Unfair prejudice to members - Relief

Re Home & Office Fire Extinguishers Ltd Rodliffe v Rodliffe and another: Chancery Division, Companies Court (Mr N Strauss QC): 4 April 2012

The claimant and first defendant brothers were 50% shareholders, directors and employees of the second defendant company. In the instant proceedings, the claimant and first defendant sought orders under section 994 of the Companies Act 2006 (the act) for the compulsory purchase of the other’s shares, each on the basis he had been attacked by the other with a hammer. The first defendant was charged with malicious wounding and subject to bail conditions, inter alia, preventing him from going to the company’s office. In January 2009, the claimant had terminated the first defendant's employment with immediate effect. In September 2009, the first defendant was acquitted. The first defendant also sought arrears of salary.

It fell to be determined: (i) whether the first defendant attacked the claimant with a hammer; (ii) whether the first defendant was entitled to arrears of salary; (iii) whether the first defendant had conducted the company’s affairs in an unfairly prejudicial manner; (iv) whether the first defendant should be ordered to sell his shares in the company; and (v) whether it was appropriate to discount the value of the first defendant’s shareholding.

The application would be allowed.

(1) The evidence established that it had been the first defendant who had instigated an attack on the claimant (see [66] of the judgment). (2) It was a well-established principle that an employee could not recover his salary if he had failed to do the work for which he was employed (see [68] of the judgment).

In the instant case, the first defendant had disabled himself by his actions from doing any work for the company on the day of or after the attack. Up to the end of his trial, his bail conditions had prevented him from going to the company’s premises. After that date, there had been no legal impediment to his going to the company’s premises, but what he had done had made it impossible to work with the claimant, and therefore impossible for him to have carried out his duties to the company. Therefore, the first defendant, having disabled himself from carrying out his contractual duties, was not entitled to his salary (see [69] of the judgment).

(3) It was established that, in order to succeed in a petition under section 994 of the act, the petitioner was required to establish that the respondent had conducted the company’s affairs in an unfairly prejudicial manner. The words ‘affairs of the company’ were to be construed liberally. The prejudicial conduct was usually a breach of the terms on which the shareholders had agreed that the company’s affairs should be conducted, but might be on a single event which had put an end to the basis upon which the parties had entered into association with each other, so as to make it unfair that one should insist on the continuation of the association (see [71] of the judgment).

In the circumstances, there was no doubt that the first defendant’s conduct had related to the affairs of the company. The first defendant’s conduct had been a breach of the implied understanding that he and the claimant would act properly and in good faith towards each other, and it had also been a single event which had made it impossible for them to continue their association as directors of, and shareholders in, the company. The company had also been deprived of the first defendant’s services, which the court found were real, even if not all they should have been, and in any case, it would be impossible for the company to continue with both as shareholders (see [72] of the judgment).

(4) In the circumstances, it was obvious that the claimant or the first defendant should sell his shares to the other and, equally obvious that it should be the first defendant who sold his shares to the claimant. That was mainly not only because the first defendant was the guilty party, but also because the claimant had been running the company on his own for nearly four years, whereas the first defendant’s performance before the attack had been below standard (see [73] of the judgment).

(5) In general, it was not appropriate to discount the value of a minority (or 50%) shareholding in a quasi-partnership company, but the court certainly had a discretion to do so where there were special circumstances, for example where the prejudicial conduct had caused loss to the company. However, the basic principle was that the valuation should be fair (see [76], [77] of the judgment).

In the instant case, it was not fair to apply either 40% or any discount because of the first defendant’s misconduct alone; the claimant had not proved that the first defendant’s conduct had caused any financial loss; to apply the discount would give the claimant an unjustifiable windfall; the claimant had done quite well out of the company since the first defendant’s employment had been terminated; and there had been no clear evidence in relation to the reasons for the decline in the company’s turnover (see [77] of the judgment).

Accordingly, the first defendant would be ordered to sell his shares to the claimant for £113,321, plus interest at 2% over the banks’ base rate from the date on which the petition was issued (see [78] of the judgment).

James Stuart (instructed by Edwards Duthie) for the claimant. Graham Sinclair (instructed by Adams Harrison) for the first defendant.