England and Wales High Court (Chancery Division) Decisions

“Dear Greg.

I am inviting you to a disciplinary hearing on Wednesday 30 November 2016 at 11am to be held at the business address in Manchester. 

The reasons for the hearing are as follows.  I believe you have breached your fiduciary duty to disclose your involvement in another company to a fellow director, i.e, Myself.  I believe this to be a conflict of interest to Lloyds Autobody Ringway Ltd. 

You can if you wish have a member of staff or a trade union representative present at the meeting. 

I need to inform you that the possible outcome of the hearing could lead to termination of your employment.

Yours sincerely,

Ged Lynch-Smith”

“We understand that your client is an employee, shareholder and director of Ringway.  You are also a director and shareholder of the Company, and you have purported to suspend our client, pending an investigation into our client’s involvement with a third-party company, Novo Incident Management Ltd, and which you claim is a “conflict of interest”.  You have summoned our client to a disciplinary hearing organised for this morning at 11am at the Company’s premises in Manchester. 

Our client will not be attending the disciplinary hearing.  It does not appear that there is any basis for our client’s suspension and/or the disciplinary hearing, but we invite you nonetheless to set out grounds and justification for the same in writing. 

Our client will be taking annual leave for the remainder of the week and next week.  We will write further with a more substantive response in relation to matters more generally regarding the Company in the near future.”

“I was disappointed that you did not attend our meeting set for 11am yesterday … and did not even let me know that you would not be attending. 

I therefore invite you once more to attend - this time 11am on Thursday 8 December 2016 - at the business address in Manchester. 

Would you please confirm by no later than 12 noon on Tuesday 6 December that you will be attending this rearranged meeting.

The reason for the hearing is, as stated, that you breached your fiduciary duty to disclose your involvement with Novo Incident Management Limited. 

During my investigations you informed me that you had invested in Novo, so there is, in my belief a fiduciary duty to have informed me. 

I will also put to you that you are receiving a gain in the way of a return from hire charges billed from Novo. 

Your Lloyds Autobody Expenses look to me as though they are being used for personal gain (i.e. Starbucks, Fuel for used for Personal and Novo Business). 

You again have the right to be accompanied at the meeting by either a work colleague or trade union representative.

Finally, I must make you aware that if you fail to attend the hearing - without good reason - it will be conducted in your absence and that the result could lead to termination of your employment.”

(1)    That the parties should instruct a joint independent accountant to value Mr Davies’s shareholding in the company, both with and without a minority discount.

(2)    That whilst Mr Lynch-Smith maintained that Mr Davies had been fully informed of the management charges and had approved the same, Mr Lynch-Smith suggested that the solicitors instruct the joint independent account to consider what impact, if any, the management charges recorded in the accounts had had on the value of Mr Davies’s shareholding; and

(3)    That the costs of the independent accountant be paid by Mr Davies and Mr Lynch-Smith equally.

It was said that such a valuation would narrow the issues and advance both parties’ positions.  It would also facilitate the purchase of Mr Davies’s shares by Mr Lynch-Smith and settlement discussions, as appropriate.  Ultimately, the hope was expressed that it would save the parties the time and costs associated with proceedings, as well as court time.  However, if court proceedings did become necessary following that process, the issues for the court to consider would be reduced, and so too would the complexity and cost of the proceedings.  If Mr Davies were agreeable to this proposal, Hill Dickinson would provide Knights with suggestions for the independent accountant, and a draft joint letter of instruction for Knights’ approval.  Hill Dickinson said that they were of the firm view that it would be entirely premature of Mr Davies to proceed to commence proceedings in the above circumstances (and generally).  The proposals set out did not prejudice Mr Davies’s position in any way and, ultimately, should serve to reduce the costs incurred by both parties.  Should he commence proceedings, Hill Dickinson anticipated being instructed to make an application for a stay to enable the parties to obtain an independent valuation and would bring the correspondence to the attention of the court on costs.

‘Specifically I see no reason why a director cannot, without committing any breach of his duty of good faith, seek to drive as hard a bargain as he is able with his future employer over the terms on which he is to be employed and the fact, if fact it be, that the result of so doing may be that the employer is deprived of assets which that employer might otherwise have devoted to trading with or acquiring an asset from the company of which the director is still then a director seems to me to be of no consequence’. 

“The burden lies on the person owing the fiduciary obligations in case of any doubt to establish the propriety of any particular payment and to account for it.  This in my judgment is particularly so where on the facts, as here, the admitted recipient is the fiduciary himself.  There is a heavy burden to account and justify.”

Mr Davies accepted that he had received the commissions, and it was therefore for him to discharge the burden of establishing that he had accounted for them; and in my judgment he has not discharged this burden.  However, even if the burden of proof had rested on Mr Lynch-Smith to disprove that he had received any of the commissions, I would have held that he had discharged it.  I find that Mr Davies has not properly accounted for the commissions he collected from PCH.  Strictly, he should have accounted to Ringway since it was Ringway which had provided the opportunity for Mr Davies to earn the commissions.  In the case of the monies paid into the Weatherbys account, I accept that Mr Lynch-Smith has had the benefit of half of the commissions; but Mr Davies has had the benefit of the other half even though he was only a 25% shareholder in Ringway.

“Lord Hoffmann’s remarks on no‑fault divorce in O’Neill v Phillips were not directed to the case where fault amounting to unfair prejudice was found to exist on the part of the respondents.  He was concerned only to exclude the possibility of a buy-out order being made simply because the parties found it difficult to co-exist, although nothing amounting to unfair prejudice could be made out.” 

