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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Anderson v Hogg [2000] ScotCS 26 (28 January 2000)
URL: http://www.bailii.org/scot/cases/ScotCS/2000/26.html
Cite as: (2000) SLT 634, [2000] ScotCS 26
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OUTER HOUSE, COURT OF SESSION |
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P67/9c/96
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OPINION OF LORD REED in Petition of JOHN FARQUHAR ANDERSON Petitioner; against RUARAIGH HOGG Respondent:
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Petitioner: G.M. Henderson; Ketchen & Stevens, W.S.
Respondent: Party
28 January 2000
These proceedings concern a petition brought under section 459 of the Companies Act 1985 in respect of a company named T. Anderson & Co. (Potato Traders) Limited ("the Company"). It is a matter of agreement that the Company is a company incorporated under the Companies Acts. Its registered office is in Scotland. It has a share capital of 160,000 shares of £1 each, all of which have been issued. 40,000 shares are held by the petitioner. A further 40,000 shares are held by the petitioner's wife, Mrs Helen Anderson. 20,000 shares are held by the respondent. A further 20,000 shares are held by the respondent's wife, Mrs Senga Hogg, who is also the petitioner's niece. The remaining 40,000 shares are held by Mrs Janet Scrimgeour, who is Mrs Hogg's sister. The Company has two directors: the petitioner and the respondent.
The history of the Company was explained in evidence and does not appear to be in dispute, except insofar as relatively recent events are concerned. At one time the petitioner and a Mr Braid were in business together growing and selling potatoes. The business was a partnership, with the petitioner and Mr Braid being the partners. Mrs Hogg and Mrs Scrimgeour are the daughters of Mr Braid. As they are also the nieces of the petitioner, I presume that Mr Braid was the petitioner's brother-in-law. The respondent was an employee of the partnership, and married Mr Braid's daughter, Senga. In 1981 Mr Braid died, and the respondent became a partner in the firm in his place.
Some time later the partners decided that the business should be incorporated, and that the "growing" side of the business and the "trading" side of the business should be carried on by separate companies. "Off the shelf" companies were acquired. The Company had been incorporated by company formation agents, Oswalds, in June 1983 under the name Nalten Limited. The Company was "purchased" by the petitioner and the respondent in September 1983 and its name was changed the following month. Another off the shelf company was similarly acquired and its name was changed to T. Anderson & Co. (Growers) Limited ("Growers"). Nevertheless, the business continued to be carried on by the partnership for several years. From 5 April 1986 the Company began carrying on the trading part of the business previously carried on by the partnership. Growers also began carrying on the growing part of the business around that time, or somewhat earlier. The companies were run on an informal basis, with decisions being taken on the basis of informal discussion. They were run as a single operation. The formal division of the business between the two companies was explained by the respondent as being due to tax considerations.
As the subsequent stages in the history are in dispute, I shall summarise the relevant evidence and then make certain findings.
The petitioner stated that he retired from the business in February 1989. He remained a director, but not an "active" director. He did not receive any remuneration. With his agreement, the respondent took over sole control of the management of the business. At the time of his retiral, he was receiving a salary of £257 per week from the Company, and the respondent was receiving £252 per week. The respondent immediately increased his own salary to £257 per week. That was all right. Shortly after his retiral, the two families (i.e. the Anderson side - himself and his wife - and the Braid side - Mr and Mrs Hogg and Mrs Scrimgeour) decided that the business should be wound down and the assets sold off. Most of the employees (of which there were 16 at the time of his retiral) were made redundant in about July 1989. The business was gradually wound down and the assets were sold off. In June 1991 there was a meeting of the shareholders at the respondent's house. At the meeting, the petitioner asked about wages. The respondent said that he did not have the wages book at present, and referred the petitioner to the Company's accountants. The petitioner thought that was a strange answer. He did not contact the accountants or otherwise pursue the matter. In June 1992 there was a meeting at the offices of T.D. Young & Co., who acted as the Company's solicitors. During the meeting, the respondent asked for a redundancy payment of £50,000, together with his company car, which he said was worth £10,000. The petitioner said it could not be paid, and that he would not agree to it. The £50,000 was nevertheless paid, and the respondent received the car. In December 1992 the petitioner asked the respondent for the wages book, and it was given to him. He discovered that the respondent's wages had increased. The petitioner had not agreed to the increases. The respondent had also received bonuses. These had not been agreed either. The petitioner went straight to his solicitors.
The petitioner was asked about a loan made by the Company to Mrs Hogg to assist in buying a house, which had been repaid after a month, without interest. The petitioner had been aware of the loan. Mrs Hogg had asked him if they could have a bridging loan. He agreed. The question of interest was not discussed. The petitioner was also asked about a pension contribution of £1,999 which had been paid by the Company for the respondent's benefit. The petitioner had known nothing about that at the time. In the past, the respondent's pension contribution had been £999 per annum.
The petitioner stated that an attempt had been made to remove him as a director of the company in October 1996. Attempts had also been made to put the Company into liquidation. Neither "side" - the petitioner and his wife, on the one hand, and the respondent, his wife and his sister-in-law, on the other hand - could command a majority of votes. The petitioner understood that the respondent was able to exercise a casting vote under the Company's articles of association (by virtue of Article 60 of Table A in the First Schedule to the Companies Act 1948, as amended by the Companies Acts 1967 to 1980). He had therefore obtained an interim interdict to prevent the respondent from convening a shareholders' meeting. I note from the interlocutor sheet that that interim interdict was obtained ex parte in October 1996.
