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OUTER HOUSE, COURT OF SESSION
[2007] CSOH 175
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P380/02
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OPINION OF LORD GLENNIE
in the Petition of
ELEANOR WHILLOCK
Petitioner;
against
(FIRST) GEORGE
HENDERSON (AP), (SECOND) SORN SPRING WATER COMPANY LIMITED and
(THIRD) G & A
HENDERSON
Respondents:
for
An Order under
Section 459 of the Companies Act 1985
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Petitioner: J.D. Campbell, Q.C., Carruthers; Russel + Aitken
Respondents: Robertson;
Balfour + Manson LLP
31 October 2007
Introduction
[1] The
petitioner seeks relief under sections 459-461 of the Companies Act
1985. She complains that the affairs of Burns
County Mineral Water Limited (hereafter "the company") have been conducted in a
manner which is unfairly prejudicial to her interest therein. The first respondent is Mr Henderson. The petitioner has abandoned against the
second and third respondents; it is unnecessary to mention them further as
respondents, though they continue to feature as actors in the story narrated in
the petition.
[2] The
case came before the court on the procedure roll on the first respondent's
first plea-in-law to the relevancy of the averments in the petition. The discussion took place over three days
spread out, unfortunately, over two years.
The petitioner amended after the second day and the discussion continued
on the third by reference to the amended Record. I deal with the points raised in argument by
reference to the Record as so amended.
[3]
The Company was incorporated on 27 December
1995 as a private company limited by shares. The objects of the company include the
business of locating and bottling spring and mineral water and the sale,
wholesale and retail of waters and other beverages. It has an authorised and paid up share
capital of г100, consisting of 100 ordinary shares of г1 each. The petitioner and the first respondent each
hold 50 ordinary shares. They have
been directors of the company since its incorporation. The petitioner is the company secretary but,
with her agreement, the first respondent has had effective control of the day
to day running of the company from the start.
[4] The
petitioner's case on Record is, in summary, as follows. The first respondent and his wife were
partners in the firm of G & A Henderson ("the partnership") which operated
a farm business at Westtown Farm, Sorn, Mauchline ("the farm"). The petitioner's husband ("Mr Whillock")
was, in 1995, the sole shareholder in Blythswood Enterprises Limited
("Blythswood") which, trading under the name "Water Direct", leased water
coolers to its customers and thereafter supplied those customers with bottled
water for the water coolers. At some
point in 1995 Mr Whillock identified the farm as a source of water for the
business and discussions took place between him and the first respondent
(acting on behalf of the partnership) about the possibility of Blythswood
procuring water from the farm. The
discussions led to the setting up of the company in December 1995. The arrangement was that the company, once
established, would have access to the water supply from the farm and would have
the use of one or more buildings in which it would establish a bottling
plant. The company would bottle water and
sell it to Blythswood for the purpose of its business. The pursuer avers that the company was, in
effect, a joint venture between the two families: the Henderson
family had, through the partnership, a source of water but no customer; whereas
the Whillock family, through Mr Whillock's involvement in Blythswood, had a
market for water but no supply. The company
was set up giving each family a 50% interest in the venture.
[5] Sometime
later Mr Whillock sold his interest in Blythswood to Watsons Water (UK)
Holdings Limited, which has changed its name on a number of occasions since
then. It is referred to in the petition
as "the customer" and I shall adopt that terminology.
[6] The
petitioner alleges that in January 2002 she was informed by the company's
accountants that the company had ceased trading on about 24 August 2001 upon the instructions of the
first respondent. Her enquiries since
then have revealed that the first respondent has set up a company known as Sorn
Spring Water Company Limited ("Sorn"). Since
August 2001 Sorn has bottled water at the farm, for a while using the company's
equipment, and has supplied the customer with bottled water from the farm in
place of the company; and all invoices to the customer for the supply of
bottled water have been rendered by Sorn rather than by the company. All of these matters were carried out without
any consultation with or notice to the petitioner.
