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Cite as: [2003] ScotCS 314
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Simmers & Ors v. Innes [2003] ScotCS 314 (17 December 2003)
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OUTER HOUSE, COURT OF SESSION |
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P353/03
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OPINION OF LORD CARLOWAY in the petition of ARTHUR SIMMERS and others Petitioners against JAMES INNES Respondent for an order under section 461 of the Companies Act 1985 in respect of Scotpigs Ltd. ________________
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Petitioners: Davidson QC; Maclay Murray & Spens
Respondent: Haddow QC; Brodies WS
17 December 2003
1. Background
The petitioners are members of the Simmers family who have been pig farmers for many years. In or about 1998, the family business, in the hands of A Simmers Ltd. and associated companies, ran into financial difficulties, resulting in receivership. A rescue package was organised involving the respondent. The terms of the package are contained in a very substantial "Shareholders Agreement" dated 18 December 1998. This provided, amongst many other matters, that the petitioners and respondent would each invest £400,000 in a new company called Scotpigs Ltd. Each would receive fifty per cent of the shares in the company, divided in each case into A and B classes. Scotpigs would then essentially take over the business and receivership properties. It did this for about £4.5 million. It was to sell certain properties to the respondent but the company and the respondent would then lease back these properties through the medium of a limited partnership. The properties were sold for £3.0 million or thereby. Essentially, therefore, the agreement was intended to finance the continued operation of the business. On 31 March 2004, however, the first petitioner was to be entitled to buy back the respondent's shares in the company and the properties at a valuation fixed by a formula with a base of £2.1 million but which also enabled all parties to participate in any increase in values over the duration of the contract. If there were no election by the first petitioner to buy back the shares and property, matters would remain entire with the company continuing and the respondent owning the properties. Meantime, the petitioners as the B class shareholders and the respondent as the A class shareholder were to have equal rights as such shareholders, each class being able to appoint one director.
Over recent years, relations between the parties have deteriorated. The petitioners aver that the respondent has: failed to co-operate in the constructive management of the company; failed to pay for the large number of pigs being supplied to him by the company: overcharged the company for goods supplied by him to the company; acted contrary to the interests of the company; and behaved in an abusive, violent and aggressive manner towards the first petitioner. The respondent denies the allegations and counters with some of his own in relation especially to his views on the management of the company not carrying any weight with the first petitioner as managing director. He also alleges that the company has failed to pay rent due to him through the limited partnership. The financial position of the company has remained perilous as a result of difficult trading conditions and the enduring impact of foot and mouth disease. A sale and leaseback plan, this time involving third parties, was devised in relation to a farm at Ormiston, West Lothian in order to raise capital of £1.5 million or so to pay back pressing creditors. In late March 2003, the petitioners lodged the current petition in order to push through the Ormiston deal in the face of what they perceived to be opposition from the respondent even although he had said that he approved of the deal in principle. In response to the respondent's retaliatory strike of a winding up petition, the petition also sought to interdict the respondent from proceeding with a winding up. It had a prayer for the removal of the respondent as a director and an alternative of ordaining the respondent to buy the petitioners' shares for £2.0 million.
The petitions called before Lord McCluskey on 10 and 11 April 2003. After a lengthy hearing, Lord McCluskey refused to grant any of the orders sought but instead ordered intimation to certain holders of floating charges in the expectation that they might appoint a receiver. They did not do so and the matter came before Lord McCluskey again in late April, the petition having been expanded to seek the appointment of a third party as an additional director to approve the Ormiston deal. Having heard submissions on the competency of making interim orders in a petition of this sort under reference to Ferguson v McLellan Salmon 1990 SLT 658, Lord McCluskey issued an Opinion and relative interlocutor dated 25 April 2003. In the Opinion, he explained that, although interim orders may be competent, it would be difficult for the Court to make any orders where there was no agreement on the facts since the Court could not be satisfied that the petition was "well founded" in terms of the section. There was agreement, however, on such facts as enabled him to conclude that the failure to sell the farm at Ormiston could be unfairly prejudicial and Lord McCluskey was, in these circumstances, prepared to appoint the third director for a limited time and purpose.
2. Motions and Opposition
The Ormiston proposal proceeded and there was agreement in relation to the sale of further properties embodied in a manuscript document dated 23 September 2003. However, further problems have continued to arise and the petition came before me on 5 December 2003 on the following motion:
"in respect that the first petitioner has given notice of his intention to exercise his right of buy-out of the respondent's properties and shares to regulate the position of the company in the interim pending completion of the buy-out by removing the respondent as a director of Scotpigs Limited, and to dispense with the requirements of Rule of Court 23 regarding intimation of this motion."
The opposition was stated thus :
"The motion is premature. The respondent has not had sufficient time to give proper consideration to the offer which was received at 5 pm on 2 December. The respondent...does not have the benefit of a current valuation of the "buy out" properties. The respondent's agents have not...had sight of the...valuation which formed the basis of the petitioner's offer."
