Company would receive
£60,000 per annum from NewCo for the services of Mr Hughes and Mr Seddon as
consultants. Mr Hughes and Mr Seddon on behalf of the Company also entered into a
services agreement whereby the Company paid £40,000 per annum to NewCo for the
provision of secretarial services, meeting room use, printing facilities and file storage
facilities. Following the sale to NewCo the business of the Company consisted of the
winding down of the work in progress and the consultancy services being carried out for
NewCo. In December 2018, on behalf of the Company, Mr Hughes and Mr Seddon
concluded that it did not owe the petitioner anything. They passed a resolution to charge
the loan account of the petitioner with the goodwill which they allege was "eroded and/or
taken by him personally" and that "[a]s an interim measure he had been debited with
£231,454 which is the goodwill write down in the accounts to 31 March 2018." They further
allege that the sum of £184,616.82 is due to the Company by the petitioner.
9
The alleged unfairly prejudicial conduct
[13]
In brief terms, the matters said to constitute unfairly prejudicial conduct to the
petitioner are as follows:
(i)
exclusion of the petitioner from management and decision-making and
conduct causing deterioration in the relationship between the directors prior to the
petitioner's departure;
(ii)
exclusion of the petitioner as a director;
(iii)
re-allocation of £82,000 to Mr Seddon;
(iv)
the grant of floating charges in favour of Mr Hughes and Mr Seddon;
(v)
sale of the business to the MBO team at an undervalue and failing to give the
petitioner any information about the sale to the MBO team;
(vi)
receipt of excessive remuneration by Mr Hughes and Mr Seddon after the
departure of the petitioner;
(vii)
failure to pay dividends;
(viii)
non-payment and debiting of the petitioner's loan account.
Evidence
[14]
In the summary of the parties' submissions, set out below, reference is made to the
key points of evidence founded upon by them. I also comment on the evidence in the
section containing my decision and reasons. At this stage I simply identify the key
witnesses led for each side and note some relevant headline points in their evidence, before
commenting briefly on the differences in approach taken by the respective experts.
10
Factual witnesses
Petitioner
[15]
The petitioner spoke to the various matters of background and the points said to
constitute unfairly prejudicial conduct. He described his dealings with the first and second
respondents, and Mr Murphy, in detail. He had known Mr Hughes personally since
childhood and they had been in business together since 1969. There had been some
disagreements and both of them were strong-willed. He had also known Mr Seddon for a
lengthy period. He mentioned individuals who ran family businesses and had used his
services as clients when he worked at the Company. After the petitioner's meeting with
Mr Murphy, Mr Hughes had on several occasions asked the petitioner "What is it you are
not telling us?", indicating to the petitioner a level of distrust. The petitioner accepted that
in meeting Mr Murphy he did not do what Mr Thomson had advised and took a different
view. He accepted that he told Mr Murphy that he would be prepared to pay £10,000 to
him. It was correct that the collapse of Heather Capital had given rise to litigations, but not
against the partnership or the Company. At no time had the petitioner acted in collusion
with Mr Murphy. The petitioner had performed a reasonably substantial amount of his
work remotely, from Australia, but that had not affected the income generated by his
services. As a holder of 42% of the shares, he had no reason to seek to harm the Company,
for example by clients leaving its business. The business was always a going concern. He
said that Craig Butler, in carrying out the valuation and in agreeing with the offer put
forward by the MBO team, had not been given access to the underlying workings of the firm
and did not have proper regard to the unrecorded work-in-progress ("WIP") position. The
amounts paid to Mr Hughes and Mr Seddon looked like a mechanism to remove the surplus
bank funds built-up by the Company.
11
[16]
Discussions about a MBO had been going on for some time. It was correct that after
his departure twenty-nine clients had given mandates allowing him to advise them on a
consultancy basis, but not on the accounting matters covered by the Company. He had
given tax advice to a customer that had proved to be incorrect and a claim had been made
against the Company resulting in a payment from the Company's insurers. He did not
accept that the offer made by the MBO team on 3 January 2018 was a fair valuation. He
could give no reason for calling into question the behavior of Craig Butler, a fellow
accountancy professional, in relation to the valuation and the offer. Two of the MBO team
were related to Mr Hughes (one being his wife and the other his son, from an earlier
marriage) and so the family as a whole would benefit from a lower sale price. He accepted
that no offer other than that made by the MBO team was made for the Company's business.
[17]
A number of individuals who owned businesses which had been clients of the
petitioner when he worked for the Company gave evidence. In broad terms he was a
trusted professional accountancy advisor. The reasons for their businesses leaving the
Company were given. The petitioner did not take on that type of business. Next,
Mr Murphy gave evidence as to his involvement in the various issues summarised above.
Respondents
[18]
Mr Hughes was the first witness led for the respondents. He explained the reason
for forming the Company, that is the fallout from the Mathon affair. The business was
transferred for £1.1m to the Company. It was correct that the former partners, now
directors, did not anticipate that a director would exit but remain as a shareholder.
Discussions about succession of the business had commenced in about 2014. It was correct
that the last audit for Mathon had been in 2009. But risk was still a live issue in 2017. The
12
initial price suggested to the MBO team had been £1.2m. However, no price was agreed and
they hadn't got down to the nitty-gritty. The relationship with the petitioner had
deteriorated from 7 August 2017, following discussions about payments to Mr Murphy.
Mr Hughes had kept saying "What is it you are not telling us?" to the petitioner because the
petitioner had gone to see Mr Murphy against counsel's advice. It was quite unclear why
the petitioner said he was going to pay the ICAS fine or penalty. Mr Hughes thought the
petitioner was in cahoots with Mr Murphy, but accepted that he gone down a blind alley
with that theory. The petitioner refused to agree to pay the bonus to Mr Seddon suggested
by Mr Hughes. The reason for giving the special notice to remove the petitioner as a
director was to try to get an explanation for his conduct. A long notice was given in the
hope that discussions could take place. No decision to remove him had been reached.
Mr Hughes did not view himself as bullying or domineering. After the petitioner left, and
two major clients had gone and twenty-nine mandates had been issued, Mr Hughes spoke to
a number of the clients who had used the petitioner when he was with the Company to see
if they would remain, but they did not commit to doing so.
[19]
Mr Hughes explained that Gordon Butler of Milne Craig had been asked to do a
valuation in October 2017 but had declined because he was too close to the Company. His
son, Craig Butler, carried out the valuations. He did not accept that Craig Butler's
valuations were incorrect. The dividend due to the petitioner in April 2017 was credited to
his loan account. He had never sued for payment. A number of legitimate claims should be
set-off against his loan account. As a result, he currently owed the Company money. The
salary and bonus payments received after the petitioner's departure were reasonable and
not over-generous. Mr Hughes had made an offer to buy-out the shares of the petitioner for
£150,000 shortly after the present action was raised.