[7] In
these circumstances the petitioner avers that the first respondent has acted in
breach of duty and/or fiduciary duty owed to her, such duties arising out of
the formation of the company and their interest in it as a joint venture. It is not necessary to look at the averments
of duty in detail. There are complaints
that the first respondent has refused to provide information about the business
of the company. Of more direct relevance
for present purposes, are the complaints that the conduct of the affairs of the
company by the first respondent has unfairly prejudiced the petitioner's
interest in the company. She avers that
the
"deceitful and
surreptitious diminution of the business of the company, and its replacement by
Sorn in the contract or contracts for the supply of water to the customer, was
all devised and implemented by the first respondent, without consultation with
the petitioner, and by excluding her from management decisions by, concerning
and within the company."
She goes on to say that she was
unable to participate in the business of the company; that the actings of Sorn,
in establishing a business relationship with the customer, were for all
practical purposes the acts of the first respondent; and that he acted so that the
company relinquished its contract with the customer in favour of Sorn, whose
actions he also controlled. She avers
that the
"running down of
the business of the company and its transfer to [Sorn] in the circumstances
hereinbefore condescended upon is conduct which is unfairly prejudicial to the
petitioner's interest in the company.
The company has thereby been deprived of its sole customer and its
entire existing trade and the making of profit."
In consequence, she seeks relief
under sections 459-461 of the Companies Act 1985.
Submissions
[8] Mr
Robertson invited me to dismiss the petition, which failing to exclude
substantial parts of it from probation. Under
reference to the terms of section 459, Mr Robertson emphasised that
the petition must be presented by the petitioner asserting rights qua member of the company; that the
conduct complained of must be prejudicial to the interests of the petitioner in
that capacity; and that such prejudice must be unfair. Unfairness must be judged in a commercial
context. Even in that context, something
might be unlawful without being unfair or unfair without being unlawful. But in order for a member of a company to
complain about lawful conduct, i.e. conduct permitted by the articles of
association, there must be something in the relationship between the parties
which entitles one party to expect that the other will not act in a particular
way. In this regard, the court exercises
its jurisdiction on the basis of established equitable principles. The test of unfairness is objective. It equates with a visible departure from the
standards of fair dealing. In support of
these general propositions he referred me to Re Saul Harrison [1995] 1 B.C.L.C. 14, 17-20, Re Noble [1982] 2 B.C.L.C. 273, 290-292, O'Neill v Phillips [1999] 1 WLR 1092, 1102-1104, Anderson v Hogg 2002 S.C. 190 at
paras.[16] and [17] and Re London School
of Electronics [1986] 1 Ch.
211. The petitioner must set forth what
act or omission is complained of. Section 461
of the Act sets out the range of remedies available only if grounds in section 459
are established.
[9] Against
that background, he took me through a number of passages in the petition and submitted
that three crucial matters had not been properly focused by the
petitioner. These were: first, the
nature and extent of the petitioner's involvement in the company; second, the contract, if any, which existed
between the company and the customer;
and, third, the existence and terms of any lease entitling the company
to continue to use and occupy the lands at the farm and to have access to the
supply of water. As to the first point, he
submitted that on the petitioner's own case it was agreed from the beginning
that the first respondent would be in sole charge of the day to day running of
the company, and there was therefore no basis for the averment made in a
petition that at some stage the petitioner was "excluded" from the running of
the company. As to the second point, the
averments did not show that the company had any binding agreement with the
customer which would have ensured its ability to continue supplying it,
particularly after the customer was taken over by a third party. As to the third point, the averments in the
petition were not sufficient to instruct a lease, and therefore it could not be
said that the company had any right to continue taking water from the
farm. The importance of the second and
third points was that unless the petitioner could show that the actings of the
first respondent had deprived the company of something thing of value, it could
not be shown that those actings had caused anything prejudicial or unfair to
the respondent. Mr Robertson
further submitted that the complaints made by the petitioner were not relevantly
made by her qua member of the company,
nor were they complaints about the actings of the first respondent qua member of the company. Insofar as the first respondent had acted
contrary to the interests of the petitioner, he had done so as a partner in the
partnership running the farm and/or in his capacity as a director of Sorn. It was Sorn who made the profits from the new
arrangement, not the first respondent.
