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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Anderson v Hogg [2001] ScotCS 287 (14 December 2001)
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Cite as: [2001] ScotCS 287
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EXTRA DIVISION, INNER HOUSE, COURT OF SESSION |
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Lord Coulsfield Lord Hamilton Lord Prosser
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P122/00 OPINION OF LORD COULSFIELD in RECLAIMING MOTION in PETITION of JOHN FARQUHAR ANDERSON Petitioner; against RUARAIGH HOGG Respondent: for Order pursuant to Section 459-461 of the Companies Act 1985 in respect of T. Anderson & Company (Potato Traders) Limited _______ |
Act: Sellars, Q.C.; Balfour & Manson (Petitioner and Reclaimer)
Alt: Sandison; Morison Bishop (Respondent)
14 December 2001
[1] This is a petition under section 459 of the Companies Act 1985 at the instance of a director and shareholder in T. Anderson & Company (Potato Traders) Limited ("the company"). The petition was presented in 1996. The only person to whom the petition was intimated was the respondent, who is also a director and shareholder in the company. The interlocutor ordering service of the petition also granted a motion for interdict against the respondent convening a shareholders' meeting until after the petition had been disposed of. No attempt has been made to have the interdict recalled. It does not appear that much happened in the process until March 1999 when it was ordered that a record should be made up on the petition and answers for the respondent and a proof was allowed. In due course, a proof took place. The respondent represented himself at the proof and, although he did so, as the Lord Ordinary says, with courtesy and dignity, the Lord Ordinary did not have the benefit of legal argument from him. As will be seen, the factual background to the petition is somewhat uncertain, because the company was always run in an informal manner, without regard to the procedure required by company law. The Lord Ordinary, however, managed, with some success, to sort out the history of the company. On 28 January 2000, the Lord Ordinary sustained the second and fourth pleas for the respondent and refused the petition. The petitioner now reclaims.
[2] The company was established in 1983 to take over a part of a business which had previously been operated by the petitioner and the respondent in partnership. Simultaneously, another company took over another part of that business. The petitioner and his wife hold 80,000 shares in the company and the remaining 80,000 issued shares are held by the respondent, his wife and his sister-in-law. The petitioner and the respondent were the only directors. As has been said, the company was always run informally, decisions being taken by discussion among the members and directors. In February 1989, the petitioner, while formally remaining a director of the company, ceased to take an active part in the business. The respondent continued in the actual running of the company and its business. Not long afterwards, the two sides (that is the petitioner and his wife on the one hand and the respondent and his wife and sister-in-law on the other) agreed that the business should be run down and the assets sold off. This was done, the employees of the company being made redundant. Meetings to progress the process of running down were held in 1991 and 1992. At these meetings, a number of issues emerged which later figured in the petition. It is not clear from the narrative why, so far as appears, little happened in connection with these issues between 1992 and 1996. In 1996, however, there were attempts to remove the petitioner as a director and to wind up the company: these presumably explain why the petition was raised. In any event, when it was ultimately raised, the petition drew attention to four issues, namely (1) alleged unauthorised salary increases and bonus payments made to the respondent, totalling £28,612.40: (2) an unauthorised pension contribution of £1,000: (3) interest foregone on a bridging loan in favour of the respondent and his wife amounting to £1,894: and (4) a payment, described as a redundancy payment, made to the respondent amounting to £50,000, together with the value of a car which was taken at £10,000. The order sought in the petition was an order for the respondent to repay the relevant sums to the company. The petitioner had not, apparently, made any attempt to persuade the company to take action itself to recover these sums and, as has been seen, there was an interdict against the respondent calling a general meeting. The Lord Ordinary decided against the petitioner on all four issues. In the appeal, there was no challenge to his findings in relation to the first three issues and argument was addressed only to the question of the so-called redundancy payment. The payment was not a statutory redundancy payment. It might be regarded as a non-statutory payment in respect of the termination of employment or service. The respondent admits that he caused that payment to be made to himself. It is perhaps important to say at this point that the Lord Ordinary held that the respondent acted in good faith throughout and that finding also was not challenged.
[3] In his opinion, the Lord Ordinary summarises the evidence which he heard in relation to the redundancy payment and makes certain findings. In order to explain what he did find it is necessary to follow the same approach in this opinion. Firstly, the Lord Ordinary refers to the evidence of the petitioner in the following terms:
"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."
