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Cite as: [2021] ScotCS CSOH_109, 2021 GWD 39-517, [2021] CSOH 109

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OUTER HOUSE, COURT OF SESSION

[2021] CSOH 109

P416/19

OPINION OF LORD CLARK

in the petition of

CHARLES MARTIN

Petitioner

against

(FIRST) THOMAS HUGHES

(SECOND) HENRY CLARK SEDDON

(THIRD) RAM 232 LIMITED

Respondents

Petitioner: Gillies Sol Adv; Pinsent Masons LLP

Respondents: MacColl QC, McKenzie; Wright, Johnston & Mackenzie LLP

26 October 2021

Introduction

[1]

The petitioner is a minority shareholder in a limited company which provides

accountancy services. It was previously named Gerber Landa and Gee Limited and is now

RAM 232 Limited ("the Company"). The business formerly operated as a partnership. The

petitioner seeks orders under sections 994 and 996 of the Companies Act 2006 on the

grounds that the affairs of the Company have been conducted in a manner that was and is

unfairly prejudicial to the interests of the members, including himself. He seeks relief in the

form of a compulsory purchase of his shares in the Company by the respondents. The

respondents deny any unfairly prejudicial conduct. The parties are also in dispute as to the

fair value of the petitioner's shares, based on the evidence of their respective experts, should

the shares require to be purchased. The case called before me for a proof before answer,

with six days of evidence followed by one day of oral submissions.

Background

[2]

On the evidence, and in part agreed by joint minute, the factual background is as

follows. The Company was incorporated on 18 April 2013. Its original directors and

shareholders were the petitioner, the first respondent (Mr Hughes), the second respondent

(Mr Seddon) and James Murphy. The petitioner, Mr Hughes and Mr Murphy each came to

hold 1500 shares and Mr Seddon held 500 shares. The four individuals were previously the

partners in the partnership, with the trading name of Gerber Landa & Gee. On

21 November 2013, shortly before the transfer of the business, assets and goodwill of the

partnership to the Company (which occurred on 1 December 2013) the directors and

shareholders of the Company entered into a Minute of Agreement. The Minute of

Agreement dealt primarily with the repayments of directors' loans which arose from the

disposal of the goodwill of the partnership to the Company. The goodwill figure was

£1,100,000 and the allocation of goodwill payments was £350,000 to the petitioner,

Mr Hughes and Mr Murphy and £50,000 to Mr Seddon. The Minute of Agreement states

that on exit, a departing director would be entitled to "repayment of his share value" in

addition to his loan account.

[3]

Incorporation of the Company had been under consideration for a period of time, but

the matter was brought to a head as a protective measure as a consequence of a police

investigation into the partnership. The investigation arose as a result of an entity described

as Mathon Finance going into administration. The partnership had been the auditor of two

companies related to that entity, Mathon plc and Bathon Limited. The police investigation

was a concern for the directors of the Company. Mr Murphy had been involved with the

auditing of these companies. The companies were associated with Heather Capital Ltd,

whose liquidators were involved in various actions against, among others, professional

advisors. Material was discovered which the other directors considered indicated

misconduct on the part of Mr Murphy. It was made clear to Mr Murphy by all of his fellow

directors that he required to resign from the Company immediately and that the balance due

on his director's loan account was subject to review in light of any adverse financial

consequences arising from the Mathon affair. Mr Hughes and Mr Seddon considered that

the Company remained exposed to a financial claim arising from Mr Murphy's conduct. On

20 March 2015 at a meeting between the original directors and shareholders Mr Murphy

resigned as a director of the Company and agreed that his shares could be transferred to the

other shareholders. The shareholding of the Company became 2,142 ordinary shares for the

petitioner and Mr Hughes and 716 ordinary shares for Mr Seddon. That remains the

position. Mr Murphy remained a creditor of the Company in terms of his director's loan

account. The debt continued to be paid to Mr Murphy from March 2015 until approximately

August 2017. The payments stopped after Mr Murphy was investigated by the Institute of

Chartered Accountants in Scotland ("ICAS") and the Investigation Committee determined

there was sufficient evidence to establish a charge of professional misconduct.

[4]

In 2017 the petitioner, Mr Hughes and Mr Seddon were attempting to implement a

succession plan which had been under consideration for a few years. The succession plan

envisaged a management buyout ("MBO") with the three directors remaining as consultants

for a period. In or around April 2017, the relationship between the petitioner and

Mr Hughes deteriorated. Around this time Mr Hughes wished to provide additional

compensation to Mr Seddon for his work. The petitioner indicated he would give it

consideration. In July 2017 Mr Hughes again raised the subject and suggested a bonus of

£90,000 to Mr Seddon. The petitioner disagreed with that suggestion and it was not taken

forward.

[5]

In July 2017 the Company approached David Thompson, advocate, for advice on the

issues with Mr Murphy and the director's loan account payments to him. Counsel produced

his opinion and met with the petitioner, Mr Hughes and Mr Seddon on 4 August 2017.

Given that the Company had continued to make payments to Mr Murphy throughout the

period of having been aware of Mr Murphy's wrongdoing, counsel raised the issue of

personal bar in the event of a claim by the Company against Mr Murphy. Counsel advised

that further payments to Mr Murphy would be prejudicial to the Company. Counsel did not

expressly advise against trying to extra-judicially resolve the dispute between the Company

and Mr Murphy. Following the meeting with counsel there was a difference of opinion

between the petitioner and Mr Hughes and Mr Seddon as to how to deal with the matter.

The petitioner met with Mr Murphy. During their discussions Mr Murphy explained that

his financial position was not good. They discussed whether matters could be settled. The

petitioner made an offer personally to pay money to Mr Murphy. Mr Hughes and

Mr Seddon, when informed of the petitioner's approach to Mr Murphy, considered this was

contrary to the board's strategy and counsel's advice. The relationship between Mr Hughes

and the petitioner deteriorated further.

[6]

In early August 2017, the petitioner desired that the Company should follow the

usual policy of payment of dividends when there were funds available, and in particular

due to reduction in a corporation tax provision. He wrote to Mr Hughes referring to the fact

that the Company was on target for this year's budget and the cash position was positive.

Mr Hughes did not agree and stated that he wished to set aside a substantial sum of money

to fund any defence and counterclaim in the event of a claim for payment from Mr Murphy.

[7]

On 26 September 2017 Mr Hughes and Mr Seddon served a special notice of the

intention to remove the petitioner as a director at an extraordinary general meeting

("EGM"). The meeting was to take place on 14 November 2017. The petitioner decided to

resign. He worked for the Company until 28 September 2017. The petitioner then cleared

his desk that weekend and posted his resignation to the Company on the afternoon of

Friday 29 September 2017, which took effect on Sunday 1 October 2017. After his

resignation, two major clients left the Company and the petitioner took on consultancy work

involving existing clients of the Company. This was separate from audit, accounting and

taxation-compliance services. He performed advisory and consultancy services under

mandates to twenty-nine clients.

[8]

In terms of service agreements entered into between the Company and the

individuals after the resignation of the petitioner, the remuneration of Mr Hughes was

£96,000 per annum and Mr Seddon's remuneration was £60,000 per annum. Under the

agreements, they were also allowed a bonus from time to time taking into account the

Company's profits and cash position on a quarterly basis. A valuation instructed by the

board of the Company and prepared by Milne Craig in October 2017 ("the October

Valuation") following the petitioner's resignation valued the goodwill in the Company at

£710,000. This included provision of £72,000 for the loss of certain of the largest clients of the

Company after the petitioner's resignation. Shortly thereafter, two individuals who had

done work for the petitioner within the Company accepted voluntary redundancy. A

revised valuation prepared by Milne Craig in November 2017 ("the November Valuation")

reduced the value of the goodwill of the Company to £545,000. This included a revised

provision of £102,000 for the loss of clients. The petitioner's share of goodwill was valued at

£230,000 after excluding his consultancy income and the effect of the lost clients. The

Company's other assets, less its liabilities, were valued at £847,818. Mr Hughes and

Mr Seddon called an EGM on 12 December 2017 to consider a resolution to grant floating

charges in their favour by the Company. The petitioner appeared by proxy and voted

against the resolution which was passed with a majority on the votes of Mr Hughes and

Mr Seddon.

[9]

On 3 January 2018, a senior person in the MBO team, Lorna Gray, wrote to

Mr Seddon indicating that the team would only purchase certain assets of the Company,

and not the shares, due to ongoing legal issues. The proposed purchase was at a price of

£475,000 paid over three years (with an initial payment of £175,000 and 12 quarterly

payments of £25,000) with a retention of £75,000 and an additional £1,000 for fixtures and

fittings and computer equipment. On 3 January 2018, Mr Hughes sent the offer to Craig

Butler of Milne Craig to consider it as confidential to the board only and specifically not to

be disclosed to the petitioner as a shareholder. Mr Hughes asked for confirmation that a

deal at that price "would not be unreasonable". On 5 January 2018 Craig Butler responded

that it "appears reasonable given ongoing uncertainty around client retention" citing "the

extent to which clients have been mandated by [the petitioner] has increased" and that "as

such it is not unreasonable to expect that the goodwill associated with the practice has fallen

since our report was issued". Milne Craig were not asked to prepare a revised valuation.

