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OUTER HOUSE, COURT OF SESSION
[2024] CSOH 42
P401/23
OPINION OF LORD SANDISON
In the Petition of
(FIRST) ALLAN DAVIDSON; (SECOND) SARAH DAVIDSON; and (THIRD) ARGYLE
ASSET MANAGEMENT LIMITED
Petitioners
for
orders under sections 994 and 996 of the Companies Act 2006 in respect of
ANGUS PARK LIMITED
Petitioners: J Brown; DAC Beachcroft LLP for Levy & McRae LLP
Respondents: Ower KC, Horn; Davidson Chalmers Stewart LLP
12 April 2024
Introduction
[1]
By this petition, Allan and Sarah Davidson, a married couple, and Argyle Asset
Management Limited ("Argyle"), a company owned and controlled by them, seek orders
under sections 994 and 996 of the Companies Act 2006 in respect of Angus Park Limited
("the Company"), claiming to have been subjected to unfairly prejudicial treatment as
members of the Company. The Davidsons are directors of the Company. They maintain
that they are also members of the Company. Against the eventuality that they are found not
to be such members, they claim alternatively that Argyle is a member and they have
2
accordingly caused it to concur in this petition. The respondents to the petition are, firstly,
Pinz Bowling Limited ("Pinz"), a member of the Company; secondly, Darren Margach; and
thirdly, Ross Anderson. The second and third respondents are directors of the Company.
They are also the only directors of Pinz, and control it. The Company itself was not called as
a respondent to the petition. The matter came before the court for a ten-day diet of proof for
determination of all issues in dispute.
Relevant statutory provisions
[2]
Sections 994 and 996 of the Companies Act 2006, so far as material, are in the
following terms:
"994 Petition by company member
(1) A member of a company may apply to the court by petition for an order under
this Part on the ground
(a) that the company's affairs are being or have been conducted in a manner
that is unfairly prejudicial to the interests of members generally or of some
part of its members (including at least himself), or
(b) 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.
...
996 Powers of the court under this Part
(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
(a) regulate the conduct of the company's affairs in the future;
(b) require the company
(i) to refrain from doing or continuing an act complained of, or
(ii) to do an act that the petitioner has complained it has omitted to
do;
3
(c) authorise civil proceedings to be brought in the name and on behalf of the
company by such person or persons and on such terms as the court may
direct;
(d) require the company not to make any, or any specified, alterations in its
articles without the leave of the court;
(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."
Summary of factual background
[3]
The accepted factual background to the dispute includes the following matters.
Mr Margach and Mrs Davidson first met as members of a pressure group set out to lobby
the Scottish Government for better treatment of the soft play industry during the Covid-19
pandemic. Mr Margach owned Pinz and had (with the assistance of his partner
Mr Anderson) built it up from a single ten-pin bowling site to the holding company of a
group of indoor leisure businesses using inflatable equipment with ancillary catering
provision. Although very successful pre-pandemic, the group had built up considerable
debt during the various lockdowns and pandemic restrictions on public association.
Mr Margach was, as the pandemic continued, increasingly diffident about his abilities to
turn its fortunes around and continue its previous growth without some external assistance.
Mrs Davidson had experience of operating (through Argyle) a soft play centre in Glasgow,
"Whale of a Time". Mr Davidson was an experienced businessman in the hotel industry
and latterly was employed in a business involved in a substantial way in the provision of
student accommodation. The four individuals formulated a plan (actuated primarily by
Mr Margach and Mrs Davidson) to go into business together. In essence, they agreed to
form the Company as a joint venture to operate a new indoor inflatable leisure business
from a site in Monifieth, trading under the "Innoflate" brand owned by Pinz. If things went
well, the intention was to replicate that plan with other such businesses in future. They
4
agreed to set up another company, DRS Leisure Limited ("DRS" standing for Darren, Ross
and Sarah respectively) which would in due course provide services to companies in the
Pinz and joint venture groups and charge fees for those services. Mrs Davidson was to work
(initially unpaid) as Operations Director for Pinz, thereby taking some strain from
Mr Anderson, who had previously been performing that role amongst others, and giving
him more time for relaxation and the enjoyment of his relationship with Mr Margach.
Mr Davidson was to continue with his existing full-time employment elsewhere, but was to
be available to advise and assist with issues which fell within his particular experience and
aptitudes.
[4]
In furtherance of that plan, the Company was incorporated on 20 August 2021, at
premises leased from Dobbies Garden Centre Limited. Incorporation of the Company was
attended to by Mrs Davidson, and on incorporation two ordinary shares of £1 each were
allotted; one to Pinz and the other to Argyle. DRS Leisure Limited was incorporated on the
same day with an issued share capital of ten ordinary shares of £1 each, seven of which were
allotted to Pinz and the remaining three to Argyle.
[5]
By agreement amongst the parties, DRS Leisure Limited was voluntarily struck off
the Register of Companies on 30 December 2021. A further company, DRSA Leisure
Limited, was incorporated on 7 January 2022 with 100 shares in issue, seventy of which were
allotted to Pinz and fifteen to each of the Davidsons. The additional "A" in the name was a
reference to "Allan". This company was intended to carry out the role initially intended for
DRS Leisure Limited. In April 2022, changes were also made to the shareholdings in the
Company, the result of which was that Mr and Mrs Davidson came to hold one share each,
and Pinz held two. These changes were made by a bookkeeper instructed by Mrs Davidson.
She maintains that they were authorised by Pinz at the same time as the change from DRS to
5
DRSA, but Mr Margach and Mr Anderson deny that, saying that they only found out about
it after the event.
[6]
The Company opened for trading on 2 April 2022. The business was carried on
successfully and profitably from the point of opening, and shareholder loans advanced to it
for the purposes of enabling it to set up were repaid in full by September 2022, with
substantial additional profit remaining. However, by that time all was not well in the
personal relationships amongst the Davidsons, Mr Margach and Mr Anderson.
Mr Anderson had come to entertain a degree of dissatisfaction about the way in which
Mrs Davidson was carrying out her role as Operations Director for Pinz. Towards the end
of August 2022 she was brusquely given to understand that she was no longer wanted in
that (or any other) role, and left it with immediate effect. Mr Margach and Mr Anderson
were also questioning more generally the wisdom of their intended venture with the
Davidsons, and had engaged a business consultant with whom they had previously worked,
Mr John McGee, to advise and assist them with their future plans. He was, where possible,
put forward by them to discuss any matter that needed to be discussed with the Davidsons.
Put short, the milk was rapidly turning sour.
[7]
The Company had started trading without any agreement having been made about
the arrangements whereby Pinz was to charge for the provision of management services. It
had become clear that the model of charging through DRSA was not acceptable to Pinz. At a
shareholders' meeting of the Company on 26 September 2022, it was formally agreed that
DRSA would be dissolved and that Pinz would present proposals to the Company for
charging for the services it was providing. In mid-October 2022, without any further
discussion or agreement having taken place, Pinz raised a number of invoices against the
Company and indeed took some money in payment thereof from the Company's bank
6
account. At a virtual meeting shortly thereafter between the Davidsons on the one hand and
Mr Margach and Mr Anderson on the other, at which the latter proposed on behalf of Pinz a
certain charging structure, Mr Anderson said that he would personally go and remove
Innoflate signage and branding from the Company's site if agreement was not reached
immediately. Under protest, Mr Davidson proposed an alternative charging structure,
which was then in its essentials agreed. It was intended that those arrangements would be
set out in writing, but that never in fact occurred.
[8]
On 20 March 2023, in the course of a meeting involving Mr Davidson and Mr McGee,
the latter asked questions about the reorganisation of the Company's share capital, stating
that Mr Margach and Mr Anderson had known nothing about it. A notice was issued by
Pinz on the same day, stating that it would cease to provide services to the Company on
20 April 2023. A letter dated 23 March 2023 was subsequently issued by Mr Margach and
Mr Anderson on behalf of Pinz, demanding the resignation of the Davidsons as directors of
the Company and the transfer of their shares to Pinz for £1 each, and stating (wrongly) that
the booking service run by Pinz on behalf of the Company had been shut down for bookings
after 20 April.
[9]
These proceedings began in May 2023 and the deadline for the withdrawal of
services was extended until June, with offers to acquire the petitioners' shares for relatively
low prices being made by Pinz and equally unrealistic counter-proposals being made.
A proposal by the petitioners as to steps which could be taken to enable the Company to
continue to trade after the withdrawal of the Pinz services and brand was met with a rather
indefinite response by the respondents. A dispute broke out about whether the Company
could be regarded as a going concern for the purposes of its statutory accounts, standing the
possibility that the services it was receiving from Pinz might be withdrawn on short notice,
7
and was resolved only after the Company was forced to cease trading for a fortnight or so
after its insurers refused to renew cover standing that uncertainty; the respondents then
agreed to give at least 3 months' notice of the withdrawal of those services, and in practical
terms intended to await the outcome of the litigation before doing anything further. Finally,
the Company's landlords issued it with an estimated invoice for electricity which it had
been using at their expense since commencing trading, and the parties delayed somewhat in
dealing with that threat to the Company's solvency. Although all parties agree that any
relationship of trust and confidence between them has been irretrievably destroyed, the
petitioners maintain, and the respondents deny, that the former have been subjected to
unfairly prejudicial conduct of the Company's affairs at the hands of the latter.
The evidence as to matters of fact
[10]
That brief summary of the facts having been given, it is necessary to set out the
evidence in the case in much more detail in order to understand the many nuances which
here, as in many cases brought in terms of section 994 of the 2006 Act, provide the key to
determining the proper treatment and disposal of the complaints made. Each of the
witnesses provided one or more witness statements and was cross-and re-examined.
Petitioners' case
[11]
Allan James Davidson (53) gave principal and two supplementary affidavits to
which he spoke, and in which he stated that his business background was in the hotel
industry, for the last 20 years in hotel management and management consultancy. He had
come to be involved in the Company through his wife Sarah, who had dealt with its
incorporation and the subsequent transfer of shares from Argyle to the two of them.
8
[12]
The Company's business was the provision of an indoor inflatable leisure facility,
trading as "Innoflate", from premises at Monifieth. The rights to that name and the
associated website were owned by Pinz, which operated a number of other similar facilities
under the same brand. The Company made money through entry charges for access to the
facility, food and drink sales, the sale of socks for use on the inflatable areas, and from
vending or amusement machines. There were both "walk in" and pre-booked customers.
The Company's premises were prominently situated on the main A92 road between Dundee
and Arbroath, at a location adjacent to other businesses such as a garden centre, gym, hotel
and restaurants. The premises were held by the Company on a sub-lease from Dobbies.
They had been lying empty from about 2018 until the sub-lease was agreed around the end
of 2021 or the beginning of 2022. Their size and formation particularly lent themselves to the
nature of the Company's business. The premises were fully fitted out for operation as an
inflatable park. The inflatable apparatus had been purchased new, with the Company
having been able to negotiate some deferment on paying the whole price, so that the
cashflow generated from the first couple of months' trading was used to pay the
outstanding balance of the cost. All of the initial capital costs were paid in full from the
revenue of the first year's trading. The equipment was shown on the Company's balance
sheet at cost less an annual depreciation charge. The realistic working life of the equipment
was at least as long as the remaining duration of the lease, which was to run for a period of
10 years from 7 March 2022 at a rent fixed at £45,000 a year for the duration of the lease, paid
monthly in advance, with an initial rent-free period of 6 months. There was a service charge
of £5,000 a year, also paid monthly. A tenant-only break option was available on 7 March
2027, subject to one year's notice of intention to exercise it being given. The terms of lease
were relatively advantageous to the Company because the premises had previously been
9
vacant for some time. Mr Davidson expected the Company not to exercise the break option
and to remain in occupation at least until 2032.
[13]
The Company used the Innoflate website for bookings, but the bookings themselves
were processed by a third-party provider, with the website simply providing the contact
point to that provider. Although the arrangements for the Company's operations had
loosely been referred to from time to time as a franchise agreement, that was not accurate.
There was nothing proprietary or exclusive in any of the operating methods, systems or
equipment. Other similar businesses operated in very substantially the same way, and
anyone who wanted to open a similar business could do likewise, buying the necessary
equipment from third party suppliers and copying the operating methods without
infringing anyone else's rights. If the Company was to sever its connection with Pinz it
would require to re-brand away from the Innoflate name, since Pinz held the rights to that
name and controlled the website. Mr Davidson did not believe that the Innoflate branding
contributed to any material extent to the custom of the Company, or that any customer
visited because the business was called Innoflate rather than something else. The brand and
website were already in existence at the point the Company commenced trading so using
them saved it the cost and effort of setting up its own. In addition to the use of the name
and the website, Pinz provided the Company with various management services, mostly
routine day-to-day operational or financial management, including payroll, banking,
VAT returns, book-keeping and accounts functions, collation of data and preparation and
presentation of monthly management accounts, and dealing with accountants for the
statutory accounts, insurance brokers for the insurance and other third party suppliers. Pinz
had an existing infrastructure and was already doing all of those things for its own units, so
making use of that avoided the need to make new arrangements for the Company. The
10
Company paid two separate charges to Pinz. One was described as a "franchise fee" and the
other as a "management charge". In the year to the end of 2022, the total cost of these
charges was about £185,000. That was excessive and was imposed on the Company under
improper threat of immediate and unplanned withdrawal of the services.
[14]
The Company's trading had been successful. In addition to repaying all of its
start-up costs in the first year, it also paid dividends of £72,000. It had positive cash flow
and held a material positive cash balance.
[15]
When the Company was set up Sarah Davidson was working closely with Pinz.
She was employed by it and had a management role in relation to its wider business. That
relationship deteriorated in August 2022 when it decided to remove her from that wider
role. The Davidsons were unhappy about the way that was done but accepted that Pinz was
entitled to decide its own future direction. At the same time Mr Margach and Mr Anderson
had decided not to proceed with the separate joint venture company which had been set up.
That company had never traded so there had been no difficulty with that. Although the
relationship amongst the individuals effectively broke down at that stage, the Company
would still have been capable of operating satisfactorily. It had day-to-day management in
place and board decisions could have been made by email, with meetings virtually or in
person a few times a year.
[16]
The starting point of the real problem had been in agreeing the charges for
management services. The original conception was that there was going to be a separate
company which would be held 30% by the Davidsons and 70% by Pinz, which would
perform the management function. However, before that arrangement got started, Pinz had
changed their minds about it. That meant that terms had to be agreed with Pinz for the
provision of services to the Company. In principle, there was no issue with that, since there
11
were things the Company needed to have done for it which Pinz had the capacity to do and
which it was reasonable for it to be paid by the Company for doing. If the Company had not
paid Pinz to do them, it would have had to pay others. Not much attention was paid to
working out the detail of that in the early stages of the business, because cash flow had to be
carefully managed and start-up costs repaid. It was only once that had been done and there
was available cash for other purposes that attention turned to the detail of the figures. An
initial discussion had taken place in which the principle of a charge was agreed, a number
was allocated to it in the business plan, and it was left that the Pinz team would come back
to the Davidsons with a detailed proposal for discussion. The dispute about management
charges had come to a head in October 2022. While on holiday, the Davidsons had received
an email from Chris McQuade, the Group Finance Director for the Pinz group of companies,
who was performing the financial controller function for the Company. The email had
attached to it a management profit and loss account, which was normal, but also had a
number of invoices from Pinz to the Company for amounts that had never been proposed by
Pinz, far less agreed by the Company. Payment had already been taken for some of those
invoices from the Company's bank account. Mr Davidson had responded by email and
correspondence ensued, resulting in the arrangement of a Teams call with Mr Margach and
Mr Anderson on 17 October. On that call, without any prior discussion, they had said that
they would remove the management services from the Company with immediate effect and
close the business down unless terms were agreed. The meeting was fraught, with no real
negotiation. There had been no proper reason for invoices to be raised without even a
discussion of what the basis of calculation should be, and still less for payment to have been
taken without agreement. After the call, the Davidsons felt that they had to do what was
necessary to keep the business trading. If the services being provided by Pinz were
12
withdrawn immediately, the business would have had to close immediately and when or
whether it could be re-opened was uncertain. Cash flow pressures would result from any
prolonged period of closure. There was a risk of the Davidsons losing all of their investment
in the Company. In those circumstances they decided to offer Pinz most of what they were
demanding. Mr Davidson had sent an email on 17 October proposing some changes to the
way in which the charges should be calculated, but essentially delivering around the same
amount of money to Pinz, at least if the business performed well. Mr Margach had accepted
that proposal in principle the same day, and various minor details were clarified in
subsequent emails. It was said that Pinz would have their solicitors draft a management
agreement, but none ever appeared. Invoices were then rendered monthly more or less on
the basis agreed, although with some overcharge. The Davidsons agreed to these charges
because they had had no realistic choice given the threat of immediate closure and the loss
of the value of their investment. The charges levied were grossly excessive given the
services which were being provided.
[17]
Thereafter, the situation settled down, despite the Davidsons being unhappy with
what had occurred and relations being further strained. The business was operating
satisfactorily and was making good profits. The Davidson would have been prepared to let
sleeping dogs lie and to get a dividend income, or to sell their stake in the Company, but no
acceptable offer in that regard was made.
[18]
In late 2021 all interested parties had agreed that the 50% shareholding in the
Company held by Argyle could be transferred to the Davidsons personally. That caused no
prejudice to Pinz. It had 50% of the Company beforehand, and still had 50% afterwards.
There was some delay in recording the share transfer as it was unclear to Mrs Davidson how
13
that should be done on the Register of Companies. Eventually an outside adviser engaged
by Mrs Davidson had dealt with the matter.
[19]
At a meeting in Glasgow on 20 March 2023, Mr Davidson was told out of the blue
that Pinz was terminating the provision of services to the Company and that it was also
concerned about the transfer of shares from Argyle to the Davidsons. The same day the
Davidsons received a letter from Mr Margach and Mr Anderson attached to an email from
John McGee, the chairman of Pinz. It gave notice of termination of Pinz's services to the
Company with one month's notice. A similar communication was received on 23 March
suggesting that Mr Margach and Mr Anderson had only just found out about the share
transfer, when Mr McQuade had noticed it when preparing the Company accounts, which
was not true. Mr McQuade had been copied in on the details by Mrs Davidson at the time
of the transfer. He had attempted to prepare a confirmation statement in April 2022 and,
having failed to lodge that, had been copied into the confirmation statement as lodged by
Mrs Davidson and showing the shareholding as changed, on 23 September 2022.
Mr Margach and Mr Anderson had demanded by the letter of 23 March 2023 that the
Davidsons should resign as directors of the Company and should transfer their shares to
Pinz for the nominal sum of £1 each. The letter stated that service provision would cease on
20 April 2023 and that the booking system would be closed to bookings made for events
occurring on and after that date (although in fact that did not happen). A further email had
been sent by Mr McGee on 27 March demanding a response by the following day and
suggesting that failure to do so would be seen as a deliberate attempt at blocking an
investigation into the share transfer matter. Mr Davidson replied on the same day,
maintaining that there had been nothing underhand or improper about the share transfer,
noting that the parties' relationship was broken beyond repair, and inviting proposals for an
14
agreed exit. Mrs Davidson had also sent an email that evening with a full explanation of
what had been done in relation to the share transfer. The next day Mr McGee had replied
raising, amongst other things, the prospect of an insolvent winding up, and offering the
Davidsons £11,000 for their shareholding together with payment of a dividend of
£2,000 each provided everything was settled and documented by 31 March. At this point
matters had been passed into the hands of solicitors, through whom communications had
thereafter tended to pass, given the difficulties in the relationships amongst the individuals
concerned.
[20]
The Davidsons' solicitors wrote to Mr Margach and Mr Anderson on 30 March 2023
rejecting the £11,000 offer but indicating that they were prepared to proceed by way of an
independent valuation. The letter also raised the question of the notice to withdraw services
to the Company and suggested that a reasonable period of notice was at least 3 months.
Correspondence between solicitors ensued, in the course of which an offer was made that
Pinz would buy the Davidsons' shares in the Company for £48,000 or else would sell its
shares to them for £1 million. The 20 April deadline for withdrawal of services was
extended until 20 June.
[21]
The Davidsons were also provided with a copy of a letter dated 24 April 2023 from
Scott Dunbar of Johnston Carmichael to Mr Margach. Johnston Carmichael were the
accountants for all the Pinz companies and it had previously been proposed and agreed that
they should also act in that capacity for the Company. Mr McQuade continued to do the
in-house management accountancy work and he was the primary liaison with Johnson
Carmichael for preparation of the statutory accounts. The Company was not subject to audit
and all of the required data was already available from the management accounts, so getting
the statutory accounts done was not a particularly major exercise. The letter from Johnston
15
Carmichael suggested that the Company was involved in a franchise arrangement with Pinz
which could be withdrawn at any time, that the major element of the value of the business
was tied up in that arrangement, and that the Company would have to cease trading if it
was withdrawn.
[22]
Court action had been commenced in May 2023, and interim orders had been sought
to prevent Pinz from withdrawing services to the Company unless and until it had put in
place alternative provision. That was intended to stabilise the situation for the duration of
the court action. A series of short-term undertakings not to withdraw services, for a month
or so at a time, was then given, which resulted in continuing uncertainty. The Davidsons
had worked out a plan for replacing the Pinz services to the Company and a proposal in that
connection had been sent by their solicitors to those acting for Pinz on 26 June 2023.
That proposal was rejected and no counter-proposal made. Pinz owned the Innoflate name,
the website domain name and related intellectual property rights, so a relatively
straightforward re-branding exercise would have been required, involving a primary one-off
cost with some recurring marketing costs. The Company's premises were the only inflatable
park in the Dundee area, so there was very little prospect of the public being confused. The
bookings were already run through a third-party provider with the Innoflate website being
just the landing point from which customers were directed to the third-party provider, so
that could be straightforwardly reconfigured to run in exactly the same way from a website
exclusively used by the Company. A provisional assessment of the work the Company
would have to do and the expenditure it would have to incur to replace the services
provided by Pinz was carried out, and concluded that the following was necessary:
(i)
Selection and engagement of a design and marketing agency to advise on the
rebranding exercise, with an initial budget of about £10,000;
16
(ii)
Selection and engagement of an IT contractor to design and build a website, with
an initial budget of £15,000, and an ongoing monthly support cost of £2,500;
(iii)
Engagement of a contractor to carry out digital and social media targeted
advertising at a monthly cost of £2,500;
(iv)
Replacement of signage at the premises and replacement of all other branded
material;
(v)
Selection and engagement of a contractor to provide external management
accounting, bookkeeping and payroll functions, at a maximum budget of £25,000
a year;
(vi)
Migration of the booking system service to the new website at a one-off cost;
and
(vii)
Recruitment and engagement of a general manager reporting to the board, with
duties including cash flow monitoring and management, health and safety and
regulatory compliance, organisation of insurance, liaison with external
contractors such as accountants and insurance brokers; being a part-time post
with an indicative budget of £30,000 a year.
If these steps were taken, the Company would have been able to trade at the same level as
previously, and would have made significant cost savings from not paying Pinz, thereby
increasing profits. Ultimately, however, Pinz gave an undertaking to maintain services
through to conclusion of the court action so no alternative steps were actually required.
[23]
There was no other indoor inflatable park in Dundee; the nearest one was in Perth,
to where the local clientele would be unlikely to travel. To some extent other leisure
offerings aimed at the same demographic were in competition with the Company for the
finite amount of leisure spending in the area. The Company had enjoyed an initial novelty
17
value and perhaps there would be some downturn from the initial peak of trading activity.
Mr Davidson expected the business to be broadly stable, with seasonal variations.
[24]
In August 2023 the issue with the accounts came to a head. The deadline for lodging
the Company's statutory accounts for the previous accounting period was 20 August. There
was no general difficulty with the content of the accounts, which was derived from the
management accounts. A draft was circulated, but warned that there was a concern about
the Company's status as a going concern. There had been no correspondence or discussion
amongst the directors, or between the Davidsons and Johnston Carmichael, about such a
warning being issued. Pinz had simply instructed Johnston Carmichael to draw the
accounts in that way, and they had done so. The Davidsons' solicitors wrote to Johnston
Carmichael on 26 May 2023 drawing attention to the filing deadline, pointing out that the
going concern warning was disputed, and asking for drafts for approval in good time.
There was no response and a reminder was sent on 12 July asking for the draft by return.
A reply from Johnston Carmichael appeared on 2 August, but just enclosed the same draft as
before. As well as the going concern warning, that draft had an entry towards the end
suggesting that the Company had future liabilities under the lease in excess of £5 million,
which was obviously wrong given that the rent was £45,000 a year and the service charge
£5,000 a year, the lease had already run for 18 months with a tenant break option at 5 years,
and payments were fully up to date. The entry was more than twenty times higher than the
most it could have been. There were also other more minor errors. A call between the
Davidsons and Johnston Carmichael was arranged for 18 August. Mr Dunbar of Johnston
Carmichael had said that the accounts were not audited and it was a matter for the directors,
not Johnston Carmichael, to make the determination as to whether or not the Company was
a going concern. He said that the going concern warning had been put in the draft accounts
18
on instructions from Pinz and that Johnston Carmichael had not at any stage given advice
that it was necessary or appropriate. He made clear that he had given and would give no
advice on whether or not the Company could continue to trade without the assistance of
Pinz. He also said that it was not for Johnston Carmichael to broker some agreed position
between two groups of directors who had a difference of opinion. Mr Davidson agreed with
all of that and said so. The matter was left on the basis that Mr Dunbar would have a further
discussion with Pinz and that any change in its position would be communicated to the
Davidsons. Mr Dunbar had also recognised that the entry of more than £5 million for the
lease liability was obviously wrong. He said the figure had been provided by Pinz and he
would look to get it corrected. An updated figure for that liability of £450,000, which was
said to have been provided by Mr McQuade and which was also obviously way too high,
had subsequently been provided. The filing deadline came and went with no movement
from Pinz on the going concern issue. By late September Pinz conceded that the accounts
should be lodged on the basis that the Company was a going concern, and also agreed to the
correction of the lease liability statement. The statutory accounts were lodged on 3 October.
They showed that the Company was a going concern and had the lease liability at a total
of £187,500, which was about right.
[25]
As a direct consequence of what had happened with the accounts, the Company
experienced a significant insurance issue. On 6 September Mr Margach had forwarded an
email to Mr Davidson from the Company's contact at its insurance broker, Mr Chris Cole.
Renewal of the Company's insurance was dealt with by Pinz as part of a general renewal
involving all of the other Pinz sites, and input from the Davidsons on insurance issues was
not routinely asked for. The broker knew that there was an issue with the accounts being
drafted on the basis that the Company should be subject to a going concern warning, which
19
information must have come from Pinz. Mr Margach must have known when the broker
first asked to see accounts at the start of August that there was going to be a problem unless
the dispute could be resolved quickly, but had waited a month before telling the Davidsons
about it. The Company paid its insurance premiums by monthly instalments, which
allowed the cost to be spread through the year. That was technically a credit facility and
there was at least some basic credit checking involved in getting it. However, the Company
had cash in the bank and was in a position to pay the whole annual premium if need be.
Mr Davidson telephoned Mr Cole, who asked what the position was about the Company
having its management services terminated. Thereafter, Mr Davidson had been told that the
insurer was not willing to offer cover. Mr Davidson was able to get an indicative quote for
cover from an alternative insurer subject to a number of conditions, but Pinz had not
co-operated with answering the questions which were posed. The insurance cover lapsed
and the Company's premises had to be closed for about 3 weeks from late September until
the matter was sorted out.
[26]
The latest dispute had been about electricity. The Company occupied its premises on
a sub-lease from Dobbies, which occupied and traded from a garden centre on the site while
the Company occupied a section previously used by various concessionaires for retail
purposes other than gardening activities. There was a single electricity supply which
originally served the whole premises, which had originally been run by a single occupier as
a unified business. The supply came into the Dobbies premises and was metered there.
There was no separate supply and no separate meter for the Company alone. This had been
the subject of some discussion at the point of negotiation of the lease, when Dobbies
indicated that they might want to split the supply at some point, which would involve a
new metred supply coming into the Company premises and the Company having its own
20
contract with a supplier. If that happened then the Company would have to enter into a
contract with a supplier and pay its bills directly. Mr Davidson had contacted
Andrew Horrix, Head of Concessions and Store Development at Dobbies, to try to find out
what was happening and was told that Dobbies had a meter in its plant room that was able
to measure all of the electricity going to the Company's premises. No one had taken any
readings from it at the point the Company took possession of its site, so there was no historic
reading from which one could ascertain directly the total consumption since it had been in
occupation. There were nine sub-meters in the Company's premises, reflecting the fact that
those premises had previously been sub-divided for retail use, and Dobbies had proceeded
on the basis that the total readings from those meters would bring out the Company's total
electricity usage. Mr Horrix had said that Dobbies wanted to have an amicable discussion
about resolving the issue and would act reasonably in doing so. He had suggested that
Dobbies could take readings from that point onwards at fixed intervals and invoice for the
consumption in that period, and once sufficient data had been amassed to give an accurate
picture of energy consumption, that could be used to work out the cost of the historic usage,
and a staged payment plan to settle the historic balance could be agreed. However, Dobbies
had then issued a further invoice on 15 December 2023 which bore no relation to any
previous discussion and appeared to have been calculated by taking the cost of electricity
that Dobbies had consumed before the Company took occupation and ascribing all increases
in consumption after that to it. Various assumptions about the instance and constancy of
consumption had been made. Mr Davidson had again contacted Mr Horrix, who had said
he was now aware of the shareholder dispute and was leaving matters in the hands of the
local manager. The sum requested by Dobbies from the Company would have to be
negotiated. The consumption going forward could be measured accurately. The annual cost
21
would probably be between £40,000 and £67,000. The management charges that Pinz had
levied on the Company had been calculated on the basis of a percentage of its EBITDA
(Earnings Before Interest, Tax, Depreciation and Amortisation), which would reduce if
electricity charges had to be paid to Dobbies, and would result in Pinz having to refund the
Company 20% of whatever sum was ultimately agreed with Dobbies. In early January 2024,
the Davidsons and Pinz had agreed to a joint approach to Dobbies, involving payment of
instalments meantime and the gathering of usage data so that an accurate assessment of the
sum owed could be made. That had been agreed to and was in the course of being worked
through.