In cross-examination (by the respondent, who conducted his own case with courtesy and dignity), the petitioner accepted that he had, on his retirement, instructed the respondent that the Company was not to borrow or get into overdraft. In consequence, the business was unable to plant potatoes. It had come through two difficult years. The potato trade was not very healthy. A decision was taken by the families to make most of the staff redundant, due to the difficult trading conditions. The petitioner also accepted that, after the respondent had taken over the management of the Company, doubts had emerged as to whether the business had been incorporated at all. It was discovered that the only shares issued were still held in the names of two employees of Oswalds, and that the fixed assets were still held in the name of the partnership. These problems had not been sorted out until the 1990s. In relation to the redundancy payment, the petitioner said in cross-examination that, when the respondent had made his proposal at the solicitors' office, his reaction had been to say that he would need to think about it. He accepted that he might have asked why the proposed payment to the respondent was greater than the proposed payment to his own son, Gordon Anderson (an employee of the Company), and that the respondent might have explained that each payment had been calculated as equivalent to two years' salary. He accepted that he had come to see the respondent to discuss Gordon's redundancy payment, and that it was possible that the subject of the respondent's own payment might have come up. Asked if he had said, "Go on and get it all done," the petitioner responded that he had agreed nothing but the car: he had only agreed that the respondent should receive his company car. Asked about the attempt to have him removed as a director, the petitioner accepted that he had refused to sign balance sheets. He could not recall whether he had also refused to sign annual returns to Companies House and cheques payable to the Inland Revenue.
Thomas Young, of T.D. Young & Co., clarified matters somewhat. He had acted for the partnership, and subsequently the companies, for many years in connection with minor litigation, but had become more closely involved when Growers ceased to trade and he was asked to advise about winding up. He discovered that the shares in both companies were still held by the original nominees. Moreover, the companies' accounts had not been properly dealt with either. The final accounts of the partnership did not tally with the opening accounts of the companies: in particular the partners' capital accounts did not tie in with the purported allocation of shares. No company secretaries had ever been appointed. Mr Young recollected the meeting at which the subject of redundancy packages for the respondent and Gordon Anderson had been raised. The respondent put forward a proposal. The petitioner said he wanted to think about it, and asked why the packages were different. There was mention of the difference between the respondent's salary and Gordon Anderson's salary. The meeting ended with the petitioner saying that he would think about it and get back to the respondent direct. Mrs Scrimgeour had also been at the meeting and had not objected to the proposal. Mr Young advised the respondent that the petitioner's consent was necessary. In cross-examination, Mr Young said that nothing had been obvious from the companies' paperwork. He had advised the respondent that he was a director, even though the formalities had not been completed. The petitioner had told Mr Young that the reason his relationship with the respondent had broken down was the petitioner's mother's will (the petitioner's mother being also Mrs Hogg's grandmother). The will had been changed.
The petitioner's wife, Mrs Helen Anderson, confirmed her husband's account of the discussion of wages at the meeting in June 1991. She had never authorised any wage increases, redundancy payment, pension contribution or bridging loan.
Gordon Anderson's evidence was taken on commission. He stated that he had worked for the "firm" from 1982 until he was made redundant in July 1989. He then re-joined the firm in October 1989 and remained there until June 1992. His father, the petitioner, had retired on his fifty-fifth birthday in February 1989. Until July 1989 the firm had grown and sold potatoes. After October 1989 the only staff were the respondent, a part-time book-keeper and himself. The only trading was as an intermediary between farmers and potato merchants, and in the letting of property. In October 1989 his wage was £150 per week gross. By June 1992 it had increased by something like £20 per week. When he was made redundant in June 1992 he received a payment of £20,000 and his company car. Mrs Anderson, Mrs Hogg and Mrs Scrimgeour took no active part in the running of the business. He had been at the meeting in June 1992 in the solicitor's office. The respondent had raised the subject of redundancy packages, and had proposed that he himself should receive £50,000 and his company car, and that Gordon Anderson should receive £20,000 and his company car. The petitioner had said that the difference between the packages was too great. He felt that the business was 50/50 between the two families, and he could not agree to the difference. In cross-examination, Mr Anderson accepted that he had been an employee of the firm (aged 26 in 1992), whereas the respondent had been a director. In relation to the redundancy packages proposal, his father had said at the meeting that he would have to think about that. Mr Anderson had subsequently received £20,000 plus the car. His father, on his retirement, had received a sum of money from a pension fund which had possibly been financed by the Company. That sum might have been £30,000. His father's stance at the meeting had been that if Gordon Anderson was receiving £20,000 and the respondent was receiving £30,000, then that would have been agreed.
The respondent gave evidence that both companies had always been run on an informal basis, without regard to the procedures required by company law. After he took over the management of the business in 1989, he was given a considerable amount of discretion as to the running of the business. He described the business as a quasi-partnership which had sought the benefit of limited liability. He had acted at all times in good faith, and had understood that he had had the agreement of the other shareholders. There was no formal company administration: no formal meetings, records, agendas or minutes.
In relation to the salary increases, he explained that the £257 per week which he had been paid by the Company in 1989 had not been the whole of his salary: there had also been a sum paid by Growers. In reality, he had received a salary to which both companies had contributed. When Growers was wound up, the amount paid by the Company had increased so as to maintain his salary at its previous level. That had been agreed by the petitioner. He (the respondent) had mentioned it at the end of the meeting in June 1991. That was the explanation of the increase in the salary paid to him by the Company of £155 per week in December 1990. The other increases had been periodical increments, in line with those paid to the other employees. The pay rises had not been discussed specifically with the petitioner: when the subject had been raised, informally, his attitude had been "I'm retired, on you go." The bonuses were in line with the business's normal practice of paying annual bonuses. All these matters had been mentioned casually from time to time, and had been disclosed in the balance sheet produced for the annual general meeting (which detailed directors' remuneration). From notes produced by the respondent, it appeared that such meetings had been held, following the petitioner's retirement, on 15 June 1991 and 5 June 1992 (the meeting attended also by Mr Young). Directors' remuneration was disclosed in the accounts for the year to 30 November 1990 (dated 30 April 1991) and in the accounts for the year to 30 November 1991 (dated 30 April 1992). The allegedly unauthorised increases took place during these two years. The respondent felt that he had had authority to deal with matters of this kind.