[4] Later the Lord Ordinary says:
"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 received his company car."
[5] In summarising the evidence of the company's solicitor, Mr Young, the Lord Ordinary says:
"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 [the respondent's sister-in-law] 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."
[6] Gordon Anderson in evidence said that the respondent had proposed that he himself should receive £50,000 and his car and that Gordon Anderson should receive £20,000 and his car. The petitioner had said the difference was too great and felt that the business was 50/50 between the two families. Gordon Anderson also said that he had later received £20,000 plus the car and that his father's stance at the meeting had been that if he was to receive £20,000 and the respondent £30,000, that would have been agreed.
[7] The respondent's evidence is narrated in the following terms by the Lord Ordinary:
"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."
[8] When the Lord Ordinary came to give his conclusions as to the redundancy payment he said:
"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."
[9] The Lord Ordinary refers to a number of authorities in relation to the application of section 459 and makes the point that even if conduct which has given rise to a petition can be characterised to any extent as unlawful against the company, it does not follow that the petitioner has been treated unfairly. That is the principal ground of his decision. The Lord Ordinary, however, also considers, at some length, the question whether an action to recover an unauthorised payment might have been brought by the petitioner as a shareholder in a representative capacity. There is no indication that any argument had been addressed to him on this issue. The conclusion at which he arrives is that a representative action is competent in Scots law. In the light of that conclusion and the view which he arrived at in relation to the various payments which had been challenged the Lord Ordinary concludes that it had not been demonstrated that the company's affairs had been conducted in an unfairly prejudicial manner. He goes on to say,
"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."
[10] For the petitioner it was submitted that the Lord Ordinary had been wrong in holding that the affairs of the company had not been conducted in a manner unfairly prejudicial to the petitioner and that he had wrongly applied guidance in House of Lords decisions as to the application of the law to a company run, as this one was, in an informal way. This argument raised the question of the relationship between unfairness and what the Lord Ordinary had described as unlawfulness. Secondly, it was argued that the Lord Ordinary was wrong in refusing a remedy under section 461 if there was unfairly prejudicial conduct. In regard to the second matter, counsel (who was not the counsel who appeared before the Lord Ordinary) did not seek to argue in detail that the Lord Ordinary was wrong in holding, in broad terms, that in certain cases a derivative action might be open to minority shareholders but he questioned the weight which the Lord Ordinary appeared to have given to that matter. As regards the first issue, there must be consent to a director taking money from the company. Such consent could be formal, under the Articles, or informal, and might be indicated by acquiescence. If, however, there was no consent of any kind to the taking of money, that always amounted to unfairly prejudicial conduct towards a shareholder. If it was shown that the payment was unauthorised, it was not necessary to go to the shareholders to determine whether or not the payment would be ratified. The complainer could proceed under section 459 on the basis that it was unlikely that he would secure majority support in the company for the recovery of the money and that the unlawfulness of the payment was sufficient to show unfairness subject, perhaps, to cases in which the amount involved or the action taken was trivial. The Lord Ordinary's approach amounted to imposing on the shareholders agreement when there was no agreement and that was contrary to the guidance given in O'Neill v Phillips [1999] 1 WLR 1092. Reference was also made to a number of cases, including in particular in Re Saul D. Harrison plc [1995] 1 B.C.L.C. 14, Re Guidezone Limited [2000] 2 BCLC 321 and Re Charnley Davies Limited (No.2) [1990] B.C.L.C. 760. The authorities showed that where there was material misconduct, even in the shape of a single act, the primary remedy was under section 459, not by a shareholders derivative action which, in England at least, required leave of the court. That was vouched by Re Little Olympian Each-Ways Limited [1994] 2 B.C.L.C. 420, Lowe v Fahey [1996] 1 B.C.L.C. 262 and Barrett v Duckett [1995] 1 B.C.L.C. 243. Reference was also made to Antoniades v Wong [1997] 2 B.C.L.C. 419. The Lord Ordinary was not correct in treating the derivative action as a primary remedy. Liquidation was not a solution since it was not clear if it was accepted that the respondent would have accepted the view taken by a liquidator as to the payment. It would have been pointless to try to get the company to take action in the circumstances. The offer to agree to the raising of such an action was only made in the respondent's submission to the court and the same applied to the suggestion that there might be a winding up. In these circumstances, the Lord Ordinary should have granted the remedy sought. The petition sought in the first instance payment of the whole £50,000. In the alternative, he would seek payment of the £20,000 if it were held that the petitioner in effect had agreed to the payment of £30,000.
