England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

		Royal Courts of Justice, Rolls Building Fetter Lane, London, EC4A 1NL
		3/11/2016

Mr Registrar Briggs:

1. The first to sixth Respondents (the "Respondents") to a shareholder dispute concerning Smart Diner Group Limited (the "Company") seek to strike out a wrongful dismissal head of claim included in a petition presented pursuant to section 994 of the Companies Act 2006.

The shareholder dispute

2. The Company has created, developed and now runs an online booking facility for restaurants. Mr Wootliff (the petitioner) was the sole director and shareholder of the Company soon after incorporation. The Company merged with a company known as Harden's Limited ("HL"). HL traded as a London-based publisher of restaurant guides. Shares in the Company and HL were subject to a Share Exchange Agreement dated 24 January 2013. After a consolidation of share capital new shares were issued and options for further shares approved. The petitioner entered into a service agreement with the Company agreeing to act as its Chief Executive Officer.
3. In September 2013 the Company suspended Mr Wootliff as an employee dismissing him on 18 October 2013. He was subsequently removed as a director of the Company. Mr Wootliff claims that the Company had no grounds to dismiss him and his removal constituted unfairly prejudicial conduct. In addition, the petition carries an allegation that the issuance of further shares, after he had been dismissed, diluted his shareholding and as such the issuance constitutes unfairly prejudicial conduct.
4. In January 2014 Mr Wootliff started a claim in the Employment Tribunal for wrongful dismissal, breach of contract, unfair dismissal and discrimination, harassment and victimisation. A judgment given by the Employment Tribunal dated 2 June 2014 records that "The Claimant's complaints of "ordinary" unfair dismissal and age discrimination were dismissed upon withdrawal on 16 May 2014". A claim for wrongful dismissal, harassment, victimisation on religious grounds remained extant.
5. Mr Wootliff decided to withdraw the last remaining claims from the Employment Tribunal at the end of April 2015. In relation to the claim for wrongful dismissal he claims to have reserved his right to pursue it in an alternative jurisdiction pursuant to rule 52(a) of the Employment Tribunals Rules of Procedure 2013. I have not seen the order, but counsel refers to an order dated 29 June 2015. That order provides that Mr Wootliff retains the right to pursue wrongful dismissal in a different jurisdiction. The unfair prejudice petition was presented on 1 June 2015 and issued out of the Manchester District Registry before being transferred to the High Court in London.
6. The petition states that the Company did not have any proper grounds upon which to suspend or remove Mr Wootliff from his employment. Paragraph 21 of the petition reads:

"The former case is set out in the Employment Tribunal Claim 1800323/2014 (brought by the [petitioner] against the Company and [Richard Harden]) in which the [petitioner] alleged (among other things) that he was wrongfully dismissed contrary to s94(1) Employment Rights Act 1996. These allegations are not repeated here but are/will be (insofar as necessary) adopted herein."

7. In the prayer Mr Wootliff pleads:

"That such order be made as the Court thinks fit including such orders as may be appropriate to provide the [Petitioner] with a remedy for the claims made in the Employment Tribunal proceedings referred to above."

8. There has, not surprisingly perhaps, been a CPR part 18 request for further information followed by correspondence. On 20 May 2016 the Respondents wrote to solicitors acting for Mr Wootliff, "is your client seeking to bring a claim for wrongful dismissal against the Company within the Petition…?" The answer came on 23 May 2016:

"If the parties or the Court accept that, provided that the Court finds that an entitlement to the same is established on the evidence, the Court has (pursuant to s996 Companies Act 2006) jurisdiction to order the petitioner to be compensated for wrongful dismissal then the petitioner (irrespective of whether or not the Court has decided, whether as a matter of fact or discretion, he should be awarded such compensation or the amount of the same) will not bring any further claims for wrongful dismissal against the Company".

9. It appears from the correspondence that Mr Wootliff is seeking a remedy within the petition that he be compensated for the loss of income for the remaining term of his service contract with the Company.