In relation to the pension contribution, the respondent explained that his contribution had been fixed at £999 before he became managing director. The petitioner, who was the then managing director, had a much higher contribution. When the respondent became managing director, he understood that he was entitled to the same remuneration as the petitioner had received in that capacity. He increased his salary to the same level as the petitioner's, and he understood that he was equally entitled to increase his pension contribution to the same level as the petitioner's. The contributions remained initially at the level of £999, but in the final year the respondent added £1,000 on the advice of his financial adviser. That was only part of the increase which he had forgone in earlier years.
In relation to the redundancy package, the respondent accepted that a payment of £50,000 for himself, and a payment for Gordon Anderson, had been proposed at the meeting at the solicitor's office, and that the petitioner had then said that he wanted to think about it. The respondent's note of the meeting recorded, in relation to that matter: "Redundancy. RH 50 + car. GA 20 + S. JFA thinks unfair discrp. bet. RH and GA." Subsequently the petitioner had visited the respondent and asked about Gordon's car and cheque, and also asked, "What about yourself?" The respondent told him that it would take another two months to get everything wound up. The petitioner said, "Get on and get it all done." The respondent thereafter transferred Gordon's car into his name and gave him the cheque for £20,000. He was under the impression that the petitioner was by then agreeable to the respondent's receiving the £50,000 he had earlier proposed. Gordon was his assistant. His salary was less than half the respondent's.
In cross-examination the respondent agreed that he had received a salary of £400 per month from Growers until the petitioner's retiral, when his salary had been increased to £620 per month. Those figures were paid on a four-weekly basis. The £155 per week in issue was that figure of £620 divided by four. In relation to the bridging loan, the respondent explained that he and Mrs Hogg were about to move into their new house, and had workmen due the next day to carry out alterations, when they discovered that their solicitor had not applied for a property enquiry certificate, and that the mortgage could therefore not be advanced. In this emergency, Mrs Hogg had asked her uncle, the petitioner, if he would agree to the Company's advancing a bridging loan. He had agreed. The loan had been repaid a month later. No interest had been paid, but that was in accordance with previous practice when the Company had made loans, when interest had never been asked for. The Company had ceased trading several years ago. Its only significant asset was a sum of money, held on deposit and waiting to be distributed. Depending on the outcome of these proceedings, there might be further amounts to be added to that sum by the respondent.
The sums in issue in these proceedings were agreed by joint minute. The allegedly unauthorised salary payments, together with the allegedly unauthorised bonus payments, totalled £28,612.40 (comprising £14,105 in respect of the increase of £155 per week, £10,466.40 in respect of the other increases and £4,041 in respect of the bonus payments). The redundancy payment, together with the value of the car, totalled £60,000.00. The allegedly unauthorised pension contribution was £1,000. Interest forgone on the bridging loan was estimated at £1,894. The petitioner seeks to have the respondent ordained to repay these sums to the Company, with interest at an appropriate rate from the date when each payment was made.
In addressing me on behalf of the petitioner, counsel submitted that the salary increases, bonus payments and other remuneration had been paid contrary to Article 76 of Table A, which provides:
"The remuneration of the directors shall from time to time be determined by the company in general meeting."
Article 108 had also been breached. It provides:
"A managing director shall receive such remuneration (whether by way of salary, commission or participation in profits, or partly in one way and partly in another) as the directors shall determine."
Counsel acknowledged that the Company had, as he put it, been "run on chaotic lines", but submitted that compliance with the Articles was a fundamental requirement. The loan was contrary to section 330(3)(b) of the Companies Act 1985, which provides:
"(3) A relevant company shall not -
......
(b) make a loan.... to a person connected with such a director [scil. a director of the company.]"
The redundancy "package" was paid contrary to section 312 of the Companies Act 1985, which provides:
"It is not lawful for a company to make to a director of the company any payment by way of compensation for loss of office, or as consideration for or in connection with his retirement from office, without particulars of the proposed payment (including its amount) being disclosed to members of the company and the proposal being approved by the company."
So far as the evidence was concerned, counsel invited me to reject the evidence of the respondent insofar as it was inconsistent with that of other witnesses. The respondent was criticised for having given certain evidence (e.g. as to the explanation for the increase in his salary) which had not been foreshadowed in his pleadings and had not been put to the petitioner in cross-examination. It was suggested that this evidence was a last-minute fabrication.
In response to questions from myself (which at the outset of the proof I had indicated I wished to be addressed on) as to the appropriateness of proceedings under section 459, and as to the appropriateness of the remedy sought, counsel submitted that the petitioner's interest in the Company as a minority shareholder was unfairly prejudiced whenever unauthorised payments were made by the Company. He was unable to compel the Company to take proceedings against the respondent, because he did not command a majority of the votes (counsel accepted, however, that no attempt had been made to have such proceedings brought). It was incompetent under Scots law for the petitioner to bring proceedings against the respondent in the name of the Company. Section 459 therefore provided the only remedy. Reference was made in that regard to Palmer's Company Law, 25th edition, para.8.817 and the authorities cited there. I was accordingly moved to ordain the respondent to repay the disputed sums. Alternatively, I was invited to make an order under section 461(1)(c) of the 1985 Act, authorising the petitioner to bring proceedings against the respondent in the name and on behalf of the Company.