[11] For the respondent it was submitted that the Lord Ordinary had reached the correct conclusion. The case of O'Neill did not support the reclaimer's submission that the absence of any active consent by the petitioner to the payment made to the respondent in itself determined the result of the petition. What O'Neill was concerned with was breach of the terms on which the company was conducted. In that case the question had been raised whether there was any breach of any agreement in law and, there being none, whether equity had been infringed, the answer again being negative. It might be the case that, in the abstract, there would be no bar to the company recovering from the respondent if it chose to take action in regard to the £50,000 (or the £20,000) but under section 459 there could be a defence of substantive fairness which was not available in an ordinary action. Under section 459 unfairness was always a substantive question. That was vouched by the authorities quoted on behalf of the petitioner and also by Jesner v Jarrad Properties Limited 1993 S.C. 34. Further the equities favoured the respondent's position. The amount of the redundancy payment was reasonable given the resources of the company and the salaries of the respondent and Gordon Anderson respectively. As regards the appropriate remedy, that was a matter committed to the discretion of the Lord Ordinary and there was no ground for holding that he had erred in treating the derivative action as the appropriate remedy in this case.
[12] In my view, it is necessary to deal with one aspect of the facts of the case, before addressing the issues of unfairness and unlawfulness. The Lord Ordinary approached the question of the redundancy payment on the basis that there was no agreement by the petitioner to a payment of £50,000 to the respondent. He did not require to consider whether there was any agreement to any other sum because he chose to approach the question in a different way. It seems to me, however, that his findings in regard to the evidence justify a finding that the petitioner did consent to a payment of £30,000. That appears, in my view, particularly from the passage in the Lord Ordinary's opinion, quoted above, in which he says that he accepts that the petitioner was content that his son should receive £20,000 and that the respondent should receive £30,000 plus the car. That approach is consistent with the evidence of Gordon Anderson and with the respondent's evidence, which the Lord Ordinary accepted in general, that the petitioner told him to get ahead and get it done. Although the Lord Ordinary did not himself expressly draw the inference that there was agreement to a payment of £30,000 I see no reason why that inference should not be drawn from the evidence as we have it. Alternatively, the view might be taken that in the circumstances the petitioner was personally barred from challenging the payment to the extent of £30,000, but I prefer to hold that the proper inference is that he had agreed to that sum. Counsel for the petitioner did not concede the point but he did acknowledge that there was substantial reason for holding that the issue in this case really related to the excess of £20,000. In my view, that is the correct basis on which to approach the remaining issue in the case.
[13] As I read the Lord Ordinary's opinion, the real basis for his decision is that it was necessary for the petitioner to show not only that the payment to the respondent was unlawful, in the sense of being unauthorised, but also that there was unfairness and that the petitioner had failed to show unfairness, in the sense which the Lord Ordinary thought appropriate. The Lord Ordinary adds, however, comments as to the availability of a derivative action and expresses the view that it is inappropriate in principle to rely on section 459 when a remedy can be obtained in an ordinary action. In my view, that part of his opinion has to be discounted. It arises from the Lord Ordinary's discussion of authorities in regard to which he did not, so far as appears, hear argument. Moreover, there is authority, to which the Lord Ordinary does not refer, that even where the facts would readily have warranted a derivative action, a petition under section 459 is not barred (see Gore Brown, Company Law section 28.13.7 and Lowe v. Fahey supra). Further, in this case the petition as originally raised involved a number of issues which, taken together, might well have justified proceeding by a section 459 petition, even on the Lord Ordinary's approach. In these circumstances, in my opinion, the Lord Ordinary should not have relied on any opinion which he had formed in regard to the availability of a shareholders' action, or as to the appropriateness of proceedings by way of such an action rather than under section 459, in deciding how to dispose of the present proceedings.
