City Branch Group Ltd, Re Companies Act 1985

LORD JUSTICE KEENE: I will ask Sir Martin Nourse to give the first judgment.

SIR MARTIN NOURSE: Section 459(1) of the Companies Act 1985 provides:

The question arises on an application by the holders of 50 per cent of the shares in a company called Citybranch Group Limited ("the company") to strike out a petition presented under section 459 by the holders of the remaining 50 per cent of the shares. On 11 December 2003 His Honour Judge Weeks QC, sitting as a judge of the Chancery Division, declined to strike out the petition and, with his leave, the respondents now appeal to this court.

The petitioners (collectively "the Gross family") are Raymond Malcolm Victor Gross ("Mr Gross"), his brother Gerald Gross and Mr Gross' s children, Adam Gross and Laura Pittal. They hold 25 per cent, 14.5 per cent, 5.25 per cent and 5.25 per cent of the shares respectively. The respondents (collectively "the Rackind family") are Peter Elliott Rackind ("Mr Rackind") and his children, Julia Pactor and Robert Rackind, who hold 39.5 per cent, 5.25 per cent and 5.25 per cent of the shares respectively. The company was incorporated on 5 October 2001 and Mr Gross and Mr Rackind have been its only directors.

The company has two wholly owned subsidiaries, Citybranch Limited ("Citybranch") and Blaneland Limited, ("Blaneland"). Citybranch was incorporated on 5 October 1982 and since 28 April 2000 its directors have been Mr Gross, Mr Gerald Gross and Mr Peter Rackind. Blaneland was incorporated on 27 April 1999 and its only directors have been Mr Rackind and Mr Gross. Before 11 December 2001, the shares in Citybranch and Blaneland were held as to 50 per cent each by the Gross family and the Rackind family. On that date they exchanged their shares in Citybranch and Blaneland for shares in the company, whereupon Citybranch and Blaneland became wholly owned subsidiaries of the company. Citybranch has a wholly owned subsidiary, Manchester Syndicates Limited, which was incorporated on 1 September 1989. Mr Rackind and Mr Gross were the directors of Manchester Syndicates Limited until 20 June 2003 when Mr Gerald Gross was appointed as an additional director. Manchester Syndicates Limited plays no part in the subsequent history of the case.

The business of the group has been conducted through the three subsidiaries. It consists of investment in property in the north or north west of England. It is common ground that all four companies were quasi partnership companies based on a quasi partnership between Mr Rackind and Mr Gross and/or Mr Gerald Gross, and that that state of affairs continued until July 2003, when the personal relationship of trust and confidence which formed the basis of the quasi partnership irrevocably broke down. On 14 July 2003 the Rackind family presented a petition to wind up the company under section 122(1)(g) of the Insolvency Act 1986, on the ground that it was just and equitable to do so: cf Re Westbourne Galleries Limited [1973] AC 360. The Gross family did not want the company to be wound up and countered by presenting their section 459 petition on 23 August 2003.

The petition claims an order regulating the future management of the affairs of the company and the subsidiaries, an order that the Rackind family, alternatively Mr Rackind alone, should sell their or his shares to Mr Gross and ancillary relief. Mr Oliver QC, for the Rackind family, has submitted that the relief sought is very unusual and in that he may be right. However, he has been unable to persuade me that that is a relevant consideration for today's purposes.

No evidence has been filed and since this is a strike out application we must accept the facts as stated in the petition. They include the following. The purpose of the quasi partnership was to generate profits and capital value in the long term by the acquisition of property with investment potential and the enhancement and realisation of the value in that property in the long term. The properties held by the group were acquired and held in accordance with that purpose; all had or have investment potential and value which would be best realised by the group over the long term.

In paragraph 59 of the petition the allegedly unfairly prejudicial conduct is summarised in five subparagraphs. In each case it is said, first, that the conduct was the conduct of Mr Rackind; secondly, that the conduct was both individually and collectively conduct of the affairs of the company (and/or one or more of its subsidiaries which amounted also to conduct of the affairs of the company); thirdly, that the conduct was unfairly prejudicial to the interests of the Gross family and each of them as members of the company.

