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OUTER HOUSE, COURT OF SESSION
[2007] CSOH 150
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P283/94
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OPINION OF LORD PHILIP
in the Petition of
ALISDAIR DAVID
BURKE
Petitioner;
against
(FIRST) BAYNE SERVICES
(EDINBURGH) LIMITED,
(SECOND) MARTIN J BURKE, (THIRD) IAN DAVID BURKE, (FOURTH) MARGARET
NICOLSON BURKE,
(FIFTH) IAN ALAN
HERBERT McPAKE AND
(SIXTH) WILLIAM
DAVID BAYNE
Respondents:
________________
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Petitioner: Party
Respondents: Miss Haldane; Tods
Murray, WS
21 August 2007
[1] This
is a petition under section 459 of the Companies Act 1985 at the instance of Alisdair David Burke in relation to the affairs of Bayne
Services (Edinburgh) Limited ("the Company") for an order requiring the Company
and certain of its shareholders to purchase the shares in the Company held by
the petitioner at a price which represented, as at the date of presentation of
the petition, that proportion of the value of the whole shares of the Company
in issue which the nominal value of the petitioner's shares bore to the nominal
value of the whole shares in issue. The
petition also sought an order requiring the Company to refrain from holding an
extraordinary general meeting or from considering a proposed resolution to sell
the Company's heritable assets or from selling those assets. An interlocutor ordering the Company to
refrain from holding an extraordinary general meeting was pronounced as long
ago as December 1994 and that mater is no longer in issue..
[2] In the petition the petitioner
avers that the Company was incorporated on 8 October 1973 and the share capital comprises 100
Ordinary shares of £1 each, of which the petitioner holds 24. Until 30 October 1994 the petitioner's
brother Martin Burke, the second respondent, owned 24 shares, Ian Burke, the
petitioner's father, the third respondent, owned 25 shares, Margaret Nicolson Burke, the wife of Ian Burke and the petitioner's
stepmother, the fourth respondent, owned 25 shares, and Ian McPake,
solicitor, the fifth respondent, owned 2 shares. On 30 October 1994 the shares held by Ian
Burke, Margaret Burke and Ian McPake were transferred
to Martin Burke who then held a total of 76 shares.
[3] The
petitioner further avers that the Company was formed as a family company to
deal in the acquisition and letting out of heritable property and that the properties
held by the Company were always regarded by the members of the Company as
family property. The petitioner was a director
of the Company from 3 July 1977
until 1 December 1978. Martin Burke has been a director since 3 July 1977 and remains the sole
Director. Ian Burke,
was a director between 19 August
1982 and 21 September
1989, and Margaret Burke was a director between 8 October 1973 and 21 September 1989.
[4] The
petitioner avers that since 1989 he has been denied access to any information
regarding the Company apart from that made available to the public by the
Registrar of Companies. He received no
notification of general meetings. Relations
between the petitioner on the one hand and Martin Burke, Ian Burke and Margaret
Burke on the other hand broke down after the petitioner Ian Burke and Margaret
Burke became engaged in litigation before the High Court of Justice in England
in 1989 in relation to rights to properties in London, a part of which the
petitioner was occupying.
[5] On
29 June 1986 the
Company acquired Dalnaglar
Castle, Glenshee,
from Ian Burke and Margaret Burke. At
the time, the petitioner was informed that the purchase price of the subjects
was £250,000, funded by loans from Ian Burke and Margaret Burke of £125,000
each. The loans were said to be interest
free, £75,000 of each being repayable on demand, and the remaining £50,000 at
Whitsunday 1996. Dalnaglar Castle
was run as a business, suites and rooms being made available on short term lets
to the public. Guests were requested to
make payment not to the Company but to Margaret Burke. Unknown to the petitioner, the property was sold
at a declared consideration of £360,000 to Dalnaglar
Estates Limited on 30 June 1994. The only directors and shareholders of Dalnaglar Estates Limited were Ian Burke and Margaret
Burke. On 12 November 1994 the
petitioner received notice of an extraordinary general meeting of the Company
to be held on 28 November 1994, giving notice of a resolution that the
heritable properties owned by the Company should be sold at a total price of
£187,050 to a Company of which Martin Burke was the sole Director and holder of
301,000 of the 302,000 issued shares.