[27]
In cross-examination, Mr Davidson further explained his business background in
hotel and asset management. He was an experienced businessman who had been involved
in many commercial negotiations and had been involved with his wife, through the medium
of Argyle, in the "Whale of a Time" soft play centre in Glasgow.
[28]
The Company had been able to get good terms for the purchase of its inflatable
equipment due to the prior connection between the supplier and Pinz. He was not involved
in the day-to-day management of the Company, and had only visited the site two or three
times. In September 2022 it had been agreed that the business model using DRSA would not
be used as initially intended and that the Company would operate as a franchise.
[29]
He had never intended to have the Company set up with one share to Argyle and
one to Pinz. It had simply been agreed that the shares in the Company would be held
equally between the Davidson interest and the Pinz interest. Mrs Davidson had involved
Argyle by mistake initially, subsequently altering the shareholdings in the Company so that
each of the Davidsons had one share and Pinz had two. Argyle was a dormant company
which had no assets. It owed about £33,000 in respect of a Covid-19 bounceback loan, which
22
he and his wife were covering, and about £50,000 in rent arrears, in respect of which an
arrangement had been entered into with its former landlord. It was not insolvent and there
was no realistic prospect of a liquidator being appointed to it. There had been no formal
discussions or board meeting to approve the changes in the Company's shareholding. He
had had no discussions about it with Mr Margach or Mr Anderson; Mrs Davidson had done
that, and he was aware that the change was going to be effected around November 2021,
although it did not actually happen until April 2022.
[30]
At the end of the meeting on 20 March 2023, under the "Any other business" heading
of the agenda, Mr McGee and Mr McQuade had said that Pinz had just found out about the
share reorganisation and it was under investigation. Mr Davidson had been aware at that
point that the reorganisation had taken place, but did not comment on it, saying that it was a
matter for Mrs Davidson, who was unwell and absent from the meeting. He did not know
who Mrs Davidson had approached for advice about how to effect the reorganisation. It
transpired that it had ultimately been done by an accountant who had worked for the
Davidsons and Argyle in the past, and her bill had been paid by the Davidsons as they were
the ones who wanted the changes to take place. Although he could not remember exactly
the conversation which had taken place at the meeting on 20 March, he was shocked that the
matter had been raised in the way it was. He had been handed a letter saying that the
business would close because of it, which he had read in silence so as to be sure to take its
contents in. It had also mentioned a breakdown in communication amongst the individuals
behind the Company, a failure to hold meetings, and rumours in the industry about the
Davidsons (which he assumed related to an issue with the person to whom "Whale of a
Time" had been sold by Argyle), and concluded by saying that the services being provided
23
by Pinz, and the Innoflate brand, would be withdrawn from 20 April 2023, although that
had never actually happened.
[31]
A subsequent letter dated 23 March 2023 had claimed again that Pinz had previously
been unaware of the share reorganisation, that the Company's Articles had not been
observed, that the shares should have been valued, and that Pinz would not have consented
to what had occurred had it been asked. It demanded the resignation of the Davidsons from
the board of the Company and the transfer of their shares to Pinz for £1 each.
[32]
Mrs Davidson's position was that Mr Margach and Mr Anderson had agreed to the
dissolution of DRS Limited and the setting up of DRSA Limited and had agreed to the
reorganisation of the Company's shares at the same time. Nothing had been put in writing.
Mr Davidson had been aware that it was happening, but was not aware of the exact timings.
[33]
After this turn of events, the Davidsons' solicitor had written to Mr Margach and
Mr Anderson offering to sell the Davidsons' shares at an independent valuation, given that
the relationship between the individuals concerned with the Company had broken down
beyond repair. Although the services being provided by Pinz had not been withdrawn,
there was a lack of information and clarity about any way forward. Pinz had then offered to
sell its shares to the Davidsons for £1 million, and they had made the same offer in return.
Neither side had accepted the other's offer. Pinz had no right to control the Company's
operating method, and Mr Davidson did not think that their branding was a particular
attraction for customers. There was no customer survey or other evidence supporting the
suggestion that it was.
[34]
There had been a meeting of the members of the Company on 26 September 2022.
It had formally agreed to dissolve DRSA Limited, which was just confirmation of something
that had already been informally agreed. It was agreed that Pinz would provide
24
management services to the Company and the principle that it would be paid for those
services was uncontroversial, but no amounts had been agreed.
[35]
On 14 October 2022, Mr McQuade had issued the Company with invoices on behalf
of Pinz. Mr Davidson had replied, disputing that the amounts invoiced had been agreed.
Mr Margach and Mr Anderson had then got involved in a virtual meeting and subsequent
emails. Proposals for a fee structure for Pinz had been put forward. Mr Margach stated that
the alternative was for the Company to rebrand and for the Davidsons to run it themselves.
Mr Anderson had threatened to go to the Company's site himself and remove the Innoflate
branding if agreement was not reached immediately. The financial demands made were
ridiculous. Mr Margach had asked for a franchise fee of 12% of gross revenue, when the
original business plan which had been agreed had only put forward a fee of 4% of booked
revenue. He also wanted to charge a management fee in excess of anything that had been
agreed. Mr Davidson made counter-proposals, but only in the context of the threat to close
the business imminently if agreement was not reached. Eventually agreement was reached
on a fee structure of 12% of gross revenue as a franchise fee, 20% of EBITDA as a
management fee, and 30% of excess profit over budgeted figures. Payment was made as
agreed and the relationships between the individuals appeared to stabilise. A contract
setting out the parties' agreement formally and in writing was promised, but never
materialised.
[36]
In June 2023 the Davidsons, through their solicitors, made a rebranding suggestion to
Mr Margach and Mr Anderson. Mr Davidson had found out that a company called
Inflatenation could provide services to the Company similar to those being provided by
Pinz. He proposed that the Company could be run by its shareholders with the assistance of
Inflatenation or a comparable service provider. It was a realistic proposition. A reasonably
25
positive response had been received, but it did not accept all of the proposals and looked to
cut the anticipated costs of the exercise. No steps to implement the plan had ever been
taken. Although Pinz ran the business very well, it was apparent that shareholder approval
to move on from that situation would be difficult to get.
[37]
Mr McQuade had sent management accounts for the Company to the Davidsons on
2 February 2023, to which no response or comment had been made. Towards the end
of April, he had raised an issue about whether the Company could be treated as a going
concern given the threatened withdrawal of the services of Pinz which had been made in
March. At Mr McQuade's request, Johnston Carmichael, the accountants for the Pinz group,
who had been asked to prepare the Company's statutory accounts for approval and
submission, invited the Davidsons to a meeting to discuss the matter by letter dated 28 April
2023. All directors of the Company would have to sign off on those accounts before they
could be submitted to Companies House. On the basis that it was not Johnston Carmichael's
business to call a shareholders' meeting and that it was unclear what the agenda was going
to be, the Davidsons did not attend the meeting or make alternative arrangements to discuss
the matter with Johnston Carmichael until 18 August. They had not been provided with the
draft statutory accounts until 2 August, despite their solicitors having asked for them at the
end of May and again in mid-July. At the discussion with Johnston Carmichael on
18 August, their partner Mr Dunbar said that he had been directed to use the "not a going
concern" basis for the Company's accounts. He said that it was not up to him to change
that, even if presented with evidence that the Company was a going concern. The deadline
for lodging the statutory accounts came and went. That caused the Company's insurers to
refuse to renew cover and a crisis had thus been created, forcing the temporary closure of its
business and damaging it. Mr Davidson had spoken to the insurance broker and informed
26
him of the dispute amongst the shareholders. The insurance lapsed on 5 October 2023 and
was renewed on 12 October, retrospectively dealing with the gap in cover.
[38]
The Company's lease from Dobbies could extend to 2032. On 9 November 2023,
Mr Anderson had forwarded to Mr Davidson an email from Keith Lough of Dobbies
concerning outstanding electricity charges due from the Company, said to amount
to £59,000. Mr Margach and Mr Anderson wanted an urgent meeting with Mr Davidson
about the matter, but in view of the imminence of the proof in these proceedings, he did not
think it appropriate to engage directly with them. He contacted Mr Horrix of Dobbies to
gain an understanding of the situation. On 15 December, Dobbies had issued the Company
with an invoice for £130,000. Mr Margach had suggested that insolvency advice be taken,
but Mr Davidson did not consider that necessary. In his view, the Company was devalued
by what had happened, but not insolvent. The invoice presented was an estimate of the
Company's liability which was not indubitably due and payable. Mr Davidson denied that
he had caused Dobbies to send the invoice. After much to-ing and fro-ing by way of email
correspondence, the directors of the Company had met on 4 January 2024 and a suggestion
had been made as to how Dobbies might be approached, which gained general approval.
[39]
Mr Davidson stated that he thought that the Company's inflatable equipment ought
to last until the expiry of its lease in 2032, but accepted that Mr Margach would be better
informed on that subject. He denied being a "silent partner" in the Company, saying that
before the dispute broke out, he had discussed a variety of Company matters with the other
individuals, and had participated in meetings, emails and decision-making.
[40]
In re-examination, Mr Davidson stated that Mr Margach and Mr Anderson had not
initially responded to a statement made by him and lodged in the court process just before
Christmas 2023 setting out how he proposed the invoice from Dobbies should be dealt with.
27
[41]
The initial start-up funds provided by the Davidsons to the Company had come from
their own resources, not from Argyle.
[42]
After agreement had been reached on the nature and level of charges to be made by
Pinz in October 2022, he had expected to be provided with a contract detailing the services
to be provided, the duration of the agreement and termination provisions, and had asked to
see a draft, but nothing had been made available.
[43]
The alternative proposals made by the Davidsons in June 2023 for the operation of
the Company's business included hiring a manager to carry out higher managerial functions
than those done by the existing manager on site, replicating some of the services then being
provided by Pinz. Mr Margach and Mr Anderson appeared not to understand that, and had
made no alternative suggestions. Progress could not be made without their co-operation.
[44]
If Johnston Carmichael had responded more quickly to his solicitors' correspondence
about the accounts issue, it could have been resolved more quickly and the accounts lodged
timeously. He did not know why that had not happened.
[45]
Scott Dunbar (39) gave statements to the petitioners and the respondents, to which
he spoke. He stated that he was a Chartered Accountant and had been a partner in Johnston
Carmichael for 5½ years, with a specific role in business advice. He acted for Pinz as its
accountant and business advisor, and had been engaged to prepare the statutory accounts
and corporation tax returns for the Company on 17
April 2023. In March 2023 he had been
provided with the Company's accounting information for the period to 31 December 2022
by Mr McQuade. Subsequently Mr Margach had telephoned him to say that there was a
dispute between the directors and that Pinz proposed to withdraw from its agreement to
supply services to the Company. Mr Dunbar considered, on the basis of what Mr Margach
had said to him, that that presented a material threat to the business as it had never traded
28
without that agreement in place and there was no evidence to suggest that it could trade
successfully without it. He did not consult with the Company's other directors before
reaching that view. Notes to statutory accounts prepared by Johnston Carmichael would
always contain a paragraph about the views of the directors as to whether the business
would continue as a going concern for 12 months after the date of signing the accounts.
As there was material uncertainly about whether that would be the case if the agreement
with Pinz was terminated, he communicated his concerns on that point to Mr Margach by
letter dated 24 April 2023, which Mr Margach had asked him to write in order to get things
in black and white to share with the other directors. He understood that Mr Margach would
circulate the letter to them, but was not aware of any other agenda which Mr Margach may
have had. The letter had been badly phrased and might have appeared too definitive about
the effect of the withdrawal of the services on the Company; if so, that was his own mistake,
and neither Mr Margach nor anyone else had indicated what he should write. He had
written the letter in good faith and without any intention to mislead. The Davidsons could
have raised any concerns they had about the terms of the letter directly with him, but did
not. He subsequently wrote, at Mr Margach's request, to all the directors asking to meet
with them to discuss the accounts before they were approved, but the Davidsons had not
responded to that suggestion. Their solicitor had subsequently contacted him and
Mr Davidson had expressed the view that the Company could remain in business without
the agreement with Pinz. Mr Dunbar had requested evidence to support that view, but had
not received it. In September or October 2023 Mr Margach had contacted him to say that it
had been agreed that Pinz would continue to provide its services on the basis that they
could be removed on 3 months' notice. On that basis, the Company's directors had agreed
that the accounts could be approved and lodged on a going concern basis, which was done
29
on 3 October 2023. Mr Dunbar clarified that he did not advise any of the parties that the
Company could not be described as a going concern. He had explained to Mr Margach in
April 2023 what the concept of a going concern was and that a company could not be
described as a going concern if there was a material uncertainty as to its ability to trade
going forward. In that case, the directors had to report the issue in the accounts in terms of
the FRS 102 accounting standard. He had told Mr Margach that the dispute between the
shareholders was something that the directors needed to assess, especially taking into
account the removal of the franchise agreement and withdrawal of the services under it.
The question was whether in the directors' opinion that created a material uncertainty as to
the Company's continued ability to trade.
[46]
In further examination in chief, Mr Dunbar stated that he had acted for some time for
Pinz and its associated companies, and for the Company since 17 April 2023. The going
concern issue was one for the Company's directors, in co-operation with their appointed
accountants; all he could do was offer advice about the relevant financial reporting
standard. The trading figures themselves gave rise to no issue about whether the Company
was a going concern. He had discussed the matter with Mr Margach, who was his point of
contact for the Pinz companies. He had not initially met or spoken with Mr Davidson, and
had never met or spoken with Mrs Davidson. A draft of the proposed statutory accounts
had been prepared by about the end of April or the start of May 2023. The draft suggested
that the Company might not be considered to be a going concern. Generally a draft was
formulated for the purposes of review and discussion. It was possible that the draft had
only been sent at that time to Mr Margach and Mr McQuade. There had been emails and
some calls with them. Had he known that there was a dispute amongst the shareholders,
he would have sent the draft to all of the directors. He had learned that there were court
30
proceedings in dependence through Mr McQuade and Mr Margach, and thus that solicitors
had been instructed, around May 2023. He did not recall contact with any solicitors at that
stage; he was aware in general terms that the dispute was about shares, but had not asked
to see, or been shown, the court papers. The matter had nothing to do with the going
concern issue as far as he was concerned. He had considered whether Johnston Carmichael
had a conflict of interest, but it was not giving any opinion or advice about the
subject-matter of the dispute, just about the statutory accounts. That advice (concerning the
going concern issue, but not the consequences of the Company being deemed not to be a
going concern) was given to all of the Company's directors, and it was up to them to form
their own view. Mr Margach was concerned about the Company's future, and in particular
how it could continue in business should the services being provided by Pinz be removed.
[47]
The going concern issue had initially been raised by Mr Margach calling him in
April 2023 and explaining the dispute, which was said to be about the share reorganisation
which had taken place, causing a divide and lack of trust amongst the shareholders. It was
said that an application had been made to remove the Innoflate brand and the support being
provided by Pinz to the Company, causing uncertainty about the future. A material
uncertainty was all that was needed to require the going concern issue to be considered.
Mr Dunbar had said that the impact of the proposed withdrawal of services on the
Company had to be considered. It was not until 18 August 2023 that Mr Dunbar had heard
from Mr Davidson that he had a different view from that of Mr Margach as to the effect that
the removal of the brand and services would have on the Company's ability to carry on
business. Mr Dunbar told Mr Davidson then that he would draft the accounts on a going
concern basis if he was provided with a suitable business plan and projections. Johnston
Carmichael had to be satisfied that drawing the accounts on that basis would be a
31
responsible thing to do. If Pinz withdrew its brand and services, there would have to be a
restructuring exercise, which would not be simple.
[48]
Mr Dunbar believed that he had sent the draft accounts to the Davidsons on a couple
of occasions. Their solicitors had written to him asking for them on 26 May 2023, but he was
aware of issues amongst the shareholders at that stage and did not send the accounts or
contact the solicitors or the Davidsons. He was concerned about confidentiality and
forwarded the solicitors' email to Mr Margach, Mr Anderson and Mr McQuade.
Mr Margach and Mr Anderson had authority to say that it would be in order to send the
accounts. He could not remember speaking to them, and did not reply to the solicitors.
He was very busy at the time, as Johnston Carmichael's financial year finished at the end of
May. If the Davidsons themselves (as opposed to their solicitors) had asked for the
accounts, he would have provided them without asking Mr Margach and Mr Anderson.
When the solicitors chased for a response after 6 weeks or so, he had communicated again
with Mr Margach and Mr Anderson and the draft accounts had been sent to the solicitors.
No one had told him to delay sending the accounts. In sending them, he had said nothing
about the going concern issue - it had probably escaped his attention at that point. The draft
accounts had contained an error about the Company's liability under its operating lease,
stating that to be £5 million rather than the true figure of £150,000 to £160,000. Johnston
Carmichael had not had a copy of the lease when drafting the accounts and had stated the
liability on the basis of the information available to it at the time. He could not recall what,
if anything, Pinz had said about the error.
[49]
On being referred to FRS 102, the relevant accounting standard, Mr Dunbar
maintained the position that the termination of the Pinz services was a material uncertainty
for the purposes of the standard. He had given no advice about the directors' options. In
32
early October 2023, it had been decided that the Pinz services would not be withdrawn,
thereby removing the material uncertainty. As at the date the accounts were signed off by
the board, there was no evidence that the services or the Innoflate brand were to be
withdrawn, so there was no relevant uncertainty.
[50]
In cross-examination, Mr Dunbar repeated that he thought that he had sent the draft
statutory accounts to all directors of the Company by the end of April 2023. Any of the
directors could have asked for them, especially when invited to the meeting to discuss them,
but the Davidsons had not done so at that stage. The meeting had been intended for the
purpose of presenting the accounts, going through the figures, and discussing the going
concern issue.
[51]
Had he been aware of Mr Davidson's views about the effect of the withdrawal of
services on the Company, he would still have advised that it was a matter that needed to be
considered from the going concern point of view. Johnston Carmichael was entirely neutral.
It had not been asked for insolvency advice concerning the Company, and had had no
engagement with the solicitors acting for Pinz at the time. The deadline for submission of
the Company's statutory accounts had been extended to 20 August 2023.
[52]
Nothing of further relevance was stated in the course of Mr Dunbar's brief
re-examination.
[53]
Sarah Rose Davidson (42) adopted principal and supplementary statements in
which she stated that her professional background was in hospitality and hotel management
and that in recent years she had been involved in owning and managing the "Whale of a
Time" soft play centre in Glasgow. She got to know Mr Margach around August 2020, when
the Scottish soft play and children's entertainment venue industry was working together to
lobby the Scottish Government for funding to support its businesses which had been closed
33
as result of Covid-19 restrictions. She, Mr Margach and two others had led that group and
were in regular communication in connection with its affairs. She first met him and
Mr Anderson in person on 8 June 2021 at a protest at the Scottish Parliament about the
ongoing closure of their businesses. Afterwards, she visited the Innoflate facility in
Livingston. Mr Margach had already mentioned to her that he and Mr Anderson were
looking for investors and partners who had skills to support the growth and development of
the Innoflate business. After discussing the matter with her husband, she came to the
conclusion that that was something in which they would be interested. They agreed to work
together at the end of July 2021 and she became Operations Director of Pinz on 30 August,
having agreed to open new Innoflate-branded properties together on a 50/50 joint venture
basis. She initially worked for no salary to show her commitment to the business in the
expectation of future dividend income. The Monifieth site was identified as the first site
where the joint venture would operate. The Company was set up to take the lease of that
site and trade the business. It was set up online by Mrs Davidson while she was on a
telephone call with Mr Margach and Mr Anderson on 20 August 2021. She was unsure of
exactly what she was doing and initially listed only Mr Margach as a director, even though
it had been agreed that both the Davidsons, Mr Margach and Mr Anderson would all be
directors. She had realised and pointed out her error in the course of the call. The
Davidsons and Mr Anderson had been added as directors on 12 October 2021, without any
resolution to that effect having been made. Ownership of the Company was to be split
equally between the Davidson interest and the Pinz interest. Mr Margach and Mr Anderson
wanted Pinz to hold its interest directly and Mrs Davidson had followed that example by
having the Davidsons' interest held by Argyle, of which each of them owned half.
Mrs Davidson was not aware of the legal requirement to keep a register of members of the
34
Company and none was kept. Nor had the Registrar of Companies been informed of any
desire on the part of the Company to use the public register in lieu of keeping its own. No
share certificates had been prepared or issued when the Company was set up.
[54]
She also set up DRS Leisure Ltd as a vehicle to capture the franchise fees for the
businesses to be opened and in the course of time for head office costs in relation to all the
businesses yet to be set up. That company was owned to the extent of 70% by Pinz and 30%
by Argyle.
[55]
Mrs Davidson's role involved the operational day-to-day running of the Innoflate
sites, including the creation of Standard Operating Procedures (SOPs) for the cafes and for
parties, and inflatables maintenance and general management. She also dealt with the
purchasing and procurement of food and beverages, managed the relationship with the
human resources and health and safety advisers, dealt with recruitment and human
resource issues for the senior team and supported the implementation of the booking
system. She visited the central belt sites during her working week and the Aberdeen site
less regularly. She sourced a new uniform and sock supplier for the group. For the
Company, she procured and purchased all of the food and beverage and office equipment,
purchased all the cleaning and disposable products, recruited and created all human
resource information for 34 team members, wrote the induction booklet and created various
SOPs. She trained the café team, created the food safety folder for the site, and liaised with
the Environmental Health function of Angus Council.
[56]
Around late 2021, Mr Davidson had come to appreciate that the Davidsons' interests
in DRS Leisure Ltd and the Company were held by Argyle and suggested to her that that
was inappropriate since all investment had come and would in future be coming from the
Davidsons personally. Mrs Davidson spoke to Mr Margach and Mr Anderson about
35
changing the shareholdings in DRS and the Company into the names of the Davidsons
personally, and they said that they were content with that. Mrs Davidson visited the
Companies House website, but was unsure how to effect the requisite changes. As DRS had
not yet traded, she agreed with Mr Margach and Mr Anderson that that company should be
dissolved and a substitute created. That was done at the end of 2021, and all of its directors
agreed to it. A new company, DRSA Leisure Ltd, was created in the course of a call with
Mr Margach and Mr Anderson on or around 6 January 2022. Its shares were held, as they
knew and agreed, to the extent of 70% by Pinz, 15% by Mr Davidson, and 15% by
Mrs Davidson.
[57]
In relation to the Company, it was already in the course of negotiations with Dobbies
about the lease of the Monifieth site and so could not simply be dissolved. Mrs Davidson
spoke to the group accountant for Pinz, Hazel Croudace, but was not confident in asking her
to make the desired changes. She spoke to Mr Margach on the telephone on or around
24 April 2022 and told him that she had still not made the changes. She asked him if it
would be in order if she asked the accountant that she was using for Argyle to make those
changes. He agreed and she accordingly instructed Jacqueline Pollock of JPS Bookkeeping
to do so, which she did, charging a fee accordingly. Mrs Davidson told JPS that the
shareholding was to change to 50% to Pinz, 25% to Mr Davidson and 25% to herself. On
23 September 2022 she had received an e-mail from Mr McQuade, group finance director for
Pinz. He copied her a letter from Companies House stating that the confirmation statement
for the Company was overdue. He indicated that he had tried to lodge the statement but
had been unable to log onto the Company's account on the system to do so. He asked her to
attend to it and confirm that she had done so. She had JPS deal with it and sent a copy to
36
Mr McQuade on 28 September by way of confirmation. The confirmation statement showed
that the shareholdings had been re-arranged. Mr McQuade raised no queries.
[58]
At the beginning of July 2022 Mr Margach had stopped speaking to her as he and
Mr Anderson had decided that they no longer wanted to continue in a joint venture with the
Davidsons. She had a phone call with Mr Anderson on 5 July 2022 when he told her that he
and Mr Margach no longer wanted to continue with joint ventures but did still want her to
work for Innoflate. She and Mr Davidson had visited Mr Margach and Mr Anderson on
8 July 2022. In the course of that meeting, the latter had said that they had a large tax bill to
pay and had no funds to pay it. The Davidsons agreed that the loans made to the Company
by Pinz could be repaid before loans due to the Davidsons. It was agreed that the
Davidsons had experience in hospitality and finance which Mr Margach and Mr Anderson
did not have, and that matters should continue as before. At that point there were four
potential sites under consideration, at Inverness, Ayr, Glasgow and Dunfermline. A set of
inflatable equipment was bought by the Company at an online auction on 20 July 2022 for
around £14,000, with the intention to use it outdoors in the summer or to keep it to fit into
new premises in the future. Funds from the Company were used for this purchase.
[59]
After the Davidsons returned from holiday in August 2022 Mrs Davidson
experienced difficulty in getting Mr Margach or Mr Anderson to meet with her, eventually
managing to do so only virtually on 22 August. The call seemed very strained and
communication afterwards was sparse. It became apparent to Mrs Davidson that decisions
she would normally be involved in were being made without her, and emails were being
exchanged on operational matters without her involvement. Towards the end of August
Mr Margach told her that he had changed his mind again about the joint venture and
definitely did not want to move forward with it. He told her that he had started to involve a
37
person called John McGee as a consultant on business strategy. That surprised
Mrs Davidson, as Mr Margach and Mr Anderson had previously told her that that
Mr McGee had been expensive to work with, as well as being incompetent. She was also
told on that call that an approach had been made to Mr Margach by a third party to
purchase all of the Innoflate sites. She arranged a call with herself, Mr Davidson,
Mr Margach and Mr Anderson later that week to discuss the offer. On that call they agreed
to discuss the joint venture at a later date depending on the outcome of the purchase offer.
Mr Margach had stated that the offer was for £19 million and valued the Davidsons' shares
at around £2.5 million.
[60]
On 29 August 2022 she was told by Mr McQuade that John McGee had joined Pinz as
Chairman. She had not previously been aware of this, although Mr Margach and
Mr Anderson subsequently claimed that she had been. It became clear to her at that point
that a move was being made to remove her from her role. At a prearranged meeting on
30 August 2022 Mr Anderson had told her that he and Mr Margach did not want to do
further joint ventures with the Davidsons but did want Mrs Davidson to continue to work
for Pinz for the meantime. She said that in that case she would have to be paid the proper
amount for the role, having worked from August to December 2021 for nothing. When the
amount of a salary was discussed, Mr Anderson stated that in fact her job could be taken on
by the general managers and that she would not be further required. She was thus
effectively dismissed without notice, severance pay or appropriate processes being followed.
On 30 August she had requested the holding of a shareholders' meeting of the Company,
which took place on 26 September and agreed the basic points of how the Company would
be run thenceforward. In October, invoices had been rendered by Pinz to the Company and
money taken from its account without any opportunity for it to discuss or challenge them.
38
Mrs Davidson emailed to challenge this on 16 October 2022 without response, but at a
virtual meeting with Mr Margach, Mr Anderson, Mr McQuade and Mr McGee the
Davidsons were in essence told to accept what was happening or see the business close. She
felt that there was no choice but to accept what was being done to protect the business in the
short term. Thereafter, the general manager at Monifieth had been promoted to group
operations manager and assumed the role Mrs Davidson had previously been doing.
[61]
In further examination-in-chief, Mrs Davidson stated that she and her husband had
not been sent the Company's draft statutory accounts at the end of April 2023.
[62]
In cross-examination, Mrs Davidson gave further details of her own business
background in hospitality and soft play, repeated her husband's evidence about Argyle, and
confirmed how she had met Mr Margach. All four individuals involved in the Company
had first met in June 2021, and they had first viewed the Monifieth site on 25 July 2021. She
was unaware of any pre-existing negotiations between Pinz and Dobbies regarding a lease
of the site, believing that nothing of the kind would have happened during the pandemic.
The four had met again in Nairn on 26 July and had agreed to work together. She was to be
the Operations Director for the Innoflate Group, ie the Pinz businesses involved with
inflatables. She was the sole director of Argyle, her husband having resigned as such before
the company took a Covid-19 loan. She had used the loan to pay Argyle's staff, heat its
premises, and for general business expenses. She had refurbished the assets of "Whale of a
Time" during the pandemic, and had then sold those assets. Her husband had noticed that
Argyle had mistakenly been made a member of the Company, and asked her to rectify that.
She discussed the proposal to remove Argyle as a shareholder, to give one share each to
herself and her husband, and another one to Pinz, with Mr Margach and Mr Anderson, who
agreed with it. Their denials of that were wrong. There had been no board meeting, and no
39
emails or text messages dealing with the matter, as they were her best friends; they spoke
many times a day and she trusted them. The matter had not been "fixed" behind their
backs. She had not asked Johnston Carmichael for help in effecting the reorganisation.
