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CHRISTOPHER TURNBULL FOR RELIEF UNDER SECTION 122 OF THE INSOLVENCY ACT 1986 AGAINST THE DIRECTORS OF AGAINST THE HEAD LTD [2024] ScotCS CSOH_37 (26 March 2024)
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[2024]CSOH 37,
[2024] ScotCS CSOH_37
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OUTER HOUSE, COURT OF SESSION
[2024] CSOH 37
P1096/23
OPINION OF LORD BRAID
In the petition of
CHRISTOPHER TURNBULL
Petitioner
for
relief under s 122 of the Insolvency Act 1986 against the directors of Against the Head
Limited
Petitioner: Party
Respondents: Anderson; Gilson Gray LLP
26 March 2024
Introduction
[1]
The petitioner, Christopher Turnbull, is a minority shareholder in (and former
employee and director of) the company Against the Head Limited, of which he is a founder
member. He seeks an order from the court winding that company up, and appointing an
interim liquidator, founding upon section 122(1)(g) of the Insolvency Act 1986, which
provides that a company may be wound up by the court if the court is of the opinion that it
is just and equitable that the company should be wound up. The petition is opposed by the
company and its directors (together, the respondents).
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[2]
It is common ground that the company is insolvent, its liabilities being greater than
its assets. At the outset, this presents a formidable obstacle to the petitioner's case (one
which, as will be seen, he has failed to surmount).
[3]
There is no dispute as to the petitioner's title to bring the petition, having been the
holder of shares for at least 6 months during 18 months before the commencement of the
petition: section 124(2)(b) of the 1986 Act. However, there is an issue over his interest to do
so, and whether or not he stands to derive a tangible benefit should the petition be
successful (in circumstances where he concedes that if the company were to be wound up,
there would be no return to shareholders). There is also an issue as to whether the petitioner
has in any event relevantly averred circumstances which could, taken at their highest, entitle
the court to be satisfied that it was just and equitable to wind the company up. I heard the
parties on these issues at a non-evidential hearing on the petition and answers, at which the
petitioner represented himself (extremely ably) and the respondents were represented by
counsel. In short, counsel for the respondents submitted that the prayer of the petition
should be refused for the lack of any relevant averments as to interest, or on the merits. The
petitioner's position is that a proof should be allowed, the petitioner acknowledging that
further inquiry into the facts would be required before the court could conclude that the just
and equitable ground was made out.
Background
[4]
The company was incorporated on 24 January 2014. Its share capital comprises
334 A shares of £1 each, of which the petitioner holds 34, and 200 B shares, held by
D C Thomson & Company Ltd. The company's sole business interest was the operation of
the Electronic Research Interchange (ERIC), which involves the sale of third-party-created
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investment research via an electronic online platform to the investment community, the
company having been formed with a view to exploiting the effect of the EU Market in
Financial Instruments Directive (2014/65/EU) legislation prohibiting fund managers from
receiving undisclosed inducements without passing them on to their customers. The
petitioner was not at first a director of the company but was an employee. In
November 2018 he was appointed as managing director, in terms of a service agreement
dated 12 November and 7 December 2018. Meanwhile, (this leading to one of the
petitioner's bones of contention), one Daren Riley had been appointed to the post of
Business Development (Sales) in early 2017, and he was appointed as CEO at around the
same time as the petitioner became managing director. Relations between the petitioner and
the company soured, and the petitioner left the company's employment in July 2019,
pursuant to a settlement agreement dated 18 July 2019, in terms of which, among other
things, the petitioner received a sum of money in lieu of notice and undertook to resign
immediately as a director, which he did. Mr Riley is still the CEO and continues to be paid
his salary in line with his own service agreement, much to the petitioner's dismay.