I will refer to each of the five allegations in turn, in three cases supplementing them by reference to the more detailed allegations made earlier in the petition. First, it is said that Mr Rackind caused, or substantially caused, an irrevocable breakdown in the relationship of trust and confidence between himself and Mr Gross and/or Mr Gerald Gross which formed the basis of their quasi partnership association through the company and the other companies in the group. Secondly, it is said that Mr Rackind threatened a winding up of the company by the court in order to put pressure on Mr Gross and the other Gross family shareholders to agree to Mr Rackind's demands for control or a purchase of the Gross family's shares, despite the fact that there was (and remains) no basis for the company being wound up on the petition of Mr Rackind. Thirdly, it is said that Mr Rackind breached his fiduciary duties owed to the company and/or to Blaneland by refusing to agree to and/or obstructing attempts to finance a payment by Blaneland of corporation tax due from it, in order to put pressure on Mr Gross and the other Gross family shareholders to agree to Mr Rackind's demands for control or a purchase of the Gross family's shares.

In relation to the third allegation, paragraphs 37 and 38 identify the claim for corporation tax due from Blaneland as being originally made in January 2002. In November 2002 it was quantified by the Inland Revenue, after negotiations, at £434,707 plus interest of £31,837. At that stage the Inland Revenue said that they would accept an interim payment of £100,000 by 29 November 2002 and payment of the balance by 31 January 2003. But it is alleged that at a meeting between Mr Rackind and Mr Gross on 25 November 2002 Mr Rackind threatened that, if Mr Gross did not agree to Mr Rackind's demands for control of the company or a purchase of the Gross family shares, Mr Rackind would allow Blaneland to be put into liquidation by the Inland Revenue and would himself force the company into liquidation.

In the result, the Inland Revenue's offer was not accepted. On 6 January 2003 they obtained judgment against Blaneland in the sum of £471,059 in respect of the unpaid corporation tax and interest. On 20 February 2003 Mr Rackind finally agreed that Blaneland should accept a facility offered by the Bank of Scotland in order to allow that liability to be discharged. There has been some discussion as to whether we should proceed on the assumption that the cost incurred by Blaneland in relation to that claim was greater than it would have been if the Inland Revenue's offer of November 2002 had been accepted. We certainly cannot proceed on an assumption that the cost was greater. Conversely, it appears to be a real possibility that it was. On that footing the third allegation can be treated as an allegation of unfairly prejudicial conduct by Mr Rackind of the affairs of Blaneland.

The fourth allegation made in paragraph 59 is that Mr Rackind continued to use Citybranch's office at 8, The Square, Hale Barnes and continued to draw a consultancy fee, or a full consultancy fee, in each case despite not working full-time for the group. In relation to that allegation, it is said in paragraphs 39 and 40 that, in about February 2000, Mr Gross expressly agreed that Mr Rackind should be allowed to use the office rent free on the expressly agreed basis that he would work full-time for Citybranch and its related companies. It is also said that Mr Rackind has been paid, on the same basis, a consultancy fee by Citybranch for his work for the group, which was initially £40,000 per annum and has since risen to £60,000 per annum, in each case plus expenses. It is said that in fact Mr Rackind has spent little of his time on the business of the group, contrary to his express agreement with Mr Gross. Again, that conduct is capable of constituting unfairly prejudicial conduct of the affairs of Citybranch.

The fifth allegation is that Mr Rackind dishonestly or improperly appropriated the funds of Citybranch and attempted to hide that fact. That is the most serious allegation against Mr Rackind. It is dealt with at some length in paragraphs 41 to 48. In essence it is an allegation of a conspiracy between Mr Rackind and a firm of surveyors acting for Citybranch to render false invoices to that company resulting in the unlawful extraction by Mr Rackind of £8,320 plus VAT of Citybranch's monies. It was the discovery by Mr Gross of that matter in May and June 2003 which finally led to the irrevocable breakdown in the relationship of trust and confidence. Again, that allegation is capable of being an allegation of unfairly prejudicial conduct of the affairs of Citybranch.

The principal submission of Mr Oliver and Miss Nicholson, for the Rackind family, is that none of the five allegations is capable in law of constituting an allegation as to the conduct of the affairs of the company, as opposed to the affairs of one or more of its subsidiaries. Accordingly they say that section 459 cannot be invoked in relation to the company. They rely on what they claim is the plain wording of the section, on what they say is the principle of the thing and also on the principle of Salamon v Salamon.