In reply, the respondent submitted that the petitioner had not been treated unfairly, even if all the requirements of company law had not been observed. In that regard, he stated that he would not have stood in the way of proceedings being taken against him by the Company, provided the petitioner had agreed to indemnify the Company in respect of expenses. He had in fact offered to go to mediation, but the petitioner had rejected that offer. He had also attempted to have the Company put into liquidation, and had offered to accept the liquidator's decision on the matters in dispute, but the petitioner had prevented the appointment of a liquidator.
Section 459 of the 1985 Act enables a member of a company to apply to the court for an order
"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....".
The crucial question in the present case is therefore whether the Company's affairs have been conducted in a manner which is unfairly prejudicial to the interests of the petitioner.
As was observed by Hoffmann L.J. (as he then was) in Re Saul D Harrison & Sons plc [1995] 1 B.C.L.C. 14, 17 - 18:
"In deciding what is fair or unfair for the purposes of s.459, 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 s.459 will be to ask whether the conduct of which the shareholder complains was in accordance with the articles of association."
Counsel for the petitioner was accordingly correct in drawing attention to the articles (and relevant statutory provisions). The articles are however only the starting point: they are not also the finishing point. As Hoffmann L.J. further observed (at 18):
"Although one begins with the articles and the powers of the board, a finding that conduct was not in accordance with the articles does not necessarily mean that it was unfair, still less that the court will exercise its discretion to grant relief. There is often sound sense in the rule in Foss v Harbottle (1843) 2 Hare 461. In choosing the term 'unfairly prejudicial', the Jenkins Committee (para.204) equated it with Lord Cooper's understanding of 'oppression' in Elder v Elder and Watson, 1952 S.C. 49:
'a visible departure from the standards of fair dealing and a violation of the conditions of fair play on which every shareholder who entrusts his money to a company is entitled to rely.'"
Lord Hoffmann returned to the meaning of the words "unfairly prejudicial" in O'Neill v Phillips [1999] 1 WLR 1092, observing (at 1098-1099):
"[A] member of a company will not ordinarily be entitled to complain of unfairness unless there has been a breach of the terms on which he agreed that the affairs of the company should be conducted."
Although the articles formally constitute the terms on which the members of a company enter into association, the equitable principles which the court must apply under section 459 are concerned with good faith, and therefore with what the parties, by words or conduct, have actually agreed. I adopt the latter phrase from a subsequent passage in Lord Hoffmann's speech in the same case (at 1101):
"[O]ne useful cross-check in a case like this is to ask whether the exercise of the power in question would be contrary to what the parties, by words or conduct, have actually agreed. Would it conflict with the promises which they appear to have exchanged? In Blisset v Daniel [(1853) 10 Hare 493] the limits were found in the 'general meaning' of the partnership articles themselves. In a quasi-partnership company, they will usually be found in the understandings between the members at the time they entered into association. But there may be later promises, by word or conduct, which it would be unfair to allow a member to ignore."
Following that approach, I take the articles and the relevant statutory provisions as my starting point. So far as remuneration is concerned, the relevant provision appears to me to be Article 108, since the respondent was the managing director of the Company throughout the relevant period. It is common ground that the increases in remuneration which are now challenged were not determined in advance by the directors. I however accept the respondent's evidence that the petitioner had been content to allow him to determine his own remuneration: it emerged clearly from the evidence that the relationship between the petitioner and the respondent at that time was one of trust and confidence. I am also inclined to accept the respondent's evidence that the petitioner became aware of the increase in salary which was designed to compensate for the loss of the Growers' salary, and was content with that increase. I think it likely, in the circumstances of this business, that the petitioner would have expected the respondent's earnings to remain at the same level despite the winding-up of Growers (the division of the operation between two companies being regarded as little more than a legal technicality). I also accept that periodical increments, and the payment of annual bonuses, were customary aspects of the payment of remuneration by the Company to its staff. An increase in the respondents' pension contribution was to be expected on his promotion to the position of managing director. I also accept that the respondent's remuneration was in fact disclosed in the balance sheets produced for annual general meetings. I regard it as significant that the petitioner accepted in his evidence that the respondent might have explained to him that the redundancy packages were equivalent to two years' salary: that would have been likely to have set alarm bells ringing if a salary of around £30,000 per annum was out of line with the petitioner's expectations. I would also have expected the petitioner to have raised the issue of directors' remuneration at the annual general meetings in 1991 and 1992 if the figures disclosed in the accounts had been considered unacceptable at the time.
I was not addressed in detail on the meaning and effect of Article 108 in the circumstances of this case, and in particular on the questions whether directors can determine remuneration, for the purposes of Article 108, informally, or retrospectively, or by authorising a director to fix his own remuneration. This is not a suitable case to decide these questions, and I accordingly prefer to reserve my opinion on them. Assuming, without deciding, that Article 108 was not complied with, the non-compliance appears to me to be the petitioner's responsibility as well as the respondent's: each was content, at the time, for matters to be dealt with on an informal basis. Following the approach suggested by Lord Hoffmann in O'Neill v Phillips, it is plain in the present case that the members paid no heed to the articles and agreed, by their words and conduct, to conduct the affairs of the Company on an informal basis which allowed the respondent to exercise powers of management more freely than the articles may have envisaged or permitted. In these circumstances, unfairness has to be assessed against what the members actually agreed rather than against the articles. I do not consider, in the circumstances of the present case, that the affairs of the Company were conducted unfairly in relation to the respondent's remuneration.
