England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
COMPANIES COURT
CHANCERY DIVISION
(Mr Kevin Garnett QC
sitting as a deputy judge of the Chancery Division)

		Royal Courts of Justice Strand London WC2 Friday, 11th May 2001

1. SIR MARTIN NOURSE: This is a renewed application for permission to appeal in proceedings initiated in the Companies Court under section 459 of the Companies Act 1985 in relation to a two-man company where each holds 50 per cent of the shares and neither has power to resolve a deadlock.
2. The essential facts are the following. The petition was presented on 7th September 2000. Although it contains a complaint that the petitioner has been wrongly excluded from the company, it is based principally on serious allegations of breach by the respondent shareholder of his fiduciary duties to the company. On 4th October the respondent made a written offer to dispose of the petition by agreement. On 25th October the petitioner made a written counter offer. On 31st October the respondent rejected the counter offer and asserted that the petitioner's pursuit of the petition, in the face of his offer of 4th October, constituted an abuse of process. On the following day, 1st November, the respondent issued an application to strike out the petition on that ground.
3. The petition came before the registrar on 12th December when it was adjourned to the judge. It was heard by Mr Kevin Garnett QC sitting as a deputy judge of the Chancery Division who, on 9th February 2001, dismissed it. He refused the respondent permission to appeal to this court. On 15th March permission was refused by Mance LJ on consideration of the documents.
4. The basis of the respondent's application to have the petition struck out was the guidance given by Lord Hoffmann in O'Neill v Philips [1999] 1 WLR 1092. That guidance was directed to how an offer should be framed if the respondent wishes to compromise the litigation or to protect himself against the petition proceeding. Lord Hoffmann said at page 1107:

"But the unfairness does not lie in the exclusion alone but in exclusion without a reasonable offer. If the respondent to the petition has plainly made a reasonable offer, then the exclusion as such will not be unfairly prejudicial and he will be entitled to have the petition struck out. It is, therefore, very important that participants in such companies should be able to know what counts as a reasonable offer."

5. That was an exclusion case, but it is clear that the same principle applies in a case where the petition is effectively based on allegations of misfeasance on the part of the respondent.
6. In the present case the deputy judge, having read that passage, said:

"Those words were obviously spoken in the context of the respondent being excluded, but at the same time being made an offer such as to render any prejudice not unfair, but I think the remarks which he makes are equally applicable to a case of the present kind."

7. The judge continued:

"The guidelines were as follows: first, the offer must be to purchase the shares at a fair value, second, the share offer, if not agreed, should be determined by a competent expert, third, the offer should be to have the value determined by an expert acting as an expert, and usually it should be a non-speaking valuation, fourth, there should be equality of arms in terms of access to information, fifth, in relation to costs, there should be an appropriate offer of costs."

8. It is to be observed at the outset that Lord Hoffmann's guidance, having been expressed in general terms, cannot be taken to be automatically applicable to every case. As Mr. Garnett emphasised more than once, each case must depend on its own facts. I would add that the decision in each case, like any other decision to strike out a form of legal process, is essentially one for the discretion or judgment of the judge of first instance. Only on well recognized principles will it be interfered with by this court.
9. It is necessary to refer in some detail to the offer made in the respondent's solicitors' letter of 4th October 2001. It was headed "Without prejudice and subject to contract Part 36 offer". It referred to the litigation commenced by the petition and continued:

"We regard the litigation as unnecessary, pointless and benefiting no-one and we therefore write with proposals to resolve the dispute as a matter of expediency and strictly without admission of any liability on the part of the respondent."

10. The letter then referred to the relief sought in the petition, which was either that the respondent should be ordered to sell his shares to the petitioner at a fair value or that the respondent should be ordered to purchase the petitioner's shares at a fair value. Then the letter set out the offer in detail. First, the respondent would purchase with full title guarantee the petitioner's entire shareholding in the company at a price to be fixed by an independent expert valuer. The identity of the valuer would be agreed between the parties and, if not agreed, would be appointed by the President of the Institute of Chartered Accountants. Second, the respondent was prepared to agree to the date of the valuation being the date of the petition or the date of the letter, and also to the valuation being carried out without any discount for the fact that the petitioner's shareholding was not a majority shareholding. Third, the valuer was to be permitted unrestricted access to all company books, records and so forth, and each party was to be permitted to make written submissions to the valuer. Paragraph 4 was in these terms:

"We think it is fair to say that the Respondent has been prepared to 'switch' each of the proposals that he has put to the Petitioner throughout this dispute and this offer is to be no exception. If the Petitioner finds the above terms unacceptable, the Respondent is prepared for the Petitioner to purchase the entirety of the Respondent's shareholding in the Company upon the same terms."

