El Bishlawi & Anor v Minrealm Ltd & Ors (Rev 1)

This appeal arises out of an unfair prejudice dispute, originally under the Companies Act 1985 section 459, and after 1 October 2007 under section 994 of the Companies Act 2006, between the shareholders of Minrealm Limited ("Minrealm") and Minrealm VAT Refunds Limited ("Minrealm Refunds"), which are the first and second respondents. Like many such disputes it has been prolonged, highly antagonistic and very expensive. A figure of £1.5m costs has been mentioned in one of the skeleton arguments.

Having eventually reached court for an estimated eight day trial at the end of November 2009, the parties, under the sensible encouragement of the judge, Sir Edward Evans-Lombe, settled by the second day of the trial all substantive relief, leaving outstanding only the question of costs.

This appeal, which unusually for a costs only appeal is brought with the permission of the judge, is about his decision to make no order as to the costs of the petition. The appellants, who are the shareholders and directors who instituted the unfair prejudice proceedings, claim that the judge's approach was wrong in principle in important respects and they should be awarded all their costs. It is again a sad reflection on the nature of this type of dispute that the time estimate for this issue before the court is a full day. In the event, with the benefit of clear and concise submissions of counsel, it has been possible to conclude the appeal in a shorter time.

One of the applications made during the course of the proceedings was by the appellants for an order that the three individual respondents (who are the other shareholders and directors of Minrealm and Minrealm Refunds) be committed to prison or fined for contempt of court, in breaching undertakings given to Mann J on 10 August 2006. In giving judgment dismissing the application on 13 September 2007, Kitchen J helpfully summarised the background as follows in his judgment:

Minrealm Refunds’ business, as an extension of that of Minrealm, had been to make VAT refund claims for overseas clients who had paid for supplies in respect of which VAT was recoverable.

I should also mention that RR Services Limited and Leading Services of the World Limited, mentioned in paragraphs [10] and [11] of Kitchen J's judgment, have been added as the sixth and seventh respondents.

It was in those circumstances that on 21 July 2006 the first appellant, Khaled El Bishlawi, presented a petition under section 459 against Minrealm and the three individual respondents; and Khaled El Bishlawi and the second appellant, Diaa El Bishlawi, presented a petition under section 459 against Minrealm Refunds and the three individual respondents. Those petitions were consolidated by order of His Honour Judge Mackie QC dated 23 February 2007. The consolidated petition is dated 16 March 2007 ("the consolidated petition").

The relief sought in the consolidated petition was an order:

Following the presentation of the unfair prejudice petitions, the individual respondents offered their shares in Minrealm Refunds to the appellants for 1p. This offer was accepted by the appellants in October 2006, and the transaction was completed. Thereafter, the petition in relation to Minrealm Refunds remained alive for the purpose of determining who should bear the costs of what had gone before.

A petition to wind up Minrealm was presented on 31 July 2007 by the directors of Minrealm, in reality the individual respondents, on the ground that the company was insolvent. That petition came before Morgan J on a disputed hearing on 6 and 7 November 2007. He refused to make a winding up order and adjourned it pending the appellants' interim payment application in the section 459 proceedings. In the event, the winding up petition, like the consolidated petition, came before Sir Edward Evans-Lombe on 30 November 2009.

I should mention at this point two offers that were made in the course of the proceedings prior to the trial. Paragraph 4 of the respondents' amended Answer contained an offer to purchase the appellants' shares:

Paragraph 2 of the Reply made in effect a counter-offer as follows:

So far as concerns Minrealm, by the time of the trial before the judge the answer of the individual respondents to the consolidated petition was that, as a result of discussions between the parties between August and June 2006, there was a binding contract for the sale by the appellants of their shares in the two companies to the fourth and fifth respondents, and therefore there was an agreement which entitled them to exclude the appellants from the management of the companies from that time.

The skeleton arguments on behalf of the individual respondents raised two further matters. They contended that the right of the appellants to take up again a management role could only have arisen by a contractual right. There was no such right and a mere refusal to allow re-entry was not in the circumstances of itself prejudicial; and also, by the relevant time, the appellants had become competitors of Minrealm.

