England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
(Mr Peter Goldsmith QC sitting as a Deputy Judge of the High Court)

IN THE MATTER OF THE COMPANIES ACT 1985
RE LEGAL COSTS NEGOTIATORS LTD

		Royal Courts of Justice Strand London WC2A 2LL
		18 February 1999

LORD JUSTICE PETER GIBSON: The issue raised by this appeal is whether the holders of 75% of the issued shares in a company have a sustainable case for obtaining relief under ss.459 and 461 Companies Act 1985 against the holder of the remaining 25% of the shares. The majority shareholders presented a petition seeking an order compelling the minority shareholder to transfer or sell his shares. The minority shareholder applied to the Companies Court to strike out the petition. The majority shareholders then applied to strike out the Points of Defence of the minority shareholder. Mr. Peter Goldsmith Q.C., sitting as a Deputy Judge of the High Court, on 3 June 1998 allowed the application of the minority shareholder and dismissed the application of the majority shareholders. They now appeal to this court, seeking the restoration of the petition.

By s.459(1) a member of a company may apply to the court by petition for an order under Part XVII of the Act on the ground that "the company's affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members (including at least himself) or that any actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial." By s.461(1) if the court is satisfied that a petition under Part XVII is well founded, it may make such order as it thinks fit "for giving relief in respect of the matters complained of." The court's order may provide for the purchase of the shares of any members of the company by other members or by the company itself (s.461(2)(d)).

The facts

The petitioners, Mr. Morris, Mr. Thaker and Mr. Turner, in February 1995 formed a partnership known as Insurers Legal Costs Consultants. The First Respondent, Mr. Hateley, joined the partnership on 14 November 1995. The Second Respondent, Legal Costs Negotiators Ltd. ("the Company"), was incorporated in September 1995. The partnership ceased trading on 31 December 1996 and all its business and assets were transferred to the Company which carried on the business formerly carried on by the partnership. The issued share capital of the Company consists of £100 £1 shares, 25 shares being held by each of the 3 petitioners and by Mr. Hateley. Each was a director and employee of the company.

On 6 June 1997 Mr. Hateley was dismissed from his employment with the Company and on 10 July 1997 he resigned as a director. But he remains the holder of 25 shares in the Company. On 19 June 1997 an attempt was made by the petitioners to purchase Mr. Hateley's shares at a fair value. But that offer has not been accepted.

On 8 September 1997 the petitioners presented their petition. In the petition they aver that the Company was or became a quasi-partnership on 1 January 1997, that between the petitioners and Mr. Hateley there was mutual trust and confidence and there was to be consultation and cooperation, and that significant decisions were to be taken on the basis of such consultation. By para. 3.3 it was averred:

"Each of the contributories had legitimate expectations that the Company would be run in the manner aforesaid, and that each would contribute and continue to contribute to the Company and be engaged full time on its business. Such expectations were legitimate in the light of each of the contributories' own contributions and commitment to the Company."

It was further averred that the Company's Articles of Association did not adequately record or reflect the supervening equitable considerations to which the Company was subject or the mutual rights, obligations and expectations between its contributories. It was said that Mr. Hateley had specific responsibility for the Company's accounting function, that he failed to carry out his responsibilities diligently or responsibly in a number of important respects and that prior to his dismissal his attitude within the Company had become aggressive and he had sought to dominate board meetings. Other complaints are made of Mr. Hateley's conduct which appear to have little to do with the conduct of the affairs of the Company. By way of conclusion it is pleaded that the Company's affairs have been or are being conducted in a manner which is unfairly prejudicial to the interests of the petitioners as members of the Company, and that the petitioners' legitimate expectations that Mr. Hateley would contribute to the Company and be engaged full time on its business have been broken.

Mr. Hateley applied to strike out the petition on 28 November 1997 on the ground that it disclosed no reasonable cause of action and was frivolous, vexatious and an abuse of the process of the court.