He invited me to sustain the first respondent's plea-in-law and dismiss
the petition.
[10] For the respondents, Mr Campbell, Q.C., reminded me of
the test of relevancy under reference to Jamieson
v Jamieson 1952 S.C. (H.L.) 44, 50. Taking the petitioner's averments pro veritate, it could not be said in
this case that the action was bound to fail.
He characterised the first respondent's argument as comprising,
essentially, two main points: first, that the petitioner had not relevantly
averred her involvement in the management of the company, so as to be able to
complain about having been excluded; and second, even if that were wrong, that the
actings of the first respondent were not to do with the management of the company
but were entirely divorced from it. In
countering these submissions, Mr Campbell referred me to the terms of section 459
and to the averments in the petition of the context in which the parties
developed their business relationship. There
was no doubt about what the petitioner was alleging. She was alleging that the first respondent
had carried out a subterfuge, setting up his own company (Sorn) to siphon off
the business of the company in which he and the petitioner were 50%
shareholders. That was a relevant case
under section 459. He referred me
to Anderson v Hogg
(supra), Re London School of Electronics (supra) and Scottish
Co-operative Wholesale Society Limited v Mayer [1959] A.C. 324. The
petitioner was offering to prove, by reference to these averments, that the company's
affairs were being managed by the first respondent in a manner which was both
unfair and prejudicial to her interest as a director and shareholder.
[11] The petitioner's amendments after the second day of the
discussion introduced further averments, particularly about the arrangements
pursuant to which the company could be said to have had a lease of relevant
parts of the farm for the purpose of its bottling operation. Mr Robertson made further criticisms of
the petitioner's pleadings. It was now
clear from the pleadings that the petitioner was not saying that the company
had ever leased the well-head itself.
There was ambiguity, he said, about which of the outbuildings were the
subject of the alleged lease - this was important to the petitioner's case of
an oral agreement which continued by tacit relocation, which would founder
unless the particular buildings could be identified. It was said that the lease was agreed by
Mr Whillock as agent for the company, but there were no averments as to
how this agency was constituted. He had
his own interest as director of the customer at the beginning of the
relationship, and had his own reason for entering into discussions with the
first respondent - it was important, therefore, that there be some
identification of the basis on which it was said that he had been acting on behalf
of the company in connection with the lease.
Under reference to a number of authorities, including John Gilmour Gray v University of Edinburgh 1962 S.C. 1257, Scottish Residential Estates Development Co Ltd v Henderson 1991 S.L.T. 490, Erskine v Glendinning (1871) 9 M 656, Mann
v Houston 1957 S.L.T. 89 and Shetland Islands Council v BP Petroleum Development Ltd 1990 S.L.T.
82, as well as Gordon, Scottish Land Law and Gloag and
Henderson, The Law of Scotland,
Mr Robertson emphasised the cardinal features of any lease, namely the
subjects, the parties, the period and the rent.
There was uncertainty as to the subjects. There was uncertainty about the period,
although he accepted that it might be implied that the lease continued on a
year by year basis. Of greater
significance, there was uncertainty about the rent. The petitioner averred that the company paid
the partnership a sum per bottle - 40p per bottle by around 2000 - and that
part of this sum was de facto rent
for the premises, the remainder being by way of a "royalty" for the water. These averments were insufficient to instruct
any agreement as to the rent payable by the company for the premises and were
therefore insufficient to instruct a relevant case that there was a lease.
[12] In a brief reply, Mr Campbell submitted that there was
sufficient in the averments to entitle the petitioner to seek to prove a
lease. In any event, it did not
ultimately matter whether the arrangement by which the company made use of the
premises had all the attributes of a lease.
It was sufficient that it used the premises and took and bottled water
from the farm pursuant to an arrangement under which it paid a composite
sum. Although the petition made
averments anent a lease, it was open to the petitioner on the facts averred to contend
for some other arrangement falling short of a lease.
