An Unfortunate Break Up?

13 November 2015

The Companies Act 2006 allows a member of a company to make an unfair prejudice petition to the Courts if it is believed that the affairs of the company are being conducted in a manner which is unfairly prejudicial to a member’s interests. If the Court is satisfied that the petition is well founded it may make any appropriate order.

An Unfortunate Break Up?

The most common order is for the shares of the petitioning member to be bought by the other members of the company or, more unusually, by the company itself. A recent Court of Appeal decision demonstrated the wide powers of the Judge in these types of cases where the Appeal Judges upheld the High Court Judge’s decision which was deemed an “imaginative solution to the difficult problem of remedy”.

The 2015 case in question was Thomas v Dawson & Anor and involved the breakdown in the business relationship between shareholders and directors of a company. Mr Thomas and Ms Dawson cohabited from 1996 until they separated in 2009 and during that time were in business together which included being 50/50 shareholders and the only directors of a company which operated a residential care home. Mr Thomas was more actively engaged in the management of the company but following the breakdown in their relationship each embarked in a series of unauthorised financial withdrawals from the company. The court had provided judgment for the company’s recovery of these sums which included a sum of £28,000 repayable by Ms Dawson. Mr Thomas brought an unfair prejudicial claim on the basis that he was managing the business but Ms Dawson was refusing to consent to him receiving a salary, he was unable to access company funds and that the parties’ relationship in the quasi-partnership had broken down.

The Court of Appeal Judges upheld the judge’s first instance decision to order an option for Mr Thomas to buy Ms Dawson’s single share for £55,000. This sum took into account the judgment of £28,000 against Ms Dawson for the monies earlier extracted and a figure of £26,000 for the capitalisation of income that Ms Dawson had taken from the company. The case was significant because the judge directed that a single joint expert be appointed by the parties, rather than the more usual method of each party putting forward his own expert evidence, and that the joint expert provide an independent valuation of Ms Dawson’s share based on the value of the company’s assets, profitability and future prospects. The report found that the company was balance sheet insolvent but not unable to pay its debts as they fell due. The Judge was then left to decide what a fair price for the share was and in doing so attributed significant value to fact that Mr Thomas would continue to have the benefit of an income stream from the company and there was benefit to him of being in complete control of the company.

Mr Thomas appealed on various grounds including that the shares were worthless and should have been transferred to him at nominal value. The Appeal judges held that whilst the Judge’s solution was unusual it was well within the ambit of his discretion and that his analysis did not fall short of a proper exercise of the broad discretion to fashion a just solution to the unfair prejudice affecting both parties in relation to the company’s affairs. For legal observers it reminds us of the width of the statutory discretion afforded to the Judge when presented with an unfair prejudice petition.  

Celia Worthington, Senior Partner of Worthingtons Solicitors, Belfast office can be contacted on celia@worthingtonslaw.co.uk

 

 

 

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