[14] Turning to the main issue, the first point to be made is that it seems clear that the payment was not actually agreed to by the petitioner or actually agreed or authorised by the company as a whole, for example by the agreement of all the members. Further, it was not within the respondent's discretion as a director to make that payment. There may be circumstances in which a director may make a payment, even an unusual payment, for example where urgency requires it, but in this case the payment was unusual, and substantial in amount; there was no urgency; and it was a payment made to the respondent himself. Further, the respondent sought the petitioner's agreement to that payment and did not receive it. The respondent's action in seeking agreement to the payment demonstrates, in my opinion, that in addition to being unauthorised in formal legal terms, the payment could not be said to be authorised by some informal understanding as to the basis on which the company's affairs were to be conducted. It is also relevant that the company's solicitor advised the respondent that the petitioner's consent was necessary. Given the Lord Ordinary's finding that the respondent acted in good faith, there is, no doubt, a temptation to look for some basis for considering the payment to be in some way appropriate or proper; but, in my opinion, there is no basis on which the payment in excess of £30,000 can be regarded as authorised, formally or informally. In my view, therefore, there is no doubt that the payment represented an unauthorised expenditure of the company's funds and that, as matters stand, the respondent could not resist a demand by the company to repay that sum.
[15] On the other hand, given the way in which this company was operated, there is much to be said for the view that the payment could have been authorised informally by the members of the company. It could therefore be said to be strange if the petitioner could succeed under section 459 on the bare ground that the payment was unauthorised without the members of the company ever having been consulted to see what they thought. It is tempting, therefore, to say that the remedy under section 459 was not appropriate in this case simply because the petitioner should have approached the members before bringing his petition to court or, at least, have intimated the dependence of the petition to them. It would, however, be unfortunate if this appeal were disposed of on that ground only, since it is a ground which might have been raised, possibly as a question of relevancy, at the outset of the proceedings. Moreover, the petition originally concerned four issues which, taken together, might have pointed to a course of conduct of the company's affairs in a manner unfairly prejudicial to the petitioner. Given that there has been a proof it would, in my view, be wrong to dispose of this case on a basis which did not involve a decision on the main issue which remains in controversy. It is true that the affairs of the company have been left in an unhappy state because there has been no attempt to get the members together, but both sides share responsibility for that state of affairs. No attempt has been made to call a meeting or to have the interdict recalled.
[16] It is clear from the terms of section 459 itself, and it has repeatedly been emphasised in the cases, that the test which a petitioner has to satisfy is the test of unfairness. In nearly all cases, however, the petitioner complains of actings by those in control of the company which are lawful in the sense that the persons acting are acting within their legal powers and authority. It is established that the petitioner may succeed in such a case if he can show that what has been or is being done is unfair, even though it is lawful. However, as Lord Hoffman pointed out in O'Neill v. Phillips supra, the court does not exercise its jurisdiction under section 459 on the basis of some indefinite notion of fairness but upon established equitable principles (see [1999] 1 W.L.R. at 1099). The purpose of these principles is to ensure that parties do not insist on strict legal rights where to do so would be inconsistent with the underlying understandings on which a company's affairs have been conducted. Lord Hoffman stresses, (at page 1098-9) that fairness in a business context is not the same as in, for example, the context of family affairs and observes that the application of equitable principles in the context of company law leads to the conclusion that a member of a company will not ordinarily be able to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted. In Re Guidezone Ltd. supra Jonathan Parker J. observed that O'Neill had established that "unfairness for the purposes of section 459 is not to be judged by reference to subjective notions of fairness, but rather by testing whether, applying established equitable principles, the majority has acted, or is preparing to act, in a manner which equity would regard as contrary to good faith". I respectfully agree with that summary of the effect of O'Neill. I would add that I do not think that the decision in Jesner v Jarrad Properties Ltd. supra is inconsistent with what is said in O'Neill, but, in any event, the guidance given in O'Neill is authoritative and should be followed.
[17] The situation in this case is the reverse of the usual case: the payment was clearly unauthorised, but the respondent maintains that it was not unfair. However, as Neil L.J. said in Re Saul D. Harrison & Sons plc supra at page 31:"A shareholder can legitimately complain...if the directors exceed the powers vested in them or exercise their powers for some illegitimate purpose" (c.f. Gore Brown supra 28.13.3). There seems to be no case in which a shareholder's complaint under section 459 on that basis has been rejected on the ground that, although the action was unlawful and materially prejudicial, it was not unfair. It seems to me that in order to justify refusal of such a complaint, it would be necessary, to apply the same test as is explained in O'Neill and therefore to show that the petitioner, as a shareholder claiming on the basis of a legal right, was restrained by principles of equity from insisting on that right, to require repayment of the sum paid without authority. To refuse the shareholder's complaint on some broad ground of fairness, not limited in the way indicated by Lord Hoffman, would involve the court in considering for itself what would or would not be reasonable for shareholders to agree upon: or, in other words, applying a subjective test of fairness. In effect the court would be saying that the complaining shareholder ought to have agreed to something which he has not agreed to.
