High Court orders petitioner’s purchase of 50% shareholding in company in unfair prejudice petition

On conclusion of the trial of a petition under section 994 of the Companies Act 2006 (Goodchild (petitioner) v (1) Taylor (first respondent) & (2) Taylor Goodchild Limited (second respondent, the ‘Company’) [2018] EWHC 2946), the High Court held that the affairs of the Company had been conducted in a way which unfairly prejudiced the petitioner. In particular, the court held that the actions of the first respondent represented the clearest possible breach of directors’ fiduciary and statutory duties, and ordered that the petitioner purchase the first respondent’s shares at a fair valuation (the relief sought by the petitioner).

Background

The petition related to the affairs of the Company (which provides legal services), of which the petitioner and the first respondent were the only directors and in which they were also the only and equal shareholders.

Relations between the two directors deteriorated and agreement was reached in principle that they would part ways and each run separate practices delivering legal services. No final agreement was reached on the detail of the split of the Company’s business. Nevertheless, the first respondent left the Company to form and run a new law firm and no longer worked for the Company, but remained a director and shareholder of the Company.

The petitioner’s case was that, both prior to and after leaving the Company, the first respondent used his position as a director and equal shareholder to affect the business arrangements of the Company in ways which were unfairly prejudicial to the petitioner.

The petitioner sought relief under section 996(2)(e) of the Companies Act 2006, i.e. that there should be an order that the petitioner purchase the first respondent’s shares.

The court’s decision

In reaching his decision, Barling J referred to the Court of Appeal decision in In re Tobian Properties Ltd [2013] Bus LR 753. Specifically, in relation to directors’ fiduciary duties, the Court of Appeal’s decision is authority for the principle that non-compliance with directors’ fiduciary duties by respondent shareholders will normally indicate that unfair prejudice within the meaning of section 994 has occurred.

Barling J considered it clear that the first respondent continued to exercise his directors’ powers after leaving the Company – for example: using the Company’s bank account to withdraw £16,500; refusing to declare a dividend (which increased the Company’s tax bill); and preventing the Company from renewing its bank overdraft facility. Further, the first respondent accepted that he had retained his directors’ powers after leaving the Company in order to protect his own position.

In finding that the affairs of the Company had been conducted in a way which unfairly prejudiced the petitioner, Barling J explained that the actions of the first respondent represented “the clearest possible breach of directors’ fiduciary and statutory duties [in exercising] his powers as a director not in the best interests of the company but with a view to safeguarding his own interests before leaving and after he had left the company.”

In response to the first respondent’s suggestion that the court should order a winding up of the Company, the judge declined to depart from the longstanding agreement in principle that the petitioner would buy the first respondent’s 50 per cent shareholding, and ordered accordingly.

Comment

While the court gave careful consideration to the case law on the principles to be applied in considering a petition alleging unfair prejudice, this case is also a reminder that the court’s decisions in such cases are heavily dependent on the particular factual matrix. In particular, Barling J considered the similar case of Patel v Ferdinand [2016] EWHC 1524 (Ch) but commented that “it does not provide me with much assistance, because cases of this kind are pre-eminently ones which turn on their own specific facts.”