Wrongful dismissal

10. A claim for unfair dismissal is to be contrasted with a claim for wrongful dismissal. An action for wrongful dismissal is a claim for breach of contract. A breach of contract claim will include a consideration of the contractual terms, the contractual notice period and the usual defences to a breach of contract will apply. It is usual that any such claim will be limited to the amount of salary the employee would have received during the course of the contractual notice period, but for in the breach. By contrast a claim for unfair dismissal is a statutory action and the employee may claim for the fact of being dismissed unfairly, and any lost earnings or benefits arising since the termination of their employment.
11. In Hollington on Shareholders' rights (seventh edition) the author states (7-178):

"Where a petitioner has a remedy against the majority shareholder on the unfair prejudice ground and also against the company for unfair or wrongful dismissal before an Employment Tribunal, any final determination of an issue of fact or law made in one set of proceedings may well, by application of the principle of abuse of process or issue estoppel, be binding in the other……The parties to unfair prejudice proceedings may therefore be faced with an important decision as to which set of proceedings should be determined first: they cannot be consolidated or heard together by the same Tribunal."

12. Mr Cook relies on this passage to support his contention that Mr Wootliff cannot pursue his claim for wrongful dismissal in the unfair prejudice petition. In my view the passage set out above merely provides the common sense view that it is entirely possible that an issue estoppel or abuse of process argument will arise if claims of a similar nature are fought in two different forums: see the analysis of Roth J in Shah v. Shah [2010] EWHC 313 (Ch). Further the findings in one forum are likely to bind another: see Re Phoenix Contracts (Leicester) Limited [2010] EWHC 2375. The reference to the claims not being capable of consolidation is correct but does not necessarily deal with a claim for wrongful dismissal. A statutory claim for unfair dismissal can only be brought in the Employment Tribunal which exercises the jurisdiction conferred on it by virtue of the Employment Tribunals Act 1996. Halsburys Laws of England Volume 12 at para 1399 states:

"Employment tribunals have no inherent power to hear common law claims, in particular those relating to the interpretation of, or granting remedies in relation to, contracts of employment".

13. The Employment Tribunal proceedings cannot be consolidated with a claim in the Chancery Division; the Chancery Division does not have jurisdiction to hear a claim for unfair dismissal. A petition for unfair prejudice cannot be heard in the Employment Tribunal.

Unfair prejudice, members and employees

14. Section 994(1) of the Companies Act 2006 provides:

"A member of a company may apply to the court by petition for an order under [CA 2006] 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."

15. The well-known authority Ebrahimi v Westborne Galleries Limited [1973] AC 360 concerns just an equitable winding up, but it is instructive. The petitioner had been removed from his office as a salaried director. As a result, he had been excluded from the management of the company and lost his right to draw a salary. The House of Lords held that it was proper to have regard to the "wider" equitable considerations and not just the strict legal rights. A claim under section 210 of the Companies Act 1948 (a predecessor to section 994 of the Companies Act 2006) would not have been possible as it was necessary to show oppression as a shareholder only: not a director or salaried employee.
16. The general view was and remains that ordinarily there will be no entitlement to complain of unfairness under s.994 if there has been no "breach of the terms on which the [petitioner] has agreed that the affairs of the company should be conducted": Re Saul D Harrison & Sons Plc [1995] 1 BCLC 14. But other factors may be taken into account in a quasi-partnership. In such a company unfairness is judged "by testing whether, applying established equitable principles, the majority has acted, or is proposing to act, in a manner which equity would regard as contrary to good faith": Re Guidezone Ltd [2000] BCLC 321 at 356.
17. In Re a Company [1986] BCLC 376 Hoffmann J (as he was) said:

"In the case of a small private company in which two or three members have invested their capital by subscribing for shares on the footing that dividends are unlikely but that each will earn his living by working for the company as a director…[the] member's interests as a member who has ventured his capital in the company's business may include a legitimate expectation that he will continue to be employed as a director and his dismissal from that office and exclusion from the management of the company may therefore be unfairly prejudicial to his interests as a member."