They were not the Company's accountants at that stage. After realising that she did not
know how to do it herself, she had contacted Jacqueline Pollock to do it for her. Mr Margach
and Mr Anderson did not know her, but knew that Mrs Davidson was instructing her.
Ms Pollock had billed the Company for her work, but should have billed the Davidsons as
they were the ones who wanted the work done.
[63]
Mrs Davidson thought that in her role as Operations Director for the Innoflate Group
she had technically been employed by the company running the Innoflate site at Livingston.
She, Mr Margach and Mr Anderson had operated the businesses, not Mr Davidson. It had
been agreed that future Innoflate sites would be 50/50 joint ventures between Pinz and the
Davidsons, and a 70/30 split had been proposed and agreed for the levying of franchise fees
for all sites, through DRSA, with the Davidsons having the minority share. Their expected
receipts from the future sites and from DRSA made the joint venture more attractive to
them. Mrs Davidson had initially worked without salary as Operations Director, with a
restricted salary of £30,000 a year from December 2021. However, by early July 2022
Mr Anderson had told her that there would be no future joint venture sites.
[64]
At the end of August 2022, John McGee had been appointed Chairman of the Pinz
Group, including the Innoflate sites. Mrs Davidson was not happy about that. On
30 August there had been a meeting at the Pinz offices in Hillington, Glasgow, to discuss the
way forward for Innoflate. She had asked to meet with Mr Margach and Mr Anderson in
private. Mr Anderson told her that there would be no new joint ventures, but that she
should continue to work for the Innoflate group. She had asked for a salary of £75,000, but
40
Mr Margach had refused that, saying that she had the dividends from the Company as
additional remuneration. Then Mr Anderson had said that they did not want to work with
her. She had not resigned her position, but rather had been told that she was no longer
wanted. They had agreed to find a way to continue to work together in some way.
[65]
On 26 September 2022 there had been a meeting of the shareholders in the Company
to discuss the way forward. It was agreed that DRSA would be dissolved and that Pinz
would continue to provide services as before to the Company. Then, on 14 October,
Mr McQuade had issued invoices to the Company on behalf of Pinz. The next day her
husband had complained about the invoices, as there was no agreement in place dealing
with the rates which Pinz could charge, only that its genuine operating expenditure in
connection with the Company would be paid. He wanted a resolution to the matter within
48 hours, and a refund of the money which Pinz had taken in respect of its charges from the
Company's account. Email exchanges with Mr Margach had ensued, and it became clear
that there was disagreement about what had been agreed at the September meeting. There
was no disagreement in principle about Pinz being paid for the use of the Innoflate brand
and for running the Monifieth site, just about the amount of the charges. There had been a
Teams call during which Mr Margach had raised the option of "debranding" the site and
leaving the Davidsons to run it. He had made certain proposals about the charging basis
which Pinz wanted, and Mr Davidson had made counter-proposals. Ultimately agreement
had been reached.
[66]
On 2 February 2023 Mr McQuade had sent out to the Company's directors draft final
year end accounts, and had invited any comment. The Davidsons had made no comment.
Mrs Davidson had already agreed that Johnston Carmichael would complete the Company's
statutory accounts. At a meeting on 20 March 2023 attended by her husband but not by her,
41
a letter from Pinz had been handed over indicating its wish to terminate the existing
arrangements with effect from 20 April and setting out reasons for that. One reason was the
share reorganisation which Mr Margach and Mr Anderson had known about and agreed to.
A similar letter had followed on 23 March, further complaining that the Company's Articles
had not been complied with in relation to the share reorganisation, and asking for the
Davidsons to resign as directors and transfer their shares to Pinz. On 27 March,
Mrs Davidson had emailed Mr McGee, setting out her position that Mr Margach and
Mr Anderson had known of the proposed reorganisation and had approved it at the same
time as they had agreed to the dissolution of DRS and the setting up of DRSA. All of the
directors of DRS had signed the requisite papers to dissolve it. Mr Margach had agreed to
the use of JPS Bookkeeping to carry out the reorganisation in April 2022.
[67]
On 25 April 2023 Mr McQuade had emailed the Davidsons to say that Johnston
Carmichael was raising issues about drawing the Company's accounts on a going concern
basis. A letter had then been sent by Mr Dunbar inviting the Company's shareholders to a
meeting at the Johnston Carmichael offices in Elgin. The Davidsons had not replied, and no
meeting had taken place. On 9 November 2023 Mr Anderson had emailed the Davidsons
suggesting that a board meeting of the Company take place to deal with the electricity
charges issue that had been raised by Dobbies. No reply had been sent. Similarly, a
suggestion by Mr McQuade on 10 November that it would be wise to have a shareholders'
meeting to deal with the electricity charge issue had not been responded to by the
Davidsons. Various other requests from Mr Margach and Mr Anderson for a meeting about
the issue had not been acceded to. After Dobbies had issued their invoice on 15 December,
Mr Margach had complained about lack of engagement from the Davidsons on the matter,
and Mr Davidson had replied pointing out the issues which existed between the parties and
42
noting that the invoice was an estimate rather than an established liability of the Company
and was not a matter requiring urgent attention in the whole circumstances. The Davidsons
had taken legal advice on any communications from Mr Margach. Finally, on 2 January
2024, Mr Margach had called a directors' meeting for 4 January and on 3 January Dobbies
had issued an invoice for £134,000, demanding payment within 7 days. The board meeting
took place with all four directors present, and it was agreed that an approach should be
made to Dobbies along the lines of a suggestion made by Mr Davidson. Mrs Davidson was
prepared to attend any board meeting of the Company which was properly called.
[68]
In re-examination, Mrs Davidson stated that an approach had been made to Dobbies
after its exact terms had eventually been agreed by Mr Anderson, and that Dobbies had
accepted the suggestion as to how to establish and pay off the electricity liability of the
Company at once. The liability would involve the Company in VAT reclaims and entitle it
to a refund of an element of the management charges levied by Pinz, as it would require a
restatement of historical earnings and profit.
Respondents' case
[69]
John McGee (58) stated that he had a background in running successful businesses
in the UK and USA, and had been involved in various public sector regeneration and
redevelopment projects. He had been Chairman of the Pinz group since 29 August 2022,
working on a paid consultancy basis 3 to 4 days a week.
[70]
He had first got to know Mr Margach in February 2018 after having been contacted
by him by telephone, and having met him the following day to discuss the business vision
which he and Mr Anderson had. They believed that he was someone who could help them
deliver a sustainable future for the Innoflate brand, and he agreed. He was assigned a role
43
creating the strategic approach in the Innoflate business. Innoflate had an extensive reach in
the market and there was widespread recognition of the value it provided to local
communities. Scottish Enterprise had facilitated workshops to allow the brand to be
expanded to a larger audience, and offered a grant and access to legal services provided by
Harper Macleod. Advice had been given on what the appropriate franchise fee rate might
be, and Harper Macleod had identified a rate in the region of 12-16% of gross revenue,
which could have been reduced to 8-12% of gross revenue should the franchisee have
hands-on day-to-day park management. The franchisee got the value of a recognisable and
respected brand, which in turn led to increased profitability. A franchisee could not simply
drop the Innoflate brand and have a business of the same calibre or profitability. The
franchise fee also covered things like on-the-ground support, assistance with negotiating
lease terms, sourcing of materials necessary for the running of the venue at competitive
prices, and staff training. The business model also involved a management fee, in exchange
for which the franchisee was provided with management services, including day-to-day
management of the venue, the administration of health and safety policies and procedures
and general compliance. The franchisee also had the benefit of the Innoflate website,
booking system and database of themed events. Mr McGee had ceased working with
Innoflate in November 2019 after an issue arose about co-operating with the former tenant of
a site being opened at Cumbernauld, but remained on good terms with Mr Margach and
Mr Anderson.
[71]
In August 2022 he had received a call from Mr Anderson asking for a meeting, which
took place the following week. Mr Anderson had asked whether he would consider taking a
role as Chairman of the Pinz group, and he had agreed. He had not been involved with the
set-up of the Innoflate Monifieth site, but understood that it was a joint venture between
44
Pinz and Argyle, which was owned by Allan and Sarah Davidson. He was introduced to
Mrs Davidson at a meeting on 30 August 2022. At the meeting, Mrs Davidson had asked to
be left alone for a period with Mr Margach and Mr Anderson, and afterwards it transpired
that she had resigned from her position. It was becoming clear that there was a problem in
the relationship between Mr Margach and Mr Anderson on the one hand, and the
Davidsons on the other. He had subsequently joined a virtual meeting with the Davidsons
on 17 October 2022, in the course of which Mr Davidson was disrespectful, arrogant and
bullish. He had put that to Mr Davidson, who had shrugged it off with smirks. Mr McGee
had suggested to Mr Margach and Mr Anderson that further contact with the Davidsons
should be by himself and Mr McQuade. It was subsequently discovered that Mrs Davidson
had been engaging with competitors to establish if they would be interested in purchasing
the shares in the Company controlled by the Davidsons.
[72]
The straw that arguably broke the camel's back was when Mr McQuade uncovered a
transfer of shares in the Company, and found an accountant's invoice for doing that
addressed to Innoflate but which had been paid directly by Mrs Davidson. A meeting to
address the matter was fixed for 20 March 2023, although Mrs Davidson was unable to
attend. Mr Davidson had been provided at the meeting with a copy of the relative invoice,
which greatly surprised him. He said that he did not know about the matter and would ask
Mrs Davidson about it. She had subsequently claimed that she had discussed the matter
with Mr Margach in April 2022 and that he had agreed to it.
[73]
Advice was sought from the company solicitors, and thereafter an email had been
sent to the Davidsons offering options for moving forward. The options were either
dissolving the Company or seeking to buy the Davidsons out. The Pinz team considered
that the main value of the Company rested with the Innoflate brand and that if that were to
45
be withdrawn, it would either have no or only nominal value. The Davidsons had offered
no realistic plan for the continuation of the business.
[74]
Mr McQuade had raised the issue of whether the Company could be described as a
going concern, and the solicitors acting for Pinz had confirmed those concerns, which
Mr McGee shared. Pinz had continued to engage with the Davidsons subject to legal advice,
but had not received co-operation.
[75]
In further examination-in-chief, Mr McGee further explained his history with the
Pinz group and noted that the Innoflate concept was in his view a unique opportunity to
help people with mental or physical health issues, which was what attracted him to it.
[76]
In cross-examination, Mr McGee stated that he had had discussions with
Mr Margach and Mr Anderson in September 2022 in which it was agreed, probably on his
suggestion, that he and Mr McQuade should represent the Pinz group in meetings with the
Davidsons. He had offered his services in this regard to try to facilitate meetings. The
Davidsons agreed that it would be a good way forward. He was not a member of the board
of the Company and did not attend any of its board meetings.
[77]
In the lead-up to the meeting scheduled to take place on 20 March 2023,
Mr Davidson had circulated a proposed agenda with nine items on it, and Mr McGee and
Mr McQuade had done the same with an agenda that had five items on it, with some degree
of overlap. The heading of "communication" on the draft agendas was to enable discussion
of the way forward for the Company. That included the share reorganisation issue. A lot of
discussion had gone on amongst Mr Margach, Mr Anderson, Mr McQuade and himself
about that matter before the meeting, to make sure that they were right and had all the facts
about what had happened. Mrs Davidson had been unwell and had not attended the
meeting. It was professional in tone and content. Pinz was looking at its options in order to
46
protect its brand and staff. Many options were looked at. One was to withdraw the services
and brand provided to the Company by Pinz with effect from 20 April 2023. It was clear
that the Davidsons' thoughts and values were at odds with those of Pinz. Mr Davidson had
behaved unprofessionally at the Teams meeting which had taken place in October 2022, and
in the way in which he expressed himself in emails, and Mr McGee had chided him for that.
The differences between the Davidsons and Pinz had not simply come to light for the first
time in the course of the meeting in March 2023. Mrs Davidson had been attempting to
interest competitors of Pinz to buy the Davidsons' shares in the Company. That was not
honest or ethical. It was not good for the brand or for mutual trust and respect amongst the
shareholders. It should have been discussed amongst them.
[78]
At the meeting on 23 March, everything on the joint agenda was discussed. The Pinz
representatives wanted to find out from the Davidsons who had paid the invoice of the
accountant who had done the reorganisation, and why. No games were played, but the Pinz
interest wanted to get its ducks in a row and decide what to do. Mr Davidson had appeared
composed, but looked shocked when the share reorganisation issue was raised. He said that
he was sure that Mrs Davidson would have the answers to the questions being posed.
[79]
At the conclusion of the meeting, or possibly afterwards, a letter which had been
composed with the benefit of legal assistance was provided to the Davidsons. Mr McGee
had had no input into its composition, and it was not discussed at the meeting. A further
letter had been emailed on 23 March to the Davidsons by Mr McGee as the appointed Pinz
communicator. Again, it was composed with legal input and he could not recall whether he
had seen it in draft form. It was simply a suggestion as to a way forward, namely the
withdrawal of the brand and services from the Company. Pinz had to consider the message
it was sending to the industry, government and local councils if it continued to be associated
47
with the Davidsons and their behaviour through the Company. The letter gave some sense
of direction for the Company. The services and brand had never actually been removed as
the letter suggested. There had been no intention to damage the business of the Company.
[80]
On 27 April 2023 Mr McQuade had emailed the Davidsons, having talked to
Mr McGee and the solicitors then acting for Pinz, trying to get a meeting about the going
concern issue. Scott Dunbar had been asked to draft an invitation to the meeting, as
Mr Davidson often did not respond timeously, or at all, to communications from Pinz. The
meeting was to go over the draft statutory accounts face-to-face and get a solution for
progressing the accounts towards signature that would work for everyone. Draft accounts
had already been circulated. Mr McGee was not aware of what Johnston Carmichael had
advised about the going concern issue. The idea was that he and Mr McQuade would
attend the meeting; he did not want Mr Margach or Mr Anderson to be in the same room as
the Davidsons. There was nothing untoward about the suggested meeting at all. If
agreement about signing the accounts had been reached at the meeting, they would have
been signed by Mr Margach and Mr Anderson afterwards. Mr McGee was unaware of the
deadline for lodging the signed accounts at Companies House. He and the others at Pinz
were simply doing their best to resolve the issue while still running all the Innoflate sites.
[81]
Pinz was an approved supplier to the Scottish Government and had been referred to
Harper Macleod as respected franchise lawyers. Various workshops had been attended, and
percentages for franchise fees discussed, all of which would be subject to negotiation.
A franchise agreement had never been entered into between Pinz and the Company. He
could not remember the details of what had been agreed about fees and charges in
October 2022. The meeting in that month had been very heated, and various emails had
been exchanged. The drafting of a formal franchise agreement would have been left to the
48
legal team, but then the share reorganisation and other issues were discovered, and no draft
agreement was ever sent to the Davidsons.
[82]
In re-examination, Mr McGee confirmed that he was not a member of the Pinz board.
The relationship between Mr Margach and Mr Anderson on the one hand, and the
Davidsons on the other, was fragile and the idea of Mr McGee attending meetings with the
Davidsons on behalf of Pinz was to assist with the process of exploring options. He was not
there to sign off on anything. The first Teams call he had attended between the Davidsons
and Mr Margach and Mr Anderson had seen considerable aggression being directed by
Mr Davidson at them, and it was discussed and agreed then that Mr McGee would represent
them in meetings and correspondence thereafter.
[83]
The agenda circulated for the meeting on 20 March 2023 included an item which
permitted discussion about the share reorganisation issue which had been discovered and
how to deal with the situation. There was no ambush at the meeting; that was not
Mr McGee's way of operating. He was aware that Mrs Davidson had been trying to sell the
Davidsons' shares to a competitor; it was a fact, not merely a rumour. That undermined the
business.
[84]
Mr Margach and Mr Anderson were concerned about the share reorganisation. They
were honest, decent individuals whom he had known since 2018 or 2019. That something
like that had been done behind their backs was very disturbing.
[85]
Darren Margach (30) stated that he was the Chief Executive Officer of Pinz Bowling
Group, the business interests of which included a bowling alley in Elgin, and six Innoflate
sites across Scotland and Wales, being Monifieth, Livingston, Cumbernauld, Dundee,
Newport and Glasgow, together with the Beach Bar in Aberdeen,. The venues (except that
in Wales) were owned by operating companies wholly owned by Pinz. It was originally set
49
up about 10 years ago, initially ran a bowling centre in Elgin, and latterly had become the
holding company for all the Pinz Bowling, Innoflate and Beach Bar sites. It provided the
executive team and management services to those sites. He had been employed by Pinz for
10 years, operating the business during that period. His day-to-day responsibilities
involved the expansion and quality control of the business, providing the highest standards
for customers, and engaging with internal and external stakeholders to that end. He
oversaw the executive team and ensured that the business ran efficiently with best use of
resources. He had previous management experience with "Bowl 2000" before a
management buyout in 2013 resulted in that company becoming Pinz.
[86]
The Company traded the Monifieth Innoflate site and was a partnership between
Pinz and Argyle. It was established to operate the site under an agreement to franchise the
Innoflate brand owned by Pinz. The site operated an inflatable park, capable of handling
120 participants per hour, with ancillary arcade, café, spectator area and two party rooms.
There were 28 employees including local management. The Davidsons had wanted a
company to be set up into which a franchise fee would be paid by the Pinz bowling alley
and the Innoflate sites at Aberdeen, Cumbernauld, Livingston and Monifieth, 30% of which
company would be owned by the Davidsons, but that idea was eventually dismissed on the
basis that Pinz owned the brand, operated as a holding company already, and held group
debt. There was no franchise agreement for Innoflate Monifieth in the beginning, and once
an agreement for fees and charges was made, the outstanding franchise fee was backcharged
and paid over 3 months. Thereafter, it was taken monthly in arrears and was based on
revenue. At the point of agreeing the franchise fees, the relationship with the Davidsons
had broken down and they wanted Pinz to take on the exclusive running of the site by
providing management services. Mrs Davidson had originally proposed a franchise fee of
50
5 - 7%, but at a workshop organised by Scottish Enterprise in July 2019, Pinz had been told
that its franchise fee should be set at 12.5%, and that if there was a lot of management being
done it should be substantially higher. The Innoflate brand was known by customers. Pinz
organised extensive marketing on social media, had 358,000 subscribers to its mailing lists,
and held special events all year round. Negotiations on the fees to be charged to the
Company took place in October 2022 and resulted in a commercial deal agreed by way of
email by all parties and to mutual benefit. Mr Davidson had had a lengthy business career
and would not have agreed to anything that did not suit him. Pinz had proposed a 12%
franchise fee, a £10,000 management fee, and head office recharges. Mr Davidson had
countered with a 12% franchise fee, 20% management fee based on EBITDA and an
"incentive fee" of 30% of excess profit. That had been agreed. While the negotiations were
going on, Mr Margach had received a WhatsApp message from Abid Faqir, owner of the
Wonderworld group which incorporated Airthrill, the largest competitor in Scotland to
Innoflate. He said that he had been contacted by Sarah Davidson wanting to discuss a deal,
which transpired to be a proposal to sell him the shares in the Company held by the
Davidsons or Argyle. Mr Faqir had declined the offer.
[87]
Mr Margach had got to know Mrs Davidson through a group that was set up during
the pandemic to fight for the reopening of the soft play sector and get fair grants for it. They
had become friends and she had said that she was looking for a new challenge, which
resulted in the joint venture at Monifieth. Pinz was not looking for investors, as the
businesses were supported by a blend of asset finance and bank debt. It was looking for
assistance to help to run the sites to allow Mr Margach and Mr Anderson to have time away
from the business on a joint basis. It was agreed that Pinz and the Davidsons would each
hold a 50% interest in the Monifieth business. It was not agreed that there would be such a
51
split in relation to future sites; that would remain for discussion. The negotiation of the
lease terms for the Monifieth site started before the Davidsons had any involvement.
Mr Margach had attended a meeting on 6 March 2020 with the landlord, Dobbies, after one
of their staff had seen the Innoflate site at Livingston. Dobbies perceived that the Innoflate
brand would bring footfall to its garden centre and that was one of the reasons why the lease
terms offered were relatively advantageous. The purchase of the inflatable equipment had
been on credit terms which were only available because Innoflate was a well-established
client of the supplier, Airquee. The useful lifespan of the equipment would be 5 years or
less, based on the experience at other sites in the group.
[88]
The Davidsons had had no money to buy into the franchise and it was agreed that
Mrs Davidson would provide operations support to the Pinz group in the role of Operations
Director, unpaid, with the idea being that she would be remunerated by way of dividend
from the Company. That arrangement had not lasted long, and she had asked for a salary,
which she set herself at £30,000 per annum. It had been said that Mr Davidson would help
with the expansion of the business and negotiation with landlords given his background.
However, his involvement was extremely sparse, and he had only visited the Monifieth site
very occasionally. The premises at Monifieth opened for business in April 2022. The
business had been profitable from the point it opened. However, there was no current
relationship with the Davidsons, and Pinz was running the Company to the best of its
ability, without any input from them. Mrs Davidson had not been sacked from her position
as Operations Director; rather, there had been a mutual parting of ways. Another
employee, Mark Stevenson, had been promoted after making a presentation on how he
could support the group with sales, and his role was focussed mainly on sales and
52
relationship building, rather than being a direct replacement in the operations role
previously carried out by Mrs Davidson.
[89]
The Company might well exercise the break option in its lease if trading continued
on recent trends. Trading was down £128,000 in the calendar year to October 2023, profit
was down £142,000, and half of the first ten trading months in 2023 had been loss making,
compared to only two in 2022.
[90]
The original shareholding arrangement at the incorporation of the Company was one
share for Pinz and one share for Argyle. Mr Margach had become aware that that was no
longer the case when Mr McQuade had submitted the second annual confirmation
statement for the company. The first such statement had been submitted by Mrs Davidson.
She had asked Mr McQuade if he wanted her to submit it, and he had not then noticed
anything amiss. Pinz had not been told that the Davidsons had transferred a share away
from Argyle or that any new shares had been created. No board meeting had approved that
happening and Mr Margach did not accept that the Davidsons were indeed members of the
Company. Had any such thing been agreed, Johnston Carmichael could have made the
necessary arrangements, and would have been asked by Pinz to do so. The invoice to the
Company from JPS Bookkeeping for doing it had been tabled at a meeting on 20 March 2023.
Mr Davidson appeared to know nothing about it. The Company had been disadvantaged
by what had supposedly happened as Argyle was potentially insolvent, and if it were to
become so, its administrator or liquidator could unwind the share transfer it had made,
leaving Pinz in business with an insolvency practitioner.
[91]
The Davidsons had made no proposals to remedy the current unsatisfactory state of
the Company's shareholdings. Consequently, Pinz wanted to remove the brand and
management services being provided to the Company. Services were to be withdrawn due
53
to a lack of trust and the breakdown in communication caused by the Davidsons having
transferred shares fraudulently and without consent. Pinz did not want its brand to be
associated with that behaviour. It had had to keep the business running to the best of its
ability without input from the Davidsons and without any idea as to what the future might
be. An agreement made by the Company's board on 26 September 2022 to meet virtually on
the third Friday of each month and in person every quarter had not been observed.
Important decisions could not be made. The directors of the Company would have to devise
a way of operating the business under a different name, and of finding different operating
methods. The Davidsons had provided no input in planning for those changes. If there was
engagement, it could all be dealt with in about 4 weeks. It just needed a logo, website and
booking system built, and the business could continue with its existing staff. The current
booking platform was provided by a third-party provider, Roller, but required intensive
updating and scheduling which was done by Pinz as part of the management services.
[92]
The business had had to close for 2 weeks in consequence of the insurance issue. The
delay in getting engagement from the Davidsons on the accounts meant that the brokers
could not renew the site insurance. The removal of cover was on the basis that Mr Davidson
had advised the insurers that there was an ongoing dispute in terms of management
services. All available documents had been provided to the insurers when requested.
Mr Margach had sought alternative sources of cover without success.
[93]
The Company was profitable due to the Innoflate branding and goodwill, and the
services and experience that Pinz and its staff had provided. Its marketing services
pre-opening had provided substantial sales at that point. Turnover had been dented by the
2 week period of closure and the need to build back customer confidence. There was a
downward trend in turnover and profit, which was to be expected given that the first years
54
of trading were always higher in such businesses. There were two competing venues in the
area, namely Fun Factory Dundee and Ryze Dundee, which had city rather than outlying
locations. There was also a new 29-lane bowling centre in Dundee with ancillary soft play,
escape rooms, arcade and restaurant, and the Kingsway retail park had several empty units
with leisure consent obtainable. These factors meant that the trading of the business was
unlikely to stabilise at previous levels.
[94]
The solicitors acting for Pinz had raised the question of whether the Company could
be treated as a going concern. Advice was sought from Johnston Carmichael and provided
on 24 April 2023. The Davidsons had put forward no plans for replacement management
services. The accounting advice on completion of the statutory accounts received after the
giving of notice of withdrawal of the services had been that the Company was not a going
concern and that it could not be signed off as such unless it was likely to survive and trade
for 12 months after the end of that accounting period. The removal of the brand with no
engagement or plan from the Davidsons made that unlikely. The Davidsons had refused to
engage with the process of settling the draft statutory accounts, and could have contacted
Johnston Carmichael at any time to give their input, as ultimately they did. The amount
stated in the draft accounts for future liabilities in connection with the lease was an error by
Johnston Carmichael. Once engaged in the process, Mr Davidson had continued to propose
changes to the accounts as late as 3 October 2023. Finally, in order to get the draft accounts
finalised, Pinz made a proposal to continue its management services with either side being
able to give 3 months' notice.
[95]
On 7 November 2023, Keith Lough, the landlord's representative at the Monifieth
site, had contacted Mr Anderson to say that the Dobbies accounts team had picked up that
the Company had not been charged for electricity since occupying the site. That contact had
55
not been instigated by anyone at Pinz. Mr Anderson had asked Mr Lough to confirm the
charges, and calculations had been done to try to work how much the cost was likely to be.
The electricity used appeared to cost more each month than either the rent or the service
charge. Mr McQuade had asked for a Company board meeting to be held urgently with a
view to discussing whether the proposed charges were actually due, and how they could be
paid if they were, but the Davidsons had not agreed to attend.
[96]
Offers to buy the Davidsons' shares (at a nominal value, given their fraudulent
transfer) and for Pinz to be bought out by the Davidsons had been made.
[97]
In further examination-in-chief, Mr Margach stated that Mr Davidson had only
attended the Monifieth site on three occasions, once before the opening of the business, and
twice thereafter. The share reorganisation had been fraudulent because it was done without
the knowledge or consent of Pinz. The Davidsons' shares had been acquired from an
insolvent company, Argyle. That share transfer could be reduced and Pinz could find
themselves in business with a liquidator or third-party purchaser.
[98]
The Company's trading was still down, but had improved during December 2023
and was looking a bit better than it had been. That would potentially affect the decision as
to whether or not to activate the break option in the lease. Advice had been taken from a
franchising expert, Andrew Fraser, during the negotiations in October 2022 with the
Davidsons about the franchise fee to be charged to the Company. That was where the figure
of 12% had come from. There had never been any agreement on a lesser percentage. The
franchise fee would cover the use of the brand, marketing resources, website, and signage.
The separate management fee would cover ongoing financial services such as payroll,
accounts, benchmarking, and data analysis. It gave access to area managers, graphic design,
56
strategic advice, human resources and health and safety functions. The terms proposed by
Mr Davidson had been accepted by Pinz.
[99]
The indicative offer which had been received for the Innoflate group had been for
£7 million, not £19 million.
[100]
DRS had been dissolved because, according to Mrs Davidson, there had been errors
in recording the spelling of the names of Mr Davidson and Mr Anderson at Companies
House, resulting in difficulties in getting banking services for the company. It was said that
it would be easier to dissolve and restart the company rather than to correct the errors.
There had been no mention of changes in shareholders in the replacement company, DRSA,
when it had been agreed that that would be set up. In any event, Argyle had only become
insolvent after the change from DRS to DRSA, when it sold "Whale of a Time" in
September 2022.
[101]
The transfer of Argyle's shares in the Company to the Davidsons represented the
removal of assets from an insolvent company. There had been issues with the person to
whom the assets of the "Whale of a Time" business owned by Argyle had been sold, and
Mr Margach and Mr Anderson sensed trouble. They did not want the risk of finding
themselves in business with a liquidator, and had taken advice from their former solicitors
about the matter. Mr Margach had found out about the share reorganisation from
Mr McQuade in early 2023. His concern was genuine, as ownership of the shares in the
Company had been all that had been keeping Argyle solvent. There had been no board
meeting to discuss the reorganisation. He did not think that he has ever been aware of the
reorganisation, and certainly had not and would not have agreed with it. He would
definitely not have agreed to the changes being effected by JPS Bookkeeping, and would
have required any such changes to be carried out by Johnston Carmichael.
57
[102]
In 2023, Pinz was looking for a way forward for the Company's business that did not
involve the Innoflate brand. There were issues with the proposals put forward by the
Davidsons in that regard, not least the silliness of the proposed trading name of
"Zillionaire", and a lack of clarity about management structures. Pinz had expressed its
reservations about the proposals and had heard nothing further about them. It did not
appear to be a serious attempt to settle on a way forward.
[103]
In relation to the claim that Pinz had levied excessive charges on the Company by
way of franchise fee and management charges, Mr Margach pointed out that the charges
had been agreed. Mr Davidson had suggested that the management fee should be 20% of
EBITDA and that there should be an excess profits charge. He was not someone who could
be forced to do anything against his will. Those charges had been agreed in October 2022
and had not been queried until April 2023. In the meantime, charges had been made in
accordance with the October agreement, although no formal contract had been provided to
the Davidsons. Mr McQuade had issued invoices in October but had only taken payment
for two of them at that time.