The effect of the reduction in the price was to reduce the petitioner's share of goodwill at the

sale date from £230,000 to £5,000 due to the reduction of £100,000, a retention of £75,000 and

a client loss claim of £50,000 agreed by Mr Hughes and Mr Seddon. The Company's annual

turnover recorded in the November valuation was £719,774 before deductions for

consultancy and client losses of £99,825 and £102,000 respectively, leaving recurring fees at

£518,489. Mr Hughes and Mr Seddon agreed to progress the without prejudice staff buyout

offer set out in the letter of 3 January 2018. Mr Hughes and Mr Seddon also agreed to award

themselves discretionary payments in terms of Clause 9.1 of their service agreements.

Mr Hughes was paid £50,000 through a consultancy company of his and £20,000 into a

pension scheme for him. Mr Seddon received £10,000 and £20,000 into a pension scheme for

him.

[10]

On 8 March 2018 Mr Hughes and Mr Seddon again unanimously agreed to award

themselves discretionary payments in terms of Clause 9.1 of their service agreements.

Mr Hughes received £55,000 and Mr Seddon £30,000 to be paid when cash flow permitted.

Their total salary for the same six month period from the date of the resignation of the

petitioner to 31 March 2018 was £78,000 (£48,000 for Mr Hughes and £30,000 for Mr Seddon).

On or around March 2018, the loan amount due to Mr Murphy (£82,000) was "re-allocated"

to Mr Seddon, said to have been done on independent accounting advice. The company's

accounts for 2018 stated that the balance due to the petitioner in respect of his director's loan

was "in dispute". The director's loans of Mr Hughes and Mr Seddon are not said to be in

dispute. There have been no payments to the petitioner from his director's loan account

since 29 August 2018.

[11]

Mr Hughes and Mr Seddon on behalf of the Company entered into the Sale

Agreement with a company incorporated by the MBO team ("NewCo") on 3 April 2018 with

a completion date the same day. This related to the accountancy business and certain assets

of the Company, leaving other assets and liabilities with the Company. The same day the

Company changed its name to RAM 232 Limited and NewCo changed its name to Gerber

Landa & Gee Limited. The purchase price was £594,000 including goodwill of £475,000

(which has subsequently been reduced to £350,000 due to retention and claims clauses

inserted in the sale agreement), £118,000 of WIP and £1,000 of various other items. The

petitioner was advised of the sale on 4 April 2018.

[12]

On 12 April 2017 the directors of the Company had declared that an interim

dividend of £70,000 would be paid to the shareholders as at that date. The petitioner was to

receive the sum of £29,988 and received a tax voucher signed by Mr Hughes confirming this.

This was not paid to the petitioner. On 9 May 2018 he demanded payment. No payment

was received from the Company. Mr Hughes and Mr Seddon on behalf of the Company

entered into a consultancy agreement with NewCo whereby the Company would receive

£60,000 per annum from NewCo for the services of Mr Hughes and Mr Seddon as

consultants. Mr Hughes and Mr Seddon on behalf of the Company also entered into a

services agreement whereby the Company paid £40,000 per annum to NewCo for the

provision of secretarial services, meeting room use, printing facilities and file storage

facilities. Following the sale to NewCo the business of the Company consisted of the

winding down of the work in progress and the consultancy services being carried out for

NewCo. In December 2018, on behalf of the Company, Mr Hughes and Mr Seddon

concluded that it did not owe the petitioner anything. They passed a resolution to charge

the loan account of the petitioner with the goodwill which they allege was "eroded and/or

taken by him personally" and that "[a]s an interim measure he had been debited with

£231,454 which is the goodwill write down in the accounts to 31 March 2018." They further

allege that the sum of £184,616.82 is due to the Company by the petitioner.

The alleged unfairly prejudicial conduct

[13]

In brief terms, the matters said to constitute unfairly prejudicial conduct to the

petitioner are as follows:

(i)

exclusion of the petitioner from management and decision-making and

conduct causing deterioration in the relationship between the directors prior to the

petitioner's departure;

(ii)

exclusion of the petitioner as a director;

(iii)

re-allocation of £82,000 to Mr Seddon;

(iv)

the grant of floating charges in favour of Mr Hughes and Mr Seddon;

(v)

sale of the business to the MBO team at an undervalue and failing to give the

petitioner any information about the sale to the MBO team;

(vi)

receipt of excessive remuneration by Mr Hughes and Mr Seddon after the

departure of the petitioner;

(vii)

failure to pay dividends;

(viii)

non-payment and debiting of the petitioner's loan account.

Evidence

[14]

In the summary of the parties' submissions, set out below, reference is made to the

key points of evidence founded upon by them. I also comment on the evidence in the

section containing my decision and reasons. At this stage I simply identify the key

witnesses led for each side and note some relevant headline points in their evidence, before

commenting briefly on the differences in approach taken by the respective experts.

Factual witnesses

Petitioner

[15]

The petitioner spoke to the various matters of background and the points said to

constitute unfairly prejudicial conduct. He described his dealings with the first and second

respondents, and Mr Murphy, in detail. He had known Mr Hughes personally since

childhood and they had been in business together since 1969. There had been some

disagreements and both of them were strong-willed. He had also known Mr Seddon for a

lengthy period. He mentioned individuals who ran family businesses and had used his

services as clients when he worked at the Company. After the petitioner's meeting with

Mr Murphy, Mr Hughes had on several occasions asked the petitioner "What is it you are

not telling us?", indicating to the petitioner a level of distrust. The petitioner accepted that

in meeting Mr Murphy he did not do what Mr Thomson had advised and took a different

view. He accepted that he told Mr Murphy that he would be prepared to pay £10,000 to

him. It was correct that the collapse of Heather Capital had given rise to litigations, but not

against the partnership or the Company. At no time had the petitioner acted in collusion

with Mr Murphy. The petitioner had performed a reasonably substantial amount of his

work remotely, from Australia, but that had not affected the income generated by his

services. As a holder of 42% of the shares, he had no reason to seek to harm the Company,

for example by clients leaving its business. The business was always a going concern. He

said that Craig Butler, in carrying out the valuation and in agreeing with the offer put

forward by the MBO team, had not been given access to the underlying workings of the firm

and did not have proper regard to the unrecorded work-in-progress ("WIP") position. The

amounts paid to Mr Hughes and Mr Seddon looked like a mechanism to remove the surplus

bank funds built-up by the Company.

[16]

Discussions about a MBO had been going on for some time. It was correct that after

his departure twenty-nine clients had given mandates allowing him to advise them on a

consultancy basis, but not on the accounting matters covered by the Company. He had

given tax advice to a customer that had proved to be incorrect and a claim had been made

against the Company resulting in a payment from the Company's insurers. He did not

accept that the offer made by the MBO team on 3 January 2018 was a fair valuation. He

could give no reason for calling into question the behavior of Craig Butler, a fellow

accountancy professional, in relation to the valuation and the offer. Two of the MBO team

were related to Mr Hughes (one being his wife and the other his son, from an earlier

marriage) and so the family as a whole would benefit from a lower sale price. He accepted

that no offer other than that made by the MBO team was made for the Company's business.

[17]

A number of individuals who owned businesses which had been clients of the

petitioner when he worked for the Company gave evidence. In broad terms he was a

trusted professional accountancy advisor. The reasons for their businesses leaving the

Company were given. The petitioner did not take on that type of business. Next,

Mr Murphy gave evidence as to his involvement in the various issues summarised above.

Respondents

[18]

Mr Hughes was the first witness led for the respondents. He explained the reason

for forming the Company, that is the fallout from the Mathon affair. The business was

transferred for £1.1m to the Company. It was correct that the former partners, now

directors, did not anticipate that a director would exit but remain as a shareholder.

Discussions about succession of the business had commenced in about 2014. It was correct

that the last audit for Mathon had been in 2009. But risk was still a live issue in 2017. The

initial price suggested to the MBO team had been £1.2m. However, no price was agreed and

they hadn't got down to the nitty-gritty. The relationship with the petitioner had

deteriorated from 7 August 2017, following discussions about payments to Mr Murphy.