In regard to the first and second allegations, it has become apparent that that is only their fall-back submission. They submit that the matters complained of, causing an irrevocable breakdown in the relationship of trust and confidence and threatening the winding up of the company in order to put pressure on the Gross family, were not conduct of the affairs of the company, or indeed of any company, but conduct of the affairs of the shareholders. Here I am entirely content to adopt the approach of Judge Weeks. As to the first allegation he said:

In dealing with the second allegation, which he described as more questionable, the judge said:

Both those points were essentially matters for the judgment or discretion of the judge. Despite Mr Oliver's strenuous argument, particularly in relation to the second allegation, no ground for interfering with the judge's decision on either point has been made out. In relation to the second allegation, Mr Oliver has submitted that the certainty of its being raised by way of defence in the winding up petition is not enough for it to found a positive cause of action in the section 459 petition. I see the force of that submission, but I repeat that it was a question essentially for the judge. I doubt whether it will make the slightest difference in the end because one petition is unlikely to be settled without the other. If, however, they both come to trial, the point will be reduced to one of mere technicality.

Before turning to their principal submission, I will deal with some subsidiary submissions made by Mr Oliver and Miss Nicholson. They submit that, even if the conduct complained of in the third, fourth and fifth allegations did constitute conduct of the company's affairs, such conduct was incapable of prejudicing the Gross family's interests in their capacity as members of the company. The short answer to that submission is that the conduct complained of is certainly capable of prejudicing the interests of the subsidiary concerned, on which footing there will be a risk of a diminution in value of the company's investment in the subsidiary, which in turn will mean actual or potential prejudice to the interests of the shareholders in the company.

The Rackind family further submit that in relation to the fifth allegation, Mr Rackind's false invoicing in Citybranch, his conduct was "dehors" that company, an expression used by Harman J in one of the authorities cited. They also raise a new point, or at any rate one not dealt with by the judge, to the effect that in relation to the Citybranch allegations, allegations (4) and (5), the Gross family themselves, by virtue of their majority on the board of that company, have it in their power to remedy the consequences of the acts complained of by means other than a petition under section 459. The factual premise of that second submission is questioned by Mr Potts QC and Mr Thompson in their skeleton argument on behalf of the Gross family. Each of these two submissions appears to be one raising an issue which can only be satisfactorily determined at a trial.

I now come to the main question. Does the court have power to make an order under section 459 in relation to a holding company where, first, it is the affairs of its wholly owned subsidiary that are being or have been conducted in an unfairly prejudicial manner and, secondly, the directors of the holding company are also directors of the subsidiary? I emphasise that here Mr Gross and Mr Rackind are the only directors of the company and of Blaneland and are also directors of Citybranch, of which Mr Gerald Gross is an additional director.

There is no English authority which directly answers this question. The nearest case appears to be Nicholas v Soundcraft Electronics Limited [1993] BCLC 360, where the company in respect of which the section 459 petition was presented was a 75 per cent subsidiary of Soundcraft Electronics Limited ("Electronics"), the remaining 25 per cent of the shares being held equally by the plaintiff, Mr Nicholas, and another. It was agreed that Electronics would support the company until it was financially viable, though the extent of the support was not discussed or defined. In any event, Electronics withheld support which it ought to have given to the company. It was held that, since Electronics exercised detailed control over the affairs of the company and since, when it withheld payments to the company, it was doing so as part of its general control over the company's affairs, the non-payment of what it owed did relate to the manner in which the affairs of the company were conducted.

At page 364 Fox LJ said:

That case was the converse of the present in that the holding company was held to have been conducting the affairs of the subsidiary. However, I agree with Judge Weeks that it shows that conduct of the affairs of one company can also be conduct of the affairs of another. Mr Oliver submits that the circumstances there were very unusual in that the holding company was actually carrying on the subsidiary's business. He adds that it is only in such exceptional circumstances that the rationale of that decision can apply. It cannot be said, he submits, that Blaneland or Citybranch carried on the company's business here.