[104]
In relation to the "going concern" issue, that had not been engineered by Pinz, which
had no power over Mr Dunbar as an independent professional. All that Mr Margach
wanted was to talk about and resolve the issue with the Davidsons. He did not want to
create an artificial crisis for the Company, although the failure to lodge accounts timeously
had eventually led to a crisis in the form of the insurance issue. Pinz had not sought to
create that situation, and was glad when matters were resolved on the basis that its services
would be continued unless 3 months' notice from either side was given, and the court would
rule relatively quickly on the issues before it.
58
[105]
In relation to the electricity charges by Dobbies, he wanted the Company's directors
to agree how to resolve the matter, and was not trying to engineer a solvency issue. He did
consider that it was something that needed to be addressed urgently, and had taken
insolvency advice from Interpath between Christmas 2023 and the New Year. After
Mr Davidson had engaged with the matter, a proposal had been agreed and made to
Dobbies, which appeared to have resolved the situation, at least for the immediate future.
[106]
In cross-examination, Mr Margach re-iterated the genesis of the arrangements with
the Davidsons. Mrs Davidson had set up both the Company and DRS during a call with
him and Mr Anderson. Errors had been made at that stage in the appointment and names of
directors. There was no particular discussion about whether the Davidsons were going to
hold their interest in the Company directly or through Argyle. At the stage of incorporation,
Mr Margach would not have been concerned about the Davidsons holding shares in the
Company directly.
[107]
The errors made at the stage of incorporation of DRS led to banking and other
problems, resulting in its agreed dissolution and replacement with DRSA at the end of 2021.
Pinz was aware that Argyle was not going to hold the 30% minority interest in DRSA, which
was to be split 15% to each of the Davidsons, and was content with that. There had been no
explanation as to why that was being done. It made no difference to Pinz. However, there
had been no discussion at all about altering the shareholdings in the Company. Had such
discussion taken place, he would have remembered it. He did not know what his reaction
would have been in December 2021 had the reorganisation been suggested, but since Argyle
was not then insolvent, he would probably not have been concerned about a transfer of its
share in the Company to one or other of the Davidsons. The Company was then taking
steps with a view to trading, so could not easily have been dissolved like DRS. No
59
formalities about shares in the Company had ever been observed. There was no register of
members, no agreement to use the public register as such, and no share certificates. There
had been board meetings, but not all business had been minuted. The addition of directors
after the initial errors at incorporation had not been agreed in any meeting, nor had a change
in the address of the registered office which had been made, though neither of these matters
was controversial.
[108]
The funds required to enable the Company to start trading in the first quarter of 2022
had been contributed by Pinz and the Davidsons themselves, not by Argyle. Everyone had
got on well before the Company's site had opened. There had been pre-opening publicity
and the first month of trading had been very successful. He had no recollection of the share
reorganisation, which took place in April 2022, being discussed. If it had been, he would
have wanted the Pinz accountants to deal with it. He had no concerns about Argyle's
solvency at that stage. The Company at that point had liabilities to directors and payment
terms to meet with its equipment supplier, as well as liabilities in terms of its site lease.
It could not have paid all of those creditors at that time. Although what had been done by
way of the reorganisation had been visible on the Companies House public website since
late April 2022, he did not use the site often and had not seen it there. In August or
September 2022 Mr McQuade had told Mrs Davidson that he was not able to log on to the
Company's account with Companies House so as to lodge its annual confirmation
statement, and had asked her if she could do it instead. She had done it in late September
and had told Mr McQuade that she had dealt with it. He was relatively new to the business
at that time and would not have appreciated the significance of the share reorganisation.
Mrs Davidson had been careful to deal only with him rather than copying others who would
know more into her emails. She had been trying to keep what she had done as quiet as
60
possible, which Mr Margach considered meant that she had been trying to deceive him and
Mr Anderson.
[109]
Between April and August 2022, everything appeared to be going well.
Mrs Davidson was still working for Pinz and the personal relationships were fine. The
Company paid off its start-up costs, then its debt to Pinz, then the Davidsons. Pinz had been
paid first because it had cash flow issues due to a VAT charge. It was that, however, which
had first begun to cause a rift in the relationship, because the preferential repayment to Pinz
had been used by the Davidsons to treat Mr Margach and Mr Anderson in a belittling
manner, as if they were two small boys who were getting something that they were not
entitled to. After its creditors were repaid, the Company had paid dividends; first, £40,000
with £20,000 to Pinz and £10,000 to each of the Davidsons, then £8,000 a month, with £4,000
going to Pinz and £2,000 to each of the Davidsons. Total dividends paid had amounted
to £72,000 before they ceased in the first half of 2023.
[110]
In August 2022 there had been a mutual parting of the ways with Mrs Davidson.
That caused a significant cooling in the parties' relationships. Mr Anderson had told her
that Pinz did not want her to continue to work for it, and Mr Margach had supported that.
At the meeting on 27 September, it had been formally agreed that DRSA would be dissolved
and a new way forward would be found. It was common ground that Pinz had to be paid
for its services. The meeting was not entirely amicable; the Davidsons were unhappy about
how Mrs Davidson had been treated, but the relationship was not beyond repair at that
time. The meeting concluded that Pinz should prepare commercial terms, but it was agreed
that its head office recharges would be invoiced and paid. On 14 October Mr McQuade had
issued various invoices to the Company in respect of charges by Pinz. In respect of one
invoice only, for £10,000 plus VAT, payment had been taken from the Company's account
61
without its consent. That must have been done on the instruction of Mr Anderson or
himself, but he was not sure exactly how or why it had been done, other than that Pinz was
looking for payment for the work it had done. The amount in question had ultimately been
credited back to the Company. He accepted that the Company had not agreed in advance to
pay all the sums invoiced, and that any authority to take sums from the Company's account
had been exceeded. Pinz was in the wrong; it had taken a decision to take the money first
and negotiate afterwards, charging more than had been agreed. Mr Margach accepted that a
number of things had contributed to the breakdown of trust and confidence between Pinz
and the Davidsons, and that this might have been one of them. A heated discussion had
followed, but he did not recall any threat of immediate closure for the business or
Mr Anderson saying that he would personally take the Innoflate signage at the Company's
site down. The removal of the services being provided by Pinz had been talked about, but
not without notice. Mr Davidson had negotiated strongly for the Company in dealing with
the proposals made on behalf of Pinz by Mr Margach and Mr Anderson. It was plain that
Pinz stood to gain (or lose out) from the negotiation. No steps had been taken to manage
conflicts of interest. The franchise fee rate had been negotiated without reference to the
duration of the franchise. He considered that one month's notice of its termination would be
reasonable. After the negotiation, input into a formal franchise agreement had been sought
from a lawyer, but there was no progress beyond a draft he had produced. The agreed
payments were being made, the services were being provided and the production of a
formal contract was not being demanded by the Davidsons and had drifted somewhat.
There was no agenda to get rid of the Davidsons, but he had formed the view that they
wanted out after the plans for DRSA were abandoned, and the events of October 2022 had
62
probably reinforced that wish. It would have been constructive if they had asked to be
bought out at that stage.
[111]
The Davidsons had some experience and transferable skills relevant to the
Company's activities. Pinz could probably negotiate better terms for the Company from
suppliers, but he could not say what the difference would be exactly. The Innoflate brand
would assist the Company's trading, as would association with the Pinz marketing
resources and customer data. The higher management functions carried out by Pinz added
value to the Company and would have to be done by others if the relationship was severed.
When the Davidsons had put forward their proposals for how to operate the Company
without Pinz, no attempt had been made to veto anything.
[112]
It had been the discovery of the share reorganisation which had particularly changed
his views about the Davidsons. The relationship had deteriorated gradually as a result of
Mrs Davidson's attempt to sell her shares to a competitor and the inability to arrange
meetings, and had broken down completely when the share reorganisation came to light.
[113]
The share reorganisation had been brought to his attention by Mr McQuade when
the latter was trying to prepare a further confirmation statement for the Company at some
point in early 2023. Mr McQuade had accessed the Company's account on the Companies
House website at the end of January 2023 in order to extend the Company's year end. He
had prepared a profit and loss account and a balance sheet and sent them to all directors on
2 February 2023. The Davidsons had not queried the figures. The balance sheet contained
no provision for long-term liabilities. Mr Margach did not know what information had been
provided to Johnston Carmichael in relation to such liabilities, but their inclusion of
£5 million under that heading in the draft statutory accounts was wrong and had not been
picked up by Pinz. He accepted now that the Davidsons had not been provided with the
63
draft statutory accounts until August 2022 (although he did not know that at the time) and
that he had received them in May. He had never instructed that Johnston Carmichael
should withhold that draft from the Davidsons, and it could have sent the draft to them at
any time.
[114]
He could not say exactly when in early 2023 he had found out about the share
reorganisation, but wanted to get to the bottom of it, and thought it best that a meeting
should take place. Mr McGee had prepared an agenda for the meeting which was
circulated, and it was intended to deal with the share reorganisation issue under the heading
"the way forward" on the agenda. Mr McGee had not been given any instructions other
than to attend the meeting on behalf of Pinz and to raise the share reorganisation issue.
There was no game plan. Other business had been discussed, such as the Company's
financial performance. He was concerned about what else was being done behind his back,
such as the attempt to sell the Davidson shares to the Company's competitor in
October 2022. It was all about trust, and he wanted an explanation, which the meeting did
not provide. He did not think that any letter giving notice to terminate the Pinz services had
been handed over at the meeting; rather, a letter or two had been drafted after the meeting
once it had become apparent that trust had broken down. It was the share reorganisation
which had rendered Argyle insolvent and which had destroyed his trust and confidence in
the Davidsons. When he had himself had discussions about selling the Innoflate group to
the same competitor as Mrs Davidson had approached, the Davidsons had been involved in
those discussions or at least had known about them, and all of the Company, not just half of
it, would have been sold had those discussions proceeded to a deal.
[115]
On 23 March 2023, Mr McGee had sent a letter to the Davidsons setting out the
proposal for their exit from the Company which had been discussed at the meeting,
64
including a share transfer form for them to sign which would have transferred their shares
to Pinz. That was on the basis of legal advice obtained by Pinz, and was drafted by its
lawyers on instructions from Mr Margach. It remained a proposal, not a demand.
Mr Margach was unclear about the details of what the lawyers were telling Pinz to request,
and what its legal entitlements were, but followed the advice he was given. The letter,
including a threat to terminate the Pinz services and remove its brand, may have looked
heavy-handed, but was simply a suggestion as to how matters might proceed, given that
trust and confidence had finally evaporated and the Davidsons were not engaging with the
affairs of the Company. Mr Margach did not believe that the Davidsons' shares were only
worth £1, which was the transfer price suggested in the letter. He did, however, want the
Pinz brand insulated from the Davidsons' behaviour. Although the letter had stated that the
booking system for the site had been programmed to refuse attempted bookings for 20 April
and afterwards, that was not true. It would have damaged the business. The Davidsons
had replied to the letter asking about dividends and requesting a sensible price for their
shares, and Mr McGee had responded saying that the Company's business would close in
the absence of a plan to move it forward. Such a plan could have been implemented within
about 4 weeks, but Mr Margach had not sought to call a board meeting to discuss
re-branding, nor resigned as a director of the Company. It was not in his interests to
devalue the Company. Everything that had been done was on the advice of the solicitors
formerly acting for Pinz. The Davidsons' lawyers had also been involved by the end of
March.
[116]
Pinz had then offered £11,000 for the Davidsons' shares, which was probably less
than they were worth, but in the ballpark due to the absence of any plan to move forward
and the going concern issue. The Davidsons had in turn offered to sell for £1 million, and
65
Pinz had responded by saying that it would sell to them for that price. It had not consulted
an insolvency lawyer at that stage, despite saying that it had done so.
[117]
In April 2023, Mr McQuade and the former solicitors for Pinz had raised the question
of whether the Company could be seen as a going concern standing the wish of Pinz to
withdraw its brand and services. Mr Margach had spoken to Mr Dunbar of Johnston
Carmichael as an independent professional about his worries on that account, and he had
explained the applicable accounting standard and how one defined a going concern. He had
not said that the Company was not a going concern. When he wrote the letter setting out his
advice, he had been more emphatic on that matter. Mr Margach had not asked for
projections or modelling to be done to assess the effect on the Company of the withdrawal of
the Pinz services. He probably should have done so, but it would have been a difficult
exercise and would have depended on assumptions about marketing and so on. Pinz could
certainly be replaced, but he did not know at what cost to the Company, or whether the
Company would thereby make savings. The immediate problem was that there was no
alternative plan to assess.
[118]
Mr McQuade had stated to the Davidsons that the Company could not be regarded
as a going concern. He was the one who had raised the issue in the first place. Mr Margach
had not sought to get Mr Dunbar to say that the Company ought not to be regarded as a
going concern. He wanted a record of the call he had had with Mr Dunbar to pass on to the
Davidsons. The letter written by Mr Dunbar in that connection did not quite accurately
repeat the oral advice he had had from him. Mr Margach simply wanted to get to a position
on the accounts with which everyone would be happy. As the Davidsons had not been
co-operative with him, he wanted Johnston Carmichael to invite them to, and host, a
meeting about the matter.
66
[119]
At the end of May, Mr Dunbar had sent him an email received from the Davidsons'
solicitors requesting a copy of the draft statutory accounts and asking whether he had
authority to send them. Mr Margach had not replied substantively in writing, and was not
sure whether or not he had spoken to Mr Dunbar about it or given him any instructions. He
and Mr Anderson were in Wales busy setting up a new Innoflate site at the time. A
subsequent email on 12 July from the Davidsons' solicitors to Mr Dunbar had been passed
on by the latter to Mr Margach on 25 July, and on 1 August he had responded, saying that
there was no difficulty in Mr Dunbar passing on another copy of the draft statutory accounts
as requested. He had said "another" copy because he had then been under the impression,
which he had subsequently realised to be wrong, that the Davidsons had had a copy of them
already. The Davidsons had come back with comments on the draft accounts, which were
correct and related to matters not spotted by Mr McQuade. Ultimately Pinz had, with the
resolution of the litigation in sight, entered into an agreement that its services would not be
withdrawn on less than 3 months' notice and on that basis had accepted that the Company
was a going concern.
[120]
In relation to the insurance issue, Pinz had been dealing with the renewal as part of
its services to the Company and was aware that the statutory accounts would require to be
lodged before the renewal could be effected. The broker had asked for them and Pinz had
had to tell him that they had not been filed and that notices to terminate its services had
been sent. That raised the insurers' perception of risk, no renewal was available, and the
Company's site had had to close. The remedy had been to withdraw the termination
notices, deal with the going concern issue and file the statutory accounts. There had been no
intention to cause the Company stress and damage.
67
[121]
As to the electricity charges, Dobbies had been asked to cancel their invoice, but the
contract with them had not quite been agreed or signed. Mr Margach had done everything
he could to sort the issue out by getting a meeting with the Davidsons, and when that had
eventually happened, a way forward had been agreed. The electricity issue would result in
a diminution of the Company's EBITDA, and a reduction in management charges due to
Pinz, which had yet to be reflected in the Company's accounts.
[122]
In re-examination, Mr Margach re-iterated various matters, including that he had
had no conversation with Mrs Davidson about the share reorganisation. No conversation
had taken place - he would have remembered if it had.
[123]
The notice to withdraw the services of Pinz given in March 2023 was to allow an
alternative plan to be put in place by the board of the Company, but the Davidsons had
provided no plan. There had been no intention to do the business down.
[124]
Chris Cole (35) an account handler employed by Tower Insurance Brokers Limited,
stated that Pinz had been an insurance client of his employer for a year or two. On 3 August
2023, he had emailed Mr Margach regarding insurance renewal, requesting turnover and
wage tables, a completed material damage questionnaire, management accounts information
for premium finance approval, a survey documents checklist, and the previous 5 years'
claims experience for each site. He had not been provided with the claims experience
information in respect of the Company, nor its management accounts. The accounts were
primarily required in respect of premium finance, but if there was an issue with overdue
accounts, that could be an indicator of more serious underlying financial issues within the
business. On 1 September 2023 Mr Margach had emailed him to advise that the accounts for
the Company were overdue, that there was an ongoing dispute between the shareholders,
and that a decision might be made to remove the Innoflate brand from the site. He had
68
requested that the accounts be provided as soon as possible in order that the renewal could
be effected. He had subsequently received a call from Mr Davidson in which the ongoing
issues with the statutory accounts of the Company and the dispute between the
shareholders were discussed. If the accounts could not be agreed and submitted, the public
liability insurance policy could not be renewed. It expired on 5 October 2023. Discussions
between the Company and his manager Mr Tim Forshaw then ensued which resulted in the
renewal of the policy on 12 October, with backdating to cover the period between 5 and
12 October 2023. The delay in the renewal had not had any real impact on the Company's
insurability; the same premium had been offered, premium finance had been secured, and
there was no reason to suppose that the Company would be treated differently by the
insurance market going forward because of the renewal delay or the reasons underlying it.
[125]
In cross-examination, Mr Cole stated that, if he had been provided with the statutory
accounts, no further questions about the state of the business would have been asked. When
he had learned of the shareholder dispute, that gave rise to a problem with placing the risk
with insurers. If the issues had been resolved by October, there would have been no further
problem.
[126]
Ross Thomas Anderson (38) stated that he was the managing director of Pinz and a
director of the Company. At Pinz, his day-to-day responsibilities included managing and
directing the business, staffing, human resource and marketing matters, liaising with
consultants in respect of health and safety, and managing the booking system. The
company was originally established to run the bowling alley in Elgin, but had since been
restructured to be the head company of a group structure, holding the assets for each of the
group's seven sites except Monifieth, but with each site being operated by its own
subsidiary company.
69
[127]
He had got to know the Davidsons through Mr Margach. Pinz was then already in
discussion with Dobbies about the Monifieth site. Mrs Davidson had proposed that she
wanted to join Pinz to enable it to expand as a company and suggested that the skills and
experience she and Mr Davidson had could result in a great partnership moving forward.
They were not to be employed by Pinz but would be paid by way of dividends from the
Monifieth site. Mrs Davidson was to assist operationally with day-to-day tasks and checks,
human resource issues and site visits and support. Mr Davidson was to assist with
acquisition of new sites and negotiations on leases and rentals. Mrs Davidson started her
work around August or September 2021. She had subsequently asked for a salary, which
was agreed, and she became a Pinz employee in December 2021, employed first by the
Livingston site company and then by Pinz directly from the end of May 2022 until
30 August 2022. The business relationship was normal and amicable for a period, and
communication with the Davidsons was effectively exclusively through Mrs Davidson.
She was based in the Glasgow area and was able to get to sites quickly and efficiently, with
Mr Anderson being based 4 hours away from most sites. After the pandemic, staffing the
business had changed significantly and there were additional strains with sickness and
self-isolation. General recruitment was difficult. Mrs Davidson engaged a recruitment
agency that she had worked with before, and managers were recruited through this
platform. Mr Davidson had been involved in the recruitment of Mr McQuade and held him
in high regard. Mrs Davidson's appointment took a lot of pressure off Mr Anderson and he
was able to focus more on health and safety, maintenance, servicing, testing, recruitment,
new site designs and work with trades and third-party contractors. They had a relaxed
working relationship; she managed her own diary and was a support in the day-to day
70
processes and operations on site. There were regular update calls and Teams meeting about
operations and discussions in relation to employee performance and HR issues.
[128]
However, after the Monifieth site opened, Mrs Davidson's attitude changed and she
became very money-orientated and was always looking for ways to cut costs. On occasion,
cost was the main priority over quality, a situation with which Mr Anderson was unhappy.
Staff were starting to play them off against each other. She proposed that Mr Anderson
should have a job title which would suggest a limitation to his role. She had started to see
herself as an owner of Innoflate rather than as an employee with a restricted business
interest. That fuelled Mr Anderson's uncertainty about the future of building sites together,
and it became clear that the working relationship was not going to work out long term.
Mr Anderson sought advice from John McGee, with whom Pinz had worked previously.
Pinz was able to review its growth strategy and how to achieve it. Part of that strategy was
to leave the Monifieth site on the sidelines. A meeting was arranged at the Company's
offices in Hillington at the end of August 2022 for Mrs Davidson to meet Mr McGee and
discuss operational matters. She had asked Mr McGee and Mr McQuade to leave the room
so she could speak to "the boys", ie Mr Margach and Mr Anderson. That term was
perceived as insulting. She had opened up the conversation by asking them what was
happening. Mr Anderson explained his view that their relationship had broken down and
that he and Mr Margach did not wish to proceed with further joint ventures, as they did not
see any value in the arrangement, especially since the Davidsons had, and would take, no
responsibility for the group debt incurred over the pandemic period. She had asked
Mr Anderson if he wanted her to continue working for Pinz and he had said that he did not.
She accepted that and said that a way would have to be found to deal with the business of
the Company. She left the room after shaking their hands. Shortly afterwards the
71
Davidsons had visited Mr Margach and Mr Anderson at their home, and indicated that they
wanted the existing arrangements for the Company to continue, saying that it was better to
be 50% of something than 50% of nothing. Mr Margach and Mr Anderson had acceded to
that, although it was not really what they wanted.
[129]
There had been a meeting on 26 September at Dundee, during which Mr Davidson
had been angry about the treatment of his wife. There were discussions about management
agreements and service agreements, and Mr Davidson had proposed low remuneration for
Pinz in those regards. Mr Anderson and Mr Margach had not agreed any fees on the day,
and sought further external advice from franchise experts. The Davidsons had subsequently
refused to attend many meetings and there was no current relationship with them.
[130]
The original shareholding of the Company was one share held by Pinz and one share
held by Argyle. Mr Anderson became aware that this was no longer the case in March 2023
when Mr McQuade was preparing the Company's annual accounts, noticed the change and
alerted Mr Margach and himself. It transpired that Mrs Davidson had created two
additional shares and allocated one to herself and one to Pinz so that Pinz held two shares.
Argyle's original share was transferred to Mr Davidson and the additional share was
assigned to Mrs Davidson. Mr Anderson had had no previous knowledge of this change.
He was concerned since the relationship with the Davidsons had already broken down and
this raised more doubt about their integrity as business partners. A meeting with the
Davidsons was called, but Mrs Davidson could not attend as she had Covid-19 at the time.
Mr Davidson had denied any knowledge of the transfer. As to DRS Leisure Limited, the
Davidsons wanted to have the minority interest split with a 15% share to each of them.
As the company had not traded, Pinz had no issue with that, but there was no connection
between that and the shareholdings in the Company.
72
[131]
Mr Anderson and Mr Margach did not want the Innoflate brand to be affected by
what the Davidsons had done, so offered to purchase the Davidsons' shares for a value
which would allow Pinz to continue to trade from the site and the Davidsons to part ways
from the group. Alternatively, the Innoflate brand would be removed and then a new
company created to operate and run the Monifieth site. That would remove the Innoflate
branding but leave Pinz and the Davidsons still in business together trading under a
separate name. Otherwise, the Company could be equitably closed down. However, the
Davidsons would not agree anything and threatened to go to court. It was agreed to
continue with the status quo on a short-term basis while the Davidsons came back with a
plan as to how they would operate the business going forward, but nothing substantive in
that regard had been forthcoming.
[132]
The most recent accounts for the Company had been delayed due to the Company's
accountants, Johnston Carmichael, being unable to prepare accounts for it on a going
concern basis. Johnston Carmichael had been informed of the impact of the Pinz
withdrawal of services on the Company and they indicated there might be an issue in
respect of the potential for the business to cease operations within 12 months of the signing
of the accounts. Mr Margach and Mr Anderson were uneasy about signing the accounts as a
going concern on that basis. The Davidsons had refused to engage with the issue, leaving
the finalisation of the accounts in limbo.
[133]
The process of renewing all the group's insurance policies had begun. The
Company's policy was separate from the rest of the group. The broker advised that it was
unable to offer the Company the facility of paying its premium over a year as it had
identified that the accounts were overdue. Pinz had advised the broker that no agreement
could be reached amongst the shareholders on the accounts being filed on a going concern
73
basis, and told the Davidsons of that. Mr Davidson had in turn contacted the broker and
advised that there was a litigation between parties, in consequence of which the broker said
that it did not wish to quote while there was ongoing litigation. Alternative quotes had been
sought but discussions on that were still continuing when the issues with the existing broker
were resolved.
[134]
On 7 November 2023, Dobbies had telephoned Mr Anderson and advised that it had
not charged the Company for electricity since its opening. It had subsequently provided
details of proposed costings and intended to make a back charge to the Company for the
units used. He wanted to have a shareholder meeting, but got no engagement from the
Davidsons.
[135]
In further examination in chief, Mr Anderson stated that Mrs Davidson had initially
brought value to the business at a time when he and Mr Margach had almost had enough of
it. She was experienced and had brought more management coverage. Mr Davidson had
not done anything for the business on a day-to-day basis. He felt the relationship with the
Davidsons had begun to deteriorate when they were told that Pinz did not want to proceed
with the DRSA plan, which was around June or July 2022. That would deprive the
Davidsons of an expected income stream, but Pinz had considerable debt and the DRSA
proposal would have entitled the Davidsons to take income from its businesses without
investment. After that, the Davidsons had visited Mr Margach and himself at their home
and had persuaded them to continue the arrangements for the Company as before, although
Mr Anderson was not happy about it. About the same time he had reached out to
Mr McGee, as his confidence was down and he felt locked into the arrangement with the
Davidsons. Mr McGee had said that he and Mr Margach were young and inexperienced,
and that there were no bad decisions, only learning opportunities. A meeting had been
74
arranged at the Hillington offices of Pinz at the end of August to confirm formally the
decision not to proceed with DRSA. He and Mr Margach appreciated that Mrs Davidson
would need notice of any termination of her role as Pinz Operations Director. She had
asked Mr McGee and Mr McQuade to leave the room, and was upset, but calm. He and
Mr Margach had said that they did not want her to continue in her existing role. She was let
down. She asked Mr Anderson if he wanted her to carry on, and he felt it best to say no.
The same had happened with Mr Margach. She was disappointed, but shook their hands
and left.
[136]
There had been a follow-up meeting in Dundee to identify a way forward. The site
was continuing to trade well and eventually fees were being paid to Pinz. It had been the
discovery of the share reorganisation that was the straw that broke the camel's back. He had
definitely not known about that before March 2023. There had been talk in the industry that
the person to whom Argyle had sold "Whale of a Time", Stephen McKinlay, had fallen out
with the Davidsons about some aspect of the sale. Mr Anderson had telephoned him to talk
about that. The dispute was to do with rent payments, and Mr Davidson had supposedly
said that he would fold Argyle if need be. It had also been discovered that the Davidsons
were trying to sell their shares in the Company to a competitor, and were looking for an exit.
When he subsequently found out about the share reorganisation, he wanted to bring the
relationship with the Davidsons to an end. They were, further, not attending meetings to
deal with the Company's affairs.
[137]
As to the suggestion that Pinz had levied excessive charges on the Company, that
was incorrect. There had been a negotiation. In return for the franchise fee, the Company
got the brand, marketing, the booking system and the business get-up and know-how. The
Innoflate brand brought value to the Company. The management charge got it the head
75
office functions, payroll, health and safety and human resources assistance. Although he
was not aware of why invoices had been issued without agreement in October 2022, there
had been agreement in principle in September that charges would be payable, going
forward and also backdated, and that there would be an interim payment based on a
division of head office costs. The issue of the invoices had provoked a Teams meeting to
reach a faster and final agreement. Nothing had been forced upon the Davidsons, although
the call had been heated.
[138]
The proposal by the Davidsons in summer 2023 as to how the business might be
rebranded had not been taken seriously by Pinz. A cautious reply had been given to it, and
nothing more had been heard about it. As to the going concern issue, Pinz had simply been
following the professional advice of Johnston Camichael. The insurance issue had caused a
difficult time, but Pinz had not wanted the business to close. The electricity issue had not
been set up by Pinz; he and Mr Margach had tried to get engagement from the Davidsons,
but they were not taking it seriously. Once they did, the matter was resolved
straightforwardly and Dobbies had accepted what was put to them on behalf of the
Company.
[139]
In cross-examination, Mr Anderson stated that the Davidsons wanted to carry on
with the DRSA proposal. Mr McGee had not advised about that matter, and he did not
make decisions. The Company had been a test to see how the relationship with the
Davidsons would work out. It had traded successfully and paid off the equipment suppliers
before going on to pay dividends, with half of the total going to Pinz and a quarter to each of
the Davidsons. Although initially arrangements had been friendly and informal, there had
come to be an element of disagreement with Mrs Davidson in relation to site management
about things for which Mr Anderson had previously been responsible. There could not be
76
two bosses on site. By the time of the meeting at Hillington at the end of August, the
relationship with her had broken down and there was no trust. It would not have worked
had she continued in the role.
[140]
At the meeting in September 2022, it had been agreed that Pinz was entitled to be
paid for the services it was providing, and it had agreed to provide a formal management
agreement by the end of October. The meeting had been amicable. Authorisation levels to
make payments on behalf of the Company had been agreed. It was agreed that there would
be consultation about business changes. There had been discussion about some inflatable
equipment which the Company had purchased for £14,000 at auction and which turned out
to be unusable. It had eventually been disposed of in September 2023 without reference to
the Davidsons, who by then were demonstrating no interest in the Company's affairs.
