Hale v Waldock

Judgment

Mr Justice Mann :

Introduction

The Background and the Facts

11. There are, however, other significant matters which are not agreed to have happened and in respect of which I have to make findings. They are as follows:

below, I think that he was keener on it than he now professes to have been, and I think it likely that he made this remark at the time.

12. There is one more important point about this meeting of 5^th October, namely that it came at a time when the partners were progressing the incorporation of the business by its being transferred into the already existing company of the same name. The intention to incorporate the business had been in the background for several years. It was felt it should be done when the time was right, and that time had come. Mr Waldock considered that the former tax advantages of being in partnership had gone. Both partners knew that steps were in train to incorporate within the near future (though as it turned out it took longer than they had intended). All this was known and intended at the time of the meeting of 5^th October. While the only explicit reference to trading through a company was Mr Hale’s remark at the end of the meeting, it is quite clear that the arrangements made at the meeting were intended to operate in the context of both trading vehicles, ie both the partnership and the company. No change was anticipated once the business was moved into the company.

13. In this context it is worth dealing with another material point of factual dispute between the parties. Mr Hale maintained that he was no more enthusiastic on incorporation than the other partners had been and that as far as he was concerned the point of doing it was tax, not the avoidance of personal liability. He said that he was told in 2000 by Mr Waldock and Miss Lewis that there was merit from a tax point of view in incorporating the business. Mr Waldock, supported by Mr Batcheler and Miss Lewis, said that Mr Hale was keener than either of the other partners were, and he became even keener and more anxious than Mr Waldock through what turned out to be the last couple of years of the partnership’s trading. I accept this evidence. Their evidence was credible and convincing on the point; I did not find Mr Hale so convincing. It is also entirely logical and plausible that Mr Hale should become keener on incorporation as he became more removed from the business and as the liabilities of the business increased (as they did – see below). It was a way of limiting his liability for a business over which he had ceded a very large degree of control. I find that Mr Hale was anxious to incorporate in 2000 and 2001, and that a major part of his motivation was the avoidance of personal liability.

14. The final chain of events which led to the incorporation eventually being achieved started in January 2000 when there was a meeting about it between the accountants and Miss Lewis, who was charged with the responsibility of bringing incorporation about. No-one is sure whether Mr Hale attended that meeting. I think it likely that he did not. It was thought that it was time to start the process. Miss Lewis told me, and I accept, that she discussed this with Mr Hale and Mr Waldock and they agreed to go ahead with it. Two months later there was a meeting with the partnership’s bankers. Discussions then took place over a period of months with the company’s bankers (Barclays) and with a company known as Transamerica Commercial Finance Ltd (“Transamerica”), which had entered into an agreement for financing the partnership’s stock and which had provided a very significant facility to the partnership. The Transamerica facility limit was £1.2m in mid-2000, but the liability in fact rose to £1.6m in mid-2000. Transamerica expressed concern to Miss Lewis about this, and asked first for charges over the partners’ homes (which she sought to discourage) or alternatively for a statement of assets and liabilities from each partner. It knew of the intention to incorporate and indicated that the latter requirement would suffice until the incorporation took place. On 11^th July Miss Lewis met a Transamerica representative and they discussed what would happen on incorporation. There was discussion of personal guarantees, but Miss Lewis pointed out that the purpose of incorporation was to avoid personal liability, and the representative indicated that the alternative would have to be for the company to have a substantial share capital, probably in excess of £1m.

15. Miss Lewis told me that she explained the requirements of Transamerica to Mr Hale in August 2000, on the occasion on which she gave him a blank form of statement of assets to fill in. They discussed why Transamerica would need a guarantee if the partners’ capital accounts went in as directors’ loans and they discussed the difference between a director’s loan account and what she described in her witness statement as a “capital account” with the company, which did not seem to her (and him) to be too different from a partner’s capital account. In her evidence Miss Lewis demonstrated a degree of uncertainty as to concepts of “capital” accounts in companies and partnerships, and particularly in relation to the former (which she actually admitted). However, I am satisfied that she understood that getting money out of the capital account of a company (which in this context means the share capital) was not easy, and might not be possible, and I think that she conveyed this understanding to Mr Hale. She went on to suggest that he talk to Claire Carter for clarification (he did not in fact do so). Mr Hale could not recall this conversation. Having heard Miss Lewis, I consider that she is correct in her evidence. It is significant because it demonstrates the first time at which Mr Hale was aware, or made aware, of a requirement that would involve his locking up his capital in the company, something which he admitted he was aware he was doing.