The appellants' position at the trial was that the winding up petition should be dismissed and a share buy-out order made in relation to Minrealm on the consolidated petition. The appellants accepted that an appropriate buy-out could be conducted of the first appellant's shares at a valuation date of 30 September 2005.

In relation to the petition concerning Minrealm Refunds, the appellants' case was that they were entitled to their costs.

At the outset of the trial, the judge expressed the view that the individual respondents' case on the absence of unfair prejudice was bound to fail if they had no arguable case that any such binding contract as pleaded in their amended Answer had ever been reached, and an order for a buy-out of the first appellant's shares at a valuation could probably be agreed between the parties as the appropriate form of relief.

In his judgment on costs on 1 December 2009 (which was the second day of the trial) the judge described what approach he had taken on the previous day. He said:

The substance of the agreement between the appellants and the individual respondents was as follows. As to the consolidated petition, it was agreed that there should be an order by consent that the individual respondents were jointly and severally to purchase the five shares in Minrealm then held by the first appellant at a price to be agreed between them, or (in the absence of agreement) to be certified by a valuer who was to be a chartered accountant, either agreed between the parties or, in default of agreement, appointed by the court. The value of the shares was to be the undiscounted pro rata proportion of the value of Minrealm as at 30 September 2005 as a going concern and on the basis of a sale between a willing buyer and a willing seller, together with an amount equal to interest at the judgment rate from 30 September 2005 to the date when the valuer certified the shares. Completion of the sale and purchase of the shares was to take place within 28 days of the valuation being certified. It was also agreed that at the same time as completion of the sale of the shares, the appellants should in effect pay or receive payment in respect of any sum due from them to Minrealm or from Minrealm to them.

So far as concerns the winding up petition, it was agreed that the petition should be dismissed by consent with no order as to costs.

That, then, left only the question of costs, as to which the judge, having heard submissions, delivered his judgment on the second day. As I have said, his decision was that there should be no orders to costs. His reasoning was expressed relatively briefly as follows:

Orders were in due course drawn up and entered giving effect to the compromise agreed by the appellants and the individual respondents and the judge's order for the costs of the consolidated petition. Save as to costs and permission to appeal, the provisions of the order on the consolidated petition were stated to be by consent.

It is clear that the order on the consolidated petition was made pursuant to section 996 of the 2006 Act, which is as follows so far as material:

The appellants appeal from the judge's order for costs. They say that the judge should have ordered the individual respondents to pay their costs of the consolidated petition. The grounds for that contention may be summarised briefly as follows: (1) the appellants had a very strong case for substantive relief under section 495 of the 1985 Act and section 994 of the 2006 Act; (2) at the trial they obtained that relief by consent; (3) the order they obtained was premised on their being entitled to that relief as a substantive matter, so that the court had jurisdiction to order it; (4) the relief that they obtained had not been previously offered; and (5) in the circumstances it was a manifestly erroneous exercise of discretion for the judge not to make an order for costs in favour of the appellants and instead to make no order as to costs.

Mr George Bompas QC, for the appellants, has elaborated upon those grounds as follows in his written and oral submissions. He submits that the judge should have found it was clear and obvious that the appellants would have won if the issues on the consolidated petition had been fought to a conclusion. The basis for that is set out in some detail in the main part of the appellants' skeleton argument and also in the schedule to that skeleton argument. As to the alleged agreement for the sale of the appellants' shares, the judge did in fact conclude that the appellant's case that there was no such contract was a strong one. Further, if there was no such contract for the sale of the first appellant’s shares, or indeed, even if there was such a contract, so long as it remained uncompleted there could be no proper basis for the exclusion of the appellants who remained directors and one or more of whom remained shareholders, or for the diversion of Minrealm's business. So far as concerns the allegation that the exclusion of the appellants was legitimate since they had become competitors of Minrealm, there was no allegation to that effect in the respondents' statements of their case and no evidence on the point. Further, the order made by the judge disposing of the consolidated petition was premised on the appellants having satisfied the court that their case under section 994 of the 2006 Act was made out. Moreover, the judge should have concluded and taken into account that, when the individual respondents offered to purchase the appellants’ shares at a valuation, they did not offer to pay interest, nor did they offer that the valuation of the appellants’ shares should be on an undiscounted basis (that is, not taking into account that they had no more than 50% of the shares), and nor did they offer to pay the appellants’ costs. It was, Mr Bompas submitted, perfectly reasonable for the appellants in those circumstances not to have accepted the offer and to continue to trial.