[141]
Mr Anderson had not been involved in the issuing of invoices to the Company by
Pinz in October 2022, and the taking of £12,000 from the Company's bank account without
consent, although he knew it had happened. He understood that the invoices had been
issued in accordance with what had been agreed in September. The payment of head office
recharge costs had been agreed, although he could not say that there had been agreement on
the amount due. There had been no agreement about the mechanism for calculating the
management charge that would be due. He did not know who had authorised Mr McQuade
to issue the invoices; he might have done it on his own. Invoicing was a matter for
Mr Margach and Mr McQuade. Mr Anderson had intended to adhere to the agreement
made in September, and had not raised or authorised the invoices. The money which had
been taken from the Company's account ought not to have been taken, but had been
credited against a bigger invoice which was due. Trust between Pinz and the Davidsons
was already non-existent at this time, and it was reasonable for the Davidsons to be angry
77
about what had happened. Mr Davidson had been irate and a polite discussion was by then
out of the question, although the situation could have been defused. Pinz had not set out to
engineer a confrontation. At the Teams meeting which followed, Pinz had said that it would
remove its services, but did not say that it would do so immediately. Mr Anderson probably
did say that he would drive down to the site himself and remove the Innoflate signage, but
no timeline was put on that. The purpose of the threat was to get an agreement that would
avoid further situations like that which had occurred. Mr Anderson acknowledged that
Pinz had an interest on both sides of the negotiation. The 4% franchise fee being suggested
by Mr Davidson was not in line with the advice Pinz had received. It was beneficial to the
Company to have Pinz and its brand involved at a reasonable price. He was content,
wearing his Pinz hat, to threaten to withdraw the brand. An agreement was reached. At the
end of the process, Mr Davidson had said that he was looking for a written contract. A
contract had been drafted but never shared. It had probably just been forgotten about.
Invoices were being raised and paid in accordance with the agreement and there was no
active dispute and no need to engage with the Davidsons. No agreement had been made
about the duration of the franchise arrangements. Had there been such an agreement, that
would have avoided further dispute about termination notices and so on.
[142]
There had been no discussion about reorganising the shareholdings in the Company.
There had been a discussion, and agreement, about changing DRS into DRSA, with different
shareholders. If Mr Anderson had been asked to consent to the proposed share
reorganisation in the Company at the end of 2021, or in April 2022, he would probably have
agreed, as it would have made no difference to Pinz. In February 2023 he had spoken to
Mr McKinlay, who had bought the assets of "Whale of a Time" in September 2022.
Mr McKinlay was no longer in an amicable relationship with the Davidsons, and what he
78
said caused Mr Anderson to think hard about who he was in business with. The
conversation had been an eye-opener. He was not speaking to the Davidsons at that stage.
When the share reorganisation came to light in March 2023, it was not so much the situation
which had been created, but the fact that it had been done behind his back, and that it had
removed assets from Argyle, which caused concern. A letter drafted by the former solicitors
for Pinz, and signed by himself and Mr Margach without extensive discussion, had been
sent to the Davidsons. It had contained what the lawyers had advised should be said.
Mr Anderson had signed it, probably without reading it. The solicitors had given poor
advice. They had said that Pinz had a pre-emption right. He did not know what a
pre-emption right was. The letter asked for the Davidsons' resignation as directors and the
transfer of their shares to Pinz for £1, which was the price they had used in the transfer to
them from Argyle. That was all done on legal advice. The Davidsons could have put
forward a better price, but asked Pinz to do so, so it then offered £11,000. A month's notice
of removal of the brand and services had been given by Mr McGee. That was also done on
advice, to get a resolution and put pressure on the Davidsons. Mr Anderson could have
rebranded the site in that period, and he expected that the Davidsons could have done so
also. However, no plan to that end had been put together, although the Pinz services could
probably have been replaced at lesser cost. Pinz had put forward no alternative plan. The
services, brand and booking system had not in fact been removed. The letter had prompted
the legal dispute. Pinz had been advised that it would be interdicted from withdrawing
services at short notice, so had continued to supply them and had ultimately agreed not to
withdraw them on less than 3 months' notice. Everything had been done to try to get an
out-of-court settlement.
79
[143]
Mr Anderson had not been involved in dealing directly with Johnston Carmichael,
but had been told that it wanted to see a trading plan, without which it would be difficult to
sign off the accounts on a going concern basis. Johnston Carmichael had said that the
decision was for the Company's directors to make. Although it had turned out that the
letter written by Mr Dunbar saying that withdrawal of the Pinz services would result in the
Company being unable to trade was wrong, that was not something that Pinz had tried to
set up, and an alternative to those services would still have to have been found.
[144]
The Company had always known that there would be an electricity liability to
Dobbies; a separate meter had been discussed when the lease was signed, but nothing had
been done about it. No amount recognising the liability had been accrued in the Company'
accounts; he did not know why.
[145]
In re-examination, Mr Anderson stated that the payment authorisation limits agreed
in September 2022 had been concerned with day-to-day operational needs, and were not
intended to apply to franchise fee and management charge payments. Although there had
been agreement that Pinz would be paid, money had been taken from the Company's bank
account without agreement. Mr Anderson had always acted honestly, but could appreciate
in hindsight that things could have been done differently.
[146]
Christopher McQuade (34), the Financial Director of the Pinz Group and a member
of ACCA, stated that his workload primarily related to Active Parks Limited (a company
associated with Pinz) and Pinz itself, which had certain historic accounting issues. He paid
less attention to the trading companies, including the Company. He was initially unaware
of the precise shareholding pattern in the Company. On 29 August 2022 he had received an
email from Mrs Davidson saying that she had received a reminder from Companies House
in relation to the Company's confirmation statement and asking whether he would like her
80
to attend to it. He had gratefully agreed to the suggestion. On 17 September 2022, he had
received another reminder from Companies House about the confirmation statement in the
post and had forwarded it to Mrs Davidson by email on 23 September, asking her to confirm
if she would deal with it as he had thought she had done it already. He had then received
an email from Mrs Davidson on 28 September which had no text and had an attachment
bearing to be the confirmation statement for the Company, to which he had not paid much
attention. He must have moved the email straight to his Outlook folder for the Company
without even opening it, as it was still showing as "unread" in that folder when he searched
for it on 19 November 2023. He had no reason to suppose that there was anything wrong
about it; Mrs Davidson was a director of the Company and he had no reason to question her
actions. Even if he had opened the email, he would not have checked the shareholders'
information, as he was not fully up to speed on how the shares were split between Pinz and
the Davidsons at that point. The confirmation statements for the other companies in the
group were being dealt with by Johnston Carmichael. He had discovered the share
reorganisation on 17 March 2023 when he noticed that the latest confirmation statement for
the Company disclosed that the shareholdings differed from those at incorporation. He had
looked through Mrs Davidson's email archives on the instruction of Mr Margach and
Mr Anderson, and had found that she had instructed the change.
[147]
He had been at the Company's management meeting on 20 March 2023.
Mrs Davidson was unable to attend, but Mr Davidson had been presented with a copy of the
invoice to the Company for making the share changes which had been raised by the
accountants instructed by Mrs Davidson. Mr Davidson appeared very surprised and could
not explain why that had been done. A letter terminating the services of Pinz had been
handed over at the meeting.
81
[148]
The issue of whether the Company was a going concern was first raised by him.
He was a chartered accountant, and it was his professional opinion that the dispute amongst
the shareholders of the Company and the possibility of the franchise services having to be
withdrawn by Pinz, was a material uncertainty that put into question whether the Company
could continue to trade for the foreseeable future. As finance director of the Innoflate group,
he advised Mr Margach and Mr Anderson about that issue, including suggesting that
further advice be obtained from Johnston Carmichael. The issue could not be ignored, and it
took time for matters to develop before it could be concluded that the Company could still
appropriately be treated as a going concern. That was only clarified in October 2023.
[149]
In further evidence in chief, Mr McQuade stated that he had had become aware of
the Company's share reorganisation on 15 March 2023. He had not immediately thought
that it represented anything untoward, but had informed Mr Margach of it.
[150]
He assembled accounts in a management format for the directors and sent them to
Johnston Carmichael with certain additional information so that they could prepare the
statutory accounts. Sometimes Johnston Carmichael came back with queries. Mr McQuade
had formed the view that if the Innoflate brand were to be removed from the Company
without an alternative trading plan being in place, it would have to fold. He had raised that
with Mr Margach too. It was decided to engage Johnston Carmichael for an independent
opinion on the matter. It was thought that that would be useful. Pinz was looking for
confirmation of Mr McQuade's view.
[151]
In October 2022 Mrs Davidson had told him that she was happy for the Company to
pay Pinz invoices for head office recharge costs. He had instructed that the invoices which
became controversial be issued and money taken from the Company in partial payment of
them. That had led to a directors' meeting and agreement about what should be paid.
82
[152]
In cross-examination, Mr McQuade stated that Mrs Davidson had given him login
details for the Company's account at Companies House, but they did not work. She had
lodged the confirmation statement which was needed and forwarded it to him. He had
subsequently accessed the Company's account to change its accounting year end, but did
not look at the confirmation statement which had been lodged at that stage.
[153]
He had sent the Company's management accounts to Johnston Carmichael around
the middle of March 2023. He had not received a copy of the draft statutory accounts before
the going concern issue had become live. He had informed Mr Dunbar of the share
reorganisation issue on 20 April 2023. Mr Dunbar needed to know who held the shares in
the Company. He also needed to know on what basis to prepare the statutory accounts,
which raised the going concern issue. Mr McQuade had looked at the relevant accounting
standard before going to Johnston Carmichael and formed his own opinion that the
Company would be unable to trade if the Pinz services were removed. Johnston Carmichael
had been asked whether Mr McQuade's view on the application of the relevant accounting
standard matter was right, rather than simply to provide advice generally. He had spoken
to Mr Dunbar on 21 April and expanded on his interpretation of the relevant accounting
standard, FRS 102. He had explained that the Pinz services were being removed from the
Company, that there was no other trading plan, and that in his view that meant that the
Company could not continue to trade. Mr Dunbar had agreed. However, the decision was
one for the directors to make, looking forward to the 12 month period from the signing of
the accounts. They had to consider whether there was any material uncertainty on the
matter. No specific advice on what exactly they should consider in that respect had been
sought. Mr Dunbar had been asked to provide a letter confirming his advice so that a
statement of his professional view was available. The involvement of Mr Dunbar, both in
83
providing that letter and in inviting parties to a meeting, was not aimed at giving a false air
of independence to the view that the Company could not be regarded as a going concern.
Mr McQuade had written to the Davidsons stating that the accounts could not be signed off
on the going concern basis, and accepted that he had worded that communication clumsily.
His facility lay in numbers, not words. He was simply trying to engage with the
shareholders and was taking what was going on at face value. He had not asked
Mr Margach or Mr Anderson for their views, and had had no engagement from the
Davidsons. They refused to come to an in-person or virtual meeting. They could have taken
their own advice if they wanted to. He did not know what Mr Margach might have said to
Mr Dunbar at any point. The enquiry to Johnston Carmichael had been made on behalf of
all of the shareholders in the Company, but he had not asked the Davidsons to agree to it
being made. He could not remember whether the Davidsons' solicitors were involved at
that point the first letter from them which he had seen was dated 9 May 2023. He had
received the draft statutory accounts from Johnston Carmichael on 17 May, and had
forwarded them to Mr Margach and Mr Anderson. He had not spotted the mistake they
contained about future lease liabilities. He had not sent them to the Davidsons; what he
had received from Johnston Carmichael on 17 May also related to another company in
which the Davidsons were not involved. It was not a conscious decision not to send the
draft statutory accounts to the Davidsons; if they had asked for them, he would have sent
them. He did not know when Johnston Carmichael had sent those accounts to the
Davidsons' solicitors. He had not been particularly aware of the terms of any
correspondence between those solicitors and Johnston Carmichael. Legal matters were not
for him to deal with. He had met Mr Davidson at the meeting on 20 March 2023, but was
not involved in the correspondence sent to the Davidsons at that time. He was aware that
84
there was a dispute by the stage of sending the management accounts to Johnston
Carmichael. Although the Pinz directors wanted to move away from the relationship with
the Davidsons, that was not the purpose of raising the going concern issue. He was not
aware of any plan for replacement of the Pinz services. No modelling of the effect of the
withdrawal of the services on the Company had been offered to directors or shareholders.
[154]
In re-examination, Mr McQuade stated that Mr Dunbar's view about the going
concern issue, as expressed to him, was that the Company might not be a going concern
should the Pinz services be removed, not that that would definitely be the case.
Mr McQuade had looked at the relevant accounting standard as a whole, and was not trying
to engineer any particular outcome.
Agreed Evidence Jacqueline Pollock
[155]
Parties agreed by Joint Minute that Jacqueline Pollock operated a bookkeeping and
accountancy business called JPS Bookkeeping and Accountancy Services Ltd in Paisley.
She regularly dealt with company filings on behalf of clients. In April 2022 she was
telephoned by Mrs Davidson in relation to the Company, with which she had not previously
been involved.
[156]
Mrs Davidson explained that she wished to effect a change in the shareholdings in
the Company from the existing holding of one share held by each of Argyle and Pinz, to
there being one share held by each of Mr and Mrs Davidson and two shares held by Pinz.
Ms Pollock indicated that she could complete the necessary administration but that she
would not give advice on what was proposed. Mrs Davidson instructed Ms Pollock to
proceed to give effect to those changes. Ms Pollock had no communication with any other
director or other representative of the Company or with any other shareholder or
85
representative of any other shareholder. She gave no advice to Mrs Davidson or anyone else
in respect of the proposed changes. Ms Pollock did not request, and Mrs Davidson did not
provide her with, any board minute or other document indicating the approval of the
members or directors of the Company to the actions that she instructed Ms Pollock to carry
out. Mrs Davidson provided Ms Pollock with the Companies House account login details
for the Company. On 25 April 2022 Ms Pollock submitted a return of allotment of shares to
Companies House recording that one ordinary share of £1 had been allotted to Mr Davidson
and one ordinary share of £1 had been allotted to Pinz. On the same day she prepared a
stock transfer form recording the transfer of the single share held by Argyle to
Mrs Davidson and emailed it to her. Mrs Davidson appended an electronic signature to it
on 26
April 2022.
[157]
Ms Pollock did not prepare or issue any share certificates in respect of either the
newly allotted shares, or the share transferred from Argyle to Mrs Davidson. She was not
asked to do so and did not suggest that she should do so. She made no entry in any register
of the Company to record either the allotment or the transfer. She was not asked to do so
and did not suggest that she should do so. On 28 April 2022 Ms Pollock issued an invoice
from JPS Bookkeeping and Accountancy Services Ltd addressed to the Company for
£75 plus VAT in respect of the work done by her.
[158]
In September 2022 Mrs Davidson asked Ms Pollock to prepare and submit a
confirmation statement for the Company. On 22 September 2022 Ms Pollock submitted a
confirmation statement to Companies House recording that there were four issued shares,
that one was held by each of Mr and Mrs Davidson and that the other two were held by
Pinz. Ms Pollock gave no advice in respect of the submission of the confirmation statement.
86
Expert evidence valuation
[159]
Expert evidence was led by both sides as to the value of the Company. The matters
ultimately in dispute between them transpired to be few, and so what follows is simply a
summary of their views.
[160]
The expert instructed by the petitioners was Matthew Geale FCA, forensic partner in
the accountancy firm of Armstrong Watson LLP. He was instructed to state his opinion on
the value of the Company based on an arm's length sale between willing buyer and willing
seller and initially provided an opinion dated 17 November 2023. He had at that stage been
provided with financial information pertaining to the Company comprising a spreadsheet
containing monthly management accounts (including profit and loss account and balance
sheet) for the period ended December 2022, and a series of spreadsheets containing monthly
profit and loss accounts for the period from January 2023 to August 2023. From that
information he calculated that in 2022 the Company made sales totalling £989,000; that its
gross margin was 87%; that the profit before any recharges levied by Pinz was £482,000;
and the recharges levied by Pinz totalled £247,000, or 51% of net profit before recharges.
There had been an initial peak in sales, which presumably followed the publicity
surrounding the opening, followed by a more consistent performance at a lower level for the
remainder of the year. There was some evidence that there was a seasonal drop in sales
around the summer months. The financial performance of the Company in 2023, until
August, showed sales totalling £635,000; a gross margin of 87%; profit before any recharges
levied by Pinz of £289,000; and recharges levied by Pinz of £151,000, or 52% of net profit
before recharges. The rate of sales on a pro rata basis in 2023 was less than that achieved
in 2022, but the gross margin was consistent across both periods. The recharges represented
a consistent proportion of the Company's profits in both periods, amounting to an aggregate
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total across the whole period of £398k, although the recharges for the period from April 2022
to September 2022 were not invoiced at the time on a regular monthly basis but were
included retrospectively on a single invoice dated 30 September 2022.
[161]
The typical cost for a franchise deal varied depending upon a number of factors,
including the industry in which the franchisor and franchisee operated; the extent of the
business system provided by the franchisor; the cost of any mandatory initial equipment or
stocks; and how well-known the brand was. The franchise fee was commonly determined
as a percentage of sales. As a rule of thumb, an initial franchise fee was typically around 5 to
10 per cent of the total investment. The exact percentage and payment terms of royalty fees
might vary depending on the franchise agreement and the specific industry, but typically
ranged from 10% to 14% of the franchisee's gross sales or revenue. Ultimately, agreement
on the franchise fees payable would be a matter between the parties involved and there was
no one prescriptive rate in any given circumstance.
[162]
In relation to management charges, franchisors often provided other goods and
services which the franchisee could opt to use. In these circumstances, the franchisor would
probably levy a charge to the franchisee in the form of a management charge or an invoice
recharge. Such goods and services might include consulting advice from experienced
advisors on a range of matters, eg business development, property selection and
development, and legal advice; specific marketing assistance; audit and accounting
services; and temporary help from experienced staff within the franchises. In
September 2022 the Company had been invoiced franchise fees by Pinz at the rate of 10% of
gross sales for the period from February 2022 to September 2022, and had been invoiced
monthly at 12% of gross sales from October 2022 to July 2023. A franchise fee had been
charged for August 2023 and was included in the management accounts to that date, but
88
Mr Geale had not seen the relative invoice. As to management charges levied on the
Company by Pinz, the charge for September 2022 was a round sum amount of £10,000; the
charges for October 2022 to December 2022 were originally issued at a rate of 10% of
EBITDA but these were subsequently credited and new invoices issued at the rate of 20% of
EBITDA; and charges for all months in 2023 were calculated as 20% of EBITDA. The
EBITDA values used for this purpose varied from the EBITDA figures in the management
accounts in respect of some months. Management charges would normally be calculated on
the basis of the specific costs of goods and services used by the franchise rather than, as in
this case, simply a percentage of EBITDA. In that regard, the management charges appeared
to be more in the nature of appropriation of profit than charges for specific items. Although
a charge was also payable in respect of excess profits, Mr Geale had not seen any actual
payment of that head of charge, presumably because the profits actually made did not
exceed the budgeted amount.
[163]
The Innoflate brand had progressively expanded into six locations since 2018. It had
made recent openings in Newport and Glasgow, in both cases in substantial premises with
significant lease costs. Each location, once up and running, was highly profitable and Pinz
had no substantial borrowings beyond a bank loan of £180,749 as at 31 December 2022.
It had a considerable commitment to future lease payments and a key to the success of its
strategy would be the maintaining of profitability in and cashflows from the existing
locations to finance the initial investment in new locations. It was common for start-up
businesses without any previous public presence to go through an initial period following
the commencement of trade in which sales increased from a low point as a customer base
was established through a combination of marketing and word of mouth reports. By
contrast, in the case of an established chain of businesses opening in a new location, the
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initial level of sales might be higher due to a pre-existing awareness of the branded
businesses operating elsewhere. The opening of the Company's site at Monifieth had been
accompanied by promotion which drew on a number of references to the Innoflate brand
and the achievements and reviews of the existing Innoflate locations. The peak in sales
achieved in April 2022 appeared to result from an initial flurry of interest which decreased
to a positive but lower level. While there might have been some impact of the brand at the
outset, this value diminished as the Company quickly became established.
[164]
A large global franchise providing a comprehensive support and training package
could charge franchise fees of approximately 20% to 30%, but for more typical franchises,
fees anywhere in the range from 5% to 14% were common. However, in most such cases,
the franchisor provided some form of well-developed formalised support beyond the simple
use of a name. The actual franchise rates charged by Pinz were only increased,
retrospectively, at the end of September or early October 2022, which was when the parties'
relationship was deteriorating. The rate of 5% of gross sales originally proposed in the
Company's business plan did not appear unreasonable as a franchise fee for the use of the
Innoflate name.
[165]
As to management charges, the Company bore its own costs for advertising,
marketing and website. The management charge invoices did not particularise any specific
goods and services. However, in the first 6 months of trading, the management charges
were particularised in the accounts and related to "wages", "rent", and "other" costs.
After September 2022, the particularisation in the management accounts disappeared and
the management charges were recorded on a single line with no analysis. They also
increased in overall amount. Mr Geale had seen no evidence that would allow him to assess
the validity of management charges after September 2022 and so had assumed that the
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Company needed to incur such charges at the rate of £5,000 per month, which was
consistent with the period up to September 2022. The effect on the Company's reserves, and
the amount available for distribution, on the assumptions that those lower franchise fees and
management charges were all that were properly payable, would be to increase them
by £104,239 for the whole period to the end of August 2023.
[166]
Against that background, valuing the Company as at 31 August 2023, Mr Geale
assumed that there would be no impact on sales revenues if the agreement with Pinz for the
use of the name "Innoflate" were to be terminated, as the name was not likely to be the
primary driver of sales and 5% of gross sales represented a fair market cost for the value
provided by the use of the name, or in any event was equivalent to the amount which the
Company would have to spend to offset the impact of any termination of the agreement
with Pinz.
[167]
The most appropriate basis of valuation was the earnings basis, based on a multiple
of EBITDA. It was also important to review the adjusted net asset value of the Company as
at 31 August 2023, which Mr Geale had calculated as £228,000. In its present form, the
Company was capable of generating future maintainable earnings of £308,200, assuming
that a cost of £61,200 per annum would be incurred as a reasonable franchise fee or else as
the cost of replacing any support or benefit of the brand, and that a further cost of £60,000
per annum would be incurred by way of the cost of management. As to the price-earnings
multiple, in Mr Geale's experience a business of this type would be capable of attracting a
multiple of between 3 and 5. He selected an average multiple of 4. That resulted in an
earnings valuation of the Company of £1,232,800. Once it had been established what the
annual liability to Dobbies for electricity was, that would represent a cost of sales which
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would result in a pound for pound reduction in profit, EBITDA, and hence the calculation of
future maintainable earnings.
[168]
After providing his first report, Mr Geale was provided with the report of the expert
instructed on behalf of the respondents, Peter Gouw of BDO LLP, and met with him in an
attempt to narrow the matters in dispute. He was further provided with a supplementary
report by Mr Gouw, and himself prepared a further report dated 22 December 2023, the
burden of which was as follows.
[169]
The experts agreed that the appropriate method of valuation was an earnings
valuation calculated by taking an estimate of future maintainable earnings (the
multiplicand) and multiplying this by a suitable price-earnings multiple (the multiplier).
Similar methods of deriving the respective estimates of future maintainable earnings had
been deployed, comprising the following components: (a) Turnover; (b) multiplied by
gross profit percentage (= Gross Profits); (c) less overheads (= Operating Profit); (d) less any
appropriate management charges; and (e) less any franchise fees. Gross profit percentage
had been agreed at 87%. After considering Mr Gouw's suggested price-earnings multiple
of 4.5 and the reasoning underlying it, Mr Geale accepted that that multiple should be used.
In relation to future turnover, further data as to the Company's performance to
November 2023 had been made available. Mr Gouw had identified four factors which he
considered explained a reduction in turnover in 2023: (a) the cost of living crisis;
(b) warmer weather; (c)delay in installation of air-conditioning; and (d) new local
competitor(s).
[170]
In relation to the cost of living crisis, the question was what impact it might have on
a putative buyer of the Company looking to invest for a number of years. Changes in the
economic environment were a normal part of business life. While the cost of living crisis
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might not yet be fully over, the forecast was better for the short and medium terms and it
was reasonable to expect that during the remaining 8 years of the Company's lease the
economic cycle would gradually improve, leading to better trading performance.
[171]
The weather in the UK was changeable. At the end of November 2023, the Company
had been trading for 20 months, which included two summer seasons. That was a short
period from which to draw any meaningful conclusion on the seasonal impact on sales.
There was clearly an initial boost to sales at opening and that should be excluded as
non-recurring when calculating earnings. Sales in May 2023 and June 2023 had been low
compared with earlier months, possibly due to warmer than usual weather during these
months, but there was no firm evidence on that. July and August 2023 appeared to achieve
normal levels, with July reaching in excess of £100,000 for the month. Sales in
September 2023 had again been particularly low but no information had been provided as to
why that was the case. In early October 2023, there was disruption to the business which
saw it closed for a period of approximately 2 weeks. It appeared from press reports that
when the closure occurred, customers might have gained the impression that the venue
might be affected not only for October 2023, but also into November 2023. It would be
inappropriate to include, or place any reliance on, the sales in October 2023 (and possibly
November or even December 2023) in any reference period for future sales; as the confusion
was almost certain to have resulted in cancelled bookings, or customers going elsewhere to
secure parties, events etc., especially during the October half-term week.
[172]
It was possible that the delay in the installation of air-conditioning as a result of the
litigation, together with other effects from the same cause, might explain the low sales
values in May, June, and September 2023.
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[173]
In relation to new local competitors, there was no firm evidence as to the impact that
might have had on sales. There had been a short period of above average sales on opening
but, after that initial flush of activity, sales settled down to a more sustained level. It was
reasonable to suggest that that was a normal pattern for new venues. If so, any impact on
the Company from new competitors might be short-lived and sales would increase again
after the competitor's own "honeymoon period". There might even be a benefit to an area of
new venues which, while appropriating market share, might have the effect of increasing
the draw of an area and increasing overall activity in such a way that a smaller share of a
bigger market was comparable with the situation prior to the openings. Taking these
matters together, an estimate of future maintainable sales should include recent data but
should exclude any non-recurring impacts on sales insofar as they did not give rise to
doubts about the longer-term future. For those reasons, Mr Geale excluded both the initial
flush of sales and sales in the period from October 2023 to December 2023. It was difficult to
ascribe a cause to the low level of sales in September 2023. The most representative
12-month period appeared to be between September 2022 and August 2023, when the total
sales revenue was £965,258. If September 2023 was taken into account, then the equivalent
figure for the most recent 12-month period to that date was £938,164. Mr Geale had taken an
approximate average of those two figures, £950,000, as the appropriate figure.
[174]
In relation to overheads, those comprised four key components: (a) salaries;
(b) property costs; (c) electricity costs; and (d) other overheads. Salaries varied with
different levels of turnover and hence business activity. A staff cost to sales ratio of 29.4%
was not unreasonable as a measure of sustainable staffing costs. Mr Geale accepted that
property costs (ie, rent and rates) should be restated at £93,000 as opposed to his
initial £108,000 estimate in the light of further information provided by Mr Gouw.
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In relation to electricity costs, Dobbies had invoiced the Company for £112,319.02 exclusive
of VAT, but that calculation assumed that all usage which Dobbies did not consider to be its
own fell to be attributed to the Company, which might not be the case. The daily usage rate
had been applied evenly across the period while the usage was likely to have been seasonal,
and the cost calculation included the period from 1 September 2022 to 30 June 2023, when
electricity prices charged to Dobbies were elevated due to the energy crisis and might,
therefore, not be representative of future costs. The calculation also assumed that the
premises were in full usage for all 31 days of October 2023, when that was not the case.
If one assumed that the "excess usage" was all attributable to the Company, and applied the
current energy cost per unit, the annual ongoing electricity costs would be £61,679.60.
However, since costs of electricity might fall in the future and the "excess usage" figure was
likely to be a maximum, Mr Geale assumed an annual electricity cost of £50,000 exclusive of
VAT. Other overheads had been stated by Mr Gouw to be £60,148 as against Mr Geale's
estimate of £50,000. Three cost categories had increased on an annualised basis despite
lower turnover and might therefore include non-recurring costs that should be excluded
from earnings. Legal and professional fees had increased from £9,147 (for the 9 months to
December 2022) to £13,347 (for the 11 months to November 2023). Insurance costs increased
from £8,635 to £18,250 for the same period. Sundry costs had likewise increased from £4,644
to £7,700 in that period. No explanation for these increases was apparent, and so Mr Geale
retained his original estimate of £50,000 on an annualised basis.
[175]
In relation to management charges, Mr Geale remained unable to comment any
further on what the management charges levied by Pinz were intended to cover, whether
the charges for the services provided were made at market rate and, if not, the extent of any
overcharge. The management charges actually levied did not represent 20% of EBITDA.
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Prior to September 2022, management charges appeared to have been levied on the basis of
actual recharged costs, rather than at 20% of EBITDA and, as these costs were lower
than 20% of EBITDA, the overall ratio in the 2022 accounts was also lower. In relation to the
11 months to November 2023, substantial electricity charges had recently been accrued on a
monthly basis and, given these additional costs and the lower turnover in recent months,
some of the months showed EBITDA losses. In months when EBITDA was negative, no
credit of management charges had been given. As a result, the ratio of management charges
to the EBITDA shown on the current management accounts was appreciably higher
than 20%. Otherwise, Mr Geale continued to hold the views on management charges
expressed in his original report, in particular that a deduction from earnings of £60,000 per
annum going forward was a reasonable assumption.