13
[20]
Mr Seddon then gave his testimony, broadly covering the background issues noted
above. He also said that at the time of the special notice he had not made up his mind to
vote in favour of the removal of the petitioner as a director. Thereafter, Craig Butler was
called and explained his reasons for reaching the views he reached on valuation. He had
been given no information about a possible sale price of £1.2m. Previous offers would not
normally be asked for, as an objective approach was taken. He looked at it from the point of
view of a buyer. The Company was not a happy ship. The sharp exit of the petitioner had
impacted the client base. There was evidence that clients were leaving. The final reduction
to £475,000 was appropriate as the business was toxic and it was difficult to imagine anyone
being interested in buying it. In carrying out the valuation process he had spoken to a
number of members of staff. He did not recall seeing a WIP balance. The WIP figure put to
him in cross-examination, £997,000, would not have affected his valuation. From a buyer's
point of view that would not have changed goodwill in the slightest.
[21]
Evidence was then led from Lorna Gray, who had been part of the management team
and took part in the MBO. She had never been formally advised that at the time of
incorporation the goodwill of the Company had been valued at £1.1m. Mr Murphy's exit
had created some uncertainty, although his clients stayed. She never agreed at any point to
be part of an MBO team buying for £1.2m. There were obvious tensions before the
petitioner's departure but she was not aware of a complete breakdown. The MBO team had
carried out a detailed assessment based on various risk factors and came up with a figure of
just over £500,000. After a further meeting around Christmas 2017, £475,000 was agreed as
the offer. No external advice was sought. Some informal discussions took place between
Mr Hughes in December 2017 and members of the MBO team. The offer was based on what
the recurring fees moving forward would be. It was thought to be a fair price. There was no
14
conspiracy between Mr Hughes, Mr Seddon and the MBO team to get a soft-price
undervaluing the business. There was no cosy deal.
[22]
The final witness for the respondents was Gordon Butler, who had worked for Milne
Craig. He had known the petitioner, Mr Hughes and Mr Seddon for many years. There
were cross-referrals of clients between the two firms. There had been discussion in 2013
about the firms merging. If the MBO had not occurred, that being the first option, a merger
may have taken place. He had become involved in discussions prior to the petitioner's
departure, in an attempt to stop polarisation of the parties. A sudden break could result in
clients being lost. He had no reason to think that his son would not do the valuation job
objectively. He had no axe to grind and knew both Mr Hughes and the petitioner, but did
not socialize with either of them. Mr Butler understood that in giving the special notice
Mr Hughes did intend to remove the petitioner as a director.
Expert witnesses
[23]
Mr David Bell, the expert led on behalf of the petitioner, prepared a valuation for the
three dates requested, namely 30 September 2017 (the day before the petitioner's
resignation), 3 April 2018 (the date of sale to the MBO team) and 31 March 2019 (the date
when the present action was raised). In his supplementary report, he also gave a valuation
for 31 October 2019, the final date used by the respondents' expert. He considered a
valuation of the Company under both what he described as a common valuation method,
that is the EBITDA multiple basis (Earnings Before Interest, Taxes, Depreciation and
Amortisation, subject to an appropriate multiplier) and on a net asset basis. On
30 September 2017, the EBITDA valuation of the Company was £1,136,000 with the
petitioner's shares being worth £487,000. On 3 April 2018, the EBITDA valuation was
15
£952,000 in total and £408,000 for the petitioner's shares. On 31 March 2019, the net asset
valuation was £392,000 and the petitioner's share of the value at £168,000. On 31 October
2019, it was £216,000 and £93,000. Mr Bell considered the EBITDA basis to be a more
appropriate method of valuation for the petitioner's shareholding at 30 September 2017 and
03 April 2018, due to the nature of the business and there being goodwill within the trade.
The net assets basis was a more appropriate method of valuation for the final dates because
the business is conducting limited trade and effectively winding down. In his opinion, a
minority discount should not be applied to the value of the petitioner's shares in the
Company, but should the court decide to apply a minority discount, a discount in the region
of 20% to 25% would be an appropriate level of discount.
[24]
Mr Robin McGregor, the respondents' expert on valuation, used the same dates for
the first two valuations and used 31 October 2019 for the third one. He was of the view that
it is unlikely that a company trading as a professional services business would be purchased
as a share sale, due to the risk perceived by a buyer of latent liabilities. The particular
circumstances of the history of the Company meant that a sale of its shares at each of the
valuation dates would not have been possible. This was because any potential purchaser
would not have been prepared to risk the liabilities that the Company had assumed when it
purchased the business of the former firm of GLG in 2013. Accordingly, a sale of the
Company would have to proceed as an asset sale. Similarly, there would be no realistic
prospect of a sale of a minority shareholding in the Company, due to the nature of the
business and the risks he outlined. The potential claims arise from the audit of Mathon and
could be brought against GLG and/or the Company.
[25]
Mr McGregor explained that when the business was transferred from GLG to the
Company, the latter assumed all assets and liabilities. Consequently, any buyer would be
16
concerned about what potential liabilities may be linked to the Mathon audit and more
widely to the principals directly involved in that work. Additionally, he considered that a
purchaser might be concerned about possible future reputational risk arising from an
association with the Mathon case. Further, in early 2017, Mr Murphy was found guilty of
professional misconduct in relation to payments that had been made to members of his
family from Mathon. In August 2017, the directors of the Company notified their insurers of
an unquantified professional indemnity claim. Hence, Mr McGregor assumed that a sale
was only likely to a trade-buyer and that such a purchaser would only acquire the business
and assets, not the shares. Therefore, he considered that the appropriate basis for the
valuation of the Company would be on a break-up or liquidation basis. In these
circumstances, the value in the Company would be realised by the sale of its business and
assets as a going concern, followed by an orderly wind-down to settle its liabilities,
culminating in a distribution of capital to the shareholders.
[26]
The conclusion reached by Mr McGregor on the value as at 30 September 2017,
assuming the petitioner's co-operation, was £526,000 for the whole share capital and
£225,000 for the petitioner's share of assets of 42.84%. The alternative basis, which assumed
a lack of co-operation from the petitioner, concluded on a lower value for the whole share
capital of £227,000 and of £97,000 for the petitioner's share at the same date. The valuation
calculation recognised that the petitioner had not co-operated to maximise the value of the
goodwill arising on a sale and had obtained mandates from some clients. As at 3 April 2018,
the conclusion was a value for the whole share capital of £262,000 and of £112,000 for the
petitioner's share. On 31 October 2019, the figures were £104,000 for the whole share capital
and £44,000 for the petitioner's share. As the valuation was on a break-up basis, no issue of
17
discount arose but if the court was minded to find that a sale of shares was more likely, a
minority discount of 33% to 50% would be appropriate.
[27]
The experts met prior to the proof and discussed a wide range of issues. Among the
central points raised, Mr McGregor was of the view that the EBITDA approach was only
suitable for larger accountancy practices, best suited to mature and stable businesses, which
was not the case here. Mr Bell disagreed with that view. Mr Bell pointed out that the three
prior valuations by Milne Craig had been carried out on an adjusted profits basis.
Mr McGregor did not view that approach as appropriate. Mr McGregor also considered the
EBITDA multiplier used by Mr Bell to be too high, but Mr Bell viewed it as the appropriate
multiplier.
Statutory provisions
[28]
Section 994 of the 2006 Act 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 that is
unfairly prejudicial to the interests of the members generally or of some part of its
members (including at least himself), or
that an actual or proposed act or omission of the company (including an act or
omission on its behalf) is or would be so prejudicial.
...