That passage is to be found in a section of the Court of Appeal’s judgment headed “Fault on Both Sides”, where it rejected the argument that the existence of fault on the part of the petitioner could be used to support the rejection of a buy-out order.

“… the question, at least in this case, is whether removal of [the petitioner] as a director and employee, without any offer to buy his shares, was a proportionate and justifiable response to what they had discovered.  In many cases, unfairness will lie not in exclusion alone but in exclusion without a reasonable offer being made…’. 

The Deputy Judge went on to recognise that the question whether exclusion with an offer (and what offer) might have remedied any unfairness might be relevant to remedy.

(1)    The task of the court, in granting relief under section 994, is, first, to identity the unfair prejudice which has been established and, then, to fashion the relief so as to cure that prejudice.  That principle must underly the issue whether or not a discount for a minority shareholding should be applied. 

(2)    The whole purpose of the unfair prejudice remedy is to grant the oppressed minority a remedy which they would not otherwise have.  It would substantially defeat the purpose of the new remedy if the oppressing majority were routinely rewarded by the application of a discount for minority shareholding.

(3)    Thus, whether or not a discount for a minority shareholding is applicable involves drawing a distinction between the general case, where it would be unfair to treat the wronged petitioner as a willing seller, and therefore for the price to be fixed on a discounted basis, and the exceptional case where it would fair to do so because (for example) he had acquired his shares at a discounted price, or had so acted as to deserve his exclusion from the company.  In other words, the emphasis of the underlying principle lies in the unfairness in treating a successful petitioner as a willing seller.

(4)    Although the general rule is that there should be no discount, the court retains a wide discretion and may apply a discount where, apart from section 994, the petitioner would not have succeeded in securing a winding-up order on the just and equitable ground: see in particular observations of HHJ Purle QC in Sunrise Radio Ltd at paragraph 301 and Mr Robin Hollington QC in  Re Blue Index Limited, Murrell v Swallow at paragraph 33. 

(5)    The choice is not necessarily between an undiscounted and a fully discounted valuation.  The wide terms of section 994 leave it open to the court to order the purchase of the petitioner’s shares at some middle figure, involving an intermediate discount, where neither a pro rata valuation nor a minority shareholding valuation would be fair: see, in particular, the observations of Mr Nicholas Strauss QC in Richards v Lundy at 398 letters C to F, and Joffe at paragraph 6.334.  However, in my judgment such cases are likely to be rare; and the court must beware of the dangers of applying “palm tree” justice before adopting some middle course. 

(6)    At least in the case of a going concern, the starting point is that the shares should be valued on the date on which they are ordered to be purchased, although the court has a discretion to vary this date, and fairness may require an earlier valuation date, as where the company has been deprived of its business: see in particular Re Addbins Ltd, Ashdown v Griffin at paragraph 82 per the late Mr Edward Bartley Jones QC. 

(1)    For the reasons I have already given, I find that Mr Davies fully deserved his exclusion from the company.

(2)    This is not a case where Mr Davies would stand any prospect of securing a winding‑up order in respect of the company on the just and equitable ground. 

(3)    In seeking a buy-out order in the circumstances as found by this court, Mr Davies should be treated as willing, and not a reluctant, seller. 

(4)    This is not a case where it would be a wholly unjustifiable reward for unfairly prejudicial conduct if the court were to order Mr Lynch-Smith to purchase Mr Davies’s shares at a full minority discount. 

(5)    This is not a case where the petitioner has provided anything more than (possibly, and at the most) the nominal value for his shares, or has invested any monies personally in the company.  Although he has provided company guarantees, they have never been called upon. 

(6)    The business connections, expertise, opportunity, and rationale for the establishment of the company were all provided by the respondent rather than the petitioner. 

Although the process of legal reasoning which leads to this conclusion is a little more involved than Mr Budworth’s stark alternatives would suggest, in my judgment he was correct to pose the binary choice between granting no relief at all and ordering the purchase of Mr Davies’s shares on a fully discounted basis.

(1)    Mr Wilkinson has attached too much, and Mr Houghton has attached too little, weight to the effect on the multiple of Ringway’s small size and the attendant risks of its business being overly concentrated upon a few major prestige car dealerships, particularly Bentley;

(2)    Mr Houghton has attached too much, and Mr Wilkinson too little, weight upon the barriers to new entrants to the car body repair business represented by the high costs of securing accreditation from prestige car dealerships; and

(3)    Mr Houghton has attached insufficient weight to the lack of facilities for material growth in the business of Ringway recognised at paragraph 4.1.4 of his report. 

Both experts recognise the subjective nature of the exercise of identifying the appropriate multiplier. 

(1)    That £20,000 should not have been paid in respect of Lee Peat’s salary after he moved over from HPP to be the manager of the bodyshop at Lloyds Liverpool in September 2011; and

(2)    That £40,000 should not have been paid to Lloyds Liverpool as a management recharge (which was misrecorded as a wages recharge) because Lloyds Liverpool had provided no management services for HPP.

As with the historic management charges applied to Ringway, and for the same reasons, I am not prepared to revisit HPP’s accounts in this way.

(1)    Mr Davies’s suspension and exclusion from Ringway were amply justified by his own conduct; but

(2)    the failure to offer to buy out his shares on a fully discounted basis of 60% was unfairly prejudicial to Mr Davies, notwithstanding that he had richly deserved his suspension and expulsion.

End of Judgment