So far as the loan is concerned, section 330(3)(b) of the 1985 Act does not appear to me to be applicable, since the Company is not a "relevant" company within the meaning of that provision: see section 331(6). The loan was not challenged on any other basis.
So far as the redundancy payment is concerned, reliance was placed on section 312 of the 1985 Act. I was not addressed in detail on the effect of section 312. In particular, I was not addressed on the question whether section 312 covers payments made to compensate for the loss of a position as an employee (cf. Taupo Totara Timber Co v Rowe [1978] AC 537 and Lander v Premier Pict Petroleum Ltd, 1997 S.L.T. 1361), or on the question whether there is any particular form in which the proposed payment has to be approved by the company (e.g. in general meeting). Nor was I addressed on the implications of Article 87, which empowers the directors to pay a gratuity on retirement to any director who has held any other salaried office or place of profit with the company. I note that in Taupo Totara the Privy Council expressed their agreement (at 545) with the judgment of Hudson J. in Lincoln Mills (Aust.) Ltd v Gough [1964] V.R. 193, to the effect that a provision in substantially the same terms as section 312 did not extend to payments made to persons who were directors in connection, not simply with the office of director, but also with some employment held by the director. That appears also to have been the understanding of the Cohen Committee (Report of the Committee on Company Law Amendment, Cmd. 6659, 1945, para.92). Like Lord Osborne in the Lander case (at 1365), I would be inclined to follow that approach, given the high persuasive authority of the judgment in Taupo Totara. Following that approach, the payment to the respondent would appear to fall within the scope of Article 87 rather than section 312. I am however unwilling to decide a point of such importance in the absence of argument, and it is, I think, in any event unnecessary for me to do so. The issue on which the argument focused was whether the petitioner had in fact agreed to the proposed payment. I do not find that an easy matter to determine. It is clear that he did not agree at the meeting on 5 June 1992. It is also clear that he subsequently agreed that the respondent should receive the car. In relation to the £50,000 payment, I accept that the petitioner's concern at the meeting on 5 June 1992 was the differential between that sum and the amount to be paid to his own son. I accept that he was content that his son should receive £20,000, and that the respondent should receive £30,000 (plus the car). On balance, I am prepared to accept that the petitioner never gave his agreement to the proposed £50,000 payment. On the other hand, given that the petitioner's son was a 26 year old junior employee, and that the respondent was a much older man and the managing director, and was paid a much higher salary, a payment of £50,000 was not outrageously large if a £20,000 payment for the son was acceptable. It also appears that the respondent gained the impression, in good faith, that the petitioner was no longer concerned about the proposed £50,000 payment so long as his son received the proposed £20,000. Given the informal manner in which the Company's affairs were conducted, there was ample possibility for such misunderstandings. In these circumstances, I would not regard the redundancy payment as an instance of the Company's affairs being conducted unfairly.
In the whole circumstances, I am not persuaded that the various payments in issue demonstrate "a visible departure from the standards of fair dealing and a violation of the conditions of fair play" (to adopt Lord President Cooper's words) on which the petitioner, as a shareholder, was entitled to rely. As I mentioned earlier, under reference to Hoffmann L.J.'s judgment in Re Saul D Harrison & Sons plc, even if the conduct out of which the petition arises can be characterised to any extent as unlawful as against the Company, it does not follow that the petitioner has been treated unfairly. The petitioner might, I think, have a relevant complaint under section 459 if the respondent had used his voting power as a shareholder (or a casting vote) to procure or ratify the payment of unjustifiably high remuneration, or to prevent an action being brought against himself to recover unauthorised remuneration (cf. Re Jermyn Street Turkish Baths Ltd [1971] 1 W.L.R. 1042). In such a situation, the affairs of the Company would have been conducted unfairly, in other words in a manner offensive to a sense of fairness; and the interests of the petitioner would be prejudiced in consequence. But I can see no such unfairness in the present case.
That is sufficient for the determination of the present case. There is however a fundamental aspect of these proceedings which I consider merits discussion. The conduct complained of in the present case consists of the diversion of the Company's assets by a director by way of unauthorised payments. The only remedy sought is an order for the repayment of the money by the director to the Company. It is suggested that that director is effectively in control of the Company. The focus is thus on a wrong allegedly done to the Company, and on a remedy designed to restore the Company to its previous position, rather than on any harm done to shareholders. In this situation, one would expect the most apt form of process to be an action for payment, rather than a petition under section 459. It was however submitted that, since Scots law did not enable either a representative or a derivative action to be brought, section 459 provided the only remedy.