Section 996 of the 2006 Act further provides:
"(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
regulate the conduct of the company's affairs in the future; require the company -
to refrain from doing or continuing an act complained of, or
to do an act that the petitioner has complained it has omitted to do;
18
...
(e) 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."
Submissions
[29]
The court had the benefit of full and detailed written submissions, followed by oral
submissions, for the petitioner and the respondents. These have been taken fully into
account. There was extensive citation of authority, and when I come to set out my decision
and reasons I shall refer to the key legal principles relied upon. At this stage, I give a brief
summary of the main points made.
Submissions for the petitioner
[30]
This case involved a quasi-partnership. There was an informal understanding or
arrangement among the incorporators, which was not reflected in the articles, that the
petitioner, and indeed all the incorporators, would be involved in the management of the
Company and be a director. The informal understanding included that nugatory salaries
would be paid, and the Company would pay dividends when it could afford to do so. Prior
to the petitioner's exit from the Company, dividends would regularly be paid by a credit to
each of the member's loan accounts. The parties understood and accepted that on an exit,
each of them would no longer participate as a member and should have their share value
returned, over a period of five years unless more than one member was leaving in which
case the period would be extended.
[31]
Contrary to his legitimate expectations, the petitioner was unfairly excluded from the
management of the Company from around April 2017. This was also contrary to the
19
expectations of the parties agreed between them at the time of incorporation such that each
of the directors would participate in the management of the Company, as they had when the
business was operated under the auspices of the previous partnership structure. Between
April and September 2017, contrary to the agreement between the parties, Mr Hughes failed
to engage openly and constructively with the petitioner, levelled false and accusatory
allegations at him, refused to pay dividends in accordance with established policy and
sought to award Mr Seddon substantial bonus payments.
[32]
The petitioner offered to meet Mr Hughes, but he declined that offer and then
proceeded to serve the special notice. Mr Hughes says he took legal advice, so service of the
notice may have been lawful but it was unfair. The notice of a resolution to remove the
petitioner as a director on 21 September 2017 was without justification and contrary to the
interests of the Company, and contrary to the petitioner's legitimate expectations. On the
evidence of Gordon Butler, Mr Hughes had determined to remove the petitioner as a
director. While a minority shareholder can be deprived of relief if the unfairly prejudicial
conduct he has suffered can be justified, or rendered not unfair, by the minority's own
conduct, there was no basis for that view here. There were insufficient grounds to justify the
petitioner's exclusion based on the meeting with Mr Murphy. There was no advice from
counsel that a director was not to meet with Mr Murphy. No adverse consequences flowed
from that meeting. The trust and confidence having irretrievably broken down between the
founding members, and the petitioner considering that he had no other choice in the matter,
he resigned.
[33]
Thereafter, with the petitioner so excluded, and in the absence of an offer to purchase
the petitioner's shares, Mr Hughes and Mr Seddon took steps which unfairly caused
prejudice to the petitioner or contributed to same. They did the following: (i) refused to pay
20
dividends when distributable reserves were available which was contrary to the legitimate
expectations of the petitioner, in particular in respect of financial year 2018 but also
subsequent to the sale of the business to the management buy-out team; (ii) granted floating
charges in favour of themselves, to secure indebtedness owed by the Company to each of
the members pursuant to the Minute of Agreement dated November 2013; (iii) re-allocated
to Mr Seddon the sum of £82,000 (which was otherwise intended to be split between the
shareholder's loan accounts equally or alternatively would be attributed to the Company's
reserves) to the exclusive benefit of the Mr Seddon; (iv) sold the business at undervalue to
the MBO team, without any or any adequate notice to the petitioner, and on terms which
defied objective commercial criteria, without informing the petitioner or giving him the
opportunity to provide information which would have improved the terms of the sale;
(v) failed to provide the petitioner with information in respect of the sale in a timeous or
comprehensive fashion, hiding behind confidentiality provisions which were ultimately
waived; (vi) paid themselves excessive remuneration in the form of bonus and pension
payments in the period following the petitioner's exit; (vii) ceased the payment of the
petitioner's loan accounts, approximately one year after his exit, both contrary to agreed and
established practice and in breach of the Minute of Agreement; (viii) threatened to and
ultimately did debit the petitioner's loan account unlawfully with arbitrary, illiquid, and
unquantified sums which had not been the subject of independent assessment or inquiry.
[34]
In relation to the sale of the assets to the MBO team, there was no attempt to sell on
the open market. Other accountancy firms were potential buyers but were not approached.
Craig Butler valued the goodwill and was not provided with details of the work in progress.
There was no evidence that the petitioner ever sought to persuade clients to leave, which
would in any event have been against his interests. The exclusion of the petitioner from any
21
information or involvement prior to the sale breached the informal understanding and
agreements entered into by the members on incorporation. The price paid for the sale to the
MBO team was not a fair price. It did not reflect the value of the Company. The petitioner
was not consulted on the salaries paid to the remaining directors. He was not paid any
dividend. The bonuses paid to the directors in 2018 and their basic salaries from April 2018
were unfairly prejudicial to the petitioner. Considered objectively these were excessive.
Both experts agreed that annual remuneration for a director of the Company (prior to sale of
the business) at £100,000 per director was reasonable.
[35]
Mr Bell took the proper approach to valuation of the petitioner's shares. He
approached the valuation with consistency and integrity, patently mindful of his duty to the
court. His approach was transparent, vouched and cross checked, and based on the
Company's trading performance. There were various problems with Mr McGregor's
approach and if his views were accepted adjustment to the sums identified were needed. It
would be appropriate to value the business as at 30 September 2017, or alternatively at 3
April 2018. As a matter of fact and law, no discount should be applied. The assertion on
behalf of the respondents that Mr Bell has failed to act as an independent expert witness and
that his evidence should not be regarded as admissible was wholly lacking in substance.
[36]
The respondents' concession that the case involved a quasi-partnership was
important. Even though the petitioner could demonstrate loss, that wasn't needed and in a
quasi-partnership a breakdown in trust will give a right of relief. The respondents asserted
that they were following legal advice but that was not sufficient as an answer. With a
history of unfair prejudice, the court should give a remedy that is commensurate with the
value that was lost. The offer to buy the petitioner's shares, made after the action was
raised, was not for a fair value. Regard should also be had to the evidence of Lorna Gray
22
that after the sale of the business consultancy arrangements were entered into with the
respondents.
Submissions for the respondents
[37]
The respondents did not take issue with the proposition that the Company was
established as a quasi- partnership. However, the petitioner had not made out his pleaded
case, either in relation to the existence of unfairly prejudicial conduct or in relation to the
relief sought. The petitioner had not established any unfairly prejudicial conduct on the part
of the respondents prior to 1 October 2017 when the petitioner's resignation as a director
took effect. In particular, in view of the petitioner's admitted conduct in his dealings with
Mr Murphy following the receipt of advice from Mr Thomson, service of a special notice on
26 September 2017 in relation to the petitioner's removal as a director did not amount to
unfairly prejudicial conduct. The Minute of Agreement relied upon by the petitioner did not
preclude removal of a director.