The petitioner's case
[5]
Although the petitioner has made detailed averments about his dissatisfaction with
the manner in which the company is being managed by the board, he succinctly summarised
his complaints in his note of arguments as follows. The company has been driven to
insolvency by its directors and CEO (Mr Riley); it has no tangible assets; it has liabilities
approaching £1.4 million; it has one employee (Mr Riley) who is significantly
overcompensated for his output and contribution to the company; the company does not
need that employee as it has long been the case that commission-only consultants work for
4
the benefit of the company; and the company loses money consistently every quarter due to
the payments made to that employee. The petitioner avers that it is just and equitable that
the company be wound up because of (a) loss of substratum; and (b) justifiable lack of
confidence in the directors due to mismanagement. In his submissions he also argued that
the directors had been guilty of a lack of probity, this stemming from his averments in the
petition that he was induced to enter into his service agreement with the company as a result
of misrepresentations as to the level of Mr Riley's salary, which, says the petitioner, caused
him to accept a lower salary than he would otherwise have agreed to. The petitioner wishes
the company wound up in order that a liquidator might carry out a thorough investigation
into the company's affairs, and the directors' conduct.
The respondents' case
[6]
The respondents accept that the company is presently balance-sheet insolvent
although it is meeting its debts as they fall due. However, it has the support of its major
creditors (one of whom is a company in which a major shareholder has an interest). There is
no deadlock at board level. The petitioner's dissatisfaction amounts to no more than a
"domestic squabble" over how the company is being run. The proper forum for the
petitioner's grievances is a general meeting of the company. Even if there was any
misrepresentation as to Mr Riley's salary, which is not accepted, any claim relating to that
was effectively swept away by the settlement agreement.
Tangible benefit
[7]
As a general rule, a shareholder seeking a winding up order must be able to establish
that the company is solvent and that there will be a surplus remaining for distribution after
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payment of the company's debts and the costs and expenses of the liquidation, and a
shareholder will not therefore be permitted to petition under section 122(1)(g) for the
winding up of an insolvent company: Fulham Football Club (1987) Ltd v Richards
was not an absolute rule, but nonetheless submitted, correctly, that the petitioner must be
able to demonstrate some tangible benefit in order to demonstrate an interest to bring a
winding-up petition.
[8]
The petitioner did not demur from that proposition, but contends that winding up
would bring about a tangible benefit. His averments about that are at Stat 19 of the petition,
where he avers, first, that there would be tangible benefit to the company as an entity in its
own right in being wound up, in that the employment contract with Mr Riley would be
brought to an end, removing monthly costs of approximately £11,000; and second, that the
petitioner will:
"gain the practical benefit of evidencing that taking a principled stand and
continuing to highlight the march towards insolvency to the board, and being
ignored, will provide the opportunity to rebuild his reputation. Being proven to be
correct and not standing for wrongdoing despite the extensive experience of the
directors concerned. Financial benefits related to this will follow."
[9]
The petitioner asked what may have been intended to be a rhetorical question during
the hearing: is a benefit to the company enough? Rhetorical or not, the short answer to that
is: no. It must be the petitioner himself who is able to demonstrate a tangible benefit. The
longer answer is that it is doubtful whether bringing about the demise of a company, even
an insolvent one, could ever be said to be to its benefit. If it were otherwise, then it could be
said of every insolvent company that it was to its benefit to be wound up; which would
render somewhat nugatory the general rule that a shareholder will not be permitted to
petition for the winding up of an insolvent company.
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[10]
Moving on to whether the petitioner has pled a sufficient tangible benefit for himself,
his averments are plainly insufficient in that regard. At best, they hint at an intangible
benefit; but even then are too vague to admit of inquiry. The petitioner not having been
involved in the management of the company in the last five years, it is unclear why his
reputation should have suffered; and "being proven to be correct" is far too nebulous a
concept to qualify as a tangible interest.
[11]
For that reason alone, the prayer of the petition falls to be refused. However, for
completeness (and lest I am wrong in relation to tangible interest) I will consider the other
arguments which were presented to me in relation to the merits of the petition.
The "just and equitable" ground the law
[12]
The starting point is to recognise that the discretion conferred on the court by
section 122(1)(g) is wide and not confined to situations which are said to be of the same
order as the other situations enumerated in section 122: Symington v Symingtons' Quarries,
Limited (1905) 8F 121, Lord McLaren at 130; Ebrahimi v Westbourne Galleries Ltd
[1973] AC 360, Lord Wilberforce at 374, 379.