18. In O'Neil v Phillips [1999] 1 WLR 1092 Lord Hoffmann considered whether or not the conduct was unfair to Mr Phillips. He said:

"The Court of Appeal found that by 1991 the company had the characteristics identified by Lord Wilberforce in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, [1972] 2 All ER 492 as commonly giving rise to equitable restraints upon the exercise of powers under the articles. They were (1) an association formed or continued on the basis of a personal relationship involving mutual confidence, (2) an understanding that all, or some, of the shareholders shall participate in the conduct of the business, and (3) restrictions on the transfer of shares, so that a member cannot take out his stake and go elsewhere. I agree. It follows that it would have been unfair of Mr Phillips to use his voting powers under the articles to remove Mr O'Neill from participation in the conduct of the business without giving him the opportunity to sell his interest in the company at a fair price."

19. Lord Hoffmann took the opportunity to explain the phrase "legitimate expectation" in the only case of unfair prejudice that has reached the House of Lords:

"It was probably a mistake to use this term, as it usually is when one introduces a new label to describe a concept which is already sufficiently defined in other terms. In saying that it was "correlative" to the equitable restraint, I meant that it could exist only when equitable principles of the kind I have been describing would make it unfair for a party to exercise rights under the articles. It is a consequence, not a cause, of the equitable restraint. The concept of a legitimate expectation should not be allowed to live a life of its own, capable of giving rise to equitable restraints in circumstances to which the traditional equitable principles have not application."

20. The equitable constraints of which Lord Hoffmann was speaking are constraints affecting the otherwise legally valid exercise of a power under the articles or constitution of a company.
21. The House of Lords concluded on the facts that there was no unfair prejudice. However, a different result emerged in Re Eurofinance Group Limited [2001] BCLC 720 where the court found that the grounds advanced for the petitioner's immediate exclusion did not justify summary dismissal, and his dismissal without an offer to purchase his interest was unfairly prejudicial. In Re Phoenix Contracts (Leicester) Limited [2010] EWHC 2375 the court held that there was a relationship of trust and confidence between the parties. The company operated as a fit out contractor. The founding members of four became two: Mr Williamson and Mr Shepherd. Mr Shepherd asserted that after the departure of the second director he and Mr Williamson discussed and agreed or had an understanding (a) that the company would be owned by the two men, (b) that they would be directly involved in the management of the company as employees and shareholders and (c) if one of them were to leave the company and the other wanted to buy his shares the purchase would be at the full market price.
22. An incident arose (which is not necessary to explain here) that led to Mr Williamson informing Mr Shepherd that he was on 'garden leave'. The locks were changed, Mr Shepherd's mobile phone was barred and he was for a while deprived of his benefit to a company car. Mrs Justice Proudman said:

"It is wholly artificial to draw a distinction between Mr Shepherd's role as an employee on the one hand and as a director and shareholder on the other."

23. Proudman J considered proceedings that had been taken in the Employment Tribunal (para 122):

"The s. 994 proceedings were in practical terms concurrent with the proceedings in the Tribunal. I do not criticise Mr Shepherd's conduct against the allegations made against him and the line taken by Mr Williamson and the Company's associate directors. If and when it comes to quantum there may be arguments about double counting. That is to say, there may be issues as to how the Tribunal's award dovetails with the valuation of Mr Shepherd's shares."