For all those reasons, the appellants say that the judge exceeded the bounds of a proper exercise of discretion in making the order for costs which he did in respect of the consolidated petition. His costs order, they say, should be set aside and this court should instead order that the individual respondents pay the applicants' costs of the proceedings, to be assessed on a standard basis, if not agreed.

The individual respondents robustly oppose the appeal on several grounds. They are set out in their skeleton argument and have been elaborated upon before us by Mr Ashley Roughton, on behalf of the respondents, in his oral submissions. They say that, in addition to the defence to the consolidated petition that there was an agreement in 2006 which entitled them to exclude the appellants from the day-to-day management of Minrealm, they were in any event justified in excluding the appellants from the affairs of the company because the appellants were competitors and because the appellants wished to obtain potentially confidential information of Minrealm for their own purposes. The respondents further say that the section 459 petition should never have been issued and the proper way of dealing with the dispute was for there to have been a winding up petition by the members, which would not have been resisted by the respondents.

The individual respondents rely particularly upon repeated offers that they made for the purchase of the appellants' shares in Minrealm in order to avoid or settle the litigation. In that connection, in addition to paragraph 4 of the amended Answer which I have cited above, they draw attention to the terms of the letter from the respondents to the appellants dated 27 July 2006, which said:

Primarily, the position of the individual respondents, as developed by Mr Roughton, is that the judge was correct to take the view that, because the appellants' case that there was no agreement for sale was not obvious or absolutely clear, the judge was right to make no order as to costs.

The principles applicable to a dispute as to costs of the present kind are now well established. The extract from the 2009 White Book quoted by the judge correctly summarises the principles set out by Scott Baker J in R (Boxall) v Waltham Forest London Borough Council [2001] 4 CCL Rep 258. They are derived from the summation in paragraph [22] of Scott Baker J's judgment. They have been approved by the Court of Appeal in R v Southwark LBC ex p Kuzeva [2002] EWCA Civ 781; Brawley v Marczynski [2002] EWCA Civ 756, [2004] 4 All ER 106; and R (Scott) v London Borough of Hackney [2009] EWCA Civ 217. In the latter case, Hallett LJ, with whose judgment the other two judges agreed, repeated that the same principles apply for publicly funded proceedings for judicial review and all other civil litigation (paragraph [38]) and that the judge dealing with the issue of costs in these circumstances should make "a reasonable and proportionate attempt... to analyse the situation and determine whether an order for costs is appropriate..." and that "A judge must not be tempted too readily to adopt the fall back position of no order for costs" ([31]). That was also a point made by Longmore LJ, giving the lead judgment in Brawley. He said as follows:

I agree with the appellants that the judge appears to have fallen into an error of approach in the present case. The substantive order on the consolidated petition was made pursuant to section 996 of the 2006 Act. There was no dismissal of the consolidated petition, but rather a substantive order made by way of relief upon it. The statutory jurisdiction can only be invoked if the court is satisfied that the unfair prejudice petition is well founded. That consideration, together with the judge's conclusion that the appellants "probably have a strong case" that there never was a binding contract for the sale of the shares, meant that, at least as a starting point, the appellants had a sound basis for claiming the costs of the consolidated petition: comp CPR 44.3(2)(a) I do not accept Mr Roughton's submission that the judge could only have ordered costs in favour of the appellants if they had established a case that was certain to succeed.