[176]
Updating the valuation of the Company to 30 November 2023, the basis of valuation;
the price-earnings multiple; the gross profit percentage; and the assessment of property
costs at £93,000 per annum were agreed. Electricity and staff costs were not agreed.
The major determinant of value was the level of future turnover that would be agreed by a
willing buyer and willing seller. It was clear that turnover had decreased rapidly and
substantially since September 2023. Mr Gouw had weighted his valuation towards 2023
data, using a 2:1 weighting, for that reason. Mr Geale considered by contrast that the
Company's results since October 2023 were not representative of underlying activity and
should not be relied upon, and that there was doubt over whether the results for
September 2023 had been affected by the current litigation or other reasons. Mr Gouw had
made his calculation by combining the actual turnover to 31 December 2022 of £989,181 and
the annualised turnover for 2023 of £777,464 in the ratio of 1:2, which had implicitly
produced an average turnover of £848,036. The figure of £777,464 represented the lowest
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value of the benchmark for future sales given the transient, non-recurring nature of at least
three of the four negative factors identified by Mr Gouw. Mr Geale considered that this
value should also be adjusted for the effects of the closure in October 2023 and that the
average weighted figure of around £850,000 should be treated as a minimum possible
turnover for the purpose of the valuation. His revised view of the likely level of future
turnover was, as stated, £950,000. That brought out a value of the Company as a whole
of £1,594,000 if franchise fees and management charges were disregarded, £1,324,000 if
management charges were deducted, and £1,067,000 if franchise fees at 5% of gross revenue
also fell to be deducted. If future turnover was deemed to be £900,000, then the relevant
figures on each basis would be £1,464,000, £1,194,000 and £951,000 respectively. If future
turnover was deemed to be £850,000, then the relevant figures would
be £1,335.000, £1,065,000 and £835,000 respectively.
[177]
The petitioners' shares would be worth 50% of the appropriate figure. If the court
determined that a minority discount was appropriate then any discount would be minimal.
Mr Gouw's discount rate of 25% was excessive. The ACCA factsheet upon which he relied
showed a possible discount range for a 50:50 holding as being in the region of 15%-25%, but
also acknowledged that, where using its figures for the purpose of a dispute, the discounts
shown were excessive and gave an example which indicated a possible reduction of 50% on
the ranges provided. The appropriate range for a discount in that context was therefore
likely to be a maximum of 7.5%-12.5%. The factsheet also acknowledged that the strategic
value of a shareholding should be considered. The Company was the only entity within the
Pinz group that operated under the Innoflate banner which was not wholly-owned. If Pinz
were to acquire the 50% shareholding owned by the petitioners, then it effectively gained
full control of the Company and was able to bring it within the Pinz group. It was
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significantly more beneficial for Pinz to acquire the petitioners' 50% shareholding than for
that shareholding to be owned by an external investor, which again would create a potential
position of deadlock. Mr Geale therefore considered that in this particular case, if a minority
discount was relevant, it should be 0%, or at least less than the 7.5% minimum
acknowledged by the ACCA factsheet. The key questions for the court which had an impact
on value were therefore: (a) the level of turnover; (b) the appropriate level of management
charges, if any, to deduct from earnings; and (c) the appropriate franchise fees, if any, to
deduct in calculating earnings.
[178]
In examination in chief, Mr Geale explained that, in calculating maintainable
earnings, he had been looking for a normal trading period, preferably over 12 months to
allow for seasonality. He had excluded the first 4 months of trading so as to leave the
Company's honeymoon period out of account. By contrast, Mr Gouw had included both
that period and the period during which the Company had encountered trading issues
towards the end of 2023, and had applied a weighted average in favour of the 2023 trading
year. It would have been better all round to have had 2 or 3 years' trading history, but that
was not possible, and in those circumstances it was best to look for a steady trading period
of 12 to 15 months. If the current, seemingly adverse, trading continued, then the
maintainable earnings figure might come down to £900,000 or even £850,000.
[179]
There was no basis for a 12% of revenue franchise fee other than the putative
agreement in October 2022. Such fees were ordinarily open to negotiation. A franchise
agreement would typically have a duration of 2 to 5 years. It was not clear what the
franchise fee in the present case covered, and the same applied to the management charge.
A franchise fee could be in the range of 6% to 12%, or more.
98
[180]
In cross-examination, Mr Geale stated that he had proceeded to some extent on
material and explanations provided by the Davidsons. The Innoflate brand appeared, from
Mr Margach's LinkedIn postings, to have been increasing in strength for 9 years. The
Company's offering was unique, and was more than just an inflatable park. It was a
business that needed experience and knowledge to set up. Franchising situations varied
considerably, and one benefit of them could be access to the franchisor's know-how. In the
present case, there had been no upfront franchise fee to be paid. Everything was a matter
for agreement between the parties involved in smaller franchising arrangements. He was
not aware of a comparable franchise situation in the same, or a similar, line of business to the
Company.
[181]
He could not express a concluded view on the value of the Innoflate brand to the
Company, but it was a diminishing one in his opinion. Although he was aware of an initial
business plan having been drawn up for the Company, he had not produced it with his
reports. The net asset value of the Company had not been used in the valuation process.
If the inflatable equipment used by the Company had a shorter life than figured, then the
depreciation which ought to be applied to it ought to be correspondingly greater.
[182]
It was difficult to determine the impact of the factors Mr Gouw had posited as
reducing future maintainable earnings. Permanent factors should be taken into account;
temporary ones less so. He considered that the factors mentioned by Mr Gouw had been
taken into account in the range of figures which he, Mr Geale, had used to arrive at his
conclusions.
[183]
Nothing material was added by Mr Geale's re-examination.
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[184]
Peter J Gouw, partner in the Forensic Accounting & Valuations department of BDO
LLP, provided an initial expert accountancy report on behalf of the respondents on
21 November 2023.
[185]
He noted that the Company's turnover for the period to 31 December 2022 was
around £989,000, effectively for a 9 month period of trade, which equated to around £110,000
per month or an annualised turnover of around £1,320,000. However, the first period of
trade was at an exceptional level and was not likely to be replicated going forward.
The forecast level of turnover for the year to 31 December 2023 showed a decrease
to £862,000. Gross margin had stayed constant at 87%. However, certain costs had not been
included in the 2022 results or were at a rate significantly different to 2022 levels in the
2023 figures. Rent in 2022 was around £20,000 but was £50,000 in the 2023 figures. Rent
going forward would also be in the order of £50,000. Rates charged in 2022 were
around £1,000, but in 2023 were shown at £44,000, which would be the rate going forward
due to the absence of ongoing rates relief. Insurance costs in 2023 were shown at £29,000
in 2023 compared to around £8,600 in 2022. The base level of those costs going forward
would be in the order of £29,000. The franchise fee included in the results for 2023 was only
up to and including September 2023. Utilities costs of £72,000 were included in the 2023
figures, but there was no comparable charge in the 2022 figures. On the other hand, the
Company's site was forced to close for a period of time between 5 and 20 October 2023,
meaning that it was possible that 2023 results and profits were actually lower than would
ordinarily have been achieved. However, Mr Gouw had elected not to make any further
adjustment to reduce total turnover for 2023.
[186]
Typically, shares in unquoted companies were valued by reference to their open
market value. The International Valuation Standards Council set out that market value was
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the estimated amount for which an asset or liability should exchange on the valuation date
between a willing buyer and willing seller in an arm's length transaction, after proper
marketing and where the parties had each acted knowledgeably, prudently and without
compulsion. The earnings basis of valuation involved a calculation of the Company's
maintainable profits, being EBITDA, based on a consideration of its past and expected
profits, to which was then applied a multiple to give the enterprise value. The enterprise
value was then adjusted for any surplus assets, excess cash and debt to arrive at the value of
the shares of the company, or the equity value. The earnings basis was a suitable method for
valuing the Company. Mr Gouw's approach to valuing the business was to take the actual
turnover for 2022 and forecast turnover for 2023, and then to apply a gross margin of 87% to
each to derive a notional gross profit. He then applied the actual 2023 expenses, as he
considered that those provided a more reliable assessment of the costs associated with the
business. He had assumed they were not materially impacted by levels of turnover. He had
then deducted management charges calculated on 20% of net profit before franchise fees and
franchise fees of 12% of net turnover, resulting in a maintainable EBITDA position. He had
then applied a weighted average of 2022: 1 and 2023: 2. This placed a greater emphasis on
the 2023 results. That recognised the ability of the business to achieve higher levels of
turnover (as in 2022), but also recognised that the 2023 results were significantly lower (with
recent months at only 50% of 2022 levels) and were not expected to increase significantly.
That resulted in an adjusted EBITDA for both years. The most persuasive level of EBITDA
was £92,486 (£93,000 rounded) based on that weighted average of profits. In Mr Gouw's
opinion that provided the most robust assessment of the likely performance of the business
going forwards and also recognised that whilst 2023 results were lower, the business did
actually achieve a higher level of profit in 2022.
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[187]
He had then considered the information available about multipliers for comparator
companies in order to derive an appropriate multiplier. His research into publicly-traded
companies in a similar sector to the Company showed listed companies had EBITDA
multiples ranging from a low of 5.7x to a high of 16.5x. If high and low outliers were
excluded, then the average was 8.0x. However, the figures for valuing the whole of a
private company had to be increased because of a control premium, arising due to the
shareholder of a private company holding more influence over the business than the
shareholder of a large publicly-listed company; and reduced due to the smaller size of the
company and lack of diversity. He had applied a 40% discount in this case, given the fact
that the business of the Company was significantly smaller and less profitable than the
comparator entities. That would result in an adjusted mean EBITDA multiple of 4.8x.
That had been checked by reference to the Small and Medium Enterprises Valuation Index
produced by the UK200 Group (composed of independent accountancy and law firms)
which collated key data on actual transactions involving the sale and purchase of businesses
from various sectors. The valuation index for the year to November 2022 indicated a mean
EBITDA multiple of 5.4x and a median multiple of 4.9x. The mid-point was
approximately 5.2x. The average deal size was £7.1m, so that the companies included in the
data for the Index were typically larger than the Company. Therefore, he had applied a
discount of 20% to the mid-point EBITDA of 5.2x, which gave a suggested multiple of 4.2x.
Taking those indications together, he considered that a multiple of 4.5x EBITDA was
appropriate, being the approximate mid-point between the publicly-traded company
information and the UK200 Group data. The enterprise value for the Company was
therefore approximately £414,000. He had considered whether the enterprise value of the
Company ought to be adjusted for any surplus assets, excess cash and net debt, but had not
102
identified any significant items or balances that required adjusting for, assuming that any
cash held would be required for trading purposes and any amounts owed to Pinz would be
considered a trading debt rather than borrowings. On that basis, the equity value of the
Company was around £416,000. The pro-rata value of a 50% interest would therefore be
approximately £208,000.
[188]
In Mr Gouw's experience, typically where a valuer was asked to value commercially
an interest in a private company that was less than a 100% interest, it might be appropriate
for that interest to be discounted from the full pro rata value. In his experience, 50% interests
could be difficult to value. Much would depend on the nature of the other interests in the
company. If the 50% interest was faced with a single other 50% interest (as in the present
case) then a deadlock position ensued and a larger discount (perhaps of 25% or 30% where
a dispute existed) might be appropriate. As suggested by Factsheet 167 produced by the
Association of Chartered Certified Accountants, a typical discount of up to 25% for
a 50%/50% owned company was a starting point. However, in addition, the level of any
minority discount to be applied would also typically depend upon various factors, including
the size of the interest, the spread of other interests, the degree to which the shareholding is
locked in and the pattern of dividend payments, both historic and going forward. The court
might conclude that the Company was effectively a quasi-partnership and thus no discount
was appropriate. However, were a minority discount to be considered appropriate, a
discount of 25% would not be unreasonable. Assuming a 25% discount was deemed
appropriate, the value of a 50% holding in the Company would become £155,000.
[189]
In a supplementary report dated 15 December 2023, Mr Gouw updated his original
calculations to reflect more recent management information concerning the results for the
Company for the 11 months to November 2023. He also had management accounts for the
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year to 31 December 2023 but those contained the Company's forecasts for December 2023
and he had not relied on those forecasts. Turnover in the eleven-month period to
30 November 2023 had decreased to £733,000 from around £989,000 for the 9-month period
to the end of December 2022. It had to be recognised that in October 2023 there had been
some disruption to the business when the site had to close for about 3 weeks following
issues with insurance. Gross margin had stayed constant at around 87%. However, certain
costs had not been included in the 2022 results or were at a rate significantly different
to 2022 levels in the 2023 figures. Rent in 2022 was around £20,000 but came to £45,000 in
the 2023 figures. Going forward, it would be of the order of £50,000. Rates charged in 2022
were around £1,000, but in 2023 were shown at £28,000 for the 11-month period. Insurance
costs in 2023 were shown at £29,000 compared to around £8,600 in 2022. A franchise fee was
shown in the 2022 results at £124,000, but for the 11 months to 30 November 2023 was
around £87,000, reflecting the downturn in turnover. Electricity also now required to be
accounted for given the claims made by Dobbies. He had made his own estimate for
December 2023 so as to enable him to prepare a forecast full year's trading results that he
could use in his calculations, checking that estimate for reasonableness against the
December 2023 management information with which he had been provided. In order to
estimate the likely turnover figure for December 2023 he had reviewed the levels of turnover
by month achieved in 2022 and 2023 and looked to identify the decrease that had occurred in
percentage terms. The average decrease was 41.86%. If this was applied to the
December 2022 turnover of £76,267, the expected figure for December 2023 would be £44,341
(being £76,267 less 41.86%). His estimated total turnover for 2023 thus became £777,464,
being £733,123 plus £44,341. Based on his assessment of turnover for December 2023, he
estimated gross profit for the full year would be in the order of a rounded figure of £676,000,
104
based on a gross margin of 87%. The franchise fees payable would be around £93,000 in the
year to 31 December 2023 based on the estimated rounded turnover of £777,000.
Adjustments were required to the overhead figure of £419,318 in the management accounts
for the 11-month period to 30 November 2023 in order to derive a more robust level of
overhead for that period. No cost had been included for cleaning and waste in the figures
for November 2023 and he had added £600 as an adjustment. No cost had been included for
rates in the management accounts for January, February and March 2023, and he had added
a figure of £10,800 based on 3 months at around £3,600 per month. The utilities cost in the
management accounts to 30 November 2023 were shown at £65,268, which included an
amount of £29,500 effectively included in respect of 2022 costs which were not accounted for
there. The revised utility costs for the eleven-month period therefore become
around £36,000 (being £65,000 less £29,500). The remainder of the overheads included in the
management accounts appeared to be broadly consistent on a month-by-month basis.
Mr Gouw therefore decided to pro-rate his adjusted overheads figure for the 11 months to
30 November 2023 to derive an estimated level of overheads for the year to 31 December
2023, resulting in a range of £437,799 to £465,250, depending on what the amount due to
Dobbies by way of electricity charges transpired to be.
[190]
Mr Gouw then took the actual turnover for 2022 and his estimated turnover for 2023,
to give him two alternative levels of potential turnover, then applied a gross margin of 87%
to each to derive a notional gross profit. He then applied the adjusted 2023 expenses
of £437,000, as he considered them to provide a more reliable assessment of the costs
associated with the business, assuming that they were not materially impacted by levels of
turnover. That produced a profit before adjustment figure. He then deducted management
fees calculated on 20% of net profit before franchise fees at 12% of net turnover. He then
105
applied a weighted average, with a weighting of: 2022: 1 and 2023: 2. That placed a greater
emphasis on the 2023 results, over those for 2022, which saw a level of turnover significantly
higher than appeared to be achievable in 2023 and beyond. That resulted in EBITDA
of £137,764 or £123,124, again depending on what view one took of the likely resolution of
the amount due to Dobbies each year in respect of electricity. The multiplier remained
at 4.5x EBITDA. The enterprise value of the Company did not need to be adjusted for any
surplus assets, excess cash or net debt. On that basis, the rounded equity value of the
Company was in the range of £620,000 to £554,000. Based on that, the strict pro-rata value of
a 50% interest would be in the range of £310,000 to £277,000. While it was a matter for the
court whether a minority discount fell to be applied, Mr Gouw remained of the view that a
discount of around 25% would not be unreasonable, bringing out the value of a 50% holding
as in the range of £232,000 to £207,000.
[191]
In cross-examination, Mr Gouw stated that he had not done any audit work on the
management account figures provided to him. No obvious issue stood out from those
accounts. A willing buyer for the Company might have any number of different
characteristics. The management and franchise fees were in place and there was no
guarantee that a new 50% shareholder would be able to change that. The experts differed
about whether the franchise fee should be 6% or 12%. The figures for management charges
came out about the same at the assumed levels of trading. Mr Geale's figures were 22%
above actual performance, which a buyer would be unlikely to accept. The general trend for
the Company was downwards. It was always difficult to know why trade fluctuated.
A buyer would be more likely to look at recent trading, taking into account the closure in
October and any knock-on effect. Only a relatively short trading period was available for
106
analysis. Judgments as to value could be crude in such circumstances. Electricity costs
could vary with turnover, but Mr Geale's figure of £50,000 a year looked low to him.
[192]
Nothing material was added in re-examination.
Petitioners' submissions
[193]
On behalf of the petitioners, counsel submitted that the general principles governing
the exercise of the jurisdiction conferred by sections 994 and 996 of the Companies Act 2006
were well-established and could be taken from Re Saul D Harrison plc
[1994] BCC 475,
[1995] 1 BCLC 14
Grace v
Company had been conducted in an unfairly prejudicial manner. That required them to
demonstrate unfairness in the sense described by Lord Hoffmann in O'Neill, viz. unfairness
in the conduct of the Company's affairs which was prejudicial to the interests of the
petitioners or the members generally. Conduct could be unfair without being prejudicial or
prejudicial without being unfair. Unfairness would usually involve a breach of the terms on
which the parties agreed to carry on business together, such as formally expressed in the
Articles of Association of the Company, or in a shareholders' agreement. Those terms might
also be implied by law, eg in the form of the duties owed to the Company by its directors, or
they might arise from informal shared understandings, classically in the case of a
quasi-partnership.
[194]
The petitioners' allegations of unfairly prejudicial conduct were of breaches by
Mr Margach and Mr Anderson of their fiduciary duties to the Company, in particular by
prioritising the interests of Pinz over that of the members of the Company as a whole, in
107
relation particularly to the charges imposed on the Company for services provided by Pinz,
and in relation to their recurring threats to withdraw services on inadequate notice and
without responsible alternative arrangements being made. There had been no real intent on
the part of Pinz to debrand the Company's site, merely to create uncertainty and drive the
Company's value down. The supposed agreement of the charges with Pinz was reached in
plain breach of the prohibition on directors voting on matters in which they had an interest.
It was inherently impossible for a market rate to be set in such circumstances. The
arrangements put in place resulted in the majority of the Company's profits going to Pinz as
brand provider and supplier rather than to the members as a whole by way of dividends.
The conduct of Mr Margach and Mr Anderson was deliberate and directed at destabilising
the Company, motivated by the furtherance of their own interests over that of the Company
(or the members of the Company as a whole). In that respect the present case was similar on
its facts to Meyer v Scottish Co-operative Wholesale Society Limited 1958 SC(HL) 40, 1958
SLT 241. As Arden L.J observed in Annacott Holdings at [22], breach of directors' fiduciary
duties would generally indicate that unfair prejudice had occurred.
[195]
There had been an exclusion from management in a manner contrary to the
reasonable expectation of inclusion. The dealings with the Company's accountants in
respect of the statutory accounts were an obvious example. The respondents had first had
private discussions with the accountants who were then authorised to disseminate the
approved position to the respondents. That was nefarious and the resultant lapse in the
Company's insurance was part of a consistent course of conduct designed to drive down its
apparent value. It was accepted that the electricity issue was not in itself an example of the
unfairly prejudicial conduct of the Company's affairs, although it remained relevant to its
proper valuation.
108
[196]
The overall detriment to the Company was obvious: it paid more for a brand and
services than it should have done, and its business was destabilised and arguably devalued.
There were direct consequences to the petitioners: they received less than they would have
done by way of dividend and the value of their investment was reduced.
[197]
Overcharging by one party was a commonly encountered example of unfairly
prejudicial conduct which the court was accustomed to address when providing a remedy:
[198]
It was evident, and perhaps unsurprising in all the circumstances, that there had
been a departure from strict formality in respect of the operation of the Company. That was
the case generally, rather than only in relation to the matters of which the petitioners
complained. The Company's articles were the default articles for a private limited company,
being those set out in Schedule 1 to the Companies (Model Articles) Regulations 2008
(SI 2008/3229).
[199]
The essential requirements of the Companies Act 2006 in respect of allotment,
certification, transfer and registration of shares and shareholdings might be summarised as
follows:
(i)
The directors could exercise the right to allot shares unless prohibited from
doing so by the articles (section 550).
(ii)
It was the duty of the Company to issue share certificates within 2 months of
allotment (section 769); and certificates were sufficient evidence of title unless
the contrary is shown (section 268).
(iii)
The company was required to keep a register of members (section 113) and had
to include in it the information specified in that section. It might do so itself in
the traditional manner, in which case it was required to make the register
109
available for inspection (section 114). Since 2015 it had been entitled to make an
election to use the public register as its register of members (Chapter 2A
generally and section 128H specifically).
(iv)
It was entry on the register of members that conferred the status of member
(section 112). Allotment would generally carry the right to be entered on the
register, but only being entered on the register would confer the status of
member.
The Company in the present case appeared neither to have elected to use the public register
nor to have kept a private one. Mrs Davidson, who dealt with incorporation, admitted that
she was unaware of the requirement to keep a register. Only Mr Margach was appointed as
a director at incorporation. That mistake was noticed as Mrs Davidson was attending to the
incorporation. She added the other three directors by making the necessary entries. There
were no minutes of either the single original director or the members in general meeting
having passed any resolution to appoint the others. Those appointments were nonetheless
effective, in accordance with the well-known principle derived from Re Duomatic Ltd
[1969] 2 Ch 365, [1969] 2 WLR 114. The court could cure any want of formality under the power
[2014] 2 BCLC 116
took the view that consent sufficient to engage the Duomatic principle was not present, the
only consequence was that neither the transfer from Argyle to Mrs Davidson, nor the
allotment of an additional share to each of Mr Davidson and Pinz was effective. The
consequence would be that Argyle held one of two issued shares and was entitled to the
remedy.
110
[200]
The scope of the statutory discretion to fashion an appropriate remedy conferred by
section 996 could scarcely be wider: the court "...may make such order as it thinks fit for
giving relief in respect of the matters complained of." In making an order for purchase at
fair value the court was exercising its discretion to provide a remedy appropriate to the
circumstances of the case, with what constituted fair value being dependent on the whole
relevant circumstances. Since unfairly prejudicial conduct would almost always involve a
breach of the terms on which the parties agreed to carry on business together, the
ascertainment of those terms would almost always be a relevant factor in the assessment of
the appropriate relief.
[201]
As to the question of whether the Company was a quasi-partnership, the petitioners
relied on the line of authority following Ebrahimi v Westbourne Galleries Ltd [1973] AC 360,
[1972] 2 WLR 1289. In Strahan v Wilcock
[2006] BCC 320 Arden LJ
observed at [18] [20]:
"The question whether the relationship between shareholders constitutes a `quasi
partnership' is relatively easy to answer if the company's business was previously
run by a partnership in which the shareholders were the partners. It is indeed
common for partnerships to be converted into companies for tax or other reasons.
It is also relatively easy to establish whether a relationship between shareholders
constitutes a `quasi partnership' when a company was formed by a group of persons
who are well known to each other and the incorporation of the company was with a
view to them all working together in the company to exploit some business concept
which they have..."
"...Thus, it is important to ask whether at that point in time the company would
have been formed on the basis of a personal relationship involving mutual
confidence. It would also be appropriate to ask whether, under the arrangements
agreed between the parties, all the parties, other than those who were to be `sleeping'
members, would be entitled to participate in the conduct of the business. Likewise it
would be appropriate to ask whether there was a restriction on the transfer of the
members' interests in the company."
It was no bar to there being a relationship of quasi-partnership that the respective holdings
were not held by individuals but were taken via interposed companies: Re Sprintroom
111
[2019] BCC 1031. All of the typical characteristics of quasi-partnership were
present in the Company, at least from its incorporation until the defenestration of
Mrs Davidson in August 2022. The respondents' complaints about the petitioners' dealings
with the shares in the Company having broken down the parties' mutual trust and
confidence tacitly acknowledged that.
[202]
The remedy sought was orthodox: an order requiring the respondents to purchase
the petitioners' shares at a value to be assessed by the court, and with such adjustments as
might be appropriate to reflect the unfairly prejudicial conduct. On the assumption that the
Company was a quasi-partnership the default setting was that purchase should be without
discount for absence of control: O'Neill; Strahan; Sprintroom. The petitioners' 50% interest
in the Company, being equal to the respondents' interest, was not a minority interest
properly so called. In the more usual cases of this type the commercial value of a true
minority interest was depressed because the majority might carry any resolution required
for the ordinary business of the company without recourse to the minority's shares and so
would have no commercial requirement to purchase. In the present case, however, the
acquisition of the petitioners' shares would give the respondents the entirety of the issued
share capital, consequentially enhancing the value of their own shares. There was an
obvious "marriage" value which it would be wholly artificial to ignore, not only in terms of
control of the Company itself, but also in terms of the respondents being able fully to
integrate it with the group of other companies owned by them and which operated their
other Innoflate branches. No such value presented itself to the Davidsons.
[203]
There was a strong presumption that there should be no discount for minority status
in a quasi-partnership. The rationale for this was most clearly explained by Lord Millett,
112
giving the opinion of the Privy Council in CVC/Opportunity Equity Partners Ltd v Demarco
Almeida
"41. The rationale for denying a discount to reflect the fact that the holding in
question is a minority holding lies in the analogy between a quasi-partnership
company and a true partnership. On the dissolution of a partnership, the ordinary
course is for the court to direct a sale of the partnership business as a going concern
with liberty for any of the former partners who wish to bid for the business to do so.
But the court has power to ascertain the value of a former partner's interest without a
sale if it can be done by valuation, and frequently does so where his interest is
relatively small: see Syers v Syers (1876) 1 App Cas 174. But the valuation is not
based on a notional sale of the outgoing partner's share to the continuing partners
who, being the only possible purchasers, would offer relatively little. It is based on a
notional sale of the business as a whole to an outside purchaser.
42. In the case of a company possessing the relevant characteristics, the majority can
exclude the minority only if they offer to pay them a fair price for their shares. In
order to be free to manage the company's business without regard to the relationship
of trust and confidence which formerly existed between them, they must buy the
whole, part from themselves and part from the minority, thereby achieving the same
freedom to manage the business as an outside purchaser would enjoy."
Reference was also made to Re Bird Precision Bellows at p. 1389. On a proper analysis of the
authorities the contrary proposition that a discount would presumptively be appropriate
where the company was not a quasi-partnership did not follow. The high water mark of
that proposition was the dictum of Arden LJ in Strahan [17]. Having outlined the settled
presumption in favour of no discount being applied in quasi-partnership cases her Ladyship
went on to make the following observation:
"It is difficult to conceive of circumstances in which a non-discounted basis of
valuation would be appropriate where there was unfair prejudice for the purposes of
the 1985 Act but such a relationship did not exist. However, on this appeal I need
not express a final view on what those circumstances might be."
As was obvious, that observation was obiter. It was also tentative, not followed through in
any detailed analysis, and there was no indication that it was the subject of argument or that
the court received a full citation of authority. The eminence of Arden LJ and the strength of
the bench generally obviously lent it weight, but making all due allowance for that, it was
113
very difficult to see it as laying down any general presumption. Had the court intended to
do so it would have required to reconcile any such presumption with the unfettered
discretion conferred by the legislation, and with the apparently contrary dicta in prior
authority.
[204]
The subsequent case law tended to confirm that view. The dictum appeared to have
[2007] 1 BCLC 445
. It was
quoted with apparent approval in Fowler v Gruber. By contrast it was doubted, or at any rate
not followed, in each of Robertson, Petitioner [2009] CSOH 23 at [35]; Re Sunrise Radio
at [290] to [308]; Re Blue Index Ltd
[2019] 1
BCLC 171
[2020] 2 BCLC 50
at [194] to [216]; Waldron v Waldron
, [2019] BCC 682 at [138]; Otello
Corporation ASA v Moore Freres & Co LLC [2020] EWHC 3261 (Ch) at [237] to [235] and
[354] to [368] a hybrid position had been adopted,
that the discretion was broad and there was no presumption, but that as a working
hypothesis, one might assume that outside the quasi-partnership scenario, it would be a
very unusual case which called for no discount to be applied.
[205]
The most persuasive analyses of the authorities were those in Re Blue Index and Otello
Corporation. Reference was also made to Hollington on Shareholders Rights (10th Ed.) at
paras [8.51] to [8.56]. It was, however, clear that the number of cases in which no discount
had been applied in non quasi-partnership cases and the variety of circumstances in which
that course had been taken could not be reconciled with that being a wholly exceptional
114
course. The better view was that such an approach might be justified in a variety of
circumstances which were far from exceptional, and that it was unhelpful to overlay terms
like "exceptional" to what was better understood to be a broad discretion to reach a fair
outcome in an infinite variety of circumstances.