It was common ground before the judge and before us that the facts averred in the petition must be treated as true. The judge in a judgment notable for its lucidity directed himself by reference to what Hoffmann L.J. said in Re Saul D Harrison & Sons plc [1995] 1 B.C.L.C. 14 at p.22:

"I accept that the notoriously burdensome nature of s.459 proceedings does not lighten the burden on the respondent who applies to have the petition struck out. He must still satisfy the court that the petitioner's case is plainly unsustainable. But I think that the consequences for the company mean that a court should be willing to scrutinise with care the allegations in a s.459 petition and, if necessary, the evidence proposed to be advanced in support, in order to see whether the petitioner really does have an arguable case."

The judge scrutinised those allegations with care. He reviewed the authorities from which he drew two points of significance for the case before him. The first was that the starting point was to consider what the parties had agreed between themselves as their commercial relationship, though he recognised that this need not always be contained in the articles of association. The second was that the essence of the powers under s.459 is to give a remedy where there is complaint about the way the company's affairs are being conducted through the use (or failure to use) powers in relation to the conduct of the company's affairs provided by its constitution. He regarded the section as concerned with the company's affairs rather than the affairs of individuals and to be concerned with acts done by the company or those authorised to act as its organs. He found that the cases showed a reluctance by the court to act where the petitioner is able to control the relevant conduct by his own powers and that the cases where relief was granted were concerned with situations in which the petitioner is otherwise powerless to stop that conduct by powers which he has under the company's constitution. He said that this was consistent with the section being generally regarded as for the protection of minorities. He expressly said that he did not suggest that there could never be a case which did not have the characteristics he had attempted to identify, and recognised the deliberate flexibility of the remedy provided by the section, but expected that such cases would be exceptional. Judged by reference to those considerations, the petitioners' case, he found, was bound to fail. He said that the complaint was not about the way the Company's affairs were being conducted, but that Mr. Hateley was holding on to his own investment in the Company. He pointed out that there was nothing in the Company's Articles of Association to require Mr. Hateley to sell his shares if the petitioners did not want him to continue as an employee or director of the Company. He referred to the quasi-partnership considerations on which the petitioners relied but held that there was nothing in the facts alleged that gave rise to an entitlement in the other shareholders to acquire the shares of a member unwilling to sell and not interfering in the conduct of the business.

The judge also dealt with the petitioners' case based on the previous conduct of Mr. Hateley as a director and employee. He said that the petitioners were able to exercise their own remedy of bringing Mr. Hateley's employment to an end and producing his resignation as a director. He recognised that it was possible (albeit unlikely) that serious mismanagement could constitute prejudice, but he considered the prospects that the court would consider it appropriate to act to require him to sell his shares against his will when the petitioners had already remedied the mischief so remote that the petition should not be allowed to proceed. He ended by saying:

"Whilst conscious of the heavy burden of which I should be satisfied before applying this summary process, and recognising that the categories of unfair prejudice are not closed, I have reached such a clear view that this case is unsustainable that I consider that burden is discharged."

I am so completely in agreement with the approach and reasoning of the judge that I would be content to adopt his judgment as my own. But that would do less than justice to the arguments forcefully and enthusiastically presented to us by Mr. Collings for the petitioners and to the skeleton argument of Miss Garcia-Miller for Mr. Hateley (in the event it was not necessary to call on her) and in deference to them I shall address those arguments.

Mr. Collings stressed the width of the jurisdiction and of the relief which may be granted. That is of course correct, but that is not to say that there are no limitations observable in the statutory language. Thus like the judge I too would lay emphasis on the need to show that it is the affairs of the company which are being or have been conducted in an unfairly prejudicial manner or that it is an act or omission of the company that is or would be so prejudicial. The conduct of a member of his own affairs, for example by requesting a general meeting of the Company or seeking answers to an excessive number of questions, is irrelevant. Further, I would emphasise the limit imposed by statute on the relief which may be given under s.461, viz. the order is for giving relief in respect of the matters complained of. As Oliver L.J. said in Re Bird Precision Ltd. [1986] Ch.658 at p.669D, the very wide discretion conferred on the court to do what it considered fair and equitable is "in order to put right and cure for the future the unfair prejudice which the petitioner has suffered at the hands of the other shareholders of the company". If the matters complained of have been put right and cured and cannot recur, it is hard to see how the court could properly give relief. Thus in Re Estate Acquisition & Development Ltd. [1995] B.C.C. 338 at p.352 Ferris J. pointed out that where the matter complained of is the failure to provide information to a member, the subsequent provision of information must be a material consideration "if only because the natural remedy for a failure to provide information is an order that the information be provided and there can be no purpose in making such an order when the information has in fact been provided before the order is made."