I reject the contention that Scots law does not enable a minority shareholder to bring proceedings, other than under section 459, where those in control of the company have committed wrongs against the company. In general, of course, where it is alleged that a wrong has been done to a company, prima facie the only proper pursuer is the company itself. That general rule follows from the principle of separate corporate personality. Moreover, if the alleged wrong arises from the internal management of the company, and is a matter which is capable of being sanctioned or ratified by the members, then an individual member could not normally in any event maintain an action: either the members would ratify the act in question, in which case the company would not have suffered any wrong, or the members would not ratify the act in question, in which case the company would itself be entitled to bring proceedings. These two principles (more accurately described as two aspects of a single principle, namely that the company is to be treated as a distinct legal person exercising autonomy in accordance with its articles and the relevant legislation), sometimes referred to as the rule in Foss v Harbottle (1843) 2 Hare 461, were applied by the House of Lords in the the Scottish cases of Davidson v Tulloch (1860) 3 Macq. 783 and Orr v Glasgow, Airdrie and Monklands Junction Railway Company (1860) 3 Macq. 799. Although it has been said that "the importation of the principles of Foss v Harbottle into Scots Law was both unsatisfactory and unnecessary" (Shareholder Remedies, Law Com. No 246, 1997, Appendix D, para 10), I am inclined to agree with the opinion expressed by the Court of Appeal in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch. 204, 210:
"A derivative action is an exception to the elementary principle that A cannot, as a general rule, bring an action against B to recover damages or secure other relief on behalf of C for an injury done by B to C. C is the proper plaintiff because C is the party injured, and, therefore, the person in whom the cause of action is vested. This is sometimes referred to as the rule in Foss v Harbottle (1843) 2 Hare 561 when applied to corporations, but it has a wider scope and is fundamental to any rational system of jurisprudence."
The related "majority rule" principle also seems to me to be, as Lord Cranworth said in Orr (at 804),
"a principle not confined to the peculiar jurisdiction of the English courts, but applicable to the jurisdiction of courts everywhere. And that principle appears to me to resolve into this, that where there are shareholders in any incorporated body who have, or think they have, a right to complain of the conduct of those who are managing the affairs of that body, their remedy is not directly against the Managers, but through the Company against the Managers, and through the Company only. And upon very obvious principles; the Managers are the servants not of the individual shareholders, but of the Company; and the course, therefore, that any shareholder must take if he is aggrieved is to call upon the employers of those Managers to bring them to account, and then, that being done, to get relief from the Company itself."
It has however long been recognised that these principles cannot be treated as an absolute bar to an action by an individual shareholder, otherwise injustices could go unremedied when wrongdoers had control of the company. In Foss v Harbottle itself, Sir James Wigram V-C said (at 491-492):
"I think there are cases in which a suit might properly be so framed. Corporations like this of a private nature are in truth little more than private partnerships, and in cases which may easily be suggested it would be too much to hold that a society of private persons associated together in undertakings which, though certainly beneficial to the public are nevertheless matters of private property, are to be deprived of their civil rights inter se because, in order to make their common objects more attainable, the Crown or the legislature may have conferred upon them the benefit of a corporate character. If a case should arise of injury to a corporation by some of its members, for which no adequate remedy remained except that of a suit by individual corporators in their private characters, and asking in such character the protection of those rights to which in their corporate character they were entitled, I cannot but think that the principle so forcibly laid down by Lord Cottenham, in Wallworth v Holt [(1841) 4 Myl & Cr 619] and other cases would apply, and the claims of justice would be found superior to any difficulties arising out of technical rules respecting the mode in which corporations are require to sue".
Returning to the Scottish cases, in Orr Lord Cranworth said, immediately after the passage quoted earlier:
"If, indeed, there be any collusion that can be suggested, or any speciality, to show that the ordinary course would lead to injustice, that would give rise to different considerations".
There have been a small number of subsequent Scottish cases in which shareholders have attempted to obtain a remedy for the company, in spite of the "proper pursuer" and "majority rule" principles, and the matter has also been touched on in other cases and textbooks. Clark on Partnership, published in 1866, does not appear to contain any discussion of an action of this type, although Foss v Harbottle is cited as an authority. In Lee v Crawford (1890) 17 R. 1094, the pursuer raised an action "on behalf of himself and all other shareholders" (a formulation based upon English practice, but criticised in Wilton, Company Law and Practice in Scotland, 19th ed., p 458, and not subsequently followed), for the repayment by a director to the company of the amount of certain loans. The Lord Ordinary, Lord Kyllachy, held that the pursuer had no title to sue, since the loans, although illegal as between the directors and the company, were not ultra vires, and were therefore capable of ratification by the company. Lord Kyllachy continued (at 1095-1096):
"It is entirely in the company's option to object to such transactions, or to approve and homologate them, and accordingly it is, I think, settled law that, if an individual shareholder complains of such transactions, his remedy is, not to bring an action in Court, but to bring this matter before his fellow shareholders, and, if they agree with him, to take action in the company's name. No doubt, where the act complained of is ultra vires of the company, as, for instance, if it involves the application of the company's funds contrary to its constitution, any shareholder is entitled to take individual action.
The reason is that such acts cannot be validated even by consent of all the shareholders. So also, if the individual shareholder, on bringing his complaint before the company, is overborne by an interested majority, or by a majority unfairly obtained, he may have redress in one form or another by applying to the Court. But it appears to me that, both on principle and authority, the pursuer here is out of Court, in respect of the particular complaints which he makes, unless he at least avers and proves that he has taken all due steps to bring the matter before the company, and has been improperly refused the co-operation of the company, or, at all events, the use of the company's name."
This passage treats the rule in Foss v Harbottle as settled law, but admits the possibility of redress "in one form or another" where wrongdoers are in control of the company (the ultra vires "exception", as described by Lord Kyllachy, is not a true exception to the general principle, but a category falling outside its scope). Before the Inner House, the defender argued that it was incompetent for an individual shareholder to raise an action to have money paid to the company, on the authority of Orr and the judgment of Sir George Jessel M.R. (as he then was) in Russell v Wakefield Waterworks Co (1875) L.R. 20 Eq 474. In that judgment the Master of the Rolls had reaffirmed the general rule that any proceedings for the recovery of a corporation's property should be brought by the corporation "and not the individual corporator who has only an ultimate beneficial interest", but had also observed (at 480):
"But that is not a universal rule; that is, it is a rule subject to exceptions, and the exceptions depend very much on the necessity of the case; that is, the necessity for the Court doing justice."