The properties mentioned in the resolution were the only assets of
substance owned by the Company. The
petitioner was informed by Martin Burke that the reason for the sale was
that the loans from Ian Burke and Margaret Burke were being called up as a
result of which the Company required £150,000 in cash immediately. The petitioner enquired as to what had
happened to the £360,000 said to have been received from Dalnaglar
Estates Limited and was told by Martin Burke that he did not know what had
happened to it. In December 1994
the petitioner was informed by the Company's solicitors that the sums owed to
Ian Burke and Margaret Burke as at 30 November
1994 totalled £155,385. Sums
received by the Company from M & B Investments between January and
June 1993 amounting to £65,000 were wrongly
credited to the loan accounts of Ian Burke and Margaret Burke. The petitioner believes that the proposed
sale was not for full value.
[6] Certain
payments made to the Company which was said to be connected with the London
properties already referred to were credited to the loan accounts of Ian Burke
and Margaret Burke. The London
properties were never owned by the Company and no explanation was ever provided
for these payments. Certain payments
made for the benefit of Ian Burke and Margaret Burke were
not put to reduce the Company's indebtedness to them when they should have
been.
[7] The
petitioner avers further that throughout the history of the Company
Ian Burke and Margaret Burke treated it as a vehicle for their personal
finances and projects with no regard for the interests of the petitioner and
the effect on the value of his shares.
He avers that Martin Burke acquiesced in these activities which
materially reduced the value of the petitioner's shares to his prejudice and without
his knowledge or consent. The Company was
deprived of income from property owned by it at 10 and 11
Belford Road, Edinburgh which
was reserved for the use of Ian Burke and Margaret Burke from 1976 and for
which no rent was paid. The Company was
tenant of commercial property in London
of which the freehold was in the name of Ian Burke and Margaret Burke. The Company paid mortgage interest in lieu of
rent. In turn the Company let the
property to tenants at a rent of approximately £90,000 per annum. The Company did not receive all of the rental
income. The property repaid a balance of the loan over that property amounting
to £96,000 which should properly have been paid by Ian Burke and Margaret
Burke.
[8] The
petitioner avers that from 1986 to 1992 one wing of Dalnaglar Castle
was reserved for the private use of Ian Burke and Margaret Burke. They paid no rent. Dalnaglar Castle
Estate was purchased by Michael Burke in 1992 and sold by him back to the
Company twelve months later. The sale
price of £400,000 in respect of the sale to Michael Burke was never paid by him
to the Company. The Company received no
interest on the unpaid purchase price during Mr Burke's ownership. The Company transferred the heritable title
to him. Michael Burke committed
suicide shortly after redisposing the Castle to the
Company. During his period of ownership
the Company paid maintenance and repair bills for the property to the value of
approximately £90,000. The assets of the
Company were therefore reduced by this amount without any gain to the
Company. The actings
of the Company in transferring title to Michael Burke represented a serious
mismanagement of the assets of the Company
[9] The
petitioner also avers that the directors paid themselves excessive remuneration
and bonuses in breach of the Articles of Association. Those payments materially diminished the
assets of the Company as did all the foregoing activities of the Company and of Ian
Burke and Margaret Burke. The assets of
the Company and the value of the petitioner's shares thereby were materially
reduced. The petitioner concludes that
the Company's affairs were conducted in a manner which was unfairly prejudicial
to his interests.
[10] So far as the procedural history of the petition is concerned,
in February 1995
a proof was allowed on the petition and answers. In April 1995 the petitioner
was granted diligence for the recovery of documents. On 4 January
1996 the proof was discharged on the motion of the petitioner. In June 1996 the petitioner was ordered to
intimate whether he intended to proceed with the petition. In September 1997 a Minute of Amendment
for the petitioner was allowed to be received. On 2 October 1997 the petitioner was again granted
diligence for the recovery of documents, and a proof fixed for 7 October 1997 was discharged on
his motion. On 28 January 1998 the petition was allowed to
be amended in terms of the petitioner's Minute of Amendment and the
respondents' Answers. On 20 May 1998 a diet of procedure roll
was discharged on the petitioner's motion and of consent and a further Minute
of Amendment for the petitioner was allowed to be received. On 29
October 1998 a proof was again allowed. On 21 January
1999 the Record was amended in terms of the second Minute of
Amendment and answers to it.