[18] In the present case, the payment which the respondent made to himself was not within his legal powers: and it was not in my opinion, authorised by any underlying understanding, for the reasons given earlier. It is possible that some observers would agree that, as the Lord Ordinary says, the sum paid to the respondent could be seen to be reasonable in comparison with the sum paid to Gordon Anderson, given their respective salaries, ages and responsibilities. It is evident, however, that the petitioner regarded that approach as too narrow and that he considered that regard should be had to fairness between the two families or sides, not just between the two individuals. In my view, there is no way in which the court can say, in these circumstances, that one view is evidently fairer than the other, unless it applies some subjective test of fairness, and to do so would, in my opinion, be illegitimate in the light of the authorities to which I have referred.
[19] In these circumstances, in my opinion, there was no proper basis on which the Lord Ordinary could refuse the prayer of the petition in so far as it relates to the excess redundancy payment. The remedy sought by the petitioner was an order for payment to the company and in my opinion, that order should be made, in the sum of £20,000.
[20] I should add that the Lord Ordinary mentions that the respondent was prepared to agree to an action being raised in the company's name or to a liquidation. However, counsel for the petitioner informed us that the offer to agree to an action was only made in submissions to the Lord Ordinary after the proof and that the respondent had never undertaken to agree to any view arrived at by a liquidator. In these circumstances, I do not think that these factors affect the course to be taken in disposing of this petition.
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EXTRA DIVISION, INNER HOUSE, COURT OF SESSION |
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Lord Coulsfield Lord Hamilton Lord Prosser
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P122/00 OPINION OF LORD HAMILTON in RECLAIMING MOTION in PETITION of JOHN FARQUHAR ANDERSON Petitioner; against RUARAIGH HOGG Respondent: for Order pursuant to Section 459-461 of the Companies Act 1985 in respect of T. Anderson & Company (Potato Traders) Limited _______ |
Act: Sellars, Q.C.; Balfour & Manson (Petitioner and Reclaimer)
Alt: Sandison; Morison Bishop (Respondent)
14 December 2001
[1] I agree with the disposal proposed by Lord Coulsfield. Subject only to the observations which follow, I agree also with his reasons for arriving at that disposal.
Restriction on the Petitioner's entitlement
[2] The petitioner is not, in my view, entitled to an order for repayment by the respondent to the extent of £50,000 as he primarily seeks. In relation to the redundancy packages for the respondent and Gordon Anderson the proposal at the meeting in June 1992 was that the former should receive £50,000 and his company car and the latter £20,000 and his company car. There appears to have been acceptance by the petitioner that each of those executives should receive a redundancy package, the part of the proposal which was unacceptable to him being the extent of the provision for the respondent. That was later partially resolved by the petitioner agreeing that the respondent should receive his car. There remained an absence of agreement about the amount of the monetary sum to be paid to him. The Lord Ordinary found as a fact (and that finding was not challenged before us) that the petitioner never gave his agreement to the proposed £50,000. The Lord Ordinary does, however, accept that the petitioner was content that his son (Gordon Anderson) should receive £20,000 (plus the car) and that the respondent should receive £30,000 (plus the car). That conclusion appears to proceed largely on the evidence of Gordon Anderson to the effect that the petitioner's stance at the meeting in June 1992 had been that, if he (Gordon Anderson) were to receive £20,000 and the respondent £30,000, that would have been agreed. The petitioner on a subsequent visit to the respondent enquired about settlement of Gordon Anderson's cheque and car, enquired about the respondent's position and pressed the respondent to process matters. The respondent thereafter arranged for the transfer of Gordon Anderson's car and the delivery to him of a cheque for £20,000. While a possible interpretation of these circumstances is that there was agreement to payment of £30,000 to the respondent, I prefer an analysis to the effect that by his actings the petitioner is now precluded on equitable grounds from challenging the payment to the respondent except in so far as it exceeded £30,000.