Discussion
[13] The cases to which I have been referred make clear that the
words "unfairly prejudicial" are deliberately imprecise; and that it is both
impossible and undesirable to define the circumstances in which there will be
some equitable restraint on the actings of a director of the company having the
day to day conduct of its affairs. In those
circumstances it will be particularly difficult, though not impossible, for a
respondent at a discussion on the procedure roll to exclude a complaint under section 459
altogether from probation. Whether the
particular conduct complained of can properly be categorised as unfairly
prejudicial will usually depend on an assessment of the whole evidence; and it
will be difficult in advance of a proof to exclude particular averments on
relevancy grounds. It is, to my mind,
therefore generally undesirable for such a case to be discussed on the procedure
roll unless the respondent can identify a clear legal point which would, if
successful, dispose of the whole action.
This is not such a case. The
procedure adopted here has not been conducive to an efficient resolution of the
dispute. I cannot help thinking that the
parties would have been better off proceeding swiftly to a final hearing.
[14] It is not difficult to understand the case which the petitioner
seeks to make. Her case is that the company
was set up as a joint venture to exploit a market for bottled water. Her complaint is equally simple. It is that the first respondent set up his
own company, Sorn, to take over the business of bottling water and supplying
the customer to the exclusion and detriment of the company and therefore of the
petitioner. And he did so without telling
her what he was doing. It is in this
context that the petitioner's complaint that she was "excluded" from any
involvement in the management of the company must be understood. It does not imply an assertion that until
then she was so involved; it simply means that although not concerned with the
day to day management of the company, she was nonetheless entitled, and could
reasonably have expected, to be consulted over any moves by the first
respondent (through Sorn) to take over the business of the company and of any
moves by him to cause the company to cease trading.
[15] Such a case, if it can be established, is clearly relevant. Mr Robertson submitted, as I understood
it, that the acts of the first respondent of which the petitioner complained were
his acts as a director of Sorn rather than as a director of the company; and
that any prejudice to the petitioner was suffered by her not qua member of the company complaining
about the acts of another person qua
member of the company but simply because the company suffered as a result of
the legitimate commercial activities of Sorn.
This, he said, was outwith the scope of section 459. In my opinion this reflects too narrow a
construction of that section. The
section allows a complaint to be made on the basis 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 some part of its members ...". That includes passive conduct. As Lord Keith of Avonholm said in Scottish Co-operative Wholesale Society Ltd
v Mayer at p.362:
"Misconduct in
the affairs of a company may be passive conduct, neglect of its interests,
concealment from the minority of knowledge that it is material for the company
to know."
He went on to say, at p.363:
"But I cannot
think that where directors, having power to do something to save a company, lie
back and do nothing, they are not conducting the affairs of the company,
perhaps foolishly, perhaps negligently, perhaps with some ulterior object in view. They are certainly conducting the affairs of
the company in breach of their duty as directors."
In the present case the complaint
is not only that the first respondent set up Sorn in opposition to the company,
but that, qua director of the company,
he did nothing to prevent its business being taken by Sorn. Both complaints, if made good, fall within
the proper ambit of section 459. I
therefore reject that part of Mr Robertson's argument.
[16] The other main points of Mr Robertson's argument were directed
to showing that the Company had neither a firm contract for the supply of water
to the customer nor a firm agreement for the lease of the premises on, or the
right to take water from, the farm.
Before considering these points, it is important to see the context in
which they arise. As I have indicated, Mr
Robertson explained that they went to the question of whether the petitioner
had been prejudiced and, if so, whether such prejudice was unfair. Even if it could be shown that the first
respondent had acted in the manner complained of, this did not lead to any
unfair prejudice unless by his actions he deprived the company, and therefore
the petitioner, of something of value. Unless
the petitioner could establish that the company had a firm agreement for the
supply of bottled water to the customer, and had a firm agreement enabling it
to take water from the farm and bottle it there, the petitioner could not show
unfair prejudice in that sense. He
submitted that the petitioner's averments on these matters were insufficient to
instruct a case habile for
proof. In my opinion this argument goes
too far. Let it be assumed that the
petitioner could not show any such firm agreements. She could still complain about the manner in
which the first respondent conducted the affairs of the company so as, in
effect, to put it out of business. That
alone, if proved, would be sufficient to bring the petitioner within section 459. The question of whether or not the company
had secure contracts would be relevant only to the measure of the detriment to
the petitioner and, therefore, to the appropriate remedy under section 461. Even if Mr Robertson were correct on
these points, therefore, it would not lead to the petitioner's case being
excluded altogether from proof. And the
petitioner would, at such proof, be entitled, on the averments of fact in the
petition, to ask the court to form a view as to the extent of the prejudice
suffered even if the company did not have firm contracts in place. So far as the company's contract to supply
water to the customer is concerned, it is true that once Mr Whillock sold
his company there was no longer a captive customer for the water. On the other hand, there is no reason to
think that the customer would not have wanted to continue taking water from the
company but for the intervention of Sorn, which the petitioner seeks to prove
was part of the first respondent's unfairly prejudicial actings; and the petitioner
would be entitled to ask the court to assess the likelihood of the company
continuing to supply the customer on the assumption that Sorn did not interpose
itself into the arrangements.