[11] Subsequently the parties through their agents entered into
heads of agreement in the following terms:
"The parties
hereby agree that they will co-operate in the appointment of an appropriate
expert, for the purposes of remitting to him the undernoted
matters. Such agreement will be made
within four weeks of the later date of execution of these presents, failing
which the President from time to time of the Institute
of Chartered Accountants in Scotland
may be requested by other party to select and appoint an appropriate forensic
accountant.
The expert will
be instructed to value Bayne Services (Edinburgh) Limited (hereinafter referred
to as 'the Company') as at 30
November 1998 on the following basis. He will be required to investigate the
affairs of the Company, by reference to the process in the present action,
including the pleadings and documentary evidence especially the accounts of the
Company and working papers, and by such means and with regard to such further
evidence as he considers appropriate, taking into account, but not limited to,
the following factors, namely:-
(1) the nature and
extent of the costs incurred by the Company in connection with the sale and re-purchase
of Dalnaglar
Castle between 1992 and 1993;
(2) the nature and value of the benefits
enjoyed by the directors of the Company from their occupancy, if any, of (i) Dalnaglar Castle or part or
parts thereof from 1984 to 1994, and (ii) 10 and 11 Belford Road, Edinburgh
from 1984 to 1998;
(3) The source of the funds identified as
those sums constituting the directors' and shareholders' loan accounts,
verification of payment and receipt and the sums paid to and from such accounts
from time to time.
He will be asked
to examine and report on the accuracy of the accounting and financial records
relating to such entries, if any, and the effects of such entries, or failure
to record or misrecording, if any, on the value of
the Company and to comment on any ancillary issues of accounting practice or
probity. He will be requested to
ascertain the effect of such transactions, or benefits, on the value of the
Company in order to arrive at a valuation of the Company as at 30 November 1998, and to
contrast such figure with the valuation arising from existing accounting
records.
The parties
undertake to assist the expert in such manner as he may request. The parties agree to abide by the valuation
of the Company arrived at in accordance with the foregoing, and to treat the
same as a fair and accurate valuation.
The parties agree that the expert shall be entitled to order that all or
a part of the legal or other expenses of one party shall be paid by the other
party. The expenses of appointment of
the expert are the joint and several liability of the
parties without prejudice to the rights of the parties thereafter to seek
relief inter se in terms of any
determination by the expert of a proportion in which each party shall pay his
expenses."
[12] By engagement letter dated 29 July 2002 Messrs Chiene
& Tait, Chartered Accountants, Edinburgh, were
instructed jointly by the parties to prepare a valuation of the Company as at 30 November 1998 on the basis set
out in the heads of agreement. Their
valuation which was made available to parties on 10 October 2006 brought out a value for the Company
of £154,237. On that basis they
calculated that each of the 100 shares was worth £1,542. The petitioner's holding of 24 shares
was therefore valued at £37,016, which, together with his loan balance of
£15,757, brought out a total due to him of £52,773.
[13] Following receipt of Messrs Chiene
& Tait's report a hearing was arranged and took
place on 16 November 2006. At the hearing the petitioner appeared on his
own behalf and Miss Haldane, Advocate, appeared for
the first and fourth respondents. Miss Haldane submitted that the parties had agreed to be bound
by the final valuation arrived at by Chiene & Tait, who had been able to reach a view on all salient
points. Her clients accepted the valuation. They were in funds and willing to settle on
the basis of it on condition that Mr Burke executed share transfer forms. The prayer of the petition sought:
".....an order
ordaining the second, third and fourth respondents or nominees to purchase the
shares held by the petitioner at a price to be hereafter determined which
represents, as at the date of presentation of this petition that proportion of
the value of the whole shares in issue which the nominal value of the
petitioner's shares bears to the nominal value of the whole shares in issue,
such value to be carried out adding back the items detailed in
Schedule (ii) hereto and to allow the parties a Proof before Answer
relative to the valuation of the petitioner's interest and quantification of
the said items detailed in the said Schedule (ii) as at the said date; ..... and to decern; or to do further or otherwise as to your
Lordships shall seem appropriate".
She submitted that the prayer of
the petition, insofar as it sought a proof before answer relative to the
valuation of the petitioner's interest and quantification of the items detailed
in Schedule (ii) had been superseded by the heads of agreement. The parties would require to
meet to enable share transfer forms to be handed over by the petitioner
in return for the sum brought out in the report as due to him. Thereafter the Court could pronounce an
interlocutor reflecting what had taken place.