24. It appears that the parties considered the issue of employment rights the preserve of the Employment Tribunal and the issue of unfair prejudice leading to a petition to buy out shares another. If the claim for wrongful dismissal in the case was the only ground for unfair prejudice, it would, at first sight, be difficult to reconcile it with the wording of s.994 of the 2006 Act. The most obvious difficulty is that a claim for wrongful dismissal is a claim made by an employee against a company whereas the s.994 petitions may only be brought by a member on the basis that the company's affairs have been or will be conducted in a manner that is unfairly prejudicial to members. The inquiry is always fact sensitive. There was a relationship of trust and confidence (or as the judge termed it in Croly v Good [2010] 2 BCLC 569, a 'personal relationship'.) So Mr Shepherd's role as an employee of Phoenix Contracts (Leicester) Limited and his role as a director and shareholder could not be separated. The exclusion of him as an employee meant exclusion from the management. There was no separate claim for compensation for wrongful dismissal in the petition before the court. In Croly v Good the court found that an agreement for remuneration had been reached and breached in the context of a quasi-partnership. The petitioner could only claim prejudice where there was evidence supporting unfairness to him in his capacity as a shareholder of the company, and not in any other capacity such as that of employee. The relief sought was the usual buy-out.
25. In J&S Insurance & Financial Consultants Limited [2014] EWHC 2206 Mark Cawson QC sitting as a deputy High Court Judge heard a petition where the grounds were (among others) exclusion from the management without an offer to acquire shares and exclusion without remuneration or payment of dividends. The judge made a buy-out order. In respect of the relief sought for loss of income he said:

"[The petitioner] seeks a direction that an independent surveyor determine the amount of income which [he] was or would have been entitled to had he not been excluded….. As a matter of discretion, I decline to make an award which compensates [the petitioner] for any loss of salary….remedying the unfairness does not, in my judgment, on the present facts, require the Court to compensate [the petitioner] for his loss of remuneration."

26. It is clear from this passage that the Judge decided the issue of compensation for loss of salary (breach of contract) on the facts not on jurisdictional grounds. Although there appears to have been no argument as to whether or not the court could entertain a claim for wrongful dismissal when hearing a petition for unfair prejudice.

The width of the available relief

27. The court has a wide discretion in relation to the relief it may give to a successful petitioner. Section 996 of the Companies Act 1996 provides that the court may make such order as it thinks fit for giving relief in respect of the matters complained of, and an order may include certain matters listed but not important for the decision of this case. Section 996(2)(e) however provides that an order may be made to

"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."

28. A shareholder's right in the context of an unfair prejudice petition may be wider or greater than just his rights qua shareholder. Much will depend on the arrangements between the shareholders and the company, and how closely connected to the company the interests of members are how they relate to it in other capacities.
29. The authorities demonstrate that in the context of a quasi-partnership the exclusion from management and breach of employment rights maybe grounds for unfair prejudice. These exclusions usually lead to the most appropriate relief available as provided for by section 996 of the Companies Act 2006. The pleading in this case advances a case of quasi-partnership. If successful at trial the exclusion from management and loss of employment will open the door to relief.
30. In Gamlestaden Fastigheter AB v Baltic Partners Limited and others [2007] 2 BCC 272, [2007] UKPC 26 Lord Scott considered whether it was open to a member of a company to make an unfair prejudice application for relief in circumstances where the relief sought would confer no financial benefit on the Applicant qua member. The main relief sought by Gamlestaden was an order that the directors pay damages for breaches of the duty they owed as directors. Lord Scott's advice was that "there is nothing in the wide language of art 143(1) to suggest a limitation that would exclude the seeking or making of such an order: the court 'may make such order as it thinks fit for giving relief in respect of the matters complained of'. …."
31. Part of Lord Scott's reasoning relied on the English case R&H Electric Ltd v Haden Bill Electricial Ltd [1995] 2 BCLC 280, [1995] BCC 958. He said:

"This was a case where the Applicant for s 459 relief was, of course, a shareholder in the company but, via another company that he controlled, had also provided working capital to the company. He was removed by the majority shareholders from any management role and accordingly applied under s 459 for an order requiring the majority shareholders to purchase his shares and, alternatively, petitioned for the company to be wound up on the just and equitable ground. One of the grounds relied on by the majority shareholders for resisting any s 459 relief was that the Applicant's: "only real involvement was as an agent for [the other company] which was a loan creditor, not a shareholder . . .; therefore . . . there was no prejudice to [the Applicant] in his capacity as a shareholder."