The form of process
[3] No question, in my view, arises about the competency of the petition. The remedies provided by sections 459 and 461 of the 1985 Act are, however, discretionary and a question may arise as to the appropriateness of granting the prayer of the petition. It was on that basis that the Lord Ordinary indicated that, even if he had been satisfied that the payments in question demonstrated unfairness, he would not have been inclined to grant any order under section 461. While it may be (though there are arguments either way) that the petitioner could effectively have used other means, including invoking internal company mechanisms, to advance the matters complained of, this petition proceeded without challenge to a proof before answer at which these matters were addressed in evidence and submission. It would, in my view, be highly unfortunate if at that stage (and a fortiori after the hearing of a reclaiming motion) the court were to refuse a remedy simply because alternative mechanisms might have been invoked.
Unfairness
[4] The Lord Ordinary accepted that the petitioner never gave his agreement to the proposed £50,000 payment. In holding that the making of the payment was nonetheless not an instance of the company's affairs being conducted unfairly the Lord Ordinary took into account that £50,000 was not outrageously large by comparison with £20,000 to Gordon Anderson and that the respondent had in good faith gained the (subjective) impression that the petitioner was no longer concerned about the proposed payment of £50,000, such misunderstanding being amply possible given the informal manner in which the company's affairs were conducted. In my view that approach fails to give proper recognition to the basis on which the internal affairs of commercial companies, including small companies, are conducted. Central to the conduct of such affairs is the concept of mutual consent among the shareholders or those authorised to make decisions on their behalf. In addressing any question of alleged unfairly prejudicial conduct the importance of that central concept must, in my view, be borne in mind. In O'Neill v. Phillips [1999] 1 WLR 1092 Lord Hoffmann at pp. 1098-9 said:
"Although fairness is a notion which can be applied to all kinds of activities, its content will depend upon the context in which it is being used. Conduct which is perfectly fair between competing businessmen may not be fair between members of a family. In some sports it may require, at best, observance of the rules, in others ('its not cricket') it may be unfair in some circumstances to take advantage of them. All is said to be fair in love and war. So the context and background are very important.
In the case of section 459, the background has the following two features. First, a company is an association of persons for an economic purpose, usually entered into with legal advice and some degree of formality. The terms of the association are contained in the articles of association and sometimes in collateral agreements between the shareholders. Thus the manner in which the affairs of the company may be conducted is closely regulated by rules to which the shareholders have agreed. Secondly, company law has developed seamlessly from the law of partnership, which was treated by equity, like the Roman societas, as a contract of good faith. One of the traditional rules of equity, as a separate jurisdiction, was to restrain the exercise of strict legal rights in certain relationships in which it considered that this would be contrary to good faith. These principles have, with appropriate modification, been carried over into company law.
The first of these two features leads to the conclusion that a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted. But the second leads to the conclusion that there will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers. Thus unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith."
[5] That passage emphasises the importance in addressing the notion of fairness of the context and background. A broad approach to unfairness which fails to give due weight to the relevant context and background is inappropriate. For the purposes of section 459 the relevant context and background are the existence of an association of persons for an economic purpose regulated by agreed rules and the application to those rules and to that relationship of established equitable principles. Thus, informal arrangements will be given effect, as will recognised restraints on the exercise of rights or powers - such as, in Scotland, might be based, for example, on personal bar or acquiescence or waiver.
[6] Counsel for the respondent emphasised that in O'Neill v. Phillips Lord Hoffmann had made a negative statement - "...a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted". It did not follow, he submitted, that a member of a company would be entitled to complain of unfairness in any case where there had been a breach of the terms on which it had been agreed that the affairs of the company should be conducted. It is unnecessary to go so far as to accept the opposing submission by counsel for the petitioner, namely, that any breach, other than a trivial or minimal breach, of the terms (formal or informal) would of itself be unfair and I reserve my opinion on that proposition. Lord Hoffmann's approach, however, points, in my view, to the central importance, when considering unfairness under section 459, of the consensual nature of the relationship. The decision and reasoning in Jesner v. Jarrad Properties Limited 1993 S.C. 34 is not inconsistent with that approach.