The factor that the judge weighed against an order in the appellants' favour was that he could not rule out the "possibility" that individual respondents "might have successfully resisted the claim in the petition that there had been unfairly prejudicial conduct by the Majority Directors against the Minority Directors". He did not amplify the reason for that possibility, and the natural assumption is that he was merely saying that the "probability" of the appellants' success on the binding agreement for sale point was not a "certainty". If that was what he meant, then, for the reasons I have already given, that would not, in my judgment, justify making no order for costs in favour of the appellants. If, on the other hand, he was taking account of the arguments of the individual respondents that they were entitled to exclude the appellants because the appellants were competitors or for some other reason, then it is clear in my judgment that those arguments were bound or were almost bound to fail.

There was no evidence as to competition by the appellants at the time that they sought to re-engage in the management of Minrealm in June 2006; and, if there was no agreement for the sale of the shares, there could be no proper basis for their exclusion for any other reason, bearing in mind that the appellants remained, and, as I understand it, still remain directors. It is clear from the correspondence, moreover, that the individual respondents were determined to exclude the appellants from participating as a matter of general principle and not related to any specific request for information or access to any particular document or computers.

For those reasons I would set aside the order of the judge. We are invited to substitute our own discretion. For my part, I do not consider that it would be proportionate or, indeed, right in principle to examine in detail the arguments for and against the existence of a binding contract for sale. The judge, who had the benefit of pre-reading for the trial and the submissions made on the first day of trial, together with subsequent submissions of counsel, formed the view that there was a strong case that the appellants would win on that issue. There is no reason, in my judgment, for the Court of Appeal to disturb that finding.

I do not consider, moreover, that it was unreasonable for the appellants to have presented unfair prejudice petitions rather than a winding up petition of Minrealm or Minrealm Refunds. The ultimate order by consent in effect verified they were reasonable in wishing to have their shares purchased at a valuation on a going concern basis.

On the other hand, however, I think it is right to bear in mind, in deciding what order for costs should be made, that the individual respondents made clear in their Answer of 8 July 2007 to the consolidated petition that they were prepared to purchase the first appellant’s shares at a valuation, in default of agreement to be determined by a valuer appointed by the court, either as at the date of the petition (21 July 2006) or 30 September 2005. The Reply expressed a willingness of the appellants to sell at the valuation, but had various qualifications. In the event, the ultimate order by consent was in substance that which was offered in the Answer, namely for a purchase at a value as at 30 September 2005, the value to be fixed by a valuer appointed by the court, if not agreed. The order, it is true, also gave interest on the price and was on an undiscounted basis, but I do not regard the absence of those matters in the individual respondents' Answer as a deliberate omission or a real stumbling block. Those points were never put in issue by the appellants. In any event, the question of interest was not raised until the Reply (see Profinance Trust SA v Gladstone [2001] EWCA Civ 1031, [2002] 1 WLR 1024), and a valuation on an undiscounted basis was never expressly demanded.

It is clear from the offers in the Answer and the Reply, and from what was achieved by agreement on the first day of the trial and the actual orders by consent that were made, that litigation after the end of 2007 achieved nothing in terms of substantive relief that could not have been and should have been achieved then and was merely a dispute as to costs, for which the parties were prepared to engage in an eight-day trial.

Mr Bompas submitted that it is wrong in principle to penalise the appellants for the failure to agree to take a course in 2007, which was in fact taken on the first and second days of the trial in 2009, in the absence of an offer in 2007 by the respondents on precisely the same terms as the consent order on the consolidated petition. Clearly, each case turns on its own facts. In the present case, it is perfectly clear that nothing was achieved by two years of further litigation after 2007, save the continuation of a dispute as to costs, and that, but for that issue of costs, the parties could and should have settled on the same terms that were eventually achieved by agreement on the first or second day of the trial. This is not a case where the opportunity for settlement only arose very shortly before the trial.

Making due allowance, therefore, for a period of time after the exchange of the offers in the Answer and the Reply for reaching agreement between the parties and bringing the matter before the court, I would order that the appellants have their costs to the end of 2007 but that there be no order for costs thereafter.

I agree and have nothing useful to add.

I also agree.