[38]
Further, the petitioner had not established any unfairly prejudicial conduct on the
part of the respondents after his resignation took effect on 1 October 2017. In particular, the
decisions taken by the respondents in relation to the sale of the Company's business after
that date were commercial decisions properly taken by the respondents on the basis of
professional advice, in difficult circumstances which had been brought about by the sudden
resignation of the petitioner. The unchallenged evidence before the court was that the
management buy-out was the "only show in town" and that the sale price achieved was
reasonable.
[39]
The evidence did not support any exclusion of the petitioner from the management
of the Company. He was able fully to participate up until his resignation as a director, at
23
which point he chose to remove himself from involvement in the management of the
Company. There was, in any event, no legitimate expectation or other sort of agreement that
a shareholder that had resigned as a director of the Company would be entitled to remain
involved in its management. Asking a colleague and friend of decades to address concerns
as to what he was up to (particularly in circumstances when he is holding meetings with a
former director contrary to the decided position of the board of the Company) did not
amount to unfairly prejudicial conduct, even if such questions were posed in a brusque
fashion.
[40]
In the period prior to the resignation of the petitioner, there was no refusal to pay
dividends in accordance with any established policy. First, the petitioner has not proved
that there was any established (far less binding) policy in relation to the payment of
dividends. Second, the evidence was that the decision not to pay a dividend in 2017 was one
taken on commercial grounds and considered and approved by the board of the Company.
Intimation of the resolution to remove the petitioner as a director was not unfairly
prejudicial (particularly in light of the circumstances which led to its intimation). The
document was served in accordance with the Company's constitutive documents and legal
advice. There was no bargain or understanding in place (far less proved in the evidence)
that directors could not be removed. Indeed, the acknowledged events which took place in
relation to Mr Murphy showed plainly that shareholders could properly be removed from
their role as directors. In cross-examination, the petitioner made a number of significant
concessions in relation to what occurred in relation to Mr Murphy. In short, the agreement
was that they wouldn't pay Mr Murphy and it would be left to see how he reacted, that is,
there would be no meetings with him. In any event, the notice of removal was never voted
upon and the petitioner's case must rest upon its mere intimation.
24
[41]
In breach of his fiduciary duties, the petitioner had forwarded emails to a client of
the Company concerning private business of the Company. As the petitioner acknowledged
in cross-examination, the advisory services he provided to clients of the Company in his
private capacity after his resignation were services which would have been provided by the
Company had it not been for his resignation, with the result that he and not the Company
obtained income from their provision. The petitioner had departed suddenly, without
putting in place any planning for his departure, his two most significant clients had
removed their business and the petitioner had sent mandates for business of twenty-nine
clients. Inevitably, these actions on the part of the petitioner significantly drove down the
value that could reasonably be achieved for the business that was sold. There was no
exclusion from the management of the Company; he had chosen to leave his role as director,
bringing his involvement in the management of the Company to an end by that act. He was
given notice of any AGM or EGM of the Company and could attend as a shareholder.
[42]
The petitioner had failed to establish any entitlement to payment of a dividend for
the period to 31 March 2017. Further, there was no prejudicial conduct after the resignation
in relation to the refusal to pay dividends. This was a matter for the board of the Company.
There was no evidence before the court to the effect that they did not act in accordance with
their view of the commercial interests of the Company. The grant of floating charges in
respect of the obligations owed to Mr Hughes and Mr Seddon has not given rise to any
prejudice to the petitioner. The reallocation of the sum of £82,000 to Mr Seddon was a
commercial decision taken by the board of the company to reflect his contribution to the
business in the exercise of the discretion of the board.
[43]
There was no evidence before the court that the business sold to the MBO team was
sold at an undervalue. That argument ran contrary to the contemporary advice of Craig
25
Butler and the position of the MBO team itself (as spoken to by Lorna Gray). No contrary
material was before the court. There was no failure on the part of the respondents to
provide information in relation to the sale to the petitioner. The petitioner had absented
himself from the business. It was a matter for the board to take forward the sale of part of
the business. Also, there was no evidence before the court that any remuneration (by way of
bonus or pension payments) has been excessive. That assertion was rejected by Mr Hughes
and Mr Seddon in their evidence. No contradictory evidence was advanced on behalf of the
petitioner.
[44]
There was no unfair prejudice in stopping the payments in respect of the petitioner's
loan account or in applying contra-charges. In light of the events following the petitioner's
resignation, the board of the Company reached the proper commercial view that it did not
accept that any further payments were in fact due. The petitioner had taken no step to
constitute any debt that might be due by way of the loan account (either in this action or
other legal proceedings). Following immediately upon the commencement of these
proceedings, an offer to purchase the shares of the petitioner at a price of £125,000
(subsequently increased to £150,000) was made by Mr Hughes. Those offers were rejected
by the petitioner.
[45]
If the petitioner is entitled to relief, the appropriate date for valuation of his shares
would be the date of the court's order, which failing 3 April 2018. In any event, the
petitioner has failed to establish the valuations of the company, and therefore of his shares,
as at each of the dates proposed by him. The evidence of Mr Bell was inadmissible or, at the
very least, unreliable. He failed to act as an independent expert witness, to the standards set
out in Kennedy v Cordia Services Limited 2016 SC (UKSC) 59 (at paragraphs [52] and [53]). His
evidence as to the choice of valuation methodology and the appropriate EBITDA multiplier
26
was, in essence and as he himself accepted, merely his say-so. Moreover, he had no
contemporary, real world valuation experience. He was unable to explain with any clarity
the nature of any historic experience which he may have had (more than five years ago).
Even then, his valuation work took place in the particular context of his role as a forensic
accountant. He gave the clear impression of using an earnings-based methodology because
that was within what he perceived to be his comfort zone, when other methods would not
have been. It is also to be noted that he accepted throughout his evidence under cross-
examination that the approach of Mr McGregor to the issues in dispute was wholly
appropriate for a professionally competent valuer. The evidence of Mr McGregor should be
preferred to that of David Bell in relation to the valuation of the company at each of the
various dates which were discussed.
Decision and reasons
Factual witnesses
[46]
Each side raised some points about the factual evidence led by the other. In my
view, no issues of any substance as to credibility or indeed reliability arose in the evidence.
The parties broadly accepted the key factual matters, with no stark disagreement, the points
of difference in the main being more nuanced and to do with why particular conduct took
place rather than whether it occurred.
Expert witnesses
[47]
I reject the submission for the respondents that the evidence of the petitioner's
expert, David Bell, is inadmissible or unreliable. In my view, he did not fail to meet the
standards set out in Kennedy v Cordia Services Limited. He obviously offered opinion
27
evidence, but it was not, as suggested, "merely his say-so". Rather than being
unsubstantiated ipse dixit, it was based upon quite standard features of the EBITDA
approach. He did have, in my view, appropriate experience. The EBITDA technique can of
course be difficult to apply without readily available comparators or factors allowing
precision, given the specific factual circumstances of the particular company. He explained,
with reasons, why the EBITDA approach for valuation on the first two dates was to be
preferred. However, the criticisms are also of no moment because, as I explain below, it is
the valuation on the final date, where there was limited disagreement between the experts,
which is relevant.
Unfair prejudice
[48]
The court was supplied with what was appropriately described by senior counsel for
the respondents as "an electronic library of the authorities" on the matter of unfairly
prejudicial conduct and the appropriate remedies. Rather than setting out these extremely
extensive citations in any detail, I refer to the central principles of relevance to the issues
raised in the present case in my reasoning below.