[7] In the present case it is clear that the respondent, in paying to himself £50,000, acted in breach of the terms (formal or informal) under which he had control of the company's funds. So far as concerns the excess over £30,000 the petitioner is not barred on any recognised equitable ground from complaining of such action. The circumstances that an outsider might have regarded a payment of £50,000 to the respondent as reasonable and that the respondent acted in good faith upon a misunderstanding do not, in my view, prevent the respondent's action from being an instance of the company's affairs being conducted, in the relevant sense, in an unfairly prejudicial manner.
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EXTRA DIVISION, INNER HOUSE, COURT OF SESSION |
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Lord Coulsfield Lord Hamilton Lord Prosser
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P122/00 OPINION OF LORD PROSSER in RECLAIMING MOTION in PETITION of JOHN FARQUHAR ANDERSON Petitioner; against RUARAIGH HOGG Respondent: for Order pursuant to Section 459-461 of the Companies Act 1985 in respect of T. Anderson & Company (Potato Traders) Limited _______ |
Act: Sellars, Q.C.; Balfour & Manson (Petitioner and Reclaimer)
Alt: Sandison; Morison Bishop (Respondent)
14 December 2001
[1] I regret that I differ from your Lordships, and would refuse the reclaiming motion. The factual and evidential context is set out fully in the opinion of Lord Coulsfield and in these respects, there is little that I would wish to add. Similarly, I do not think it necessary to embark upon a separate narrative of the contentions advanced by the parties.
[2] Before turning to the issue of unfairness, I should say that in my opinion this is not a case in which recourse to section 459 of the 1985 Act, or an order under section 461, can be regarded as appropriate. If the petitioner considered that the payment of £50,000 (or at least £20,000 thereof) was unlawful, I see no reason for his not having attempted to have proceedings brought by the company for recovery of the sum in question. Even if one assumes that Mrs. Hogg would wish her husband to receive the £50,000, and would vote accordingly, I see no basis for assuming that the other shareholder, Mrs. Scrimgeour, owning 25% of the shares, would prefer that Mr. Hogg should keep the £50,000 in full: like Mr. and Mrs. Anderson, she might well prefer that sum to be restricted, so that more would remain for herself as a shareholder. In my opinion, these are matters which ought to be tested by ordinary means, before recourse to the courts under sections 459 and 461 of the 1985 Act. While I think it worthwhile to mention these matters, and indeed to note that the petition was not even served upon Mrs. Scrimgeour or the other shareholders, I do not think it necessary or appropriate to go so far as to hold that the petition is incompetent.
[3] I turn to the issue of unfairness. In relation to remuneration, the Lord Ordinary observes that "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." His Lordship observes that any non-compliance "appears to me to be the petitioners' responsibility as well as the respondents': each was content, at the time, for matters to be dealt with on an informal basis." When considering the separate question of the £50,000 payment, it seems to me that these observations made by the Lord Ordinary are again both sound and in point.
[4] It is not suggested, on behalf of the respondent, that the agreed informality, or the fact that from 1989 onwards the management of the business was left to the respondent alone, would have sufficed as authority for him to pay himself the £50,000. If he had done so without a meeting such as was held in June 1992, it would have been both unlawful and unfair. Equally, as I understood the submissions for the respondent, it is not suggested that what occurred at that meeting was sufficient to render the subsequent payment either lawful or fair. But the payment did not follow simply upon that meeting. It followed upon that meeting and a subsequent meeting. It is necessary to consider what seems to have happened on both of these occasions.
[5] Putting matters shortly, the petitioner's position at the outset of the meeting in June 1992 appears to have been one of simple rejection or refusal of the suggestion that £50,000 should be paid to the respondent. However, during the meeting it appears that the parties raised not only the petitioner's suggestion of equality between families, but also the respondent's reasons for differentiating between the two employed persons who were to receive payments. By the end of the meeting, it appears that the petitioner's position had altered substantially: he not only acknowledged in principle that the respondent should receive a payment of as much as £30,000, but also said that he would need to think about the respondent's own proposal.
[6] At that stage, it seems to me that it was clear that there would be payments to both the respondent and Gordon Anderson, and I do not think that it was suggested that when these payments came to be made, it would be anyone other than the respondent who would attend to the actual mechanics of payment. There is thus no unfair decision by the respondent that he should receive some "redundancy" payment, nor any unfairness in his being the person to give effect to any such payment. The issue is whether there was unfairness in his paying himself £50,000 rather than £30,000.