Mr Hughes had kept saying "What is it you are not telling us?" to the petitioner because the

petitioner had gone to see Mr Murphy against counsel's advice. It was quite unclear why

the petitioner said he was going to pay the ICAS fine or penalty. Mr Hughes thought the

petitioner was in cahoots with Mr Murphy, but accepted that he gone down a blind alley

with that theory. The petitioner refused to agree to pay the bonus to Mr Seddon suggested

by Mr Hughes. The reason for giving the special notice to remove the petitioner as a

director was to try to get an explanation for his conduct. A long notice was given in the

hope that discussions could take place. No decision to remove him had been reached.

Mr Hughes did not view himself as bullying or domineering. After the petitioner left, and

two major clients had gone and twenty-nine mandates had been issued, Mr Hughes spoke to

a number of the clients who had used the petitioner when he was with the Company to see

if they would remain, but they did not commit to doing so.

[19]

Mr Hughes explained that Gordon Butler of Milne Craig had been asked to do a

valuation in October 2017 but had declined because he was too close to the Company. His

son, Craig Butler, carried out the valuations. He did not accept that Craig Butler's

valuations were incorrect. The dividend due to the petitioner in April 2017 was credited to

his loan account. He had never sued for payment. A number of legitimate claims should be

set-off against his loan account. As a result, he currently owed the Company money. The

salary and bonus payments received after the petitioner's departure were reasonable and

not over-generous. Mr Hughes had made an offer to buy-out the shares of the petitioner for

£150,000 shortly after the present action was raised.

[20]

Mr Seddon then gave his testimony, broadly covering the background issues noted

above. He also said that at the time of the special notice he had not made up his mind to

vote in favour of the removal of the petitioner as a director. Thereafter, Craig Butler was

called and explained his reasons for reaching the views he reached on valuation. He had

been given no information about a possible sale price of £1.2m. Previous offers would not

normally be asked for, as an objective approach was taken. He looked at it from the point of

view of a buyer. The Company was not a happy ship. The sharp exit of the petitioner had

impacted the client base. There was evidence that clients were leaving. The final reduction

to £475,000 was appropriate as the business was toxic and it was difficult to imagine anyone

being interested in buying it. In carrying out the valuation process he had spoken to a

number of members of staff. He did not recall seeing a WIP balance. The WIP figure put to

him in cross-examination, £997,000, would not have affected his valuation. From a buyer's

point of view that would not have changed goodwill in the slightest.

[21]

Evidence was then led from Lorna Gray, who had been part of the management team

and took part in the MBO. She had never been formally advised that at the time of

incorporation the goodwill of the Company had been valued at £1.1m. Mr Murphy's exit

had created some uncertainty, although his clients stayed. She never agreed at any point to

be part of an MBO team buying for £1.2m. There were obvious tensions before the

petitioner's departure but she was not aware of a complete breakdown. The MBO team had

carried out a detailed assessment based on various risk factors and came up with a figure of

just over £500,000. After a further meeting around Christmas 2017, £475,000 was agreed as

the offer. No external advice was sought. Some informal discussions took place between

Mr Hughes in December 2017 and members of the MBO team. The offer was based on what

the recurring fees moving forward would be. It was thought to be a fair price. There was no

conspiracy between Mr Hughes, Mr Seddon and the MBO team to get a soft-price

undervaluing the business. There was no cosy deal.

[22]

The final witness for the respondents was Gordon Butler, who had worked for Milne

Craig. He had known the petitioner, Mr Hughes and Mr Seddon for many years. There

were cross-referrals of clients between the two firms. There had been discussion in 2013

about the firms merging. If the MBO had not occurred, that being the first option, a merger

may have taken place. He had become involved in discussions prior to the petitioner's

departure, in an attempt to stop polarisation of the parties. A sudden break could result in

clients being lost. He had no reason to think that his son would not do the valuation job

objectively. He had no axe to grind and knew both Mr Hughes and the petitioner, but did

not socialize with either of them. Mr Butler understood that in giving the special notice

Mr Hughes did intend to remove the petitioner as a director.

Expert witnesses

[23]

Mr David Bell, the expert led on behalf of the petitioner, prepared a valuation for the

three dates requested, namely 30 September 2017 (the day before the petitioner's

resignation), 3 April 2018 (the date of sale to the MBO team) and 31 March 2019 (the date

when the present action was raised). In his supplementary report, he also gave a valuation

for 31 October 2019, the final date used by the respondents' expert. He considered a

valuation of the Company under both what he described as a common valuation method,

that is the EBITDA multiple basis (Earnings Before Interest, Taxes, Depreciation and

Amortisation, subject to an appropriate multiplier) and on a net asset basis. On

30 September 2017, the EBITDA valuation of the Company was £1,136,000 with the

petitioner's shares being worth £487,000. On 3 April 2018, the EBITDA valuation was

£952,000 in total and £408,000 for the petitioner's shares. On 31 March 2019, the net asset

valuation was £392,000 and the petitioner's share of the value at £168,000. On 31 October

2019, it was £216,000 and £93,000. Mr Bell considered the EBITDA basis to be a more

appropriate method of valuation for the petitioner's shareholding at 30 September 2017 and

03 April 2018, due to the nature of the business and there being goodwill within the trade.

The net assets basis was a more appropriate method of valuation for the final dates because

the business is conducting limited trade and effectively winding down. In his opinion, a

minority discount should not be applied to the value of the petitioner's shares in the

Company, but should the court decide to apply a minority discount, a discount in the region

of 20% to 25% would be an appropriate level of discount.

[24]

Mr Robin McGregor, the respondents' expert on valuation, used the same dates for

the first two valuations and used 31 October 2019 for the third one. He was of the view that

it is unlikely that a company trading as a professional services business would be purchased

as a share sale, due to the risk perceived by a buyer of latent liabilities. The particular

circumstances of the history of the Company meant that a sale of its shares at each of the

valuation dates would not have been possible. This was because any potential purchaser

would not have been prepared to risk the liabilities that the Company had assumed when it

purchased the business of the former firm of GLG in 2013. Accordingly, a sale of the

Company would have to proceed as an asset sale. Similarly, there would be no realistic

prospect of a sale of a minority shareholding in the Company, due to the nature of the

business and the risks he outlined. The potential claims arise from the audit of Mathon and

could be brought against GLG and/or the Company.

[25]

Mr McGregor explained that when the business was transferred from GLG to the

Company, the latter assumed all assets and liabilities. Consequently, any buyer would be

concerned about what potential liabilities may be linked to the Mathon audit and more

widely to the principals directly involved in that work. Additionally, he considered that a

purchaser might be concerned about possible future reputational risk arising from an

association with the Mathon case. Further, in early 2017, Mr Murphy was found guilty of

professional misconduct in relation to payments that had been made to members of his

family from Mathon. In August 2017, the directors of the Company notified their insurers of

an unquantified professional indemnity claim. Hence, Mr McGregor assumed that a sale

was only likely to a trade-buyer and that such a purchaser would only acquire the business

and assets, not the shares. Therefore, he considered that the appropriate basis for the

valuation of the Company would be on a break-up or liquidation basis. In these

circumstances, the value in the Company would be realised by the sale of its business and

assets as a going concern, followed by an orderly wind-down to settle its liabilities,

culminating in a distribution of capital to the shareholders.

[26]

The conclusion reached by Mr McGregor on the value as at 30 September 2017,

assuming the petitioner's co-operation, was £526,000 for the whole share capital and

£225,000 for the petitioner's share of assets of 42.84%. The alternative basis, which assumed

a lack of co-operation from the petitioner, concluded on a lower value for the whole share

capital of £227,000 and of £97,000 for the petitioner's share at the same date. The valuation

calculation recognised that the petitioner had not co-operated to maximise the value of the

goodwill arising on a sale and had obtained mandates from some clients. As at 3 April 2018,

the conclusion was a value for the whole share capital of £262,000 and of £112,000 for the

petitioner's share. On 31 October 2019, the figures were £104,000 for the whole share capital

and £44,000 for the petitioner's share. As the valuation was on a break-up basis, no issue of

discount arose but if the court was minded to find that a sale of shares was more likely, a

minority discount of 33% to 50% would be appropriate.

[27]

The experts met prior to the proof and discussed a wide range of issues. Among the

central points raised, Mr McGregor was of the view that the EBITDA approach was only

suitable for larger accountancy practices, best suited to mature and stable businesses, which

was not the case here. Mr Bell disagreed with that view. Mr Bell pointed out that the three

prior valuations by Milne Craig had been carried out on an adjusted profits basis.

Mr McGregor did not view that approach as appropriate. Mr McGregor also considered the

EBITDA multiplier used by Mr Bell to be too high, but Mr Bell viewed it as the appropriate

multiplier.

Statutory provisions

[28]

Section 994 of the 2006 Act provides:

"(1) A member of a company may apply to the court by petition for an order under

this Part on the ground -

that the company's affairs are being or have been conducted in a manner that is

unfairly prejudicial to the interests of the members generally or of some part of its

members (including at least himself), or

that an actual or proposed act or omission of the company (including an act or

omission on its behalf) is or would be so prejudicial.