General principles
[49]
The key principles applicable to the court's task in identifying unfairly prejudicial
conduct of a company's affairs are summarised by Lord Hoffman in the decision of the
House of Lords in O'Neill v Phillips [1999] 1 WLR 1092 and by the Court of Appeal in Grace v
Biagioli [2006] 2 BCLC 70 (per Patten J at para [61]). The petitioner requires to establish,
assessed on an objective basis, that the acts or omissions complained about relate to the
management of the affairs of the company, caused prejudice to the petitioner's interests as a
28
member and that the prejudice is unfair (see also Bovey Hotel Ventures Ltd, Re unreported 31
July 1981; RA Noble & Sons (Clothing) Ltd, Re [1983] BCLC 273; Saul D Harrison, Re [1995] 1
BCLC 14; Guidezone Ltd, Re [2000] 2 BCLC 321). Unfairness and prejudice are both required
and establishing only one of these will not suffice: Jesner v Jarrad Properties Ltd 1993 S.C. 34;
1994 SLT 83; Rock (Nominees) Ltd v RCO (Holdings) Plc (In Members Voluntary Liquidation)
reasonable bystander observing the consequences of the conduct, would regard it as having
unfairly prejudiced the petitioner's interests. A member of a company will be entitled to
complain of unfairness where there has been some breach of the terms on which he agreed
that the affairs of the company should be conducted, or where the rules have been used in a
manner that equity would regard as contrary to good faith: O'Neill v Phillips [1999], at 1099;
Re Phoenix Office Supplies Limited [2003] 1 BCLC 76, at 85h; Wilson v Jaymarke Estates Limited
and others 2006 SCLR 510, at para [10]. As Lord Hoffman explained in O'Neill v Phillips,
compliance with equitable considerations is a more appropriate articulation of the concept
than the expression "legitimate expectations". Within a quasi-partnership, a court may give
effect to informal agreements and understandings which have been relied upon even if they
would not otherwise have binding legal force (see eg Re Guidezone Ltd, at para [17]; In Re
Hart Investment Holdings Ltd [2013] EWHC 2067, at para [38]).
The petitioner's heads of claim for unfair prejudice
(i)
Exclusion of the petitioner from management and decision-making and conduct causing
deterioration in the relationship between the directors, prior to the petitioner's departure
[50]
The respondents accepted that the Company was a quasi-partnership company, thus
falling within the species of private company described by Lord Wilberforce in Re
29
Westbourne Galleries Ltd [1973] AC 360. The Company here was one in which shareholders,
who could have run the business as a partnership, preferred the form of a private company
to be managed by all of them. In a quasi-partnership, understandings or arrangements
about the future management of the company commonly exist between the members. In the
present case, Mr Hughes and Mr Seddon accepted that it was understood that each of the
former partners would be involved in the management of the company. Exclusion from
management can cover taking decisions in secret or not informing the petitioner: Robertson
Petitioner (No 1) 2010 SLT 143. A petitioner may have a justifiable complaint, even if no
longer involved in day-to-day management, of not being told of matters which have, or
could have, a fundamental effect on the company.
[51]
The petitioner's contention that Mr Hughes and Mr Seddon excluded him from
management and decision-making from around April 2017, up to his resignation as a
director, is not well-founded. No specific management matters or decisions which involved
exclusion of the petitioner were identified. Moreover, there were accepted examples of his
involvement in the Company's affairs, such as attending a board meeting, taking an active
part in the processing of the final accounts for the year ending 31 March 2017, issuing
instructions for counsel's advice in relation to the situation with Mr Murphy and attending a
consultation in that regard on 4 August 2017, and making a request for a board meeting in
September 2017 accompanied by proposed items for inclusion in the agenda. The petitioner
was not excluded from the decision reached after being told of the desire by Mr Hughes to
pay Mr Seddon a bonus. Indeed, the petitioner's views on that issue prevailed. The fact that
Mr Hughes put forward that proposal was, of itself, neither unfair nor prejudicial.
Exclusion from management prior to the petitioner's departure from the Company is not
made out.
30
[52]
There was undoubtedly a deterioration in the relations between the petitioner and
Mr Hughes and Mr Seddon, on various matter but particularly in relation to dealing with
Mr Murphy's situation. The petitioner made a number of concessions in cross-examination
about his meeting with Mr Murphy, broadly to the effect that the advice of counsel (to "wait
and see") which the directors agreed to, was not followed by him and that he had gone back
on what was agreed at the meeting with counsel on 4 August 2017. When he met with
Mr Murphy (on 1 September 2017) to explain why Mr Murphy's loan repayments were
being stopped, in addition to seeking to broker a settlement between Mr Murphy and the
Company, he mentioned the possibility of making a payment to Mr Murphy out of his own
pocket. It was what occurred at this meeting that caused Mr Hughes to ask, and over-time
more than once, "What is it you are not telling us?". While I accept that this question can
imply an element of distrust, one can also at the same time appreciate that, against the
fraught and tense background of the Mathon situation, which remained a concern for the
board, this unexplained meeting and offer had happened and Mr Hughes was unable to
understand why these things had been done. There had already been a finding of
professional misconduct by ICAS on 30 May 2017 in respect of Mr Murphy. He had caused
the Company to become involved in assisting with an ongoing criminal investigation and
there were continuing queries to the Company from the bankruptcy trustee of the key player
in Heather Capital. The Company's professional indemnity insurers were on notice of a
potential claim against the Company because of its position as auditor of Mathon and
Bathon. Substantial claims against other professionals had also been made by Heather
Capital. In these circumstances, the concerns of Mr Hughes, manifested in his question, are
entirely understandable and do not meet the test for unfairly prejudicial conduct.
31
[53]
The mere fact of a deterioration in their relationship does not suffice. It is not
enough to found a petition for relief in respect of unfairly prejudicial conduct just to show
that the trust and confidence between members of a quasi-partnership company have
broken down, regardless of whether that breakdown can be said to be the result of the
conduct of the respondent (McKee v O'Reilly [2003] EWHC 2008 (Ch); [2004] 2 BCLC 145, at
[54], under reference to O'Neill v Phillips per Lord Hoffman at 1104F-1105B). In a quasi-
partnership context where there is an implied understanding that each person will act in
good faith and if there is conduct which breaches that standard, that may, on the facts, be
unfair. Equally, the destruction of trust and confidence could arguably be prejudicial. But
the breakdown of trust and confidence must flow from, or amount to, unfairly prejudicial
conduct. Accordingly, while conduct that destroys trust and confidence between the
member and those controlling the company can constitute unfair prejudice, I do not consider
the conduct of Mr Hughes at this stage to be unfairly prejudicial. In any event, if a
shareholder led those controlling the company to act in the manner complained of, that may
affect whether the conduct is unfair and here there was conduct by the petitioner which
gave rise to the questions asked by Mr Hughes.