[7] Whether there was any such unfairness seems to me to depend quite specifically upon what happened at the second meeting, in the light of how matters had been left at the end of the first meeting. The petitioner had gone away to think about the respondent's proposal. When he came back, one might have expected him, if he had reverted to his original rejection of the proposal, to say so. It does not appear that he did this, or that he stated, or restated, his view that £30,000 was the maximum acceptable figure. Still less does it appear that that figure was bi-laterally agreed. While it seems that the arrangements for Gordon were mentioned, and that the petitioner said something like "what about yourself?", neither party seems to have reverted to the question of how much the respondent should be paid, and both seem to have spoken in terms of the respondent going ahead and finalising matters. Whatever else may be said, it appears that at the end of the second meeting the petitioner knew and accepted that the respondent was going to go ahead and finalise matters.
[8] No doubt this was a very unsatisfactory situation. Understandably, the Lord Ordinary has not felt able to hold that the petitioner had actually agreed, expressly or by implication, that the respondent should receive £50,000. He has moreover stopped short of holding that there was acquiescence in a payment of that sum. On the other hand, and in my view entirely understandably, he has accepted that when the respondent proceeded to pay himself the £50,000 figure, he was acting in good faith. Given that the petitioner had gone away to think about the £50,000 proposal in the light of the explanation which he had received for it, and that when he came back he gave the respondent a "go ahead" without suggesting that the parties were at odds or that the proposal was unacceptable, I see no reason to doubt the respondent's good faith, when he went ahead with his proposal. It does not seem to me that there is any question of saying that the petitioner ought to have agreed to something which he has not agreed to. That would plainly be quite wrong. But in attempting to interpret and understand what happened at the second meeting, I think it is legitimate to take into account the fact (as it appears to me) that the respondent's proposal was a rational one, having regard to the salaries and service of the persons who were going to receive payments, whereas the petitioner's belief that there should be equality between the two sides (perhaps understandable as an opening position) makes no apparent sense in relation to payments of the kind in question, which were payments to specific employees whose service was being terminated. It is not a matter of saying that the petitioner ought to have agreed to the £50,000 payment. But these considerations make it understandable that he did not at the second meeting re-raise or press his original suggestions, that he did not criticise the basis upon which the respondent had computed the proposed payments and that he apparently moved directly to questions of timing and execution.
[9] I am not sure how useful it is to attempt to apply to the very specific facts of this case any generalised view as to the interrelation between lawfulness, agreement and fairness. There are many situations in which a court has to decide what is fair or reasonable in given circumstances. In doing so, the court is in my opinion applying quite settled approaches and principles. When a court concludes that something is or is not fair or reasonable, this conclusion can of course be described as "subjective", if no "objective" criterion is identified and relied upon. But it does not appear to me that, in Scotland, at least, the courts have ever found it necessary, or seen it as possible, to categorise fairness or reasonableness in such neat pigeon-holes. If the court concludes that some act has been unfair, then the result may be that it is unlawful. If there has been a breach of a specific agreement, it may be difficult, although not in my opinion impossible, to envisage circumstances in which one would not also see that as unfair. But in the present case, with the petitioner and respondent parting upon the basis that the respondent was to go ahead and finalise the matter, after a meeting when neither party had raised the issue of quantum which the petitioner was supposed to have been considering, I do not feel able to hold that the petitioner has established any unfairness in what the respondent then did. The Lord Ordinary sees the matter as one of misunderstanding. He says that given the informal manner in which the company's affairs were conducted, there was ample possibility for such misunderstandings. That appears to me to be true generally, but also to be true specifically in relation to the way in which the petitioner and respondent handled matters at the second meeting. The Lord Ordinary's finding that the respondent made the £50,000 payment in good faith cannot in my view be quarrelled; and having regard to what was said in O'Neill and Re Guidezone Ltd., it seems to me that this finding of good faith provides a proper basis for holding that unfairness was not established. I do not feel able to differ from the Lord Ordinary's view: "I would not regard the redundancy payment as an instance of the company's affairs being conducted unfairly."
[10] Your Lordships take a different view; but I would not have disturbed the Lord Ordinary's interlocutor.