[13]
However, there are certain well recognised grounds on which a "just and equitable"
order may be granted. The first is loss of substratum, that is, where a company has been
formed to pursue a particular object or to carry on a business of a particular type, which it
has abandoned to pursue an entirely different business: for a recent example, although not
referred to in submissions, see Re Klimvest Plc [2022] BCC 747. The second is where, in the
case of a company which is a corporate quasi-partnership, there has been an irretrievable
breakdown in trust and confidence between the participating members. The third ground is
7
However, the remedy may be granted in any situation where it is just and equitable to do so;
one further example being where the directors have acted with a lack of probity in the
conduct of the company's affairs.
[14]
Since the petitioner founded strongly on lack of probity, it is worth exploring that in
a little more detail, having regard to the words of Lord Shaw of Dunfermline in Loch v John
Blackwood Ltd [1924] AC 783, quoted with approval by Lord Briggs in Lau v Chu, at 4666:
"It is undoubtedly true that at the foundation of applications for winding up, on the
`just and equitable' rule, there must lie a justifiable lack of confidence in the conduct
and management of the company's affairs. But this lack of confidence must be grounded
on conduct of the directors, not in regard to their private life or affairs, but in regard
to the company's business. Furthermore the lack of confidence must spring not from
dissatisfaction at being outvoted on the business affairs or on what is called the domestic
policy of the company. On the other hand, wherever the lack of confidence is rested on
a lack of probity in the conduct of the company's affairs, then the former is justified by the
latter, and it is under the statute just and equitable that the company be wound up
(emphasis added)."
[15]
It is clear from this that the focus must be on the company's affairs, by which is
meant more than the manner in which the company conducts its business with third parties
or its "domestic policy"; rather, loss of confidence, if it is to found a just and equitable
winding up, must arise from the manner in which the directors are conducting the affairs of
the company insofar as it affects the petitioner's relations with the company. For example,
in Loch, the conduct consisted of a failure to hold general meetings or to submit accounts or
recommend a dividend; in Baird v Lees [1924] SC 83, it included a failure to submit accounts
to the shareholders, to declare a dividend and to keep a separate bank account in the
company's name. So called domestic squabbles between two sets of shareholders are not
sufficient, a point also made in Symington, above, Lord President Dunedin at 129: the
company itself is the proper forum for the resolution of such disputes.
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[16]
Finally, the section 122(1)(g) remedy is one of last resort: Lau v Chu. The court must
carry out a three-stage analysis, asking:
(i)
Is the petitioner entitled to some relief?
(ii)
If so, would the winding-up be just and equitable if there was no other
remedy available?
(iii)
If so, has the petitioner unreasonably failed to pursue some other available
remedy instead of seeking winding-up?
[17]
Having set out the law, I will now examine the various grounds on which the
petitioner relies in asserting that it is just and equitable that the company be wound up.
Loss of substratum
[18]
As already noted, the company was formed to operate the ERIC. It still does so. As
the petitioner admits, the business of the company is stated in its articles of association to be
the sale of third party created investment research via an electronic exchange or online
platform to the investment community. That is what the company still does. It is common
ground that the original intention of those who set up the company was that it would
operate on a "demand-pull" basis to allow fund managers to buy research, but that the
market was not receptive to such an approach. This has necessitated the company doing
business in a different way, namely, by acquiring a sales function to enable it to profit from
sales of investment research. As the respondents submit, taking the petitioner's averments
at their highest, they indicate a change to the way in which the company has sought to
generate revenue from the same business, rather than any fundamental change to the nature
of the business itself.
[19]
Accordingly, the petitioner's case in relation to loss of substratum is bound to fail.