(ii)
Exclusion of the petitioner as a director
[54]
As is obvious, a single act or omission may be sufficient for unfair prejudice to result
and for a petition to succeed (see eg Re Marchday Group plc [1998] BCC 800, at 816). The
conduct may only be proposed or be in contemplation, or something which is sought to be
done: Re Kenyon Swansea Ltd (1987) 3 BCC 259 at 264; see also Whyte, Petr 1984 SLT 330; Petr
Thomas Orr and anr in re D S Orr & Sons (Holdings) Limited [2013] CSOH 116, at para 39.
Various decisions show that where a member in a quasi-partnership is formally or
32
informally excluded from the management of the company, this will form grounds for relief,
when it was agreed or understood that he would remain involved and his conduct did not
justify taking that step. If his conduct did justify such a step, there will be no unfair
prejudice in his exclusion or removal as a director: Re Sprintroom Ltd [2019] BCC 1031, at
[154].
[55]
By email dated 21 September 2017, Mr Hughes advised the petitioner that a special
notice had been received on that day proposing the removal of the petitioner as a director.
Consideration of that special notice formed part of the agenda for the board meeting the
following day. The minutes of that meeting recorded that the special notice had been
received from Mr Hughes, stating his intention to propose the following ordinary resolution
at the next general meeting of the company:
"That Charles Martin be and is hereby removed from the office as director of the
company."
The minutes recorded that it was resolved that a general meeting be arranged and that the
resolution be proposed to the members of the company. The meeting would take place no
earlier than 28 days from that date. Whether or not it is true that Mr Hughes and
Mr Seddon were actually seeking to give the petitioner time to consider and discuss the
position (which in respect of Mr Hughes does not fit with the evidence of Gordon Butler) the
fact is that a simple and clear message of an intention to remove the petitioner as director
was given. Moreover, the petitioner offered to meet with Mr Hughes before the notice was
issued and that offer was declined. No qualifications to that intention to remove were ever
passed on to the petitioner. The evidence was that legal advice was obtained resulting in the
notice being served, but the existence of such advice does not exclude unfair prejudice being
33
the result. The petitioner did not attend the board meeting, but there was no indication that
if he had attended the decision reached would not have been passed. Against the
background of tense and fraught exchanges and correspondence, which of themselves did
not cause unfair prejudice, this apparently clear next step of removal of the petitioner from
his position as director went too far. In the context of this quasi-partnership, it amounted to
unfairly prejudicial conduct. Its unfairness is made out, firstly, because it proposed to
breach the understanding or arrangement that the former partners would be directors
(unless they left) and, secondly, the notice was not based upon any specific breach of any
fiduciary or other duty by the petitioner. Rather, it was said in the evidence to be an attempt
to flush out the reasons why the petitioner had discussed matters with Mr Murphy and
made the proposal to make a personal payment. The need for further discussion about such
an issue did not require the extreme measure of a notice of removal, especially when the
petitioner had previously offered to meet up for discussions.
[56]
The point made on behalf of the respondents that the petitioner had acted in breach
of fiduciary duty is, in my view, a red herring; that formed no basis for the proposed
removal. The respondents' position that on 8 and 9 September 2017 the petitioner had
forwarded emails relating to private Company business to a client of the Company played
no part in influencing any of the conduct relied upon by the parties at the material time. The
notice of removal was also prejudicial for the simple reason that the petitioner being told by
the two remaining former partners and now directors that they intended to remove him
from his position as director plainly had a negative impact on the petitioner.
[57]
But the problem for the petitioner is that the prejudice ends there, because ultimately
the actual cause of the petitioner's exclusion (better put, his withdrawal) was his own choice
and decision to resign. In his witness statement, the petitioner explained that from around
34
April 2017 his relationship with the other directors, primarily Mr Hughes, started to
deteriorate. He states that the distrust and accusations from Mr Hughes coupled with the
notice to remove the petitioner "and the cumulative stress of the months prior to this" led to
his resignation. While resignation may not have actively been under consideration prior to
the special notice, it is clear from the petitioner's evidence that a range of factors caused it to
occur. Serving the notice no doubt contributed to the breakdown in relations, but these
were already strained by that stage. The special notice was never implemented and, on the
evidence, it might not have been implemented. Removal was clearly threatened, in an
unfairly prejudicial manner, but it was not inevitably the outcome. While Gordon Butler
spoke of the desire of Mr Hughes to remove the petitioner, Mr Seddon was, on his own
evidence, not fully committed to that approach. It cannot be said that there was no option
other than to resign. Among other things, the petitioner could have waited for the outcome,
or if need be sought an interim interdict preventing his removal. As is obvious and made
clear in the articles of association, resignation causes a person to cease to be a director. It
was that act, and not the respondents' conduct, which resulted in the petitioner ceasing to be
a director. While some prejudice resulted from the proposed removal, the central matter
relied upon by the petitioner (exclusion from management) did not.
[58]
I should add that I see no force in the submission for the petitioner that the parties
understood and accepted that on an exit, each of them would no longer participate as a
member and should have their share value returned, over a period of five years. That was
plainly the position in the Minute of Agreement, but there was no suggestion by the
petitioner at the time of his exit or indeed afterwards that this part of the agreement had to
be complied with. The petitioner is not relying upon that; if he was to do so the unfair
35
prejudice would presumably have been to refuse to pay him that portion of the share value
which by now he should have received.
(iii)
Re-allocation of £82,000 to Mr Seddon
[59]
There is an arguable basis that the re-allocation of this sum to Mr Seddon could be
regarded as prejudicial to the petitioner, in that it was not split between the shareholders'
loan accounts equally or attributed to the Company's reserves, and Mr Seddon could instead
have been given a bonus or salary increase. However, this conduct cannot be viewed as
unfair to the petitioner. No basis for any agreement or understanding that such a payment
could not be made was presented. While the payment created a benefit to one of the
remaining directors, it did not benefit the other. It was a decision reached on a commercial
basis, by the board of the company, to reflect Mr Seddon's contribution to the business. This
was a matter for the discretion of the board.
(iv)
The grant of floating charges in favour of Mr Hughes and Mr Seddon;
[60]
I do not accept the petitioner's submission that the grant of floating charges in
respect of the obligations owed to Mr Hughes and Mr Seddon constitutes unfairly
prejudicial conduct. It was not unfair. The petitioner could readily have moved, at for
example an AGM, for a floating charge in his own favour but did not do so. In any event,
whether at the time or at any point thereafter it has not resulted in any prejudice to the
petitioner.
36
(v)
Sale of the business to the MBO team at an undervalue and failing to give the petitioner any
information about the sale to the MBO team
[61]
In considering this allegation, it is of major importance to have regard to the
background to the sale to the MBO team. It had been under consideration for quite some
time. There was an initial reference to the goodwill of the Company being valued in the
region of £1.2m. But the October 2017 valuation (£710,000) and the November 2017
valuation (£545,000) carried out by Craig Butler reached much lower figures, with the first of
these being, on Craig Butler's evidence, a draft valuation. The petitioner had resigned
shortly prior to these dates and that gave rise to a number of events. He informed clients of
the Company, including in particular Slater Menswear and Samuel Kingsley, of his
resignation. These two major clients left the business of the Company. He provided
consultancy services to twenty-nine clients. These were services that could have been
provided by the Company and hence their loss could potentially reduce its income. In
December 2017 two senior staff took voluntary redundancy, linked to the departure of
clients who had used the services of the petitioner and those who worked with him.