...

Section 996 of the 2006 Act further provides:

"(1) If the court is satisfied that a petition under this Part is well founded, it may

make such order as it thinks fit for giving relief in respect of the matters complained

of.

(2) Without prejudice to the generality of subsection (1), the court's order may

regulate the conduct of the company's affairs in the future; require the company -

to refrain from doing or continuing an act complained of, or

to do an act that the petitioner has complained it has omitted to do;

...

(e) provide for the purchase of the shares of any members of the company by other

members or by the company itself and, in the case of a purchase by the company

itself, the reduction of the company's capital accordingly."

Submissions

[29]

The court had the benefit of full and detailed written submissions, followed by oral

submissions, for the petitioner and the respondents. These have been taken fully into

account. There was extensive citation of authority, and when I come to set out my decision

and reasons I shall refer to the key legal principles relied upon. At this stage, I give a brief

summary of the main points made.

Submissions for the petitioner

[30]

This case involved a quasi-partnership. There was an informal understanding or

arrangement among the incorporators, which was not reflected in the articles, that the

petitioner, and indeed all the incorporators, would be involved in the management of the

Company and be a director. The informal understanding included that nugatory salaries

would be paid, and the Company would pay dividends when it could afford to do so. Prior

to the petitioner's exit from the Company, dividends would regularly be paid by a credit to

each of the member's loan accounts. The parties understood and accepted that on an exit,

each of them would no longer participate as a member and should have their share value

returned, over a period of five years unless more than one member was leaving in which

case the period would be extended.

[31]

Contrary to his legitimate expectations, the petitioner was unfairly excluded from the

management of the Company from around April 2017. This was also contrary to the

expectations of the parties agreed between them at the time of incorporation such that each

of the directors would participate in the management of the Company, as they had when the

business was operated under the auspices of the previous partnership structure. Between

April and September 2017, contrary to the agreement between the parties, Mr Hughes failed

to engage openly and constructively with the petitioner, levelled false and accusatory

allegations at him, refused to pay dividends in accordance with established policy and

sought to award Mr Seddon substantial bonus payments.

[32]

The petitioner offered to meet Mr Hughes, but he declined that offer and then

proceeded to serve the special notice. Mr Hughes says he took legal advice, so service of the

notice may have been lawful but it was unfair. The notice of a resolution to remove the

petitioner as a director on 21 September 2017 was without justification and contrary to the

interests of the Company, and contrary to the petitioner's legitimate expectations. On the

evidence of Gordon Butler, Mr Hughes had determined to remove the petitioner as a

director. While a minority shareholder can be deprived of relief if the unfairly prejudicial

conduct he has suffered can be justified, or rendered not unfair, by the minority's own

conduct, there was no basis for that view here. There were insufficient grounds to justify the

petitioner's exclusion based on the meeting with Mr Murphy. There was no advice from

counsel that a director was not to meet with Mr Murphy. No adverse consequences flowed

from that meeting. The trust and confidence having irretrievably broken down between the

founding members, and the petitioner considering that he had no other choice in the matter,

he resigned.

[33]

Thereafter, with the petitioner so excluded, and in the absence of an offer to purchase

the petitioner's shares, Mr Hughes and Mr Seddon took steps which unfairly caused

prejudice to the petitioner or contributed to same. They did the following: (i) refused to pay

dividends when distributable reserves were available which was contrary to the legitimate

expectations of the petitioner, in particular in respect of financial year 2018 but also

subsequent to the sale of the business to the management buy-out team; (ii) granted floating

charges in favour of themselves, to secure indebtedness owed by the Company to each of

the members pursuant to the Minute of Agreement dated November 2013; (iii) re-allocated

to Mr Seddon the sum of £82,000 (which was otherwise intended to be split between the

shareholder's loan accounts equally or alternatively would be attributed to the Company's

reserves) to the exclusive benefit of the Mr Seddon; (iv) sold the business at undervalue to

the MBO team, without any or any adequate notice to the petitioner, and on terms which

defied objective commercial criteria, without informing the petitioner or giving him the

opportunity to provide information which would have improved the terms of the sale;

(v) failed to provide the petitioner with information in respect of the sale in a timeous or

comprehensive fashion, hiding behind confidentiality provisions which were ultimately

waived; (vi) paid themselves excessive remuneration in the form of bonus and pension

payments in the period following the petitioner's exit; (vii) ceased the payment of the

petitioner's loan accounts, approximately one year after his exit, both contrary to agreed and

established practice and in breach of the Minute of Agreement; (viii) threatened to and

ultimately did debit the petitioner's loan account unlawfully with arbitrary, illiquid, and

unquantified sums which had not been the subject of independent assessment or inquiry.

[34]

In relation to the sale of the assets to the MBO team, there was no attempt to sell on

the open market. Other accountancy firms were potential buyers but were not approached.

Craig Butler valued the goodwill and was not provided with details of the work in progress.

There was no evidence that the petitioner ever sought to persuade clients to leave, which

would in any event have been against his interests. The exclusion of the petitioner from any

information or involvement prior to the sale breached the informal understanding and

agreements entered into by the members on incorporation. The price paid for the sale to the

MBO team was not a fair price. It did not reflect the value of the Company. The petitioner

was not consulted on the salaries paid to the remaining directors. He was not paid any

dividend. The bonuses paid to the directors in 2018 and their basic salaries from April 2018

were unfairly prejudicial to the petitioner. Considered objectively these were excessive.

Both experts agreed that annual remuneration for a director of the Company (prior to sale of

the business) at £100,000 per director was reasonable.

[35]

Mr Bell took the proper approach to valuation of the petitioner's shares. He

approached the valuation with consistency and integrity, patently mindful of his duty to the

court. His approach was transparent, vouched and cross checked, and based on the

Company's trading performance. There were various problems with Mr McGregor's

approach and if his views were accepted adjustment to the sums identified were needed. It

would be appropriate to value the business as at 30 September 2017, or alternatively at 3

April 2018. As a matter of fact and law, no discount should be applied. The assertion on

behalf of the respondents that Mr Bell has failed to act as an independent expert witness and

that his evidence should not be regarded as admissible was wholly lacking in substance.

[36]

The respondents' concession that the case involved a quasi-partnership was

important. Even though the petitioner could demonstrate loss, that wasn't needed and in a

quasi-partnership a breakdown in trust will give a right of relief. The respondents asserted

that they were following legal advice but that was not sufficient as an answer. With a

history of unfair prejudice, the court should give a remedy that is commensurate with the

value that was lost. The offer to buy the petitioner's shares, made after the action was

raised, was not for a fair value. Regard should also be had to the evidence of Lorna Gray

that after the sale of the business consultancy arrangements were entered into with the

respondents.

Submissions for the respondents

[37]

The respondents did not take issue with the proposition that the Company was

established as a quasi- partnership. However, the petitioner had not made out his pleaded

case, either in relation to the existence of unfairly prejudicial conduct or in relation to the

relief sought. The petitioner had not established any unfairly prejudicial conduct on the part

of the respondents prior to 1 October 2017 when the petitioner's resignation as a director

took effect. In particular, in view of the petitioner's admitted conduct in his dealings with

Mr Murphy following the receipt of advice from Mr Thomson, service of a special notice on

26 September 2017 in relation to the petitioner's removal as a director did not amount to

unfairly prejudicial conduct. The Minute of Agreement relied upon by the petitioner did not

preclude removal of a director.

[38]

Further, the petitioner had not established any unfairly prejudicial conduct on the

part of the respondents after his resignation took effect on 1 October 2017. In particular, the

decisions taken by the respondents in relation to the sale of the Company's business after

that date were commercial decisions properly taken by the respondents on the basis of

professional advice, in difficult circumstances which had been brought about by the sudden

resignation of the petitioner. The unchallenged evidence before the court was that the

management buy-out was the "only show in town" and that the sale price achieved was

reasonable.

[39]

The evidence did not support any exclusion of the petitioner from the management

of the Company. He was able fully to participate up until his resignation as a director, at

which point he chose to remove himself from involvement in the management of the

Company. There was, in any event, no legitimate expectation or other sort of agreement that

a shareholder that had resigned as a director of the Company would be entitled to remain

involved in its management. Asking a colleague and friend of decades to address concerns

as to what he was up to (particularly in circumstances when he is holding meetings with a

former director contrary to the decided position of the board of the Company) did not

amount to unfairly prejudicial conduct, even if such questions were posed in a brusque

fashion.

[40]

In the period prior to the resignation of the petitioner, there was no refusal to pay

dividends in accordance with any established policy. First, the petitioner has not proved

that there was any established (far less binding) policy in relation to the payment of

dividends. Second, the evidence was that the decision not to pay a dividend in 2017 was one

taken on commercial grounds and considered and approved by the board of the Company.