The Master of the Rolls cited as an example the case of Atwool v Merryweather (1867) L.R. 5 Eq. 464, in which the wrongdoer controlled the company and prevented any proceedings being brought in its name. In Lee v Crawford, Lord Young, in whose opinion the other judges concurred, stated (at 1097):
"[T]he general rule is that stated by Sir G. Jessel in the case of Russell [v Wakefield Water-Works Co (1875) L.R. 20 Eq. 474], that an action to have money replaced in the company's coffers must, as a general rule, be at the instance of the company itself, and be laid against the directors as a body. The Master of the Rolls says, - 'The rule is a general one, but it does not apply to a case where the interests of justice require the rule to be dispensed with.' I cannot find in the circumstances of this case any case of necessity, in the "interests of justice", which ought to introduce an exception to the rule, and allow this pursuer to sue Mr Crawford (or indeed all the directors) to restore this alleged balance due by the managing director. I can understand a case in which the circumstances are such that the Court will not refuse to an individual shareholder the remedy of suing alone such an action. But they do not exist here.'"
Lord Lee added (at 1098):
"Here the pursuer demands that the defender shall pay money into the coffers of the company. Now, the pursuer did not attend the meeting of the company and object to what was done, and therefore he is not in the position of a protesting minority."
In Hannay v Muir (1898) 1 F. 306 minority shareholders raised an action against the directors concluding for the payment of a sum of money to the company. They averred that the chairman had defrauded the company and had used his voting power to prevent the pursuers getting redress through the company. The Lord Ordinary (Lord Low), held that the pursuers had a title to sue:
"It was argued that as this was a complaint of the conduct of those who were managing the affairs of the company, it could only be insisted in by the company and not by individual shareholders. If the pursuers had been a majority of the shareholders they might have sued in the company's name, because a majority was competent to decide upon all matters relating to the internal management of the company, but being a minority they could not do so.
There is no doubt that the general rule is that for which the defenders contend. Directors and managers are servants of the company, and it is the company who has the title to call them to account (Orr v Glasgow &c Railway Company, 3 Macq. 799). Further, if the complaint relates to a matter of internal management which it is competent for a majority to sanction, an action by individual shareholders will not be sustained (Macdougall v Gardiner, 1 Ch D 13; Foss v Harbottle, 2 Hare 461).
But to these general rules there are exceptions.
Thus if a company is defrauded by a person who can command a majority of votes, and who thereby stifles inquiry, a minority of the shareholders, or even a single shareholder, can sue (Mason v Harris, 11 Ch. D. 97; Atwool v Merryweather, 5 E. 464).
That is the case which is alleged here. The pursuers aver that Sir John Muir has defrauded the company, and has used the voting power under his control to prevent the pursuers obtaining redress through the company. I am therefore of opinion that, assuming these averments to be true, the pursuers have a good title to sue...."
The Lord Ordinary's decision on that point was not challenged when the case went to the Inner House.
This area of the law was further discussed in Brown v Stewart (1898) 1F. 316, where a shareholder brought an action against directors seeking to have them ordained to accept a transfer of his shares and to repay his subscription. The Lord Ordinary, Lord Stormonth-Darling, observed (at 320):
"The rule applicable to such a case both in England and Scotland - a rule associated in England chiefly with the case of Foss v Harbottle 2 Hare 461, - is thus expressed by Lord Cranworth in the Scottish case of Orr v The Glasgow, Airdrie and Monklands Railway Company..."
The Lord Ordinary then quoted the passage from Lord Cranworth's speech which I have quoted above. In the Inner House, Lord Kinnear, in whose opinion the Lord President (Lord Robertson), Lord Adam and Lord McLaren concurred, stated (at 324) his agreement with the Lord Ordinary that the relevant principle was that established by the cases of Foss v Harbottle and Orr and others of the same class. MacLaren's Court of Session Practice, published in 1916, affirms the title to sue of an individual shareholder where the claims of justice require it, citing English authorities such as Atwool v Merryweather and Russell v Wakefield Waterworks Co. The most recent Scottish authority appears to be Oliver's Trs. v W.S. Walker & Sons (Edinburgh) Ltd, 1948 S.L.T. 140, where minority shareholders brought an action against a company and its directors, concluding for a declarator that the directors were bound to repay certain (unascertained) sums to the company. Their title to sue does not appear to have been challenged.
In the light of the authorities which I have discussed, although there are relatively few Scottish cases, and the reasoning in those cases is not developed in detail (in particular, as to the basis of the shareholder's title to sue), I am satisfied that minority shareholders can obtain remedies for the company at common law in Scotland as well as in England, and that these can include a pecuniary remedy. The shareholder's title to sue is exceptional, in that it is a title to bring proceedings for the enforcement of an obligation owed to another legal person. This is not a suitable case in which to attempt an analysis, in the absence of detailed submissions on the point. I would however venture a tentative suggestion that it may be relevant to bear in mind that an equitable jurisdiction was not exclusive to the Court of Chancery: the Court of Session also possesses such a jurisdiction. One of its most familiar aspects is the supervisory jurisdiction, where locus standi depends on more flexible considerations than in an ordinary action concerned with the law of property or of obligations. Another aspect of the equitable jurisdiction is the Court's nobile officium. This describes the Court's ability to provide a remedy where no other suitable remedy is available and the Court's intervention is necessary in the interests of justice, for example to meet a casus improvisus in a statute. I appreciate that the cases which I have discussed did not involve any petition to the nobile officium. Nevertheless, it might be worth consideration whether the Court's equitable jurisdiction might be relevant where there was a practical necessity to recognise a shareholder's entitlement to bring proceedings for the benefit of the company, given his ultimate interest (as a member of the company) in its affairs and its property, in circumstances in which the company had been wrongfully disabled from bringing proceedings itself. In such a situation, the procedures established by the Companies Acts (or other basis of incorporation) - i.e., the procedures enabling the company, as an autonomous legal entity, to decide whether to bring proceedings for the vindication of its rights - would have failed to secure the interests of justice, by reason of breaches of duty for which those procedures made no allowance, and justice might require that in those circumstances the shareholder be permitted to bring proceedings for the vindication of the company's rights. I do not however express any view on the matter in the absence of more detailed argument than I heard in the present case.