[14] In response the petitioner said that he did not accept
Miss Haldane's submission. So far as he was concerned the share valuation
was adequate for the time being. Chiene & Tait were acting as
an expert and not as an arbiter. His
former agent had advised him that the reference to the expert was identical to
a reference to a tribunal of fact. After
the expert had issued a factual report the parties would come back to the Court
to have the substance of the petition heard.
Chiene & Tait
were not forensic accountants. He had
submitted written legal submissions to them but they had said that they were
unable to deal with them. The heads of
agreement were amended in October 2005 to take account of that.
[15] In terms of section 461(2)(c) of the Companies Act 1985 the
Court could authorise proceedings to be brought in the name of the Company, for
example, for damages against directors for breach of fiduciary duty. There were irregularities in the Company's
borrowing activities in respect that no resolutions had been passed in relation
to them, nor had any loan documents been executed. In the absence of a resolution in relation to
any specific loan transaction, the Company would not be bound by that
transaction. Accordingly loan transactions
of between £300,000 and £500,000 were not enforceable against the Company. Chiene & Tait had glossed
over these irregularities and were not willing to probe further. Evidential presumptions, of which Chiene & Tait would not be
aware, would come into play in Court.
When money came into the Company whether by gift or by loan, it was all
taken out to pay for the personal expenses of Mr and Mrs Burke. That was a breach of fiduciary duty. All these issues were raised in the petition.
[16] The four properties which required to be investigated were: Dalnaglar, covering
50 acres including the Castle; eight flats at Raeburn Place, Edinburgh; and property at Belford
Road, Edinburgh. There were also properties in London
and in Spain
which were funded by Company money but the titles to them were not held by the
Company.
[17] Mr & Mrs Burke resigned as Directors in 1989 for tax
purposes and went to live in Spain
to avoid paying capital gains tax on the London
property. At a meeting on 28 April 2003 between Chiene & Tait and Martin
Burke, Martin Burke accepted that although not appointed Directors, Mr &
Mrs Burke exercised influence and control as a consequence of being the
largest creditors and majority shareholders.
Mrs Burke had never been questioned or investigated.
[18] In their report Chiene & Tait said that Mr & Mrs Burke were shadow
Directors. In terms of section 320 of
the Companies Act 1985 the acquisition of a Director or a shadow Director of a
non-cash asset was unlawful unless the arrangement was approved by a resolution
of the Company's general meeting. In
terms of section 322(3) a Director was liable to account to the Company for any
gain which he had made by an arrangement struck at by section 320. The actions of Mr & Mrs Burke fell
within the provisions of these sections.
The Company required to be restored to the position it was in before
that happened. There was no time limit
and prescription did not run. Mr &
Mrs Burke bought Dalnagar for £360,000 and sold the
property, excluding an area retained by Mrs Burke, for £815,000. The petitioner referred to of a Law
Commission Consultation Paper on Shareholder Remedies published on 31 July 1996 in which it was
said at paragraph 1022:
"it is clear that by ordering the valuation to
be carried out on a pro rata basis,
and determining the date on which the valuation is to take place, together with
any adjustments to take account of misappropriation, the Courts could be said
to be compensating the petitioner for the unfairly prejudicial conduct of the
respondent, as the petitioner will receive more than the market value of the
shares. The Courts have acknowledged
this and have considered it to be part of their discretion to do what is fair
as between the parties".
He went on to submit that to
require him to raise separate proceedings against Mrs Burke would be
"bureaucratic". Chiene
& Tait had picked up the fact that the Company
had become burdened with large loan accounts which had never been authorised by
resolution. The loan accounts
represented the loan capital of the Company.
It could have purchased further properties with that money but it had
been prevented from doing so by Mr Burke's use of the money for his own private
purposes. Part of the proceeds of Dalnaglar which was in offshore accounts should be paid
into Court to compensate for Mrs Burke's use of those proceeds. Mr & Mrs Burke had been financing
their own development in Spain
with Company property.
[19] Miss Haldane submitted that the
petitioner was asking the Court to deal with a number of complaints arising out
of the management of the Company and to carry all of those complaints into a
single process. What the petitioner was
asking was not possible in this process.
Those complaints were not the subject of live claims in the sense of
proceedings having been raised in respect of them. Nor could they be dealt with standing the
terms of the prayer of this petition.