In support of the motion, the petitioners submitted that the removal of the respondent was a matter which required to be done as a matter of urgency because of the continued problems with the financial position of the company. Its assets continued to exceed its liabilities but it was important for further assets to be sold to reduce indebtedness. The respondent, it was said, continued to obstruct progress and frustrated the running of the company. One example had occurred that very morning with an employee of the respondent informing feed suppliers that "Scotpigs was finished" and they should not continue to supply them. It was said that the respondent had ulterior motives in relation to the land tenanted by the limited partnership, whose demise would increase land values. The respondent was trying to push the company "over the brink" towards liquidation. Against that background, the petitioners had made the respondent an offer, contained in a letter dated 2 December 2003 (No. 6/164 of process), whereby the first petitioner would buy back the shares and properties for £3.5 million on certain terms and conditions in full and final settlement of all outstanding matters. In a separate letter, the petitioners proposed advancing the buy-out date. Upon the basis of the proposals, which were supported by a valuation of the buy out properties of £3.05 million, the essential contention of the petitioners was that the respondent had no substantial interest left in the company. In such circumstances, standing his obstructive attitude, he should be removed as a director. It was accepted that removal of a director under the statutory provisions was novel but it could not be said to be contrary to what was permitted under sections 459-461 of the 1985 Act. If the company was to have a sensible future then it required to be managed appropriately and this was being prevented by the respondent. A judicial factor was not appropriate as he would not have the requisite skills to manage the business of pig farming. However, it was accepted that, contrary to the terms of the motion, the proposals in the letter did not amount to an election in terms of the agreement. On the appropriateness of the orders, reference was made to Virdi v Abbey Leisure [1990] BCLC 342 per Balcombe J at 350 and Re Phoenix Office Supplies v Larvin [2003] 1 BCLC 76, per Auld LJ at 85.
The respondent complained of lack of proper intimation, which had been given at 5 pm on 2 December; contact with the respondent only having been possible on 3 December. It had not been possible to advise the respondent on the petitioners' offer because appropriate property valuations were not yet available. Furthermore, the respondent did not consider that the petitioners were in a position to meet the obligations in the proposal. Equally, the current allegations were contained in a Minute of Amendment which the respondent had not had time to answer. In any event the allegations remained both vague and denied. The respondent was co-operating with the sale of assets, as he had done with Ormiston, including the properties in the agreement of 23 September 2003. The urgency in the application was not reflected in the absence of action since the hearings in April. The respondent was entitled to remain a director in terms of the agreement reached in relation to the rescue package of the petitioners' business. Any financial difficulties which the company was in were attributable to the petitioners, who had the day to day responsibility of running the company. The respondent accepted that it was competent to make interim orders but these required the Court to be satisfied in terms of the section.
3. Decision
Sections 459 to 461 of the Companies Act 1985 (c 6) provide remedies to those shareholders who consider that a company's affairs are being conducted in a manner which is unfairly prejudicial to their interests. However, before these remedies can be exercised, the Court has to be satisfied that the application of the shareholders is "well founded". In petition procedure, which is summary in nature, there are no doubt a number of ways in which such satisfaction can be achieved. It may be plain from the answers, from admissions made at the bar or from documentation, that the petition is well founded, wholly or in part. If wholly well founded then the prayer may simply be granted, for example on a simple motion for decree. If part only can be seen as well founded, then an interim order (that is to say, strictly, an order granting the prayer of the petition in part) may be pronounced to remedy the problem (Ferguson v McLellan Salmon (supra)). Where, on the other hand, there is no material upon which facts can be held established, it will seldom be possible for the Court to be satisfied in terms of the section. The Court will not, in that situation, be able to pronounce an order in terms of the statutory provisions. It may, however, be possible for the Court to grant an interim interdict against an apprehended legal wrong (including unfairly prejudicial actings) or otherwise to regulate ad interim the actings of the Company. Thus, it may well be open to the Court to prohibit a director from taking certain steps or from refraining from doing so. However, none of these remedies is sought here. Rather, the motion is to remove the respondent as a director; a position which he is entitled to hold in terms of the parties' agreement. Such removal, if competent at all, would result in the respondent losing all practical ability he had, contractually and in terms of his appointment, to observe the affairs of the company into which he appears to have invested a not inconsiderable sum of money and to which he has, in effect, leased substantial properties.
In the present state of affairs, the Court is simply not in a position to make any judgment upon the truth of the parties' contentions. That could be done summarily at a hearing on the petition and answers but perhaps most appropriately only after some form of proof. It may be important in a case such as this, therefore, that the petition proceeds to a hearing with expedition. However, what I am being asked to do is to remove a director on the motion roll, thereby handing control of a company, without proper enquiry into the facts, to only one of the parties to a contested litigation concerning the conduct of the affairs of that company. Such a step would not appear to accord with principles of equity or fairness in litigation and it is simply one which I am not prepared to take. The motion is accordingly refused.
I should add too that, given that it was accepted that the offer contained in the letter of 2 December 2003 did not amount to an election in terms of the Shareholders Agreement, the basis for the motion would not appear to be well founded and it remains to be seen whether the first petitioner will be able to make and implement such an election. Furthermore, although the petitioners' anxiety to proceed is understandable if their contentions are correct, where an offer such as has been made forms the basis of an application of such substance as the present one, the respondent requires a reasonable time to consider it and I am not persuaded that such time has yet been afforded here.