The court on an application to strike out a s.459 petition can look at the realities of the case. It is entitled to take the pragmatic view that the petition should not be allowed to proceed where the likelihood of the trial judge exercising his discretion to grant the claimed relief is so remote that the case can be described as perfectly hopeless (see Supreme Travels Ltd. v Little Olympia Each-Ways Ltd. [1994] B.C.C. 947 at pp.955 and 957 per Lindsay J. and Re The Oriental Gas Co. Ltd. (unreported) 4 February 1998 p.18 where Ferris J. adopted what Lindsay J. said in posing the test whether it is plain and obvious that the relief claimed would never be granted).

Mr. Collings advanced separate arguments on each of two limbs of the petitioners' case. One limb related to the continuing conduct of the affairs of the Company. The other related to past conduct. Both were connected to this extent, that they depended on breaches of the legitimate expectations of the contributories which are pleaded in para.3.3 of the petition and which are not reflected in the Articles of Association. He reminded us of the often quoted words of Lord Wilberforce in Re Westbourne Galleries [1973] A.C. 360 at pp.379 as to how, in the jurisdiction to wind up a company on the just and equitable ground, the court is able to subject the exercise of legal rights to equitable considerations such as arise where the company is a quasi-partnership and its constitution does not adequately reflect the understandings of the quasi-partners. Mr. Collings drew our attention to the identification by Hoffmann L.J. in the Harrison case ([1995] B.C.L.C. at p.19) of the concept of unfair prejudice in s.459 with the concepts referred to by Lord Wilberforce in relation to the just and equitable jurisdiction. He rightly said that the present case was the typical case of a quasi- partnership arising from the conversion of an existing partnership into a company. Accordingly, the legitimate expectations pleaded in para.3.3 of the petition had to be taken into account.

I start with previous conduct. Here Mr. Collings relies on the pleaded allegation that Mr. Hateley, with specific responsibility for the Company's accounting function, failed to carry out his responsibilities diligently or responsibly, and our attention was drawn to a number of serious allegations made against him. I accept that this was conduct prejudicial to the interests of the petitioners as members and probably prejudicial to the interests of Mr. Hateley as a member as well. But the statutory requirement is that the conduct should be unfairly prejudicial, and as Neill L.J. said in the Harrison case at p.31, conduct may be prejudicial without being unfair. As Knox J. indicated in Re Baltic Real Estate (No.2) [1993] B.C.L.C. 503 ("No.2") at p.507 (in a passage to which I must return), prejudice will not be unfair to the petitioner's interests where the petitioner had available to him a method of bringing that prejudicial state of affairs to an end.

Mr. Collings then said that the prejudicial state of affairs had not been brought to an end. He argued that the matter complained of in the petition had not been remedied by Mr. Hateley's removal as an employee and director, because, he explained, that matter was the retention by Mr. Hateley of his shares in circumstances where there had been a quasi-partnership. He said that it was unfair that Mr. Hateley, whom he described as having "decimated" the quasi-partnership by his bad conduct of the affairs of the Company and as having brought about his own dismissal, should continue to benefit from his interest as a shareholder in the Company, when the legitimate expectations were as described in para.3.3 of the petition.

I would comment first that there is an inconsistency between Mr. Collings' reliance on past conduct and his explanation that the matter complained of in the petition was the continuing act of retention by Mr. Hateley of his shares. Further, the retention of those shares is not conduct of the Company's affairs or an act of omission of the Company. True it is that the petitioners' dissatisfaction stems from past conduct of the Company's affairs by Mr. Hateley, but that conduct has been terminated by his removal as employee and director.