[17] As regards the criticism of the averments concerning the lease
of premises on the farm, I accept that in order to establish that there was a
lease the petitioner will have to establish the four cardinal parts of a
lease. There is no difficulty about the
parties. Nor do I think there is any
substance to Mr Robertson's complaint that the premises to which the lease
relates are uncertain - on a proper reading of the averments in the petition,
the lease relates to the new premises into which the company moved in about
March 1996. Nor is there any real
problem about the duration of the lease, since Mr Campbell did not seek to
assert an agreement going beyond one year.
The main criticism focused on the averments concerning the rent. I accept that there is no specific
identification of what part of the sum per bottle was rent and what part was
royalties. But I do not think that this
matters. The petitioner's case is that
in return for the use of the premises and the sourcing of the water the company
would pay a sum per bottle to the partnership.
If that sum has to be divided up, it may be that one cannot say how much
of it was rent and how much of it royalties for the water. But there is no reason why rent, even in the
strict sense, should not consist of something more than a fixed sum of money
payable at certain times. It is possible
on the averments in the petition to regard the rent in this way: that in return
for the use of the premises the petitioner would (a) pay rent and (b) take
water and pay a royalty for it. On that
analysis, the whole sum payable per bottle would be consideration for the lease
of the premises. The sum appears to have
been fixed from time to time. In the
year 2000 it was 40p per bottle. If it
were not possible to infer that from year to year thereafter the sum per bottle
would be a reasonable sum, then the parties would be fixed with the 40p as the
continuing rate. But this is going
further than is necessary at this stage.
It is sufficient to say that I do not think there is any difficulty in
holding that the petitioner has made sufficient averments anent the lease to go
to proof. But if I am wrong as to whether
the agreement, thus analysed, would constitute a lease in the strict sense, I
see no difficulty in viewing the arrangements as a licence which is sufficient
for these purposes. The averments of
fact in a petition are sufficient to instruct a licence and it does not matter
that the word "licence" is not used as an alternative to "lease".
[18] Mr Robertson raised some other points of detail. I do not think that they require me to refuse
probation to any particular averments in the petition. The test is one of fair notice and I am
satisfied that the first respondent has full notice of the case being made
against him. This applies also to the
criticism that the petitioner does not make averments as to the basis on which
Mr Whillock acted for the company in discussions anent the lease. It seems to me that it is quite sufficient
for the petitioner to say simply that he did act on behalf of the company. That causes the first respondent no
difficulty in terms of fair notice
[19] One point was left to be dealt with. Part of the relief claimed is an order
against the company. The company has not
been named as a respondent.
Mr Campbell indicated that he was prepared to offer an amendment to
include the company as a respondent and to make averments relative
thereto. Mr Robertson accepted that there
was no prejudice in allowing that amendment at this stage since all interested parties
are already before the court. It was
agreed that I should put the case out By Order and that the amendment could be
discussed at that time.
Disposal
[20] I propose to allow to the petitioner probation of her averments
in the petition. Before doing so,
however, and so that the point of the company's involvement in the petition can
be dealt with, I shall put the case out By Order. Parties may wish to address me on that occasion
as to further procedure, including what form of probation would be appropriate.