16. The liability to Transamerica increased throughout this period, and it rose to £2m in August 2000. According to Miss Lewis, she was a party to a conversation in that month in which Mrs Carter advised a transfer to the company as soon as possible. They were to aim to achieve this on 1^st January (a target they ultimately missed by several months). On 14^th November 2000 Mr Hale, Mr Waldock and Miss Lewis attended a meeting at the bank in relation to the transfer of the partnership accounts into the company. They signed the necessary account opening forms there. There was discussion as to whether directors’ guarantees would be required (from Mr Hale and Mr Waldock) – the manager thought it likely that they would, though that depended on the amount of the issued share capital. Mr Hale remembered signing bank documents, but did not remember this meeting. He admitted he was not in a position to contradict Miss Lewis in her account of it, and I find that that account (which I have summarised) was correct. From this material Mr Hale would have been becoming increasingly aware of the significance of a substantial share capital.

17. The arrangements to incorporate carried on at a slow pace. The process of starting to write to suppliers to tell them of the proposed change of business entity started in November 2000. The 1st January 2001 start date was missed, and the partnership carried on trading during the first half of 2001. So far as drawings were concerned, they were increased when in about January 2001 Mr Hale and Mr Waldock agreed that the latter’s “salary”, and the former’s drawing on account of profits, would increase to £7,000. A bank mandate had been signed before Christmas 2000, but as things happened the transfer was still some way off. It seems that by mid-April terms had been agreed between Transamerica to allow the company to take over or to acquire the stocking facility afforded to the partnership, and terms were offered to the directors of the company by a letter from Transamerica dated 11^th April 2001. It offered an overall credit limit of £1.3m, subject to certain conditions which included the following:

“Confirmation via Companies House records in respect of the share capital injection of £600,000 [Transamerica to obtain]

Written confirmation that existing bank loans and overdraft have been agreed and rolled-over to Metropolis Motorcycles Ltd.”

It also contained two “Financial covenants” as follows:

“Directors Drawings [inclusive of remuneration and dividends] not to exceed £300,000 or 75% of the aggregate sum of net profit pre-tax & Drawings [whichever the lower] in any one fiscal year.

The ratio of Shareholder Equity + Retained profit less Intangible Assets [Goodwill/Other Debtors inc loans to directors/Pre-Payments/leasehold improvements as defined at Transamerica’s entire discretion to Total Liabilities is not to exceed 6.4:1.

Transamerica reserve the right to withdrawn of reduce facilities on the event that any Financial or Operating Covenant is breached.”

(In each of those extracts the square brackets and the words in them are in the original documents.) By the time of the first of those documents Transamerica had agreed to accept a substantial share capital injection by the shareholder/directors in place of guarantees. Those terms were repeated verbatim in a confirmatory letter of 2^nd July 2001. Miss Lewis was negotiating with the bank during the same period. The bank’s view had originally been to require personal guarantees from the directors, and a charge on Mr Waldock’s home (Mr Hale did not have one to charge at this point), but after Transamerica agreed not to press for that security and the bank took the same view. Accordingly, it was agreed with the lenders that the paid up share capital of the company would be £600,000.

18. While this was going on Miss Lewis told Mr Hale what was happening. As a result of the arrangement of October 2000 he was not attending the partnership premises to work, but he did go there on occasions to have his motorcycle serviced or repaired, as the partnership’s computerised records show, and Miss Lewis says that on one or more of these occasions she kept him informed of what was going on with the financial institutions. In particular, on about 3^rd May 2001 she told him that the company would start trading on 1^st June and that the partnership capital accounts would be transferred to the company as directors’ loan accounts, and in due course a portion of these would be converted at a later date to the required share capital, but she was unsure of some of the aspects of the manner in which this would be done. The general thrust of Mr Hale’s evidence in relation to this is that he could not recollect being told of these things. I am satisfied that, although the meetings were casual and informal, during this period Miss Lewis informed Mr Hale of the resolution of the discussions with Transamerica and with the bank about share capital. If Mr Hale cannot recollect being told about all this, then it is because he has forgotten. I think it likely that he was happy to leave all this sort of thing to Mr Waldock and Miss Lewis, and since it was consistent with his desire to incorporate and to remove his personal liability for a business from which he had withdrawn (in terms of management and control) he was entirely content and did not need to focus on them because these matters coincided with what he wanted.