[206]
In the present case it was clear that there were several circumstances pointing away
from the imposition of a discount. The first was the obvious marriage value, with the
consequence that the imposition of a discount on the petitioners would generate a
substantial windfall for the respondents. On Mr Gouw's proposed discount of 25% the
petitioners' 50% holding would transact at 37.5% of the net value of the Company as a
whole. By necessary implication the respondents' shares must have an identical value since
they suffered from the same lack of overall control. But that would be cured by the
acquisition, and afterwards they would hold 100% of the value. The consequence of the
application of a 25% discount would be that they would pay 37.5% of the value of the
Company as a whole and in exchange receive the 62.5% of that value that they did not
already control. Such an outcome would reward them and penalise the petitioners for the
unfairly prejudicial conduct in which the respondents had engaged. Secondly, it was clear
that the circumstance which was material to the outcome in cases like Lloyds Autobody - that
the applicant's own egregious misconduct had wholly justified his exclusion from
management - was entirely absent in the present case. The respondents' attempts to
characterise the petitioners' dealings with the Argyle shares as some sort of misconduct was
eloquent only of their own bad faith and opportunism. Thirdly, the suggestion that the
petitioners might be brought within the category of those who did not pay full value for
their shares and so should not be entitled to expect to be bought out at full value was plainly
unfounded. All of the original shares were acquired at the same price the £1 par
115
subscription value. The value that had been generated was derived from the substantial
investment made by the members, in the form of unsecured loans advanced to the company
to fund its start-up costs and provide initial working capital, and to the efforts of the
directors, contributed without salary or other direct emolument, and in the case of the
petitioners without any other indirect interest. It was true that the loans made by the
petitioners had been repaid but so had the loans made by the respondents, and there was no
warrant for the proposition that in a loan of this type, which had as its only commercial
rationale the hope or expectation of increasing the value of the underlying equity
investment, repayment without interest was somehow sufficient reward for the commercial
risk taken. As with the marriage value already described, the consequence of such an
approach would be to expropriate the value from one shareholder and confer it gratuitously
on another. It was also true that the respondents or their employees undertook most of the
burden of management, but they did so by choice, and they did not do so gratuitously, but
on the basis of substantial charges imposed by them upon the Company in exchange for
such services. The court might reasonably conclude that but for the respondents' conduct
the most likely exit would have been by way of agreed sale of the whole of the business with
pro rata distribution of the proceeds. One test discussed in a number of the authorities was
whether the petitioners would be entitled to a winding-up on the just and equitable ground
were they to seek one. The significance of that in the present context was that the
consequence of winding-up would be distribution of any surplus among the members
pro rata. Not all unfairly prejudicial conduct would justify a winding-up. The respondents
had consistently suggested that winding-up was appropriate. It was clear that the
petitioners could satisfy the test for a just and equitable winding-up as explained most
recently in Lau v Chu
116
That was so regardless of whether the Company fell to be considered as a quasi-partnership.
It was also clear that the breakdown in the relationship was such that there was no realistic
prospect of the parties being able to work together in the future, and in that regard the
present case was similar to Jesner v Jarrad Properties Ltd 1993 SC 34, 1994 SLT 83, in which the
unfair prejudice remedy was refused but the court made clear that it considered the test for
winding-up to have been met.
Respondents' submissions
[207]
Senior counsel for the respondents moved the court to dismiss the petition with an
award of expenses in their favour. It had not been established that the conduct of the
respondents was either unfair or prejudicial to the Davidsons as members of the Company.
[208]
The petitioners claimed that the respondents forced commercial arrangements on the
Company which provided for grossly excessive payments to Pinz. However, the Davidsons
agreed to those commercial arrangements. Indeed, Mr Davidson had suggested the
arrangements which formed the basis of the agreement between the Company and Pinz and
had only complained about them many months later, when these proceedings were raised.
It was the breakdown of the parties' relationship which had led to the retrospective
characterisation of the charges as unilaterally imposed and unreasonable. In any event, the
payments to Pinz were not excessive, but rather were commercially reasonable. The
occasion in October 2022 when invoices had been raised without agreement was an isolated
incident, not subsequently repeated.
[209]
The petitioners further claimed that the conduct of the respondents was calculated to
destabilise the business of the Company, and to create artificial distress to drive down the
value in its business. However, the business of the Company was not destabilised by any
117
conduct of the respondents. Since the date when the petition was raised, the business of the
Company had suffered a downturn. It required to close for a brief period in October 2023,
because of an issue with the renewal of insurance for the site, which in turn was caused by
the existence of this litigation. In any event, the breakdown in the relationship of trust and
confidence amongst the parties resulted, in the main, from the transfer of shares from Argyle
to the Davidsons without the knowledge or consent of the respondents. In effect, the
conduct of the Davidsons prejudiced Pinz, and a breakdown of trust and confidence flowed
from that.
[210]
The petitioners averred that the cessation of management services by Pinz with no
other arrangements was an act which, if not restrained by the court, would cause significant
prejudice to the Company and to the petitioners. However, the services had never been
withdrawn. The threat to withdraw them had been the result of suboptimal legal advice
received from former agents, for which Pinz accepted responsibility. Nonetheless, it had
agreed to continue to provide the services for the benefit of the Company. Mr Margach and
Mr Anderson asked the Davidsons for alternative management proposals, on the basis that
the current arrangements could not continue in the circumstances. However, no such
proposals had been forthcoming, and inaction generally had been the Davidsons' policy
thereafter. The Davidsons had also failed to engage in the finalisation of any agreement to
continue the services indefinitely. In any event, any decision to terminate management
services had been a commercial decision, properly taken by the directors of Pinz.
[211]
The petitioners contended that the Company was a quasi-partnership. However,
there was a distinct absence of many of the features of a partnership. Mr Margach and
Mr Anderson carried out the day-to-day management of the Company. Mrs Davidson had
provided operations support to the wider Pinz group. Her role with the Company was one
118
aspect of her role with the wider group. Mr Davidson had a very limited role in the
Company. It was anticipated that he would assist with identifying further properties at
which inflatable parks could be opened. However, no further sites were identified by him,
nor were any further sites opened by the Company. He had no role with the day-to-day
running of the Company. In essence, the Davidsons were passive investors in a business
which Pinz was operating. There was no agreement or understanding that all parties would
be involved in running the business. All parties were not, in fact, involved in the running of
the Company. That could be seen by the general lack of engagement in the operations of the
Company by the Davidsons.
[212]
In these circumstances, the respondents submitted that the petitioners had failed to
establish a case of unfair prejudice in relation to any one or more of each of the three limbs
of their case against the respondents.
[213]
If the court was persuaded that such a case was made out and that an order ought
properly to be made in terms of sections 994 and 996 of the 2006 Act, a discount of 25%
ought properly to be applied to the valuation of the petitioners' shares. The Company was
not a quasi-partnership. Even if the court found that it was, it should exercise its discretion
in reaching a fair value for the shares of the Davidsons to apply a discount of 25% in any
event.
[214]
"The key principles applicable to the court's task in identifying unfairly prejudicial
conduct of a company's affairs are summarised by Lord Hoffmann in the decision 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 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
119
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
test is whether a 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] 2 BCLC 1, 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])."
[215]
In Gray v Braid Group (Holdings) Limited [2015] CSOH 146, Lord Tyre had noted
at [22] to [23]:
"22. The petitioner must therefore prove both prejudice and unfairness.
23. The concept of fairness must be applied judicially and the content which it is
given by the court must be based upon rational principles: O'Neill v Phillips
[1999] AC 1092, Lord Hoffmann at 1098. Lord Hoffmann went on to observe: `...A member
of a company will not ordinarily be entitled to complain of unfairness unless there
has been some breach of the terms on which he agreed that the affairs of the
company should be conducted. But... there will be cases in which equitable
considerations make it unfair for those conducting the affairs of the company to rely
upon their strict legal powers. Thus unfairness may consist in a breach of the rules
or in using the rules in a manner which equity would regard as contrary to good
faith."
[216]
In Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, Lord Hoffmann had previously
observed (pages 17-18):
"In deciding what is fair or unfair for the purposes of [what is now section 994], it is
important to have in mind that fairness is being used in the context of a commercial
relationship... Since keeping promises and honouring agreements is probably the
most important element of commercial fairness, the starting point in any case under
[section 994] will be to ask whether the conduct of which the shareholder complains
was in accordance with the articles of association.
The answer to this question often turns on the fact that the powers which the
shareholders have entrusted to the board are fiduciary powers, which must be
120
exercised for the benefit of the company as a whole. If the board act for some ulterior
purpose, they step outside the terms of the bargain between the shareholders and the
company... The fact that the board are protected by the principle of majority rule
does not necessarily prevent their conduct from being unfair within the meaning of
[section 994]..."
[217]
In Jesner v Jarrad Properties, the court had held that conduct which prejudiced a
petitioner might not necessarily be unfair. The case involved two companies run as a single
entity with little or no regard paid to the constitutional provisions of either of them. That
was held not to be unfair because the petitioners had known and agreed to or acquiesced in
the arrangement.
[218]
Conduct might be unfair but not prejudicial. For instance, in Rock (Nominees) Ltd v
RCO (Holdings) Plc (In Members Voluntary Liquidation)
[2004] 1 BCLC 439, the Court of Appeal found that the directors of a company had acted unfairly by
entering into a transaction on behalf of the company in relation to which they were
conflicted. However, the court refused a remedy to the petitioner on the grounds that the
petitioner was not prejudiced.
[219]
In Martin v Hughes, Lord Clark noted at [53]:
"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".
[220]
In Re Elgindata (No.1) [1991] BCLC 959, the court did not accept that mismanagement,
as such, amounted to unfair prejudice, unless it amounted to serious mismanagement. The
court would not order a respondent to purchase a petitioner's shares if the prejudice to the
121
petitioner was not significant and the petitioner was in effect a passive investor: Hale v
[2007] 1 BCLC 520.
[221]
The petitioner's heads of claim for unfair prejudice commenced with the allegation
that commercial arrangements forced on them provided for grossly excessive payments to
Pinz. However, the arrangements in question were not forced on the Davidsons. Indeed,
the arrangements in question had been put forward by Mr Davidson. An amicable
agreement had been made. The parties had originally discussed setting up the Company as
a franchise. It was implicit in those discussions that there would be an associated fee
payable to the franchisor. Agreement was, in fact, reached on the payment of such a fee.
The Davidsons also desired that the Company be run with management services being
provided by Pinz. On that basis, it was difficult to see how any arrangement in that regard
was forced on the Davidsons. It would have been open to them to seek, before trading
began, to have different management services or not to run as a franchise. The petitioners
clearly had input into the feeing arrangements, and confirmed their agreement to the
arrangements which were implemented. In any event, the petitioners' case essentially rested
on the basis that the fees charged by Pinz were excessive. The fees charged by Pinz were
reasonable and in line with the market. Mr Margach and Mr Anderson were very familiar
with that market. The Davidsons were not. Their contention that the fees were not at
market rate was not grounded in any factual basis. The petitioners did not offer to prove
what a reasonable fee would have been for the services. They did not appear to have gone
out to canvas the market. No averments were made as to what would be reasonable, in the
circumstances. In the circumstances, the respondents' conduct was not unfair or prejudicial
to the Davidsons.
122
[222]
The next allegation was that the conduct of the respondents was calculated to
destabilise the Company and create artificial distress to drive down its value. The basis of
that allegation was not clear. Any alleged conduct on the part of the respondents did not
drive down the value of the business. A drop in business after initial success was to be
expected. The actions taken by Mr Margach and Mr Anderson in relation to the removal of
management services was not proposed to destabilise the Company. Pinz was a shareholder
in the Company. Any diminution of the value of the Company would have been adverse to
its interests. In any event, the proposal to withdraw the services of Pinz did not destabilise
the Company. The services were not withdrawn. The allegation that the behaviour of
Mr Margach and Mr Anderson was motivated by a desire by them to acquire the Davidsons'
shares at undervalue had not been made out. The breach in the relationship between the
parties resulted from the purported transfer of the shares from Aryle to the Davidsons, and
the associated breakdown of trust and confidence. In effect, the Davidsons' conduct
prejudiced Pinz, and a breakdown of trust and confidence flowed from that. The
petitioners' real issue was simply that there had been a breakdown in the relationship
between the parties. That was insufficient to warrant the granting of any order in terms of
sections 994 and 996 of the 2006 Act. There had been a dispute regarding the fees charged
by Pinz. However, the parties resolved that issue and moved on with running the
Company. It was some time later, when the share transfer was discovered, that there was a
threat to withdraw the services of Pinz. At that point, the relationship of trust and
confidence between the parties had arguably already broken down. In any event, the link
between the threatened removal of services and any alleged destabilisation of the business
was not clear. The business of the Company continued, and the management services had
not been withdrawn. If anything destabilised the business and diminished its value, it was
123
the present litigation and the concomitant issues with the insurance renewal process.
The going concern issue had been raised by Mr McQuade, and Mr Margach and
Mr Anderson considered, as directors of the Company, that that was an issue which
required to be considered. Ultimately, the issue was resolved, and the accounts were lodged
on the basis that the Company was a going concern. There was no unfairness or prejudice to
the petitioners in that regard. The provision of management services had not ceased.
Mr Margach and Mr Anderson sought alternative management proposals from the
Davidsons, but none had been made.
[223]
In a quasi-partnership, understandings or arrangements about the future
management of the company commonly existed between the members. In Re Westbourne
Galleries Ltd [1973] AC 360, [1972] 2 WLR 1289, the company 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. The issue was whether the relevant company should be
wound up on a just and equitable basis. Lord Wilberforce noted at 379:
"The 'just and equitable' provision does not, as the respondents suggest, entitle one
party to disregard the obligation he assumes by entering a company, nor the court to
dispense him from it. It does, as equity always does, enable the court to subject the
exercise of legal rights to equitable considerations; considerations, that is, of a
personal character arising between one individual and another, which may make it
unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.
... There are very many of these where the association is a purely commercial one, of
which it can be safely be said that the basis of association is adequately and
exhaustively laid down in the articles. The superimposition of equitable
considerations requires something more, which typically may include one, or
probably more, of the following elements: (i) an association formed or continued on
the basis of a personal relationship, involving mutual confidence - this element will
often be found where a pre-existing partnership has been converted into a limited
company; (ii) an agreement, or understanding, that all, or some (for there may be
'sleeping' members), of the shareholders shall participate in the conduct of the
business; (iii) restriction upon the transfer of the members' interest in the
company - so that if confidence is lost, or one member is removed from management,
he cannot take out his stake and go elsewhere."
124
Reference was further made to the observations of Lord Clark in Martin v Hughes at [49] set
out above.
[224]
The Company did not operate as a quasi-partnership. The business was run
day-to-day by Mr Margach and Mr Anderson using the Pinz brand. Mrs Davidson
provided operational support to the wider Pinz group. Mr Davidson had a limited role, and
no role in relation to the day-to-day running of the business. The Davidsons were passive
investors in a business which Mr Margach and Mr Anderson were already running. That
was borne out by the lack of engagement, particularly by Mr Davidson.
[225]
As to the questions of valuation and discount, Lord Clark in Martin v Hughes stated:
"[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/Opportunity Equity
[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 prejudice held to be established: Re Abbington
that prima facie an interest in a going concern ought 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
125
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
[226]
A finding that there was a quasi-partnership created a general presumption that the
minority interest should be purchased without a discount: Re Bird Precision Bellows Ltd. The
rationale for applying a minority discount was summarised in Re Blue Index Ltd at [48]: "the
discount that should be applied to reflect the lack of control that a minority shareholder has
over the management of a company in contrast to the control that a larger shareholder has".
In Irvine v Irvine at [11] it was noted that "...there is no reason to accord to it [a minority
shareholding] a quality which it lacks".
[227]
Regarding non quasi-partnerships, Arden LJ noted obiter in Strahan v Wilcock at [17]
that "It is difficult to conceive of circumstances in which non-discounted basis of valuation
would be appropriate where there was unfair prejudice..." In Re Edwardian Group Ltd it was
stated at [640] that: "Any basis of valuation selected must be fair in all the circumstances. It
must also provide a remedy that is proportionate to the unfair prejudice suffered by the
Petitioners". In Re Dinglis Properties Ltd it was noted at [367] that the court had a broad
discretion and must:
"try to arrive at a valuation method which is fair in light of the facts of the case,
including the nature of the unfair prejudice identified. As a working hypothesis I am
prepared to assume that, outside the quasi-partnership scenario, it will be a very
unusual case which calls for no discount to be applied."
[228]
The Company was not a quasi-partnership. A discount should thus be applied for
the Davidsons' minority shareholding. The suggested discount of 25% proposed by
Mr Gouw was reasonable and should be applied. If the court should find that the Company
was in fact a quasi-partnership, a discount of 25% should nonetheless be applied to any
126
order made against the respondents to purchase the Davidsons' shares. The application of
such a discount would be fair in circumstances where the Davidsons essentially paid
nothing for their shares, had had their initial loan investment repaid, and had little to no
involvement in the running of the Company.
Discussion and decision
[229]
This case raises no particularly novel question of law; as with most petitions raised
in terms of section 994 of the 2006 Act, the legal framework against which the dispute falls to
be decided is capable of clear, if somewhat abstract, expression and the court's task is to
determine such disputed issues of relevant fact as may exist and fit its findings into that
existing legal framework. I observe only that, when assessing how the Company's affairs
have been conducted, although it may frequently be tempting in the course of the analysis to
split the notion of unfair prejudice into its constituent parts of unfairness and prejudice, it is
important to remember that the statutory concept is a unitary one and that to draw artificial
distinctions between its two ingredients risks distorting it unnecessarily and unhelpfully.
In this case, there is no shareholders' agreement and no suggestion that any breach of the
Company's Articles (of which there were plenty, since the existence and content of the
Articles never seems to have impinged upon the thought processes of any of the individuals
involved) amounted to the unfairly prejudicial conduct of the Company's affairs. The focus
will therefore be on whether the Company's directors relevantly breached their duties to it,
or whether the affairs of the Company were conducted contrary to shared understandings
and expectations which equity required in all the circumstances to be observed.
127
The witnesses
[230]
Some initial indication of the impressions I gained about the various witnesses in the
course of the relatively lengthy proof may serve to provide a context illuminating the views
I have formed about the issues which divide the parties. It is also appropriate to note here
that I formed the general but distinct overall impression that, once the litigation commenced,
a rather performative element appeared in the behaviour of both sides, by which I mean that
everything done or left undone, said or left unsaid, happened with at least one eye on how it
might eventually play out before the court. That element requires to be taken into account
in assessing the true significance of various events which were examined critically in the
course of the proof.
[231]
Mr Davidson was, as his resumé evidences, an experienced and accomplished
businessman, with all the insight and acumen which that entails, albeit his involvement in
the Company was very much a sideline to his principal employment and, at least until
August 2022, secondary and consequential to that of his wife. He was evidently much
aggrieved (and justifiably so) about her treatment by the respondents at that point, and it is
impossible to conclude that his views about how certain subsequent events should properly
be characterised were unaffected by that or by the broader views which he had by that point
formed about the characters of Mr Margach and Mr Anderson. However, on matters of
substantive fact of which he had direct knowledge, I had no concerns about his credibility or
reliability.
[232]
Mrs Davidson, likewise, gave her evidence in a clear, straightforward and
convincing manner, although from time to time she appeared, naturally enough, to find it a
little difficult to recount events which were unpleasant to recall. After her sacking for that
is what it was in August 2022, she took more of a back seat in the affairs of the Company
128
and left matters primarily to her husband, resulting in her evidence about subsequent events
being less direct and weighty than his. However, in general terms she gave her evidence in
all good faith and I had no reason to doubt her general credibility and reliability.
[233]
Mr Margach is relatively young to have become successful in business to the extent
that he has. It is clear that that success has not been accidental, and that he has a keen
appreciation of business opportunities and risks in his field. However, there was in him a
certain naivety, especially when it came to reliance upon the professional advice of others,
especially lawyers and accountants, which, it seemed to me, he tended to follow with
something of a blind and at times uncomprehending faith. It was hard to see him as
someone who could form and subsequently implement a plan involving any degree of
cunning to do down the Davidsons and their interest in the Company. I found him a
fundamentally honest witness, able genuinely to accept that he had on occasion made
mistakes in his dealings with the Davidsons, and had in some regards acted in a way which
he now regretted, which was all to his credit.
[234]
Mr Anderson was in essentially the same position as Mr Margach, in general terms
honest, perhaps a little tougher in attitude, but likewise without the nous or indeed guile
that would be necessary to engage in the sort of determinedly nefarious behaviour of which
he was accused. Again, he accepted that his behaviour towards the Davidsons could
properly be criticised, although as the proof had developed, by the time he gave evidence
that would have been a difficult concession to withhold.
[235]
The more minor witnesses in the case presented as a mixed bag. Mr Dunbar's initial
evidence was as casual as his demeanour. He could not at first see that there might be any
issue at all with the role that Johnston Carmichael had played in events, and when he came
to appreciate that there was, made the unwise decision to double down on his assertions
129
that nothing unusual had happened, leading him to adopt unsustainable positions on, for
example, why he had not provided the draft statutory accounts to the Davidsons' solicitors
on their request. Ultimately his evidence had an overall unsatisfactory quality, but the
petitioners' case in relation to the matters in which he was involved would require him to
have been either a conspirator with the respondents, or at least their useful idiot, and I did
not find either of those characterisations of him as convincing.
[236]
Mr McGee was a somewhat curious witness. Before he appeared in the witness box,
I had formed the impression that he had been brought in by Pinz as some kind of hardline
frontman tasked to deal with Mr Davidson's ability robustly to defend his interests, and
those of his wife, in the Company's affairs. However, on appearance it became clear that his
favourite topics were social responsibility and business morality, on which subjects he
expatiated frequently when given the chance, and which lent his evidence a somewhat
ethereal air in the context of a hard-fought commercial dispute. I am not sure quite what I
would have made of his evidence had anything of materiality turned on it, which happily
transpired not to be the case.
[237]
Mr McQuade declared himself at one point in his evidence to be a numbers man
rather than a words man, an overall self-assessment with which I found it difficult to
disagree. Again, the suggestion that he was conscripted into, or otherwise consciously
lending his aid to, a scheme which would devalue and destabilise the Company to the
detriment of the Davidsons seemed to me to involve an over-estimation of his relative
comprehension what would be required to that end.
[238]
Mr Cole's brief evidence was uncontroversial.
130
Assessment of the allegations of unfair prejudice
[239]
It is next convenient to set out in some detail my assessment of the allegations of
unfairly prejudicial conduct of the Company's affairs which have been made by the
petitioners. It is common ground that the idea to set up the business which came to be
carried on by the Company was hatched by Mr Margach and Mrs Davidson, whose
friendship formed in the adversity created by the Scottish Government's reaction to the
pandemic was the key relationship amongst the parties. They saw some synergy between
the Pinz business in the state it was in towards the end of the pandemic (ie laden with
unaccustomed debt and with an exhausted senior management) and Mrs Davidson's skills
and experience. Their respective partners went along with the idea, albeit seemingly
without their degree of enthusiasm. It was obvious to anyone who cared to think about it
that the Company's business model, that is to say the operation of a facility which would
use the brand and services of Pinz but would be owned 50/50 by Pinz and the Davidsons,
immediately presented at least the potential for conflict between the two interests.
However, that notwithstanding, the terms upon which Pinz would provide its brand and
services to the Company, and in particular the charges that it would levy in those regards,
were apparently left unagreed. There was mention in the evidence of a business plan which
seems to have existed at or around the time of the Company's formation, but somewhat
mysteriously neither side presented it in evidence and I can accordingly make nothing of
whatever its contents might have been. In their haste to work together, the
parties - assuming the continuation of an amicable relationship simply left over for future
agreement the details of the commercial arrangement between Pinz and the Company,
thereby creating the core instability which, as matters turned out, has led them to the court.
131
[240]
The Company's business was immediately successful, money flowed in, its debts
were paid and handsome dividends were issued. For a while trouble loomed no more
pressingly than would a small cloud on the horizon. However, Mrs Davidson's mode of
working came to annoy, in particular, Mr Anderson. Again, there had been no precise
working out of their respective roles and responsibilities, and he formed the view that she
was not only treading on his toes, but was altogether too big for her boots. The difficulties
which had seemed to assail Pinz during and at the end of the pandemic were rapidly
receding, and it came to appear to Mr Anderson, and through him to Mr Margach, that the
Davidsons were the answer to a problem that no longer existed, and indeed had rather come
to represent a burden to which they had unwisely hitched themselves. The result was
the - to the outsider somewhat puzzling engagement of Mr McGee, apparently as some
variety of corporate Svengali, the dumping of all existing plans for future collaboration with
the Davidsons, and the sudden and brutal dismissal of Mrs Davidson from her job as
Operations Director for Pinz in August 2022. From that point on, the conflict which had
until then been simply a potential became all too real. Mrs Davidson was deeply hurt by
what had been done to her, Mr Davidson was livid about her treatment, and the Pinz
interest had come to see the Davidsons as a dead weight best shrugged off. It was out of
that toxic mix that the events which form the subject-matter of the present litigation
emerged.
[241]
A somewhat fraught shareholders' meeting in September 2022 produced the
framework for a future business relationship which neither side particularly wanted to
continue. It was agreed in principle that Pinz would have to be paid for what it had
provided to the Company and what it would in future be providing, and that while the
details of that were being bottomed out, it would in the meantime be entitled to recharge an
132
appropriate proportion of the head office expenses which it was incurring in servicing the
Company and other Innoflate outlets. What then followed was the key episode in the events
forming the subject-matter of the litigation. That episode was triggered in mid-October 2022
by Mr McQuade issuing substantial invoices on behalf of Pinz to the Company, and to some
extent accessing its bank account and taking payment therefor, in relation to sums which
had not been agreed as due. It was suggested on behalf of the petitioners that this was a
deliberate move on the part of Mr Margach and Mr Anderson, designed to assert the
dominance of Pinz over the Company and to denude it of funds which were not properly
due to Pinz. However, Mr Anderson had no usual involvement with the invoicing processes
of Pinz, and I accept his evidence that he knew nothing about what happened in this
instance before it had been done. Mr Margach would normally have had responsibility for
initiating or at least approving any invoicing by Pinz that was out of the ordinary, but was
unable to recall having been involved before the event in this instance and seemed
genuinely puzzled by how it had happened. Ultimately, I understood Mr McQuade to
accept responsibility for the issue of the invoices in question and the taking of the money
from the Company's account. He did that on the basis of an imperfect understanding of
what had and had not been agreed at the September meeting and from some rather vague
exchanges which he had in the meantime had by email with Mrs Davidson. I thus find that
the issue of the invoices which were not due, and the taking of money from the Company
account, was the result of carelessness or lack of understanding on the part of Mr McQuade
rather than any deliberate attempt by Mr Margach, Mr Anderson or Pinz to seize money
from the Company. The money taken which was not then due was ultimately credited to
the Company against sums subsequently agreed to be due by it to Pinz, so no ultimate
detriment was suffered by it in that regard. Although the September meeting had agreed
133
authorisation limits for the taking of money from the Company's account, and the amount
taken exceeded what could properly be taken without the Davidsons' authorisation, in my
view the amounts agreed at the meeting were intended to relate to expenditure on the
Company's day-to-day activities, rather than to any liability being accrued to Pinz.
It follows that I do not regard this particular aspect of events as an example of unfairly
prejudicial conduct of the Company's affairs.
[242]
However, the issue of the invoices and the taking of the money from the Company's
accounts naturally provoked a reaction on the part of the Davidsons, who heard about it
when trying to enjoy a relaxing holiday abroad with their children. What had happened up
to that point in time had resulted in a lack of trust between them and Pinz, which was now
transformed into positive and active mistrust. Mr Davidson, understandably enough,
complained bitterly about what had happened, resulting in what can only be described as a
muscular negotiation on the part of Pinz as to the amounts which were to be payable to it by
the Company, backed by a threat, intended to be taken seriously, to withdraw its brand and
services from the Company in the absence of agreement. Against that background,
ultimately Mr Davidson suggested a charging structure between Pinz and the Company and
that was agreed, implemented and (more or less) observed thereafter. It will be necessary to
examine more closely in due course the legal significance of those events. For now, it
suffices to say that they resulted in what can only be described as a cold war between the
Davidsons and the Pinz interest in the Company. Neither side wanted the status quo to
continue, but equally neither made, at that stage, any realistic suggestion as to how it might
be brought to a mutually-satisfactory end. A written contract, promised by Pinz, to set out
the nature of the relationship between it and the Company as agreed in October, did not
materialise, although Pinz procured a professionally-prepared draft of such a contract which
134
it never shared. Equally, the Davidsons never pressed the matter. The fact was that both
sides regarded the arrangements arrived at in October 2022 as the terms of an uneasy
armistice rather than as the basis for any lasting peace.