Intimation of the resolution to remove the petitioner as a director was not unfairly

prejudicial (particularly in light of the circumstances which led to its intimation). The

document was served in accordance with the Company's constitutive documents and legal

advice. There was no bargain or understanding in place (far less proved in the evidence)

that directors could not be removed. Indeed, the acknowledged events which took place in

relation to Mr Murphy showed plainly that shareholders could properly be removed from

their role as directors. In cross-examination, the petitioner made a number of significant

concessions in relation to what occurred in relation to Mr Murphy. In short, the agreement

was that they wouldn't pay Mr Murphy and it would be left to see how he reacted, that is,

there would be no meetings with him. In any event, the notice of removal was never voted

upon and the petitioner's case must rest upon its mere intimation.

[41]

In breach of his fiduciary duties, the petitioner had forwarded emails to a client of

the Company concerning private business of the Company. As the petitioner acknowledged

in cross-examination, the advisory services he provided to clients of the Company in his

private capacity after his resignation were services which would have been provided by the

Company had it not been for his resignation, with the result that he and not the Company

obtained income from their provision. The petitioner had departed suddenly, without

putting in place any planning for his departure, his two most significant clients had

removed their business and the petitioner had sent mandates for business of twenty-nine

clients. Inevitably, these actions on the part of the petitioner significantly drove down the

value that could reasonably be achieved for the business that was sold. There was no

exclusion from the management of the Company; he had chosen to leave his role as director,

bringing his involvement in the management of the Company to an end by that act. He was

given notice of any AGM or EGM of the Company and could attend as a shareholder.

[42]

The petitioner had failed to establish any entitlement to payment of a dividend for

the period to 31 March 2017. Further, there was no prejudicial conduct after the resignation

in relation to the refusal to pay dividends. This was a matter for the board of the Company.

There was no evidence before the court to the effect that they did not act in accordance with

their view of the commercial interests of the Company. The grant of floating charges in

respect of the obligations owed to Mr Hughes and Mr Seddon has not given rise to any

prejudice to the petitioner. The reallocation of the sum of £82,000 to Mr Seddon was a

commercial decision taken by the board of the company to reflect his contribution to the

business in the exercise of the discretion of the board.

[43]

There was no evidence before the court that the business sold to the MBO team was

sold at an undervalue. That argument ran contrary to the contemporary advice of Craig

Butler and the position of the MBO team itself (as spoken to by Lorna Gray). No contrary

material was before the court. There was no failure on the part of the respondents to

provide information in relation to the sale to the petitioner. The petitioner had absented

himself from the business. It was a matter for the board to take forward the sale of part of

the business. Also, there was no evidence before the court that any remuneration (by way of

bonus or pension payments) has been excessive. That assertion was rejected by Mr Hughes

and Mr Seddon in their evidence. No contradictory evidence was advanced on behalf of the

petitioner.

[44]

There was no unfair prejudice in stopping the payments in respect of the petitioner's

loan account or in applying contra-charges. In light of the events following the petitioner's

resignation, the board of the Company reached the proper commercial view that it did not

accept that any further payments were in fact due. The petitioner had taken no step to

constitute any debt that might be due by way of the loan account (either in this action or

other legal proceedings). Following immediately upon the commencement of these

proceedings, an offer to purchase the shares of the petitioner at a price of £125,000

(subsequently increased to £150,000) was made by Mr Hughes. Those offers were rejected

by the petitioner.

[45]

If the petitioner is entitled to relief, the appropriate date for valuation of his shares

would be the date of the court's order, which failing 3 April 2018. In any event, the

petitioner has failed to establish the valuations of the company, and therefore of his shares,

as at each of the dates proposed by him. The evidence of Mr Bell was inadmissible or, at the

very least, unreliable. He failed to act as an independent expert witness, to the standards set

out in Kennedy v Cordia Services Limited 2016 SC (UKSC) 59 (at paragraphs [52] and [53]). His

evidence as to the choice of valuation methodology and the appropriate EBITDA multiplier

was, in essence and as he himself accepted, merely his say-so. Moreover, he had no

contemporary, real world valuation experience. He was unable to explain with any clarity

the nature of any historic experience which he may have had (more than five years ago).

Even then, his valuation work took place in the particular context of his role as a forensic

accountant. He gave the clear impression of using an earnings-based methodology because

that was within what he perceived to be his comfort zone, when other methods would not

have been. It is also to be noted that he accepted throughout his evidence under cross-

examination that the approach of Mr McGregor to the issues in dispute was wholly

appropriate for a professionally competent valuer. The evidence of Mr McGregor should be

preferred to that of David Bell in relation to the valuation of the company at each of the

various dates which were discussed.

Decision and reasons

Factual witnesses

[46]

Each side raised some points about the factual evidence led by the other. In my

view, no issues of any substance as to credibility or indeed reliability arose in the evidence.

The parties broadly accepted the key factual matters, with no stark disagreement, the points

of difference in the main being more nuanced and to do with why particular conduct took

place rather than whether it occurred.

Expert witnesses

[47]

I reject the submission for the respondents that the evidence of the petitioner's

expert, David Bell, is inadmissible or unreliable. In my view, he did not fail to meet the

standards set out in Kennedy v Cordia Services Limited. He obviously offered opinion

evidence, but it was not, as suggested, "merely his say-so". Rather than being

unsubstantiated ipse dixit, it was based upon quite standard features of the EBITDA

approach. He did have, in my view, appropriate experience. The EBITDA technique can of

course be difficult to apply without readily available comparators or factors allowing

precision, given the specific factual circumstances of the particular company. He explained,

with reasons, why the EBITDA approach for valuation on the first two dates was to be

preferred. However, the criticisms are also of no moment because, as I explain below, it is

the valuation on the final date, where there was limited disagreement between the experts,

which is relevant.

Unfair prejudice

[48]

The court was supplied with what was appropriately described by senior counsel for

the respondents as "an electronic library of the authorities" on the matter of unfairly

prejudicial conduct and the appropriate remedies. Rather than setting out these extremely

extensive citations in any detail, I refer to the central principles of relevance to the issues

raised in the present case in my reasoning below.

General principles

[49]

The key principles applicable to the court's task in identifying unfairly prejudicial

conduct of a company's affairs are summarised by Lord Hoffman in the decision of the

House of Lords in O'Neill v Phillips [1999] 1 WLR 1092 and by the Court of Appeal in Grace v

Biagioli [2006] 2 BCLC 70 (per Patten J at para [61]). The petitioner requires to establish,

assessed on an objective basis, that the acts or omissions complained about relate to the

management of the affairs of the company, caused prejudice to the petitioner's interests as a

member and that the prejudice is unfair (see also Bovey Hotel Ventures Ltd, Re unreported 31

July 1981; RA Noble & Sons (Clothing) Ltd, Re [1983] BCLC 273; Saul D Harrison, Re [1995] 1

BCLC 14; Guidezone Ltd, Re [2000] 2 BCLC 321). Unfairness and prejudice are both required

and establishing only one of these will not suffice: Jesner v Jarrad Properties Ltd 1993 S.C. 34;

1994 SLT 83; Rock (Nominees) Ltd v RCO (Holdings) Plc (In Members Voluntary Liquidation)

[2004] EWCA Civ 118; [2004] BCC 466; [2004] 1 BCLC 439. The objective test is whether a

reasonable bystander observing the consequences of the conduct, would regard it as having

unfairly prejudiced the petitioner's interests. A member of a company will be entitled to

complain of unfairness where there has been some breach of the terms on which he agreed

that the affairs of the company should be conducted, or where the rules have been used in a

manner that equity would regard as contrary to good faith: O'Neill v Phillips [1999], at 1099;

Re Phoenix Office Supplies Limited [2003] 1 BCLC 76, at 85h; Wilson v Jaymarke Estates Limited

and others 2006 SCLR 510, at para [10]. As Lord Hoffman explained in O'Neill v Phillips,

compliance with equitable considerations is a more appropriate articulation of the concept

than the expression "legitimate expectations". Within a quasi-partnership, a court may give

effect to informal agreements and understandings which have been relied upon even if they

would not otherwise have binding legal force (see eg Re Guidezone Ltd, at para [17]; In Re

Hart Investment Holdings Ltd [2013] EWHC 2067, at para [38]).