The observations of Ralph Gibson LJ in Nicholas v Soundcraft Electronics Limited may have been an echo of those made in the Divisional Court of the Queen's Bench Division presided over by Lord Parker CJ, in R v Board of Trade ex p St Martins Preserving Company Limited [1965] 1 QB 603. In that case a company sought an order of mandamus against the Board of Trade for the appointment of an inspector to investigate the affairs of the company under what is now section 431 of the 1985 Act. The question was whether the affairs of the company ceased to be its affairs on the appointment of a receiver and manager. It was held that they did not. At page 613, Phillimore J, who gave the leading judgment, said:

The observations of Phillimore J demonstrate that the expression "the affairs of the company" is one of the widest import which can include the affairs of a subsidiary. Equally, I would hold that the affairs of a subsidiary can also be the affairs of its holding company, especially where, as here, the directors of the holding company, which necessarily controls the affairs of the subsidiary, also represent a majority of the directors of the subsidiary. (In the case of Blaneland they are identical).

In support of the contrary view, Mr Oliver and Miss Nicholson have referred us to a number of other authorities which do not take the matter significantly further. I need only refer to Re A Company [1987] BCLC 141, a decision of Harman J, where he said at page 144:

The view I have formed is consistent with two Australian authorities to which Judge Weeks felt it was unnecessary for him to be referred. The first is Re Norvabron Pty Ltd (No 2) (1986) 11 ACLR 279. Norvabron was a holding company which had a wholly owned subsidiary called Transfield (Qld). The affairs of whose conduct complaint was made under a provision equivalent to section 459 were the affairs of Transfield (Qld). At page 292 Derrington J, sitting in the Supreme Court of Queensland, said:

The decision in Norvabron was followed and applied by Powell J, sitting in the Equity Division of the Supreme Court of New South Wales, in Re Dernacourt Investments Pty Ltd (1990) 2 ACSR 553, where the facts were similar to those in Norvabron. It was held that the conduct of the affairs of the holding company towards a subsidiary may constitute the conduct of the affairs of the subsidiary and vice versa. At page 556 Powell J said:

Mr Oliver and Miss Nicholson have relied on three other Australian authorities. In their supplemental skeleton argument they say that what they call the liberal approach exemplified in Norvabron and articulated in Dernacourt has been considered and has been consistently rejected. In my view that is putting it far too high. Indeed, I do not think that in his oral submissions Mr Oliver has put it that high. What he has really said is that the other three decisions show a different and preferable approach to the construction of provisions such as section 459 which is inconsistent with Norvabron and Dernacourt.

That view of the matter is rejected by Mr Potts and Mr Thompson in their supplemental skeleton argument. Without dealing with any of the other points they make, I would accept their argument for the following reasons. First, the earliest of the decisions relied on, Morgan v 45 Flers Avenue Pty Ltd & Anor (1987) 5 ACLC 222, was decided before any of the other cases, including Norvabron. Secondly, Morgan was not referred to in Norvabron. Although it was referred to in Dernacourt, it does not appear to have been referred to on the point with which we are concerned. Thirdly, although Morgan was referred to in the second case relied on by Mr Oliver and Miss Nicholson Reid v Bagot Well Pastoral Co Pty Ltd [1993] 12 ACSR 197, neither Norvabron nor Dernacourt was there referred to. Fourthly, in the third case, Michael Guerinoni v Argyle Concrete & Quarry Supplies Pty Ltd (22 April 1999, unreported), Master Sanderson, sitting in the Supreme Court of Western Australia, although he referred to Morgan and Norvabron, did not refer to Dernacourt. We are told that his decision was affirmed on appeal, but that the particular point was not referred to in the judgment.

In my judgment none of the three further authorities can be said to diminish the persuasive value of the decisions in Norvabron and Dernacourt. Those were considered judgments of judges of the Supreme Courts of Queensland and New South Wales respectively and they are directly in point. I would follow them accordingly.

For these reasons, I would decide the main question, like the subsidiary questions, in favour of the Gross family. In conclusion I refer to the decisive passage in Judge Weeks's judgment:

I must also deal with the Rackind family's appeal against the judge's decision to permit the section 459 petition to be amended. That was a decision entirely within the discretion of the judge and I would affirm it.

I would dismiss this appeal.

LORD JUSTICE JACOB: I agree.

LORD JUSTICE KEENE: I also agree.