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Loss of confidence/lack of probity
[20]
I deal with these headings together because the petitioner's averments do not raise
the issue of lack of probity, and insofar as he founded upon a lack of probity in the course of
his submissions, that appeared to be closely related to his averments of lack of confidence in
the directors. The first point to make is that the petitioner has made no averments of any
particular relationship of trust or confidence, nor does it appear that he would have been in
a position to do so given that one major shareholder is a juristic person and another
shareholder is a trustee for a trust. The petitioner does aver that he has been prevented from
taking part in the management of the company since July 2019, but, as he also avers, that
was the consequence of his entering into the settlement agreement to terminate his
employment and directorship (having had the benefit of legal advice). That would on any
view be insufficient to found a just and equitable winding up of the company at the time, let
alone some four or five years later. As is clear from the petitioner's own succinct summary
of his complaints, his grievance stems largely from his dissatisfaction at the manner in which
the company has been managed since then, in particular, the continued employment of
Mr Riley; and the pursuance of a strategy of trading (with the creditors' support) although
insolvent, in the hope, to put it colloquially, that there will be light at the end of the
(admittedly somewhat lengthy) tunnel. The petitioner has averred detailed criticisms of the
respondents, including a lack of sales, the decision to appoint a sales person, the lack of
investment in the ERIC platform, and the fact that the second respondent is not only the
major shareholder but also (through another company in which he has an involvement) the
major creditor. There is a large degree of repetition in the petitioner's averments, all coming
10
back to his dissatisfaction at the employment of Mr Riley coupled with the company's
insolvency.
[21]
As counsel for the respondents submitted, these complaints are of the nature of a
domestic squabble, between the petitioner, a minority shareholder, and the directors over
the manner in which the business of the company is being conducted by the latter; the
petitioner does not agree with their business strategy. What the petitioner does not aver is
any lack of probity on the part of the directors in the manner in which they are conducting
the affairs of the company (as opposed to the manner in which they are conducting its
business affairs, although even in that regard no relevant lack of probity is averred). As the
petitioner fairly accepted, the lack of probity (as he sees it) sprang from the respondents'
dealings with him in relation to his service agreement and the termination thereof, but on
any view that was a domestic dispute between the company and the petitioner as an
employee which was in any event settled by a compromise agreement at the time it arose.
The petitioner clearly feels a lingering sense of resentment, not least due to his perception
that the company has been mismanaged since then, but there is nothing arising from those
circumstances from which the court could ever conclude that it was just and equitable to
wind the company up. If the petitioner did have a remedy arising out of misrepresentation,
the proper means of pursuing that would have been by raising a civil court action against
the company.
[22]
For completeness, insofar as the petitioner complains that the directors are
continuing to trade a company which is insolvent, there is nothing inherently wrongful in
that insofar as his interests as a shareholder are concerned. Indeed, given that the company
is, it is agreed insolvent, the respondents must have regard to the creditors' interests in
conducting the management of the company: BTI 2014 LLC v Sequana SA [2022] 3 WLR 709.
11
As Lord Briggs said in that case, at paragraph 176, there may be circumstances where
directors require to treat shareholders' interests as subordinate to the creditors'; it may
depend on who has the most "skin in the game", ie, the greatest economic interest. It must
also be observed that if either the majority shareholders, or one or more creditors, were
unhappy with the company's strategy, a petition could be presented to the court to wind the
company up on the basis that it was unable to pay its debts. Such a course is not open to the
petitioner, since he is not a creditor.
[23]
Drawing all of this together, and reverting to the three stage analysis described in
para [16] above, the petitioner's averments do not get him beyond the first stage: he has not
relevantly averred that he is entitled to a remedy, whether on the grounds of loss of
substratum, loss of confidence, lack of probity or otherwise. He clearly feels very strongly
that the company is being mismanaged and that the directors' conduct should be
investigated by a liquidator, but the law simply does not afford him a remedy, even if all he
offers to prove is true.
Disposal
[24]
I have refused the prayer of the petitioner principally on the basis that the petitioner
has no interest to bring it, the company being insolvent. Even had that not been the case, I
would have refused it on the basis that the circumstances prayed in aid by him are
insufficient to show, on any view, that it would be just and equitable to wind the company
up. I will reserve the question of expenses.