The petitioner's heads of claim for unfair prejudice

(i)

Exclusion of the petitioner from management and decision-making and conduct causing

deterioration in the relationship between the directors, prior to the petitioner's departure

[50]

The respondents accepted that the Company was a quasi-partnership company, thus

falling within the species of private company described by Lord Wilberforce in Re

Westbourne Galleries Ltd [1973] AC 360. The Company here was one in which shareholders,

who could have run the business as a partnership, preferred the form of a private company

to be managed by all of them. In a quasi-partnership, understandings or arrangements

about the future management of the company commonly exist between the members. In the

present case, Mr Hughes and Mr Seddon accepted that it was understood that each of the

former partners would be involved in the management of the company. Exclusion from

management can cover taking decisions in secret or not informing the petitioner: Robertson

Petitioner (No 1) 2010 SLT 143. A petitioner may have a justifiable complaint, even if no

longer involved in day-to-day management, of not being told of matters which have, or

could have, a fundamental effect on the company.

[51]

The petitioner's contention that Mr Hughes and Mr Seddon excluded him from

management and decision-making from around April 2017, up to his resignation as a

director, is not well-founded. No specific management matters or decisions which involved

exclusion of the petitioner were identified. Moreover, there were accepted examples of his

involvement in the Company's affairs, such as attending a board meeting, taking an active

part in the processing of the final accounts for the year ending 31 March 2017, issuing

instructions for counsel's advice in relation to the situation with Mr Murphy and attending a

consultation in that regard on 4 August 2017, and making a request for a board meeting in

September 2017 accompanied by proposed items for inclusion in the agenda. The petitioner

was not excluded from the decision reached after being told of the desire by Mr Hughes to

pay Mr Seddon a bonus. Indeed, the petitioner's views on that issue prevailed. The fact that

Mr Hughes put forward that proposal was, of itself, neither unfair nor prejudicial.

Exclusion from management prior to the petitioner's departure from the Company is not

made out.

[52]

There was undoubtedly a deterioration in the relations between the petitioner and

Mr Hughes and Mr Seddon, on various matter but particularly in relation to dealing with

Mr Murphy's situation. The petitioner made a number of concessions in cross-examination

about his meeting with Mr Murphy, broadly to the effect that the advice of counsel (to "wait

and see") which the directors agreed to, was not followed by him and that he had gone back

on what was agreed at the meeting with counsel on 4 August 2017. When he met with

Mr Murphy (on 1 September 2017) to explain why Mr Murphy's loan repayments were

being stopped, in addition to seeking to broker a settlement between Mr Murphy and the

Company, he mentioned the possibility of making a payment to Mr Murphy out of his own

pocket. It was what occurred at this meeting that caused Mr Hughes to ask, and over-time

more than once, "What is it you are not telling us?". While I accept that this question can

imply an element of distrust, one can also at the same time appreciate that, against the

fraught and tense background of the Mathon situation, which remained a concern for the

board, this unexplained meeting and offer had happened and Mr Hughes was unable to

understand why these things had been done. There had already been a finding of

professional misconduct by ICAS on 30 May 2017 in respect of Mr Murphy. He had caused

the Company to become involved in assisting with an ongoing criminal investigation and

there were continuing queries to the Company from the bankruptcy trustee of the key player

in Heather Capital. The Company's professional indemnity insurers were on notice of a

potential claim against the Company because of its position as auditor of Mathon and

Bathon. Substantial claims against other professionals had also been made by Heather

Capital. In these circumstances, the concerns of Mr Hughes, manifested in his question, are

entirely understandable and do not meet the test for unfairly prejudicial conduct.

[53]

The mere fact of a deterioration in their relationship does not suffice. It is not

enough to found a petition for relief in respect of unfairly prejudicial conduct just to show

that the trust and confidence between members of a quasi-partnership company have

broken down, regardless of whether that breakdown can be said to be the result of the

conduct of the respondent (McKee v O'Reilly [2003] EWHC 2008 (Ch); [2004] 2 BCLC 145, at

[54], under reference to O'Neill v Phillips per Lord Hoffman at 1104F-1105B). In a quasi-

partnership context where there is an implied understanding that each person will act in

good faith and if there is conduct which breaches that standard, that may, on the facts, be

unfair. Equally, the destruction of trust and confidence could arguably be prejudicial. But

the breakdown of trust and confidence must flow from, or amount to, unfairly prejudicial

conduct. Accordingly, while conduct that destroys trust and confidence between the

member and those controlling the company can constitute unfair prejudice, I do not consider

the conduct of Mr Hughes at this stage to be unfairly prejudicial. In any event, if a

shareholder led those controlling the company to act in the manner complained of, that may

affect whether the conduct is unfair and here there was conduct by the petitioner which

gave rise to the questions asked by Mr Hughes.

(ii)

Exclusion of the petitioner as a director

[54]

As is obvious, a single act or omission may be sufficient for unfair prejudice to result

and for a petition to succeed (see eg Re Marchday Group plc [1998] BCC 800, at 816). The

conduct may only be proposed or be in contemplation, or something which is sought to be

done: Re Kenyon Swansea Ltd (1987) 3 BCC 259 at 264; see also Whyte, Petr 1984 SLT 330; Petr

Thomas Orr and anr in re D S Orr & Sons (Holdings) Limited [2013] CSOH 116, at para 39.

Various decisions show that where a member in a quasi-partnership is formally or

informally excluded from the management of the company, this will form grounds for relief,

when it was agreed or understood that he would remain involved and his conduct did not

justify taking that step. If his conduct did justify such a step, there will be no unfair

prejudice in his exclusion or removal as a director: Re Sprintroom Ltd [2019] BCC 1031, at

paras [82]-[83]; Badyal v Badyal Paramount Powders (UK) Ltd [2018] EWHC 68 (Ch), at para

[154].

[55]

By email dated 21 September 2017, Mr Hughes advised the petitioner that a special

notice had been received on that day proposing the removal of the petitioner as a director.

Consideration of that special notice formed part of the agenda for the board meeting the

following day. The minutes of that meeting recorded that the special notice had been

received from Mr Hughes, stating his intention to propose the following ordinary resolution

at the next general meeting of the company:

"That Charles Martin be and is hereby removed from the office as director of the

company."

The minutes recorded that it was resolved that a general meeting be arranged and that the

resolution be proposed to the members of the company. The meeting would take place no

earlier than 28 days from that date. Whether or not it is true that Mr Hughes and

Mr Seddon were actually seeking to give the petitioner time to consider and discuss the

position (which in respect of Mr Hughes does not fit with the evidence of Gordon Butler) the

fact is that a simple and clear message of an intention to remove the petitioner as director

was given. Moreover, the petitioner offered to meet with Mr Hughes before the notice was

issued and that offer was declined. No qualifications to that intention to remove were ever

passed on to the petitioner. The evidence was that legal advice was obtained resulting in the

notice being served, but the existence of such advice does not exclude unfair prejudice being

the result. The petitioner did not attend the board meeting, but there was no indication that

if he had attended the decision reached would not have been passed. Against the

background of tense and fraught exchanges and correspondence, which of themselves did

not cause unfair prejudice, this apparently clear next step of removal of the petitioner from

his position as director went too far. In the context of this quasi-partnership, it amounted to

unfairly prejudicial conduct. Its unfairness is made out, firstly, because it proposed to

breach the understanding or arrangement that the former partners would be directors

(unless they left) and, secondly, the notice was not based upon any specific breach of any

fiduciary or other duty by the petitioner. Rather, it was said in the evidence to be an attempt

to flush out the reasons why the petitioner had discussed matters with Mr Murphy and

made the proposal to make a personal payment. The need for further discussion about such

an issue did not require the extreme measure of a notice of removal, especially when the

petitioner had previously offered to meet up for discussions.

[56]

The point made on behalf of the respondents that the petitioner had acted in breach

of fiduciary duty is, in my view, a red herring; that formed no basis for the proposed

removal. The respondents' position that on 8 and 9 September 2017 the petitioner had

forwarded emails relating to private Company business to a client of the Company played

no part in influencing any of the conduct relied upon by the parties at the material time. The

notice of removal was also prejudicial for the simple reason that the petitioner being told by

the two remaining former partners and now directors that they intended to remove him

from his position as director plainly had a negative impact on the petitioner.

[57]

But the problem for the petitioner is that the prejudice ends there, because ultimately

the actual cause of the petitioner's exclusion (better put, his withdrawal) was his own choice

and decision to resign. In his witness statement, the petitioner explained that from around

April 2017 his relationship with the other directors, primarily Mr Hughes, started to

deteriorate. He states that the distrust and accusations from Mr Hughes coupled with the

notice to remove the petitioner "and the cumulative stress of the months prior to this" led to

his resignation. While resignation may not have actively been under consideration prior to

the special notice, it is clear from the petitioner's evidence that a range of factors caused it to

occur. Serving the notice no doubt contributed to the breakdown in relations, but these

were already strained by that stage. The special notice was never implemented and, on the

evidence, it might not have been implemented. Removal was clearly threatened, in an

unfairly prejudicial manner, but it was not inevitably the outcome. While Gordon Butler

spoke of the desire of Mr Hughes to remove the petitioner, Mr Seddon was, on his own

evidence, not fully committed to that approach. It cannot be said that there was no option

other than to resign. Among other things, the petitioner could have waited for the outcome,

or if need be sought an interim interdict preventing his removal. As is obvious and made

clear in the articles of association, resignation causes a person to cease to be a director. It

was that act, and not the respondents' conduct, which resulted in the petitioner ceasing to be

a director. While some prejudice resulted from the proposed removal, the central matter

relied upon by the petitioner (exclusion from management) did not.