Mr. Collings then accused the judge of failing to have any or sufficient regard to the founding of jurisdiction by past conduct even where the unfairness has been remedied. The suggestion that to found a petition it is sufficient that the affairs of the company have in the past been conducted in a way which was unfairly prejudicial to the petitioner even though at the date of the petition the unfairness has been remedied derives from the words of Vinelott J. to that effect in Re Kenyon Swansea Ltd. [1987] B.C.L.C. 514 at p.521b. I do not disagree, provided that what Vinelott J. said is understood in context. He went on to say:

"The question whether an order is required to protect the interests of the petitioner from the consequences of unfair conduct or of an act which has been proposed and which may again be proposed is one to be answered at the hearing of the petition. In the instant case it is clear that Mr. Kenyon, understandably, has not altogether abandoned his wish to reassert his control over the company".

In other words Vinelott J.'s remarks were made in the context that what had happened in the past could recur. If the remedying of the unfairness was carried out in such a way that the objectionable conduct could not recur, then there is no scope for giving relief under s.461 in respect of the matters complained of. In the present case the judge properly had regard to whether realistically there was scope for relief. In my judgment he rightly concluded that there was no realistic prospect of the court ordering Mr. Hateley to sell his shares.

I consider next the averment in the petition that the affairs of the Company are being conducted in an unfairly prejudicial manner. Mr. Collings accepted that the affairs of the Company were being and had since July 1997 been conducted by the petitioners themselves to the exclusion of Mr. Hateley, but he pointed out that in s.459(1) nothing is said about who is conducting the affairs of the company in the unfairly prejudicial manner required by the subsection and he submitted that this meant that even persons in complete control of the company as directors and shareholders can bring a petition when the legitimate expectations of the contributories are not fulfilled as in the present case. He went so far as to submit that the judge erred in concluding that circumstances in which majority shareholders may petition are exceptional.

That is a remarkable submission, given that not one of the numerous reported decisions on petitions under s.459 (or its statutory predecessor) or under s.210 Companies Act 1948 (which allowed a member of a company complaining that the affairs of the company are being conducted in a manner oppressive to some part of the members (including himself) to present a petition) is a case in which a petition by controlling majority shareholders has proceeded, as Miss Garcia-Miller pointed out. In 1962 the Company Law Committee, of which the chairman was Lord Jenkins, made recommendations in Chapter VI (headed "Minorities") and in a section headed "Protection of Minorities" at p.73 of its report (Cmnd. 1749). Those recommendations formed the basis of the predecessor section to s.459, s.75 Companies Act 1980 (see the Law Commission's Consultation Paper : Shareholder Remedies (1996) Law Com. No.142 para. 7.12). Miss Garcia-Miller was in my opinion right to submit that there is academic and judicial consensus as to the meaning of the section and as to the mischief which it was intended to cure, viz. the abuse of power to the prejudice of shareholders who lack the power to stop that abuse. A mere majority shareholding may not suffice its holder : for example, the voting rights may not accord with the shareholding, as in Re H.R. Harmer Ltd. [1959] 1 W.L.R. 62. But in the ordinary case where the shares carry equal voting rights, a majority shareholder will generally have the power to stop unfairly prejudicial conduct of the company's affairs or any unfairly prejudicial act or omission of the company.

In my judgment, the judge was justified in saying that s.459 was essentially directed at cases where powers in relation to the conduct of a company's affairs have been abused or there has been an unfairly prejudicial omission to use powers. In Harrison Hoffmann L.J. gave guidance on the starting point in s.459 cases, directing attention first to the articles of association and to the powers of directors and of the company in general meeting ([1995] 1 B.C.L.C. at pp. 18-20). The judge recognised that in a quasi-partnership company legitimate expectations can exist and can render the use of, or the failure to use, powers unfairly prejudicial to the interest of members. But in the present case there are no relevant powers which would enable the petitioners to require the sale or transfer by Mr. Hateley of his shares, nor do the pleaded expectations give rise to an entitlement to such a sale or transfer.