The petitioner did not fully understand the exercise carried out by Chiene & Tait. In fact Chiene
& Tait had taken all the petitioner's complaints
into account and had indexed up the sale price of Dalnaglar Castle
to reflect open market value as that had been assessed by an independent valuer as shown in Appendix A to Chiene
& Tait's report.
They had carried out the same exercise in relation to the loss of rental
income in relation to the Belford Road
property. The petitioner's claims for
restitution for sums not paid into the Company had been taken into account by Chiene & Tait in arriving at
the sum due to him. The parties had
agreed to be bound by the exercise carried out by Chiene
& Tait.
The Court could do no more than to give effect to the order which the
petitioner sought in the prayer. His
desire to have other matters explored could not be fulfilled in this
process. There was nothing to prevent
him from pursuing such claims as he saw fit.
The respondents accepted that the petitioner was entitled to the sum of
£52,773 brought out in Appendix A to Chiene
& Tait's report.
The heads of agreement had been entered into to avoid a lengthy
proof. The exercise was now complete and
there was nothing left in the petition that required the leading of
evidence. Miss Haldane
moved for a short continuation to allow for the execution of share transfers
and payment of the consideration to the petitioner. Thereafter a hearing would be required in
order to pronounce the appropriate interlocutor.
[20] As I have already recorded the principal element of the prayer
of the petition which remains outstanding is the request for an order ordaining
the second, third and fourth respondents to purchase the petitioner's shares at
a price which represents that proportion of the value of the whole shares in
issue which the nominal value of the petitioner's shares bears to the nominal
value of the whole shares in issue. The
petitioner also prays that the valuation be carried out adding back the items
detailed in Schedule (ii) to the petition.
Schedule (ii) contains a list of factors which the petitioner alleges
diminished the Company's assets and the value of his shares. In addition the prayer seeks a proof before
answer in relation to the value of the petitioner's interest and of the
quantification of the items detailed in the schedule.
[21] In terms of the Heads of Agreement entered into by the
petitioner and the respondents, the parties agreed to co-operate in the
appointment of an expert who was to be instructed to value the Company as at 30 November 1998. They also agreed that the expert would be
required to investigate the affairs of the Company by reference to the process
in the petition including the pleadings and documentary evidence, in particular
the accounts of the Company and working papers, and by such means and with
regard to such further evidence as the experts considered appropriate, taking
into account, but not limited to, the three numbered factors set out in the
Heads of Agreement which were quoted earlier in this Opinion. Further, the parties agreed to abide by the
valuation of the Company arrived at in accordance with the terms of the Heads
of Agreement and to treat it as a fair and accurate valuation.
[22] It is clear from the terms of the Heads of Agreement that the
parties were binding themselves to relieve the Court of the task of valuing the
whole shares in issue of the Company and to remit the task to the expert who
was empowered on the basis of that valuation to determine the price to be paid
for the petitioner's shares. The remit to the expert accordingly covered the
only remaining live issue in the case. It was left to the expert to decide what
evidence, in addition to the pleadings and the documentary evidence referred
to, was required to enable him to comply with his instructions. It was accordingly open to him to decline to
take into account any additional material submitted to him by the parties.
[23] Messrs Chiene & Tait were appointed as the expert by an engagement letter
of 29 July 2002 and the terms of their Report, made available on 10
October 2006 make it clear that they have carried out the investigation and
provided the report which they were instructed to carry out and provide. In doing so they have made such allowance for
such of the items listed in Schedule (ii) as they have found themselves
able to identify and quantify on the basis of the information before them. In these circumstances Chiene
& Tait have fulfilled the instructions given to
them in terms of the Heads of Agreement.
Since the parties have bound themselves to abide by the valuation of the
Company arrived at by Chiene & Tait, it is not now open to the petitioner to seek further
consideration of that valuation by the Court.
Remitting the task of valuation to the expert was a practical course of
action engaging, as it did, the accountancy expertise of the expert,
and eliminating the very considerable cost of a lengthy adversarial hearing
before the Court. In these circumstances,
in accordance with the motion for the respondents, I shall continue the cause
to allow the execution of share transfers to be completed by the petitioner and
the payment of the consideration to him by the respondents in terms of Chiene & Tait's valuation. Thereafter a further hearing will be required
in order to pronounce the appropriate final interlocutor.