[58]

I should add that I see no force in the submission for the petitioner that the parties

understood and accepted that on an exit, each of them would no longer participate as a

member and should have their share value returned, over a period of five years. That was

plainly the position in the Minute of Agreement, but there was no suggestion by the

petitioner at the time of his exit or indeed afterwards that this part of the agreement had to

be complied with. The petitioner is not relying upon that; if he was to do so the unfair

prejudice would presumably have been to refuse to pay him that portion of the share value

which by now he should have received.

(iii)

Re-allocation of £82,000 to Mr Seddon

[59]

There is an arguable basis that the re-allocation of this sum to Mr Seddon could be

regarded as prejudicial to the petitioner, in that it was not split between the shareholders'

loan accounts equally or attributed to the Company's reserves, and Mr Seddon could instead

have been given a bonus or salary increase. However, this conduct cannot be viewed as

unfair to the petitioner. No basis for any agreement or understanding that such a payment

could not be made was presented. While the payment created a benefit to one of the

remaining directors, it did not benefit the other. It was a decision reached on a commercial

basis, by the board of the company, to reflect Mr Seddon's contribution to the business. This

was a matter for the discretion of the board.

(iv)

The grant of floating charges in favour of Mr Hughes and Mr Seddon;

[60]

I do not accept the petitioner's submission that the grant of floating charges in

respect of the obligations owed to Mr Hughes and Mr Seddon constitutes unfairly

prejudicial conduct. It was not unfair. The petitioner could readily have moved, at for

example an AGM, for a floating charge in his own favour but did not do so. In any event,

whether at the time or at any point thereafter it has not resulted in any prejudice to the

petitioner.

(v)

Sale of the business to the MBO team at an undervalue and failing to give the petitioner any

information about the sale to the MBO team

[61]

In considering this allegation, it is of major importance to have regard to the

background to the sale to the MBO team. It had been under consideration for quite some

time. There was an initial reference to the goodwill of the Company being valued in the

region of £1.2m. But the October 2017 valuation (£710,000) and the November 2017

valuation (£545,000) carried out by Craig Butler reached much lower figures, with the first of

these being, on Craig Butler's evidence, a draft valuation. The petitioner had resigned

shortly prior to these dates and that gave rise to a number of events. He informed clients of

the Company, including in particular Slater Menswear and Samuel Kingsley, of his

resignation. These two major clients left the business of the Company. He provided

consultancy services to twenty-nine clients. These were services that could have been

provided by the Company and hence their loss could potentially reduce its income. In

December 2017 two senior staff took voluntary redundancy, linked to the departure of

clients who had used the services of the petitioner and those who worked with him.

Craig Butler explained the factors which he took into account, including the above and of

course the ongoing concerns about the Mathon matter. Whether or not in his witness

statement his use of the word "toxic" was because his father, and Mr Hughes, had earlier

used that term, he adhered to that view in his oral evidence. The MBO team carried out its

own assessment, as Lorna Gray explained, and came up with their offer of £475,000 for the

goodwill of the business. Mr Hughes asked for advice from Milne Craig on this offer and

Craig Butler advised that it was not unreasonable. He explained in his evidence why he

took that position. The submissions for the petitioner stopped short of any allegation that

Craig Butler had somehow acted unfairly or unreasonably in arriving at his views. The

focus for the petitioner's allegations came to be on non-inclusion of WIP figures and to a

lesser extent the valuation of assets.

[62]

I regard the evidence of Craig Butler as entirely credible and reliable, and indeed

persuasive as to the reasonableness of the MBO team's offer. There was no suggestion of

any other offer being available or indeed of any sound basis for the price being unfair. It is

of course correct that relatives of Mr Hughes (his son, born during the previous marriage,

and his second wife) formed part of the MBO team. But there was no serious contention that

this somehow affected the reasonableness of the price. Indeed, Mr Seddon agreed to the sale

price, thus applying it to his own share of business, and no relatives or associates of his were

in the MBO team. The conclusion, which I consider to be firmly supported, is that an

independent professional adviser advised the respondents that the price offered by the MBO

team was not unreasonable and he had sound, indeed good, reasons for reaching that view.

I therefore reject the contention that the sale of the business to the MBO team was in any

way a matter of unfair prejudice.

[63]

However, the exclusion of a continuing shareholder in this quasi-partnership

company, against the background of the parties' understanding, from any involvement

whatsoever in relation to a proposed sale of the business was in my view unfair. As a long-

standing and founding member of the business, with a substantial shareholding, he plainly

had an interest in a sale. While keeping the Company's affairs confidential was arguably a

factor, the petitioner could nonetheless have been advised of relevant matters and given an

opportunity to comment or contribute to the discussion. But there remains a need to show

prejudice. There is no doubt that he was prejudiced in a very general sense by not having

information and not being able to participate in any way in the discussions about the sale,

but at the same time there was nothing in the evidence to point towards his comments or

contributions, had they been obtained, having any impact on the proposed transaction. For

example, there is nothing to suggest that an enhanced sale price from the MBO team, or

from a different purchaser, could have been achieved as a result of involving him. In short,

the sale would have gone ahead in any event and at the same price. Accordingly, there is no

real prejudice arising from the denial of his involvement.

(vi)

Receipt of excessive remuneration by Mr Hughes and Mr Seddon after the departure of the

petitioner

[64]

The relevant legal principles in relation to remuneration in private companies are set

out and explained in Irving v Irving (No.1) [2007] 1 BCLC 349, per Blackburne J, at paras

[267]-[270]. In some circumstances, a person who has ceased to be a director may be able to

argue that directors' remuneration, where there is no payment of dividends to the

shareholders, is excessive. This could arise when, for example, the remuneration does not

reflect a reasonable payment for their contributions and in effect includes sums which ought

to have been paid as dividends. Reliance on established practices in relation to payments

made by the company whilst all parties were involved in management of the company is

inappropriate after one of the directors resigns: Wilson v Jaymarke Estates Ltd and anr. In the

present case the Minute of Agreement in fact lays out the intended position, which is that

the person who leaves as a director will have his shares bought out and paid for (in the

circumstances of a single departure from directorship) over a five year period. There is

simply nothing to support the view that there was any informal agreement or

understanding that a person who resigned as a director must receive a dividend. The

petitioner made no suggestion that the remaining directors had fixed their remuneration in

disregard of the provisions of the articles of association governing that matter. In fact, the

proper procedures for fixing the directors' remuneration were followed. This matter is a

commercial decision by the board. Excessive remuneration by the respondent to himself

from company funds controlled by him can amount to unfairly prejudicial conduct to the

petitioner: Fowler v Gruber [2009] CSOH 36, per Lord Menzies, at para [132]. But in order for

the remuneration to be excessive, it would have to have been fixed not by reference to

objective commercial criteria and not within the bracket that directors carrying the

responsibility and discharging the duties in the particular company would expect to receive.

The fundamental problem for the petitioner is the absence of any proper evidential basis

that the amounts paid were excessive and unreasonable. It is correct that the expert

witnesses identified particular sums for the purposes of their assessments on valuation, but

no specific focus on the reasonableness of the sums paid, having regard to the profits of the

enterprise, was put before the court. This ground must therefore fail.

(vii)

Failure to pay dividends

[65]

Unfair prejudice may be established where the payment of dividends, when justified

by the company's financial position, was part of the agreed or understood basis on which

the petitioner became a member of the company and where there is no justification for not

paying dividends. But the fact that a minority shareholder is part of a quasi-partnership

company does not of itself establish such an agreed or understood basis and no other

ground for it was advanced. Fixing dividends is a commercial decision. Even if a broad

expectation of dividends being payable arose from their previous conduct, there were sound

commercial reasons for retaining the funds to which the respondents had regard, including

the potential requirement to fund a defence and counterclaim should Mr Murphy bring

proceedings.

[66]

For the petitioner to be able to show that non-payment of dividend (apart from the

non-payment of the dividend declared in April 2017, discussed below) to amount to unfairly

prejudicial conduct he would require to show either that (i) the directors failed in their duty

under section 172 of the Companies Act 2006; (ii) there was an understanding or

arrangement, express or implied, that where a person resigned as a director he would

continue to receive a dividend; (iii) the sums paid to the directors by way of remuneration or

bonuses were excessive. None of these points is made out. I therefore reject the defender's

contention that a failure to pay dividends, such as requested by the petitioner in August

2017, was unfairly prejudicial.