If the Company through its directors or in general meeting exercised its powers to conduct the affairs of the Company in an unfairly prejudicial manner which failed to give effect to the legitimate expectations of its contributories and that state of affairs could not be cured by the petitioners through the exercise of powers available to them, then a petition, I accept, would lie. But that is not this case. Mr. Collings submitted that just as a minority shareholder, whose legitimate expectation to share in the management of a company is defeated by the majority shareholders excluding him from that management, can bring a s.459 petition for the sale of their shares, so majority shareholders, whose legitimate expectation that the minority shareholder would contribute to that management is defeated by his misconduct necessitating his dismissal, can bring a petition for the sale of his shares. I do not accept that the two situations are at all comparable. In the first there is continuing unfairly prejudicial conduct of the affairs of the company by the majority shareholders, relief in respect of which may be given by ordering a sale of the shares. In the second the majority shareholders had a choice between dismissing the minority shareholder from working for the company or allowing their legitimate expectation to be fulfilled by letting the minority shareholder continue to contribute to the management of the company in some way. In the present case they chose the former, thereby putting an end both to their legitimate expectation and to the prejudicial conduct of the affairs of the Company by Mr. Hateley. No relief under s.461 could properly be given by the court in respect of that conduct which the majority shareholders have remedied and there is no continuing unfairly prejudicial conduct of the affairs of the Company when that conduct is in their hands alone.

Mr. Collings submitted that the judge was wrong not to conclude that the word "or" in the second part of s.459(1) before the reference to any actual or proposed act or omission is disjunctive and was therefore wrong not to conclude that the words "of the company" only apply to that part of s.459(1). I see no error by the judge in stating that both parts of s.459 were directed to corporate behaviour. From the Jenkins Committee report (paras. 204, 206 and 212) it is clear that the intention in including the second part of s.459(1) was to clarify that the section related not only to a course of action but also to specific acts.

In any event I have difficulty in understanding how it can be said that the interests of petitioners as holders of 75 of the 100 shares are being unfairly prejudiced by Mr. Hateley holding on to his shares. The petitioners have precisely the same interests which they have always had. There is a fundamental difference between a partnership and a company which is a quasi-partnership. The petitioners are not obliged to carry on business through the medium of a company of which Mr. Hateley is a member. If the petitioners choose not to wind up the Company which they have the power to do at any time, and not to cause its business to be sold to another company of which Mr. Hateley is not a member, they cannot complain if he as a minority shareholder chooses to hold on to his shares.

Finally, Mr. Collings submits that the judge ought to have followed Re Baltic Real Estate Ltd. (No.1) [1993] B.C.L.C. 498 ("No.1") in which Knox J. refused to strike out a s.459 petition brought by a majority shareholder, and that he was wrong to find persuasive what Knox J. said in No.2. Mr. Collings had argued before the judge that No.1 was authority for the proposition that a petition of a controlling majority shareholder such as the petition in the present case should not be struck out.

In No.1 a 51% shareholder brought the s.459 petition against the second and third respondents who were directors and the original allottees of 49% of the shares, but, although they remained directors, they had transferred those shares to the fourth and fifth respondents. By the petition the majority shareholder sought an order allowing him to purchase the 49% shareholding. Knox J. was asked to strike out the petition against the second and third respondents on two separate grounds. One was that a majority shareholder who has voting control, where there is no suggestion of any interference with the exercise of that voting control, cannot present a petition under s.459 because voting control of itself effectively protects against unfair prejudice. Knox J. said that the main support for that proposition was derived from the Harmer case, which was concerned with s.210 Companies Act 1948. He commented that section is not by any means in identical terms to s.459. Apart from that comment he deliberately refrained from expressing any reasons for concluding that he should not strike out on that ground. The second ground was that the second and third respondents were not proper respondents to the application as they were not members of the company. On that ground the petition was struck out as against them. Thus all that can be said about No.1 is that it is a solitary example of a case where the court was not prepared to strike out a petition when the application was purely on the ground that the petitioner was a controlling majority shareholder; but as the reasoning for that conclusion is not given, it does not provide authority for any proposition of law.