[243]
The cold war heated up again in March 2023, when the issue of the share
reorganisation was raised at the meeting amongst Mr Davidson, Mr McGee and
Mr McQuade, unexpectedly so far as the former was concerned. An attempt was made on
the part of the respondents to present this merely as part of a neutral fact-finding exercise,
but it plainly was no such thing. Rather, it was part of a premeditated plan to identify and
prosecute a fresh casus belli against the Davidsons. Consideration must at this point be given
as to whether Mrs Davidson's version of events, viz. that Mr Margach and Mr Anderson had
at the end of 2021 been told about, and agreed to, the restructuring of the Company's
shareholding so as to remove Argyle and substitute the Davidsons, or that of Mr Margach
and Mr Anderson, that no such thing had occurred, is to be preferred. This issue represents
the major (indeed perhaps the only) substantive dispute about a matter of primary fact in
the case. I prefer Mrs Davidson's account, for two principal reasons. Firstly, her evidence
on the matter was given in a definite and straightforward manner, with no discernible
difference between this chapter of her evidence and chapters in relation to which no dispute
arose. By contrast, at least initially the evidence of both Mr Margach and Mr Anderson was
much more tentative on the subject, with each preferring to say at first that he did not recall
or did not think that the matter had been raised and agreed. Although upon being pressed,
particularly in cross-examination, the evidence of each became more definitive, overall the
impression given by their evidence in comparison to that of Mrs Davidson on the subject
was unfavourable. Secondly, and probably more tellingly, there did not seem to be any
reason why Mrs Davidson would have sought to withhold from Mr Margach or
135
Mr Anderson what she and her husband wanted to do about the ownership of the
Company. At the end of 2021, and well into 2022, the parties were still on entirely amicable
terms. Neither Mr Margach nor Mr Anderson could suggest any reason why they would
have refused to consent to the proposed change had they been asked to do so at the relevant
time, or why the Davidsons might have conceived that they might do so. At around the
same time, each had agreed without any issues to the substitution of the Davidsons for
Argyle in the membership of DRSA, which replaced DRS as the vehicle then intended to be
part of the future arrangements amongst the parties. It makes no sense that in these
circumstances Mrs Davidson would not have asked Mr Margach and Mr Anderson also to
agree to the apparently uncontentious proposed changes in the Company's membership
structure, but rather would have preferred to proceed in secret, particularly since those
changes would inevitably in due course have to become part of the public record of the
Company's shareholders, and thus incapable of sure concealment. My conclusion that,
through Mr Margach and Mr Anderson, Pinz agreed to the share reorganisation, entails that,
by the operation of the Duomatic principle, Argyle is no longer a member of the Company
and that both of the Davidsons are.
[244]
That conclusion also raises the question of why Mr Margach and Mr Anderson chose
to make such an issue of the share reorganisation in March 2023. By that time, of course, the
landscape around the Company had changed dramatically, as already described. It is
possible that by that stage they had simply forgotten about what would have been regarded
at the end of 2021 by all concerned as an entirely inconsequential affair. Alternatively and
I think more plausibly they may have been given to understand by someone involved in
the affairs of Pinz or advising it that the share reorganisation was something that could be
weaponised against the Davidsons, and they were prepared to try to use it as such. In their
136
pleadings and in the earlier part of the proof diet, the respondents' articulated ground of
complaint about the share reorganisation was that, were Argyle to fall into liquidation, and
its liquidator to succeed in reversing the share transfer to the Davidsons on the ground of
inadequate consideration, Pinz could end up in business with an insolvency practitioner and
anyone to whom he sold the Company's shares. I do not consider that either Mr Margach or
Mr Anderson had thought of that possibility themselves, or even really understood it.
When I pointed out that, had Argyle remained a member of the Company and gone into
liquidation, exactly the same result would have been arrived at, and more directly, the wind
seemed to go out of those sails and the focus came to be on how the supposedly secret
reorganisation had finally and irrevocably undermined any trust and confidence which Pinz
had in the Davidsons. That narrative came to be bolstered by the respondents' evidence
about Mrs Davidson's apparent attempt to sell the Davidsons' shares in the Company to the
business rival of Innoflate and the gossip which had come to their ears about the Davidsons'
falling-out with the person to whom the assets of "Whale of a Time" had been sold in
circumstances which supposedly reflected badly on them. However, it remained an
unconvincing narrative, not least because the parties had thought nothing good of each
other since the last quarter of 2022.
[245]
Howsoever exactly it suggested itself to them as a good idea, Mr Margach and
Mr Anderson were prepared in March 2023 to try to make the share reorganisation a major
issue in the parties' relationship. A letter was issued at the meeting on 20 March repeating
the threat of October 2022 to terminate the services provided by Pinz to the Company.
A further letter, drafted by the respondents' then solicitors but signed by Mr Margach and
Mr Anderson on behalf of Pinz, was sent 3 days later further threatening to remove its
services (this time on a month's notice) and demanding that the Davidsons should sign over
137
their shares in the Company to Pinz for £1 each and resign as directors. Mr Margach and
Mr Anderson signed that letter despite failing to understand much of what it said in relation
to matters corporate. For example, the letter claimed that Pinz could have exercised
pre-emption rights over the initial Argyle share in the Company, rather than allow it to be
transferred. Not only was that inaccurate, but Mr Margach and Mr Anderson each accepted
at proof that they did not even know what pre-emption rights were. They accepted, with
the benefit of hindsight, that sending the letter had not been a good idea, but blamed it on
bad advice received from the former solicitors instructed by Pinz. That may or may not be
the case, but it does not absolve them of responsibility for its contents. Had the letter and its
contents represented unfairly prejudicial conduct of the Company's affairs, they would have
had to accept that they, and through them Pinz, were to blame for that.
[246]
However, the overall tone and content of the letter were nothing short of risible, and
the Davidsons, whether on their own account or because they were better advised, did
nothing of what was demanded of them. Indeed, they used the letter as part of their
complaints in this litigation, turning its contents back against the respondents. The services
of Pinz continued to be supplied without interruption and the Company carried on trading
regardless. In the event, although things could easily have turned out differently, the
respondents' letters of March 2023 contained nothing which made any difference at all to the
course of the Company's affairs.
[247]
It might be said that the repeated threat abruptly to withdraw the Pinz services
resulted in an uncertainty about the Company's ability to continue its business in an orderly
manner, but the reality was that by March 2023 all parties were aware that that threat was a
hollow one. The respondents disclosed in the course of the proof that they had been advised
that any attempt to withdraw the services of Pinz in a manner that would have dislocated
138
the Company's ability to carry on business without interruption would in all probability
have been prevented by the court. That advice was patently well-founded; the services
being provided by Pinz were being furnished routinely by it as part of its ordinary business
and it was being paid the fees which had been agreed to be due for them. Any suggestion
that the Innoflate brand was somehow being tarnished by association with the Company
because of the Davidsons' share dealings or other behaviour (about which those outside the
corporate circle knew and must be reckoned to have cared nothing) would not have been
taken seriously. When this litigation commenced in May 2022, an application for interim
interdict against the abrupt removal of services was indeed made, in the face of which the
respondents undertook to maintain them, and renewed that undertaking from time to time
as and when required, without the matter ever having to be ruled upon by the court. If the
emptiness of the threat was obvious to the respondents, it must have been equally clear to
the Davidsons. Indeed, so far as the evidence disclosed, they took no steps to ascertain
whether alternative sources of the services being provided by Pinz could be secured until
June 2022, after the current litigation had commenced, and even then at a fairly abstract
level, by way of general suggestions which were not taken further when the respondents
expressed relatively mild dissatisfaction about them. Had the threats to withdraw services
been taken seriously by the Davidsons, they would undoubtedly have taken steps to protect
the Company's interests in that regard more definitely and vigorously at the time. Such
steps could have been taken by them, whether in conjunction with or, if need be,
independently of Mr Margach and Mr Anderson, at any time. However, once the action was
raised, both sides proceeded on the basis that the affairs of the Company were then under
the ultimate supervision of the court and that their dispute was going to be resolved by it,
rather than by their own efforts. That was a realistic attitude for them to take. The threat to
139
withdraw services made in March 2022 and ostensibly maintained thereafter was seen by all
concerned as nothing more than sable-rattling. The events of March 2022 made it clear that
the truce which had held since the previous October was over, but had no wider significance
for present purposes. In particular, I do not accept that in March 2022, or at any other point
in time, those representing the Pinz interest set out deliberately to destablise or devalue the
Company. Insofar as they may be regarded as having launched any form of attack, their
consistent target was the Davidsons themselves, not the Company.
[248]
The only immediate result of what occurred in March 2022 was that each side made
offers to buy out, or be bought out by, the other at prices or mechanisms which were never
going to be acceptable. It became quite clear that if the hostilities were going to end, that
would require external intervention, and this litigation eventually commenced in May.
[249]
In March and April 2022 the question of whether or not the Company's accounts
could be drawn on the basis that it was a going concern began to emerge, although it was
not eventually resolved until October. This episode began because Mr McQuade, being
aware that the threat to remove the Pinz services had been made and was supposed to take
effect from 20 April 2022, persuaded himself that in those circumstances there might be
material doubt as to whether the Company could continue to trade for the next 12 months.
With Mr Margach's permission, he referred that question to Mr Dunbar for external advice.
What followed could well, in hindsight, be interpreted as a deliberate attempt to
manufacture an apparent existential crisis for the Company, enlisting the assistance (witting
or otherwise) of the Pinz accountants, Johnston Carmichael, to that end. An extensive and
impressive attempt to analyse and present matters in that light was made by counsel on
behalf of the petitioners. However, given the nature of the characters involved, I have
without much difficulty formed the view that the whole episode falls to be regarded as one
140
of bumble and blunder rather than anything more sinister. Mr Dunbar may have been
somewhat inclined to oblige his client Pinz rather than anyone else, but whatever his faults
(which included a lack of circumspection and an unfortunately infelicitous mode of
expression), was not someone prepared knowingly and thoroughly to compromise his
professional integrity. Mr McQuade was well aware of the mood music in the Pinz
community, that the Davidsons were a thorn in the side of the group that it would be well
rid of, and would, I think, have been inclined to do what he reasonably could to ingratiate
himself with Mr Margach in that regard. He may have been a little over-enthusiastic in
seizing upon and reacting to the careless statements being made by Mr Dunbar, but
ultimately I accept that, from his accountant's point of view and way of thinking, he
genuinely thought that the going concern issue was a real one which needed to be taken
seriously, and acted accordingly. He and Mr Dunbar rather fed off each other in that
respect. I do not believe that either Mr Margach or Mr Anderson had any real grasp of the
nuances of the going concern issue; as usual, they had a successful corporate group to run,
they took advice from appropriate professionals as and when it seemed to be required, and
they acted upon the advice received. It is difficult to see how they can be faulted for that.
Equally, the actions of the Davidsons in relation to the going concern issue are not beyond
criticism. Whether they thought there was a genuine problem or not, they were asked to
attend a meeting with the Company's accountants to discuss and resolve any issue with the
draft accounts and simply ignored that invitation, in any variation, for a lengthy period. In
those circumstances it takes considerable chutzpah now to maintain that the going concern
episode was an example of their exclusion from the management of the Company.
[250]
The ultimate lapse in the Company's insurance cover, which undoubtedly prejudiced
it, was entirely a product of the going concern issue and the consequent failure of the
141
Company timeously to lodge its statutory accounts. It appeared to be common ground in
the litigation that neither side intended or wanted that lapse to happen, and when it did,
Mr Davidson became engaged for the first time in seeking to resolve the issue, and the
respondents in turn put their undertaking not to remove the Pinz services onto a more long-
term footing. The whole sequence of events illustrates that the core problem facing the
Company lies in the failed personal relationship amongst the corporators rather than
elsewhere.
[251]
Another similar example can be found in the electricity issue. During the course of
the proof, each side alleged that the other had put Dobbies up to raising that matter and
demanding payment from the Company. Ultimately it came to be accepted that the simple
truth was that Dobbies had belatedly realised that it had been paying for the Company's
considerable consumption of electricity for many months and, naturally enough, was not
prepared to continue to do so. The electricity issue remains relevant only in relation to the
valuation of the Company, but the fact that each side was quite prepared to make
unfounded allegations about it well illustrates the state of suspicion and mistrust into which
the parties' relationship had fallen by at least the latter quarter of 2022 and thereafter.
[252]
In summary, I do not consider that any of the matters complained of by the
petitioners amounts, objectively viewed, to the conduct of the Company's affairs in a
manner that has unfairly prejudiced their interests as its members, with the possible
exception of the events in October 2022 which settled the future arrangements between the
Company and Pinz in respect of the provision to the former of the latter's brand and
services, to which I now turn for a more detailed examination.
142
Events of October 2022
[253]
The essential submission for the petitioners in relation to the negotiation which took
place in October 2022 about the charging arrangements between the Company and Pinz was
that Mr Margach and Mr Anderson were in breach of their fiduciary duties as directors of
the Company in advancing the interests of Pinz over those of the Company, or at least in
attempting to reconcile the conflicting interests which it was their duty faithfully and
separately to advance. I do not consider, however, that matters can be viewed in quite such
simplistic terms. It was quite plain to all that, in the negotiation (including in making, for
the first time, a threat abruptly to withdraw the services of Pinz), Mr Margach and
Mr Anderson were acting in their capacity as directors of Pinz, and were presenting the
position of Pinz to the Davidsons (and in particular Mr Davidson), who alone represented
the interests of the Company. There was no question of Mr Margach and Mr Anderson
wearing two hats in the negotiation, or taking part in any decision-making on behalf of the
Company as to whether to accept or how to react to the terms offered by Pinz; that was left
entirely to the Davidsons. Nor was there any question of concealment of any material fact
from the Davidsons. The fact that the Company was going to be dealing consistently with
Pinz as an ordinary incident of the carrying on of its business, and that Mr Margach and
Mr Anderson would be representing the interests of Pinz as and when its interests and those
of the Company might conflict, were matters that were baked into the Company's business
model from the outset. Indeed I have already described that circumstance as the core
instability with which the Company has had throughout its life to contend.
[254]
Article 14 of the Company's Articles of Association (being the model articles
provided for by Schedule 1 to the Companies (Model Articles) Regulations 2008
(SI 2008/3229) provides as follows:
143
"14.-- Conflicts of interest
(1) If a proposed decision of the directors is concerned with an actual or proposed
transaction or arrangement with the company in which a director is interested, that
director is not to be counted as participating in the decision-making process for
quorum or voting purposes."
I also note that the general statutory restatement of the common law rules and principles
concerning the duties of directors set out in sections 171 to 177 of the Companies Act 2006
provides (in section 175(3)) that the duty to avoid conflicts of interest "does not apply to a
conflict of interest arising in relation to a transaction or arrangement with the company".
[255]
Although (typically for the Company and with the tacit agreement of all the
corporators) no particular process was followed and no paperwork completed, what
actually happened in the course of the October 2022 negotiation does not seem to me to have
been at odds with the requirements of the relevant statutory provision, nor of the terms of
the relative Article.
[256]
Even if there had been a technical breach of fiduciary duty of some kind on the part
of Mr Margach and Mr Anderson in relation to what transpired in the course of
October 2022, that in itself would not necessarily have sufficed to bring the petitioners' case
home. I am mindful of what was said by the English Court of Appeal, speaking through
Arden LJ, in Annacott Holdings at [22], to the effect that breaches of fiduciary duties will
"generally indicate that unfair prejudice has occurred". For my own part, I would prefer
simply to say that while there may be a correlation (perhaps a strong correlation) between
the situation of a company whose affairs are being conducted in breach of the fiduciary
duties incumbent on its directors and the existence of unfairly prejudicial conduct of those
affairs, a conclusion that the latter is present is far from a necessary consequence of the
existence of the former (cf Rock (Nominees) Ltd at [79]).
144
[257]
Equally, the conclusion that Mr Margach and Mr Anderson did not act in breach of
their fiduciary duties to the Company in October 2022 does not necessarily result in a
conclusion that the affairs of the Company were not then being conducted in a manner
unfairly prejudicial to the petitioners. The Company's situation may bear certain
comparisons to that in issue in Meyer v Scottish Co-operative Wholesale Society, in which
Lord President Cooper observed (1954 SC 381 at 391) that the legislation then analogous to
what is now section 994 of the 2006 Act:
"warrants the Court in looking at the business realities of a situation and does not
confine them to a narrow legalistic view. The truth is that, whenever a subsidiary is
formed as in this case with an independent minority of shareholders, the parent
company must, if it is engaged in the same class of business, accept as a result of
having formed such a subsidiary an obligation so to conduct what are in a sense its
own affairs as to deal fairly with its subsidiary."
That view was endorsed on appeal in the House of Lords. In the present case, then, might it
properly be regarded as unfairly prejudicial conduct of the Company's affairs should Pinz,
in what in strict legal terms were the conduct of its own affairs, fail to deal fairly with the
Company, which it at least regarded as its sole franchisee, and in which the Davidsons held
with it a joint and equal interest? The analogy between the respective situations of the
company in Meyer and the Company here is by no means an exact one; most obviously, the
Company is not a subsidiary of Pinz, and the Davidsons do not hold a minority share.
However, it may be observed that the Company was formed in good faith with a business
plan that made its success or failure to a very large extent dependent on the continuing
benevolence of Pinz, and that all concerned with the Company's formation took the
continuance of that benevolence for granted. I consider that those features, in particular, are
sufficient to carry the analogy with the company in issue in Meyer. It may also be correctly
observed that the legislative background is, in point of form at least, now rather different
145
from how it stood in the 1950s, and that the authoritative exposition of the underlying
principles informing the proper application of the current statutory provisions set out in
O'Neill v Phillips then lay many decades in the future. Nonetheless, the notion that the
current legislation reflects in the corporate field one of the traditional roles of equity, namely
the restraint of the "exercise of strict legal rights in certain relationships in which it
considered that this would be contrary to good faith" (O'Neill at [1999] WLR 1092)
strongly suggests that the rationale of Meyer continues to apply in this context, in
appropriate cases.
[258]
I consider that this is such a case. The Company, although perhaps not a classic
quasi-partnership given the shortness (and shallowness) of the pre-existing relationship
amongst the individuals behind the initial corporators, was nonetheless formed on the basis
of the trust and confidence which those individuals conceived to exist amongst themselves
at the time. The Pinz and Davidson interests each took 50% of the share capital of the
Company. Neither would have done so unless each had come (directly or indirectly) to
entertain the view that the other possessed the relevant skills to contribute meaningfully to
its business and was a trustworthy business partner. Each proceeded on the basis that all of
the individuals concerned were going to work together (albeit in differing capacities) in
good faith in order to direct and achieve the success of the Company and the wider business
relationship which they hoped and expected to develop amongst them. None saw the need
to resort to any degree of formality in recording their arrangements or the operation of the
Company. The directors of the Company were entitled in terms of Article 26(5) of the
Company's Articles of Association to refuse to register the transfer of any share, providing a
considerable measure of restriction on the introduction of strangers to the body corporate.
146
At its outset, at least, the Company was a quasi-partnership within the meaning of Ebrahimi;
cf Strahan at [23].
[259]
I accept that the relationship of trust and confidence in which the parties embarked
upon their corporate relationship had ceased to exist by October 2022 (cf Fowler v Gruber
at [136] [137]). That had essentially occurred because of the decision of Mr Margach and
Mr Anderson, and through them Pinz, to withdraw from the wider business plan which
originally existed and to sack Mrs Davidson from her job at Pinz, although it is important to
note that it was not suggested by the petitioners that any of that amounted in itself to an
example of the unfairly prejudicial conduct of the Company's affairs. There is no evidence
to suggest that the breakdown occurred as a result of any fault on the part of either of the
Davidsons. After the breakdown had occurred, they did contribute to making matters even
worse, as by the attempt to sell their shares to the Company's business rival and their
effective withdrawal from any sort of routine participation in necessary corporate
decision-making, but these were actions taken in reaction to a breakdown in trust and
confidence which had already occurred, not the cause of that breakdown. In these
circumstances again, not dissimilar to those in Meyer, where the parent company changed
its plans and came to see its subsidiary with an independent minority interest as a burden to
be unloaded I do not consider that Pinz was, at least for the purposes of section 994 of the
2006 Act, entitled to rid itself brevi manu of the obligation which was inherently implicit in its
original business relationship with the Company, and in October 2022 continued to be
obliged to deal with it fairly.
[260]
The question thus comes to be whether it has been demonstrated that what occurred
in October 2022 was relevantly unfair. The principal ground of complaint in this regard was
the claim that the amounts of the franchise fee and management charge demanded by Pinz
147
grossly exceeded a market rate for the services and facilities being provided. However, the
evidence before the court does not support that claim. The respondents' position (advanced
by Mr McGee as well as by Mr Margach and Mr Anderson) was that Pinz had been
informed in seminars organised under the auspices of Scottish Enterprise that the fee which
it demanded for the provision of what it called its franchise services fell within the
reasonable range of fees which could be demanded in that connection. Mr Davidson's
evidence was that he did not agree, based on his general business experience, that the charge
was reasonable. However, all of the evidence in this connection was extremely vague in
character and raises more questions than it answers, for example whether the very particular
arrangements between Pinz and the Company fall properly to be regarded as an example of
franchising at all, and whether the fact that the supposed franchisor had a half share in the
putative franchisee alters the fairness of the amount of the sum properly chargeable as a
franchise fee. The matter was also visited in the petitioners' expert evidence on the value of
the Company given by Mr Geale. He at least seemed to have some independent perspective
on the range of franchising fees, but the burden of his evidence was that the amount
requested by Pinz fell within the range of franchise fees which were, as a matter of fact,
charged and paid in the market (typically being 10% to 14% of gross sales). He made the
point, which I accept, that ultimately the amount of a franchise fee in any given situation
will depend on the outcome of a commercial negotiation taking place in a particular market
and against the background of the relative strengths and weaknesses of the parties involved.
He had apparently seen the Company's initial business plan to which I have already
referred, and which seems to have referred to a fee for the services to be provided by Pinz at
a significantly lesser rate (5%) than that demanded in the October 2022 negotiation.
However, in the absence of the plan from the evidence before the court, and knowledge of
148
what exactly it was referring to, I am unable (not simply as a result of the best evidence rule,
but because what was said and in what context remains entirely opaque) to place any
evidential weight on that. Essentially the same conclusion falls to be reached, for the same
reasons, in relation to the separate management charge demanded by Pinz. Doubts were
expressed, again primarily by Mr Geale, about what exactly Pinz was providing in return for
those charges, and as an abstract proposition they certainly appeared to represent a
substantial imposition upon the Company, but in the absence of any detailed analysis of
what was provided and what the market rates might have been for equivalent services, a
conclusion that what was demanded was excessive could not amount to anything more than
speculation, and ultimately the parties' respective valuation experts appeared to differ more
on how the management charge might properly be calculated rather than on what it might
in practical terms amount to.
[261]
Slightly different considerations apply to the manner in which the October 2022
negotiation was conducted on behalf of Pinz, as opposed to the content of the terms which it
proposed. There seems to be little doubt that a robust, even aggressive, approach was taken
by Mr Margach, and it was accepted that Mr Anderson went so far as to threaten in the
course of the negotiation to go to the Company's premises, seemingly without delay, and
personally remove the Innoflate signage if agreement was not reached. As this was the first
time that a threat had been made to remove the brand and services being provided by Pinz
to the Company, it would have had greater force than on the later occasions when it was
repeated as, by then, a somewhat weary trope. On the other hand, Mr Davidson expressed
the view in his evidence that, after a few months of trade, the Company was not dependent
to any significant extent on access to the Innoflate brand in order to operate successfully and
it follows that the effect of the threat on him may not have been quite as dramatic as
149
Mr Anderson may have thought it would be. Abrupt removal of the brand would have
been seen by the Davidsons as a very substantial inconvenience, but would not have been
regarded as a death knell for the Company. One also has to bear in mind that Mr Davidson
is an experienced and capable businessman, and was well able to act vigorously in the
interests of the Company. I accept that when he suggested the terms which were agreed to
by Pinz, he rightly did not conceive himself to have an entirely free hand to negotiate as he
might have wished on behalf of the Company, but the same could be said of many
commercial negotiations, in a variety of circumstances. The arrangements which were
agreed, and the background against which that agreement was reached, were evidently not
sufficiently intolerable to cause the Davidsons to resort quickly to legal action; that did not
come after until the further provocations of March 2023. On the whole, and bearing in mind
that the situation was already far removed from what might be regarded as any
paradigmatic example of unfairly prejudicial conduct of the Company's affairs, I conclude
that the events of October 2022 also fail, by a small but decisive margin, to qualify in law as
such conduct.
[262]
In the absence of any demonstration of the unfairly prejudicial conduct of the
Company's affairs by the respondents, the order for the purchase of the petitioners' shares
sought by them cannot be granted. In these circumstances, it is unnecessary for me to
express any detailed views on how I would have valued those shares had such an order
been appropriate. In deference to the arguments which were carefully presented to me in
that regard, however, it may be helpful if I indicate in general terms how I regarded the
valuation evidence and the legal issues which arose.
[263]
There was no dispute that the appropriate method of valuation was on the earnings
basis, taking an estimate of future maintainable earnings and multiplying this by a suitable
150
price-earnings multiple. In relation to turnover, it is undoubtable that the period during
which the Company has been trading is shorter than one would ordinarily hope for in order
to draw firm conclusions as to what is likely to occur in the future. That circumstance makes
it more appropriate, in my view, to stick as closely as possible to the actual trading figures,
excluding periods which can objectively be identified as outliers for specifically-identifiable
reasons, and refraining from "adjusting" those figures in supposed reaction to external
factors in ways which risk representing little more than a projection of the valuer's own
subjective views onto the hard facts. It follows that in general terms I prefer Mr Geale's
approach to the assessment of sustainable turnover over the more impressionistic tack taken
by Mr Gouw. Of the supposedly depressing factors identified by Mr Gouw (the cost of
living crisis, warmer weather, delay in the installation of air-conditioning and new local
competition) it seems to me that only the latter would be viewed by a hypothetical buyer of
the business as something to be taken into account as a depressing feature in assessing the
longer-term prospects for turnover; the others are merely normal and relatively transient
incidents of the conduct of such a business as is carried on by the Company. I would have
assessed the turnover of the business for the purposes of the valuation exercise at £900,000.
[264]
The gross profit percentage was agreed at 87%.
[265]
In relation to overheads, I would have assessed salaries as 29.4% of sales, and
property costs at the agreed level of £93,000. Electricity costs remain to be calculated as part
of the exercise currently being carried out by the Company and Dobbies, and I consider it
reasonable to estimate that that exercise will produce a recurrent cost of £55,000 per annum
exclusive of VAT. Other overheads also retain an element of imponderability in the range of
approximately £50,000 to £60,000 and I consider that a mid-range estimate of £55,000 is also
appropriate in that regard.
151
[266]
Turning to management charges, it appears to me that the Company falls to be
valued "as is", that is to say as coming with an established arrangement involving a
management charge of 20% of EBITDA. There was a good deal of discussion, both in
evidence and in argument, about whether a purchaser might take a different view as to the
likely cost in the longer term of providing the management services currently provided by
Pinz, but that seemed to me to miss the point that what is notionally for sale for the purpose
of the exercise is the Company as it stands, and that what any hypothetical prospective
purchaser might do in order to alter it falls, at least in this case, into the realms of
speculation rather than valuation. The same applies to franchise fees, which I would have
assessed at 12% of revenue for the purposes of the exercise. Of course, had the levels of
management charge and franchise fee been found to be examples of the unfairly prejudicial
conduct of the Company's affairs, then a different approach would have to have been taken,
although it would have been difficult to determine in such circumstances what an
appropriate level of franchise fee would have been. I have not made any allowance for the
excess profit charge agreed as part of the October 2022 arrangements, since I doubt that the
Company's EBITDA will reach an amount sufficient to trigger any such payment.
[267]
A price-earnings multiple of 4.5 was agreed.
[268]
I would not have discounted the value of the petitioners' 50% share. I have already
concluded that, at its inception, the Company was a quasi-partnership. Although it had
ceased to be so by the time of the events complained of as amounting to the unfairly
prejudicial conduct of its affairs, that was not as a result of anything done by the petitioners,
and it would have been unfair, in those circumstances and in the particular context of
section 994, to devalue their interest in consequence of things done to them rather than by
them.
152
Petitioners' true remedy
[269]
The petitioners are not left without a remedy for the situation in which they find
themselves. In Lau v Chu, the Judicial Committee of the Privy Council, speaking through
Lord Briggs JSC, observed at [14] [15] that:
"14 A just and equitable winding up may be ordered where the company's members
have fallen out in two related but distinct situations, which may or may not overlap.
First, a winding up may be ordered to resolve what may conveniently be labelled a
functional deadlock. This is where an inability of members to co-operate in the
management of the company's affairs leads to an inability of the company to
function at board or shareholder level ...
15 Secondly, where the company is a corporate quasi-partnership, an irretrievable
breakdown in trust and confidence between the participating members may justify a
just and equitable winding up, essentially on the same grounds as would justify the
dissolution of a true partnership ..."
[270]
Reference may also be made in the Scottish context to Jesner v Jarrad, per the
Lord Justice Clerk (Ross) at 1993 SC 45A-B and Lord Morison at 48F-G. The situation
disclosed by the facts in the present case would appear amply to meet both tests for the
making of an order for the just and equitable winding-up of the Company. Whether viewed
at the micro level at which it has been necessary to analyse events in order to determine the
proper disposal of the unfair prejudice allegations, or more simply at a macro level, posing
generally the question of how and why it is that the Company stands now in the state in
which it does, it cannot sensibly be denied that the picture which emerges is one of an
irretrievable breakdown in trust and confidence amongst the members which has led to
functional deadlock, to the detriment of all.
153
Disposal
[271]
Although the prayer of the petition will fall to be refused, I shall appoint the case to
call By Order so that parties may consider whether it would be convenient to present a Note
within the present process seeking the winding-up of the Company on the just and equitable
ground, thus avoiding the need for any further procedure in that regard, as well as to deal
with questions of expenses and any ancillary matters which may require to be addressed.
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