[67]

However, the failure of the directors to pay the dividend declared on 12 April 2017,

which was payable contemporaneously and demanded by the petitioner to be paid on

12 May 2018, was unfairly prejudicial. It is correct that the previous practice had been for

such due dividends to be allocated to the individual's loan account. But there was no clear

arrangement or understanding to that effect and I was shown no basis for rejection of a

member's request for payment of a due dividend rather than having it put into his loan

account.

(viii)

Non-payment and debiting of the petitioner's loan account

[68]

The fact that the first and second respondents ceased the payment of the petitioner's

loan account, approximately one year after his exit, was unfairly prejudicial. Doing so was

contrary to the understanding of the shareholders and established practice and inconsistent

with the Minute of Agreement. No convincing ground for viewing this conduct as not being

unfair and prejudicial was made out. Given that this is a quasi-partnership and the

arrangements between the shareholders, nothing turns on the fact that the loan account was

payable in his capacity as a director.

[69]

As narrated above in relation to the factual background, the first and second

respondents (as the board) threatened to and ultimately did debit the petitioner's loan

account. They gave reasons for doing so. However, on the evidence led no clear and

substantiated basis for making these debits was established. Indeed, the respondents did

not seek to establish such a basis on any detailed and vouched grounds but instead

suggested that this was an ongoing dispute that required to be resolved by other means. In

the absence of any proper ground for the debits, I regard the conduct as unlawful but even if

not, then it was certainly unfair. The sums debited were not the subject of any independent

assessment or inquiry. It was also plainly prejudicial as the petitioner no longer received

payments from his loan account. No doubt if the respondents do have a proper basis for

debiting the loan account and their claim that the petitioner owes money to the Company,

they can seek to recoup any sums by whatever means is appropriate.

Conclusion on heads of claim on unfair prejudice

[70]

Accordingly, I conclude that to a limited extent the petitioner's assertions of unfairly

prejudicial conduct are made out. In particular, the unfairly prejudicial conduct comprised

the service of the special notice (albeit that the resulting prejudice was restricted), non-

payment of the dividend declared in April 2017, cessation of payments on his loan account

and debiting of his loan account.

Remedies

[71]

In putting right, or curing, the consequences of unfairly prejudicial conduct the court

has a wide discretion to do what is just and equitable: s 996 of the 2006 Act; Re Bird Precision

Bellows. However, the normal remedy, and the most practicable and equitable, is to have the

petitioner's shares purchased at a fair value by the respondents or the company. A price

based on a pro-rata valuation is more likely (Profinance Trust SA v Gladstone and see also In

re Bird Precision Ltd, at 430D) particularly where the company is a quasi-partnership: CVC/

Opportunity Equity Partners Ltd v Demarco Almeida [2002] 2 BCLC 108, at para [41]).

[72]

The overriding requirement is that the valuation should be fair on the facts of the

particular case (London School of Electronics, Re [1986] Ch 211). Where unfair prejudice has

been established, the court is obliged to consider the whole range of possible remedies and

choose the one which, on an assessment of the current state of relations between the parties,

is most likely to remedy the unfair prejudice and deal fairly with the situation which has

occurred (Grace v Biagioli, at para [73]). There is no single appropriate method to be applied

to any valuation. Rather, the appropriate basis for valuation will depend upon the whole

facts and circumstances of the particular case, with the court requiring to make a choice that

is fair to all the parties.

[73]

The choice of the date at which shares are to be valued for the purposes of a buy-out

order is a matter for the exercise of the discretion of the trial judge (Re Cumana Ltd

[1986] BCLC 430, at 436b-436c; Re Elgindata Ltd [1991] BCLC 959), but the overriding requirement is

that the date of valuation should be fair on the facts of the particular case (Profinance Trust

SA v Gladstone, at para [60]). The date should be that which best remedies the unfair

prejudice held to be established: Re Abbington Hotel Ltd [2011] EWHC 635 (Ch); [2012] 1

BCLC 410. The starting point should be that prima facie an interest in a going concern ought

to be valued at the date on which it is ordered to be purchased. However, there are many

cases where fairness to one side or the other requires the court to take a different date. But a

petitioner is not entitled to a "one-way bet", and the court will not direct an early valuation

date simply to give the petitioner the most advantageous exit from the company, especially

where severe prejudice has not been made out: Profinance Trust SA v Gladstone. The remedy

is to be proportionate to the unfair prejudice suffered Re Edwardian Group Ltd [2018] EWHC

1715 (Ch), [2019] 1 BCLC 171.

[74]

The experts on valuation each gave reasonably sound and clear evidence. The

central difference is that for the first two valuation dates Mr Bell used the EBITDA approach

using a multiplier, thus valuing the business as a going concern and Mr McGregor used a

net-assets approach. Mr Bell's evidence in relation to the first two dates of valuation was

less persuasive than that of Mr McGregor. While Mr Bell made some reference to other

share transactions, there was a lack of appropriately comparable financial data which

supported the approach to the EBITDA valuation for an accountancy-service company of

this size. The potential impact of the departure of key clients was not, in my view, fully

recognised. While there is some evidential support for the view that the financial

performance of the Company was not in the short-term affected by the departure of the

petitioner, regard must be had to the longer-term consequences. Mr McGregor gave proper

weight to the highly significant issue about the potential impact upon the company resulting

from the Mathon affair.

[75]

However, the valuations on those first two dates are not relevant. The problem here

is that these two dates (the date of resignation and the date of sale of the business) were not

points in time when the respondents' conduct had caused any sufficiently serious unfair

prejudice. It is really the accumulation of the acts over the whole period of time, including

the non-payment and debiting of the loan account which occurred after the dates

mentioned, that gives rise to the unfair prejudice of the kind that merits a remedy. There is

no earlier point in time after which further damage to the financial position of the Company

arose because of the unfair prejudice, which, if it had occurred, might have caused that point

in time to be appropriate. The sale of the Company's business and assets to the MBO team

clearly changed the Company's position, but payment for that sale was received and there

was no unfair prejudice to the petitioner from that transaction.

[76]

Taking the third date (31 October 2019), Mr Bell quite properly adopted the net-asset

approach. To all intents and purposes this was the same method as the break-up valuation

used by Mr McGregor, except that Mr McGregor made certain adjustments. Prior to those

adjustments, for each expert the net-asset value was £216,000. An item in the management

accounts described as "the goodwill adjustment suspense", amounting to £47,000 was

treated by Mr McGregor as a provision of funds and hence was deducted. Mr Bell was not

clear as to why that position was reached and indeed no evidence supporting the deduction

was provided. Mr McGregor also deducted £40,000 in contingent liabilities in relation to the

office lease. As Mr Bell notes, the purchaser remains in the property and continues to meet

the costs of the property. No sufficient basis for that further deduction was advanced. The

final deduction by Mr McGregor is £25,000 for dissolution costs. Mr Bell considered that

due to the directors' professional backgrounds they would look to mitigate and minimise

these costs wherever possible, but this point was not developed further. I shall therefore

take £216,000 as the starting point, deducting only the £25,000 for dissolution costs. This

results in a net asset value of £191,000, meaning that the value of Mr Martin's 42.84%

shareholding at the final date given is, rounded up, £82,000.

[77]

Based upon the authorities, I therefore conclude that the appropriate date for fixing a

price for the purchase of the petitioner's shares is that final date. That is the date which best

remedies the unfair prejudice established. While some of the unfairly prejudicial conduct

occurred earlier, I have had regard to the cumulative effect of it including the ongoing

matters concerning the petitioner's loan account. In light of my findings above, there is no

ground for going back to the date of the petitioner's departure from the Company or the

date of the MBO for the purposes of valuation. I also conclude that it is not appropriate, in

this quasi-partnership case, to apply a discount.

[78]

For completeness, I observe that early in these proceedings Mr Hughes made an offer

to purchase the petitioner's shares for £125,000, subsequently increased to £150,000. But it

was not suggested that this offer included the expenses incurred by the petitioner nor, more

importantly, that it met the criteria in O'Neill v Phillips. There was no independent valuation

behind the offer and it was not suggested that at that point the petitioner was afforded full

access to the Company's records and other relevant information to allow him to form a view

or receive expert advice on the point. Moreover, the figure offered apparently included

sums already owed to the petitioner in his loan account.

Disposal

[79]

I shall therefore make an order for the purchase of the petitioner's shares in the sum

of £82,000. I shall also grant orders for payment to the petitioner of £16,856 in respect of his

director's loan account and £29,988 in respect of the interim dividend for the period to

31 March 2018. However, the question of whether it is Mr Hughes and Mr Seddon, or the

Company, who should be ordained to make the particular payments requires to be

addressed and I will fix a by-order hearing to deal with this matter. In the meantime, I

reserve all questions of expenses.