11. It was then said that the offer was made pursuant to Part 36 of the Civil Procedure Rules and that it would remain open for 21 days and, should it not be accepted within that period, that it could only be accepted by agreement or by order of the court and that, in the event that the offer was not accepted, the respondent would bring the letter to the attention of the court on the question of costs and abuse of process. The final term of the offer was that, without any admission of liability, upon acceptance of either of the options proffered and completion of the sale, the respondent would agree to be responsible for the petitioner's reasonable legal costs.
12. It is unnecessary to refer in detail to the counter offer made in the claimant's solicitors' letter of 25th October. I can adopt the summary of the deputy judge, who said that it was clear from it that the offer put forward by the respondent was not accepted, first, on the basis that it was too uncertain; second, that it was not clear how the respondent intended to finance any purchase; and, third, that the petitioner was not in a position to commit himself to a purchase until he knew what the purchase price was going to be. The suggestion was that the purchase price should be fixed by an independent valuer and that the valuation ought to be carried out first of all.
13. After the counter offer had been rejected and the application to strike out issued, the petitioner's solicitors wrote again, saying that in their view the key to unlocking the dispute was to have a valuation of the shares. The respondent's solicitors replied, seeking clarification as to the basis on which a valuer was to be instructed. That was how the matter stood when the application came before Mr Registrar Buckley on 12th December. Later, by agreement, the valuation was made. To the surprise of both parties a 50 per cent shareholding was valued at £22,500, a figure very much below that which either party had previously been suggesting. The result was that each party then offered to purchase the other's shares at £22,500. Needless to say, neither offer was accepted and that was how the matter stood when the application to strike out came before Mr Kevin Garnett.
14. The judge was of the opinion that the respondent's offer of 4th October was fair, in the sense that it offered everything which the petitioner was asking for in the proceedings. But he said that the question was whether the petitioner, in refusing that offer and making a counter offer while keeping the petition alive, was abusing the process of the court. He identified the real criticism of the petitioner's failure to accept the offer as being that he wanted to await the outcome of the valuation before deciding whether he could afford to purchase, and that meanwhile he was unwilling to accept the respondent's offer because he said that he could not be certain that the respondent had the funds himself. The judge added:

"In effect, the petitioner wanted to wait and see which of two different cakes turned out to be the better one before deciding which one to eat."

15. The judge gave a careful judgment, in which he appears to have considered every material aspect of the case. In summarizing his views, he said:

"Looking at the position in the round, does the letter of 25th October show the petitioner was using the process of the court for some improper purpose?It seems to me, on the contrary, that the counter offer showed a real intention to try and find a mechanism to settle this dispute without having to go to trial. The mechanism that was put forward was a development of that which had been proposed by the respondent."

16. Later, in dealing with the arguments of Mr. Richard Millett who then appeared for the respondent, the judge said:

"Nevertheless in the present case both sides accept that it is not obvious whether, if unfair prejudice were to be proved, it is the petitioner who should go or whether it is the respondent who should go. I think the second answer to Mr Millett's objection is therefore this: that in that minority of cases such as this, where it is not clear, if a respondent does wish to be rid of the litigation he can frame an offer in such a way as to permit a valuation before any election if that is appropriate in the particular circumstances and if that is what the petitioner in the end wants. But, as I have said previously, each case has to be looked at on its own particular facts. Looking at the facts of this case it does not seem to me that it was unreasonable for the petitioner to take that viewpoint. Of course, if the respondent is not willing to give the petitioner the opportunity to have the company for himself, his only option will be to fight the petition."

17. The final passage I must read from the judge's judgment is this:

"It seems to me there is also something unrealistic in striking out this petition. The respondent's earlier offer has been withdrawn. Each side has made new offers. Each side wants to buy the other's shares. Who should buy whose shares has become the battleground of the petition. It is accepted that on this application, as I have said, that I cannot determine which party has the better right. That may depend on who is in de facto control of the company, how that person came to be in that position and what the allegations of misconduct, if any, are proved. Of course, if none are proved then the petition will fail. But as to who should have the company, that can only be resolved by a full hearing of the petition."

18. In this court the respondent has been represented by Mr. Purle QC. He has made two preliminary points which were either not made before the judge or, if made, were not pressed in such a way as to find a response in his judgment. I do not propose to go into those points because it appears to me that neither of them is of materiality. They might have been material if the application had been, not to strike out the petition on the ground that it was being pursued in face of the offer of 4th October, but on the ground that its presentation was itself an abuse.
19. Mr. Purle has then gone on to adopt the primary written submission made by Mr. Millett in his skeleton argument, which is that the judge, having correctly held that the respondent's offer of 4th October was fair, was wrong not to strike out the petition there and then. Mr. Millett submitted that the effect of the offer was to negate or defuse any alleged unfairness on the part of the respondent. I cannot accept that it would be right to attribute to the guidance given by Lord Hoffmann in O'Neill v Philips such dire and automatic consequences. I think that the judge was fully entitled to go on and consider whether the petitioner's rejection of the offer and his making of the counter offer was reasonable. Moreover, in spite of Mr. Millett's further written submissions, which have not been greatly elaborated by Mr. Purle, I think that the judge was entitled to conclude that the petitioner had acted reasonably and that it would be wrong to strike out the petition.
20. Mr. Purle has said that if the judge's decision is allowed to stand, it will effectively drive a coach and horses (that is my description of his submission) through the guidance given by Lord Hoffmann and the consequences that it was intended to have. I repeat my belief that those consequences cannot have been intended to be as dire and automatic as is contended for on behalf of the respondent. In the penultimate passage that I have read from the judge's judgment, it is clear that he recognized that this case was one of a minority. The judge treated it as a case on its own facts. He was entitled to do that. He arrived at his decision in the exercise of his discretion or by the application of his judgment. I can see no grounds on which this court, on well established principles, could interfere with it. For these reasons I would dismiss this application.
21. LORD JUSTICE MANCE: I agree.
Order: Application refused.