As to this point Robert Walker J said this:

"If [the Applicant] himself had been [the company's] loan creditor, under arrangements made between him and the majority shareholders when the company was first being planned, I should have had little hesitation in coming to the conclusion that the arrangements were a reflection of, and sufficiently closely connected with, [the Applicant's] membership of [the company] as to be within the scope of s 459."

32. In my judgment this is authority for the proposition that court has power to make an order, when granting relief pursuant to section 996 of the Companies Act 2006, for the payment of damages or compensation to the company. In Re Charley Davies Limited (No 2) [1990] BCLC 760 Millett J noted that the 'distinction between misconduct and unfairly prejudicial management' should be measured against the remedy sought. However, in Lowe v Fahey [1996] 1 BCLC 262 Charles Aldous QC (sitting as a deputy High Court Judge) noted that the allegations "of unfairly prejudicial conduct upon which the 'buy out' order is sought centre on Mr Fahey's alleged wrongful diversion of profits from the company to Brickfield acquiesced in or condoned by Mrs Fahey; which are the very same allegations on which the derivative claims are based'. He held that if the only relief sought was compensation for the company, then a derivative action was more suitable. If the relief is not exclusively on behalf of the company, and: (p268):

"where for example the unfair prejudicial conduct involves a diversion of company funds a petitioner is entitled as a matter of jurisdiction to seek an order under s461 for payment to the company itself not only against members, former members or directors allegedly involved in the unlawful diversion, but also against third parties who have knowingly received or improperly assisted in the wrongful diversion."

33. The deputy judge in Lowe v Fahey came to his conclusion having considered an earlier judgment of Lindsey J in Supreme Travels Limited v Little Olympian Each-Ways Limited [1994] BCC 947 where he emphasised that the statute had given the courts the "greatest possible flexibility".

Conclusions

34. The Companies Act 2006 has not cut down the wide language used in respect of section 994 or the relief that may be granted by the court. The court may make such order as it sees fit to grant relief. As the language is so wide it cannot be said in my judgment, it shuts out relief for compensation for breach of a service agreement. When considering the interests of the petitioner in this case much will depend upon the relationship with the other members.
35. The petitioner will have to show that the affairs of the Company have been conducted (by act, omission or proposed act or omission) in such a way that is both unfair and prejudicial to the interests of members. The service contract with the Company may be a reflection of the overall relationship and the interests of members. When the evidence is heard the court may or may not treat the separateness (the term used by Lord Scott) of the petitioner as member and the petitioner as employee as excluding him from relief for the relief sought. It may demonstrate that the petitioner as member and employee "formed part (and an essential part) of the arrangements entered into for the venture to be carried on" by the Company. If the evidence favours the petitioner this will overcome the objection that the petitioner is not pursuing the claim qua member.
36. In my judgment J&S Insurance & Financial Consultants Limited demonstrates a willingness of the courts to entertain a breach of contract claim within an unfair prejudice petition, although it was not argued otherwise. Phoenix Contracts (Leicester) Limited may be treated as authority for the proposition that the court will ensure that there is no double recovery when there is a concurrent unfair prejudice claim and claim for compensation in the Employment Tribunal for wrongful dismissal. It does this by giving directions in respect of a share valuation so the necessary adjustments can be made. The court will be astute to ensure no double recovery if a buy-out order is made.
37. In these circumstances, although the point is novel (I am informed there is no authority that deals directly with a challenge to a claim for wrongful dismissal in the context of an unfair prejudice petition), I find that it is not appropriate to strike out the claim.
38. In any event, if the claim for loss of salary (breach of contract) were to be commenced by an ordinary claim form, there could be no real objection to it being heard together with a petition for relief for unfair prejudice: the issues arise out of the same facts. In my judgment it would be inefficient, disproportionate, a waste of court resources and could lead to different findings of fact if such a claim were to be heard in a separate proceeding. As a matter of case management I would order the trial of all issues be heard together before a Registrar of the High Court.
39. I invite counsel to agree an order.