If, as I consider to be the case, it is possible in Scotland for a minority shareholder to bring proceedings when he can bring himself within one of the exceptions to the rule in Foss v Harbottle, then a question arises as to the relationship between that procedure and the procedure under section 459. In this regard I respectfully agree with the observations of Millett J. (as he then was), in connection with the analogous issue under section 27 of the Insolvency Act 1986, in Re Charnley Davies Ltd (No 2) [1990] B.C.L.C. 760, 783-784:
"An allegation that the acts complained of are unlawful or infringe the petitioner's legal rights is not a necessary averment in a s.27 petition. In my judgment it is not a sufficient averment either. The petitioner must allege and prove that they are evidence or instances of the management of the company's affairs by the administrator in a manner which is unfairly prejudicial to the petitioner's interests. Unlawful conduct may be relied on for this purpose, and its unlawfulness may have a significant probative value, but it is not the essential factor on which the petitioner's cause of action depends.
Counsel for the petitioners asked: 'If misconduct in the management of the company's affairs does not without more constitute unfairly prejudicial management, what extra ingredient is required?' In my judgment the distinction between misconduct and unfairly prejudicial management does not lie in the particular acts or omissions of which complaint is made, but in the nature of the complaint and the remedy necessary to meet it. It is a matter of perspective. The metaphor is not a supermarket trolley but a hologram. If the whole gist of the complaint lies in the unlawfulness of the acts or omissions complained of, so that it may be adequately redressed by the remedy provided by law for the wrong, the complaint is one of misconduct simpliciter. There is no need to assume the burden of alleging and proving that the acts or omissions complained of evidence or constitute unfairly prejudicial management of the company's affairs. It is otherwise if the unlawfulness of the acts or omissions complained of is not the whole gist of the complaint, so that it would not be adequately redressed by the remedy provided by law for the wrong. In such a case it is necessary to assume that burden, but it is no longer necessary to establish that the acts or omissions in question were unlawful, and a much wider remedy may be sought.
A good illustration of the distinction is provided by Re a company (No 005287 of 1985) [1986] BC.L.C. 68. In that case the petitioners, who were minority shareholders, alleged that the respondent, who was the majority shareholder, had disposed of the company's assets in breach of his fiduciary duty to the company and in a manner which was unfairly prejudicial to the interests of the petitioner. Hoffmann J refused to strike out the petition, holding that the fact that the petitioners could have brought a derivative action did not prevent them seeking relief under s.459.
Again, I respectfully agree. The very same facts may well found either a derivative action or a s.459 petition. But that should not disguise the fact that the nature of the complaint and the appropriate relief is different in the two cases. Had the petitioners' true complaint been of the unlawfulness of the respondent's conduct, so that it would be met by an order for restitution, then a derivative action would have been appropriate and a s.459 petition would not. But that was not the true nature of the petitioners' complaint. They did not rely on the unlawfulness of the respondent's conduct to found their cause of action; and they would not have been content with an order that the respondent make restitution to the company. They relied on the respondent's unlawful conduct as evidence of the manner in which he had conducted the company's affairs for his own benefit and in disregard of their interests as minority shareholders; and they wanted to be bought out. They wanted relief for mismanagement, not a remedy for misconduct."
In short, the gravamen of a complaint under action 459 is unfairness, not unlawfulness. Unlawful conduct may be unfair, but it is not necessarily so. If the member's complaint in a particular case is of unlawful conduct, and the remedy which is desired can be obtained in an ordinary action (either at the instance of the company, or - if the wrongdoers control the company and prevent the raising of such proceedings - at the instance of the member), then it seems to me to be inappropriate in principle to embark on proceedings under section 459. At the same time, I recognise that the law relating to derivative actions (i.e., shareholder actions in which the member seeks to enforce a cause of action vested in the company) is in many respects unclear (cf. Smith v Croft (No 2) [1988] Ch. 114), and that it will therefore sometimes be understandable that a minority shareholder should resort to section 459 rather than embark on an exploration of the obscurer aspects of such actions. For the reasons which I have described, however, it appears to me that a petition under section 459 is not in principle the ideal procedure in such circumstances.
In the present case, I am not persuaded that the various payments which have been challenged demonstrate that the Company's affairs have been conducted in an unfairly prejudicial manner. There is therefore no basis for my granting any order under section 461. Indeed, even if I had been satisfied that the payments in question did demonstrate unfairness, I would not have been inclined to grant any order under section 461, given (1) that no attempt had been made by the petitioner to have proceedings brought by the Company for the recovery of the money, or to have the Company put into liquidation (despite its having ceased to trade several years ago) and (2) the respondent was content to have proceedings raised in the Company's name (subject to the petitioner's undertaking to indemnify the Company in respect of expenses), and had attempted to have the Company put into liquidation. I shall accordingly sustain the respondent's second and fourth pleas-in-law, and refuse the petition.