Craig Butler explained the factors which he took into account, including the above and of
course the ongoing concerns about the Mathon matter. Whether or not in his witness
statement his use of the word "toxic" was because his father, and Mr Hughes, had earlier
used that term, he adhered to that view in his oral evidence. The MBO team carried out its
own assessment, as Lorna Gray explained, and came up with their offer of £475,000 for the
goodwill of the business. Mr Hughes asked for advice from Milne Craig on this offer and
Craig Butler advised that it was not unreasonable. He explained in his evidence why he
took that position. The submissions for the petitioner stopped short of any allegation that
Craig Butler had somehow acted unfairly or unreasonably in arriving at his views. The
37
focus for the petitioner's allegations came to be on non-inclusion of WIP figures and to a
lesser extent the valuation of assets.
[62]
I regard the evidence of Craig Butler as entirely credible and reliable, and indeed
persuasive as to the reasonableness of the MBO team's offer. There was no suggestion of
any other offer being available or indeed of any sound basis for the price being unfair. It is
of course correct that relatives of Mr Hughes (his son, born during the previous marriage,
and his second wife) formed part of the MBO team. But there was no serious contention that
this somehow affected the reasonableness of the price. Indeed, Mr Seddon agreed to the sale
price, thus applying it to his own share of business, and no relatives or associates of his were
in the MBO team. The conclusion, which I consider to be firmly supported, is that an
independent professional adviser advised the respondents that the price offered by the MBO
team was not unreasonable and he had sound, indeed good, reasons for reaching that view.
I therefore reject the contention that the sale of the business to the MBO team was in any
way a matter of unfair prejudice.
[63]
However, the exclusion of a continuing shareholder in this quasi-partnership
company, against the background of the parties' understanding, from any involvement
whatsoever in relation to a proposed sale of the business was in my view unfair. As a long-
standing and founding member of the business, with a substantial shareholding, he plainly
had an interest in a sale. While keeping the Company's affairs confidential was arguably a
factor, the petitioner could nonetheless have been advised of relevant matters and given an
opportunity to comment or contribute to the discussion. But there remains a need to show
prejudice. There is no doubt that he was prejudiced in a very general sense by not having
information and not being able to participate in any way in the discussions about the sale,
but at the same time there was nothing in the evidence to point towards his comments or
38
contributions, had they been obtained, having any impact on the proposed transaction. For
example, there is nothing to suggest that an enhanced sale price from the MBO team, or
from a different purchaser, could have been achieved as a result of involving him. In short,
the sale would have gone ahead in any event and at the same price. Accordingly, there is no
real prejudice arising from the denial of his involvement.
(vi)
Receipt of excessive remuneration by Mr Hughes and Mr Seddon after the departure of the
petitioner
[64]
The relevant legal principles in relation to remuneration in private companies are set
out and explained in Irving v Irving (No.1) [2007] 1 BCLC 349, per Blackburne J, at paras
[267]-[270]. In some circumstances, a person who has ceased to be a director may be able to
argue that directors' remuneration, where there is no payment of dividends to the
shareholders, is excessive. This could arise when, for example, the remuneration does not
reflect a reasonable payment for their contributions and in effect includes sums which ought
to have been paid as dividends. Reliance on established practices in relation to payments
made by the company whilst all parties were involved in management of the company is
inappropriate after one of the directors resigns: Wilson v Jaymarke Estates Ltd and anr. In the
present case the Minute of Agreement in fact lays out the intended position, which is that
the person who leaves as a director will have his shares bought out and paid for (in the
circumstances of a single departure from directorship) over a five year period. There is
simply nothing to support the view that there was any informal agreement or
understanding that a person who resigned as a director must receive a dividend. The
petitioner made no suggestion that the remaining directors had fixed their remuneration in
disregard of the provisions of the articles of association governing that matter. In fact, the
39
proper procedures for fixing the directors' remuneration were followed. This matter is a
commercial decision by the board. Excessive remuneration by the respondent to himself
from company funds controlled by him can amount to unfairly prejudicial conduct to the
petitioner: Fowler v Gruber [2009] CSOH 36, per Lord Menzies, at para [132]. But in order for
the remuneration to be excessive, it would have to have been fixed not by reference to
objective commercial criteria and not within the bracket that directors carrying the
responsibility and discharging the duties in the particular company would expect to receive.
The fundamental problem for the petitioner is the absence of any proper evidential basis
that the amounts paid were excessive and unreasonable. It is correct that the expert
witnesses identified particular sums for the purposes of their assessments on valuation, but
no specific focus on the reasonableness of the sums paid, having regard to the profits of the
enterprise, was put before the court. This ground must therefore fail.
(vii)
Failure to pay dividends
[65]
Unfair prejudice may be established where the payment of dividends, when justified
by the company's financial position, was part of the agreed or understood basis on which
the petitioner became a member of the company and where there is no justification for not
paying dividends. But the fact that a minority shareholder is part of a quasi-partnership
company does not of itself establish such an agreed or understood basis and no other
ground for it was advanced. Fixing dividends is a commercial decision. Even if a broad
expectation of dividends being payable arose from their previous conduct, there were sound
commercial reasons for retaining the funds to which the respondents had regard, including
the potential requirement to fund a defence and counterclaim should Mr Murphy bring
proceedings.
40
[66]
For the petitioner to be able to show that non-payment of dividend (apart from the
non-payment of the dividend declared in April 2017, discussed below) to amount to unfairly
prejudicial conduct he would require to show either that (i) the directors failed in their duty
under section 172 of the Companies Act 2006; (ii) there was an understanding or
arrangement, express or implied, that where a person resigned as a director he would
continue to receive a dividend; (iii) the sums paid to the directors by way of remuneration or
bonuses were excessive. None of these points is made out. I therefore reject the defender's
contention that a failure to pay dividends, such as requested by the petitioner in August
2017, was unfairly prejudicial.
[67]
However, the failure of the directors to pay the dividend declared on 12 April 2017,
which was payable contemporaneously and demanded by the petitioner to be paid on
12 May 2018, was unfairly prejudicial. It is correct that the previous practice had been for
such due dividends to be allocated to the individual's loan account. But there was no clear
arrangement or understanding to that effect and I was shown no basis for rejection of a
member's request for payment of a due dividend rather than having it put into his loan
account.
(viii)
Non-payment and debiting of the petitioner's loan account
[68]
The fact that the first and second respondents ceased the payment of the petitioner's
loan account, approximately one year after his exit, was unfairly prejudicial. Doing so was
contrary to the understanding of the shareholders and established practice and inconsistent
with the Minute of Agreement. No convincing ground for viewing this conduct as not being
unfair and prejudicial was made out. Given that this is a quasi-partnership and the
41
arrangements between the shareholders, nothing turns on the fact that the loan account was
payable in his capacity as a director.