In No.2 Knox J. was asked to give leave under O.11 to serve the petition out of the jurisdiction on the fourth and fifth respondents. The test which he had to apply, viz. was there a good arguable case, differed from the more stringent test for striking out. Knox J., however, in finding that no good arguable case had been shown, based himself on his interpretation of s.459. Having stated that the Harmer case was authority for the proposition that a person with voting control cannot be oppressed by a person without voting control, he said ([1993] B.C.L.C. at p.507):

"Even the wider phrase "unfair prejudice" however in my judgment is not apt to encompass prejudice from which the person whose interests are said to be prejudiced can readily rid himself. The prejudice relied upon by the petitioner is based solely upon the activities of the second and third respondents as directors of the company, a status which they only enjoyed until the majority shareholders removed them. That the second and third respondents were in breach of their obligations under the shareholders' agreement, which I assume in the petitioner's favour, does not in my view establish the proposition that the petitioner's prejudice was unfair within the meaning of s.459, because on that hypothesis the petitioner had an available method of bringing that prejudicial state of affairs to an end and indeed did so. I take into account the consideration that s.459 does not require the unfair prejudice to be subsisting at the date of the presentation of the petition but is capable of sanctioning past prejudice by ex- members of the company. Nevertheless, the section was I believe enacted to enable help to be given to those who needed it and it seems to me impossible that the petitioner could show it fell into such a category."

The good sense and correctness of those words seem to me obvious. In my judgment the judge was entitled to find Knox J.'s observations in No.2 persuasive on the ground that they contain a clear statement that the section is not apt to deal with a case where the petitioner can himself readily put an end to the unfair prejudice alleged.

I am persuaded by none of the criticisms of the judge's judgment put forward on behalf of the petitioners. In truth this is a very clear case where the petitioners by reason of their ownership of 75% of the shares always had the power to procure the passing of any resolution of the Company and so could bring to an end any prejudicial state of affairs in the Company and in fact did so by stopping Mr. Hateley from conducting any of the Company's affairs. They are not entitled to bring a s.459 petition to force him as a minority shareholder to give up his investment. I would dismiss this appeal.

LORD JUSTICE HENRY: I agree.

LORD JUSTICE ROCH: I agree. Mr Hateley ceased to play any part in the conduct of the affairs of this company when he was dismissed as an employee of the company on the 6th June 1997. His withdrawal from the running of the company was completed when he resigned as a director on the 10th July of that year, it having been made clear to him that if he did not resign he would be removed from that office by the petitioners. I am prepared to accept that Mr Hateley had, prior to the 6th June 1997, conducted the affairs of the company in a manner which was prejudicial to the interests of the petitioners as members of the company.

Since that time the conduct of the company's affairs has been wholly in the hands of the petitioners who are the directors of the company and who own between them 75% of the company's shares. They have so conducted the company's affairs that the company has prospered and the value of their shares has increased. So has the value of Mr Hateley's shares. That has occurred without any contribution by him to the conduct of the company's affairs. That increase in the value of his shares is said to be an unfair prejudice to the interests of the three petitioning members of the company. In common parlance, the situation can be described as unfair. That said, these facts simply do not come within the terms of s. 459 (1) of the Companies Act 1985. The company's affairs are being conducted by petitioners, not by the first respondent. The company's affairs are being conducted so that the members interests are being promoted, in that the value of their shares is increasing as the company's business increases. There is nothing which is remotely prejudicial, let alone unfairly prejudicial in the way in which the company's affairs are being conducted.

In those circumstances, in my judgment the Deputy Judge was correct to dismiss the appellant's petition.

Order: Appeal dismissed. Appellant to pay respondent's costs (not to include application to adduce additional evidence).