[69]
As narrated above in relation to the factual background, the first and second
respondents (as the board) threatened to and ultimately did debit the petitioner's loan
account. They gave reasons for doing so. However, on the evidence led no clear and
substantiated basis for making these debits was established. Indeed, the respondents did
not seek to establish such a basis on any detailed and vouched grounds but instead
suggested that this was an ongoing dispute that required to be resolved by other means. In
the absence of any proper ground for the debits, I regard the conduct as unlawful but even if
not, then it was certainly unfair. The sums debited were not the subject of any independent
assessment or inquiry. It was also plainly prejudicial as the petitioner no longer received
payments from his loan account. No doubt if the respondents do have a proper basis for
debiting the loan account and their claim that the petitioner owes money to the Company,
they can seek to recoup any sums by whatever means is appropriate.
Conclusion on heads of claim on unfair prejudice
[70]
Accordingly, I conclude that to a limited extent the petitioner's assertions of unfairly
prejudicial conduct are made out. In particular, the unfairly prejudicial conduct comprised
the service of the special notice (albeit that the resulting prejudice was restricted), non-
payment of the dividend declared in April 2017, cessation of payments on his loan account
and debiting of his loan account.
42
Remedies
[71]
In putting right, or curing, the consequences of unfairly prejudicial conduct the court
has a wide discretion to do what is just and equitable: s 996 of the 2006 Act; Re Bird Precision
Bellows. However, the normal remedy, and the most practicable and equitable, is to have the
petitioner's shares purchased at a fair value by the respondents or the company. A price
based on a pro-rata valuation is more likely (Profinance Trust SA v Gladstone and see also In
re Bird Precision Ltd, at 430D) particularly where the company is a quasi-partnership: CVC/
[72]
The overriding requirement is that the valuation should be fair on the facts of the
particular case (London School of Electronics, Re [1986] Ch 211). Where unfair prejudice has
been established, the court is obliged to consider the whole range of possible remedies and
choose the one which, on an assessment of the current state of relations between the parties,
is most likely to remedy the unfair prejudice and deal fairly with the situation which has
occurred (Grace v Biagioli, at para [73]). There is no single appropriate method to be applied
to any valuation. Rather, the appropriate basis for valuation will depend upon the whole
facts and circumstances of the particular case, with the court requiring to make a choice that
is fair to all the parties.
[73]
The choice of the date at which shares are to be valued for the purposes of a buy-out
order is a matter for the exercise of the discretion of the trial judge (Re Cumana Ltd
[1986] BCLC 430, at 436b-436c; Re Elgindata Ltd [1991] BCLC 959), but the overriding requirement is
that the date of valuation should be fair on the facts of the particular case (Profinance Trust
SA v Gladstone, at para [60]). The date should be that which best remedies the unfair
BCLC 410. The starting point should be that prima facie an interest in a going concern ought
43
to be valued at the date on which it is ordered to be purchased. However, there are many
cases where fairness to one side or the other requires the court to take a different date. But a
petitioner is not entitled to a "one-way bet", and the court will not direct an early valuation
date simply to give the petitioner the most advantageous exit from the company, especially
where severe prejudice has not been made out: Profinance Trust SA v Gladstone. The remedy
is to be proportionate to the unfair prejudice suffered Re Edwardian Group Ltd [2018] EWHC
[74]
The experts on valuation each gave reasonably sound and clear evidence. The
central difference is that for the first two valuation dates Mr Bell used the EBITDA approach
using a multiplier, thus valuing the business as a going concern and Mr McGregor used a
net-assets approach. Mr Bell's evidence in relation to the first two dates of valuation was
less persuasive than that of Mr McGregor. While Mr Bell made some reference to other
share transactions, there was a lack of appropriately comparable financial data which
supported the approach to the EBITDA valuation for an accountancy-service company of
this size. The potential impact of the departure of key clients was not, in my view, fully
recognised. While there is some evidential support for the view that the financial
performance of the Company was not in the short-term affected by the departure of the
petitioner, regard must be had to the longer-term consequences. Mr McGregor gave proper
weight to the highly significant issue about the potential impact upon the company resulting
from the Mathon affair.
[75]
However, the valuations on those first two dates are not relevant. The problem here
is that these two dates (the date of resignation and the date of sale of the business) were not
points in time when the respondents' conduct had caused any sufficiently serious unfair
prejudice. It is really the accumulation of the acts over the whole period of time, including
44
the non-payment and debiting of the loan account which occurred after the dates
mentioned, that gives rise to the unfair prejudice of the kind that merits a remedy. There is
no earlier point in time after which further damage to the financial position of the Company
arose because of the unfair prejudice, which, if it had occurred, might have caused that point
in time to be appropriate. The sale of the Company's business and assets to the MBO team
clearly changed the Company's position, but payment for that sale was received and there
was no unfair prejudice to the petitioner from that transaction.
[76]
Taking the third date (31 October 2019), Mr Bell quite properly adopted the net-asset
approach. To all intents and purposes this was the same method as the break-up valuation
used by Mr McGregor, except that Mr McGregor made certain adjustments. Prior to those
adjustments, for each expert the net-asset value was £216,000. An item in the management
accounts described as "the goodwill adjustment suspense", amounting to £47,000 was
treated by Mr McGregor as a provision of funds and hence was deducted. Mr Bell was not
clear as to why that position was reached and indeed no evidence supporting the deduction
was provided. Mr McGregor also deducted £40,000 in contingent liabilities in relation to the
office lease. As Mr Bell notes, the purchaser remains in the property and continues to meet
the costs of the property. No sufficient basis for that further deduction was advanced. The
final deduction by Mr McGregor is £25,000 for dissolution costs. Mr Bell considered that
due to the directors' professional backgrounds they would look to mitigate and minimise
these costs wherever possible, but this point was not developed further. I shall therefore
take £216,000 as the starting point, deducting only the £25,000 for dissolution costs. This
results in a net asset value of £191,000, meaning that the value of Mr Martin's 42.84%
shareholding at the final date given is, rounded up, £82,000.
45
[77]
Based upon the authorities, I therefore conclude that the appropriate date for fixing a
price for the purchase of the petitioner's shares is that final date. That is the date which best
remedies the unfair prejudice established. While some of the unfairly prejudicial conduct
occurred earlier, I have had regard to the cumulative effect of it including the ongoing
matters concerning the petitioner's loan account. In light of my findings above, there is no
ground for going back to the date of the petitioner's departure from the Company or the
date of the MBO for the purposes of valuation. I also conclude that it is not appropriate, in
this quasi-partnership case, to apply a discount.
[78]
For completeness, I observe that early in these proceedings Mr Hughes made an offer
to purchase the petitioner's shares for £125,000, subsequently increased to £150,000. But it
was not suggested that this offer included the expenses incurred by the petitioner nor, more
importantly, that it met the criteria in O'Neill v Phillips. There was no independent valuation
behind the offer and it was not suggested that at that point the petitioner was afforded full
access to the Company's records and other relevant information to allow him to form a view
or receive expert advice on the point. Moreover, the figure offered apparently included
sums already owed to the petitioner in his loan account.
Disposal
[79]
I shall therefore make an order for the purchase of the petitioner's shares in the sum
of £82,000. I shall also grant orders for payment to the petitioner of £16,856 in respect of his
director's loan account and £29,988 in respect of the interim dividend for the period to
31 March 2018. However, the question of whether it is Mr Hughes and Mr Seddon, or the
Company, who should be ordained to make the particular payments requires to be
46
addressed and I will fix a by-order hearing to deal with this matter. In the meantime, I
reserve all questions of expenses.
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