19. Trading through the company actually started on 1^st June 2001, but the formal documents and steps necessary to transfer the business and its assets into the company, and to bring about the necessary share capital increase from £100 to £600,000, were not executed and taken for some time. It was apparently felt that before the latter could take place fully it was necessary to finalise the partnership accounts for the period ending 31^st May 2001, and this took some time. The relevant documents were executed in October and November 2001, and there is a dispute as to how execution came about. Before dealing with that dispute it will be useful to describe what those documents were and who signed them, so that in the narrative which follows they can be referred to in a way which makes sense. The documents which were intended to bring about or record the transfer and the proper constitution of the company were as follows. Some of them are or purport to be minutes of meetings. In many cases it is common ground that there was no actual meeting.

(i) Minutes of a meeting of the board of directors dated 1^st May 2001. This records the production of a draft agreement for the acquisition of the partnership business and purports to authorise Mr Waldock to execute the agreement on behalf of the company. It is signed by Mr Waldock as purported chairman. No such meeting took place. Mr Carter said she originated this document. On any footing its dating is wildly inaccurate. This did not reflect the content of any actual meeting.

(ii) Minutes of a meeting of directors dated 1^st May 2001. This notes that following the acquisition of the business of the partnership the goodwill was retained by the vendors. The partners offered the goodwill to the company for £184,500, the offer was considered by the directors and it was accepted verbally on behalf of the company by Mr Waldock. This did not reflect the contents of any actual meeting. It is signed by Mr Waldock as purported chairman.

(iii) An undated document signed by Mr Waldock and Mr Hale in their personal capacities, and by Mr Waldock for the company, claiming gift holdover relief in respect of a gift of the goodwill of the partnership for nil consideration. This is said to reflect part of the goodwill not comprised in the sale referred to in other documents.

(iv) A consent to short notice of an EGM of the company to be held on 18^th September 2001, dated 31^st August 2001 (which it is accepted is not the correct date) and signed by Mr Waldock and Mr Hale.

(v) Notice of the EGM referred to in the document at (iv) above giving notice that resolutions would be proposed to increase the share capital from £100 to £1m. It is dated 31^st August 2001 and signed by Mr Waldock.

(vi) A minute of the EGM referred to in the preceding two documents, increasing the share capital to £1m. The meeting was purportedly held on 18^th September 2001, with Mr Waldock and Mr Hale present, and Mrs Carter in attendance. It is signed by Mr Waldock as Chairperson.

(vii) Company resolution recording the resolution just referred to. It is signed by Mr Waldock and bears a Companies House bar code dated 19^th October 2001.

(viii) Minutes of a meeting of the directors of the company purportedly held on 10^th October 2001, with Mr Waldock and Mr Hale present and Mrs Carter in attendance. It records the approval of the minutes of the previous meeting, and records agreement:

“that the company would issue the following £1 ordinary shares as a capitalisation of the Directors Loan Accounts

Mr I Waldock 347,942

Mr A Hale 251,958”

It is signed by both Mr Waldock and Mr Hale.

(ix) A Companies House form 88(2) recording the allotment of shares in the amounts referred to in the above minute of 18^th September. It is signed by Mr Waldock and is undated.

(x) A Companies House form 88(3) (particulars of a contract relating to shares allotted as fully or partly paid up otherwise than in cash), relating to the allotment. As a return it is signed by Mr Waldock on an unspecified date. Below that there is a box containing a certificate of value, with the amount not filled in but signed by both Mr Waldock and Mr Hale, again on an unspecified date. The date of the signing of this form, and the circumstances in which it was signed, are highly contentious issues.

(xi) An undated Sale Agreement in respect of partnership assets, signed by Mr Waldock and Mr Hale. Mr Waldock has signed in the presence of Mr Kieran, a solicitor who had acted for the partnership over the years and who was well known to him. Mr Hale signed in the presence of Miss Lewis. It assigns the business as a going concern (apart from Goodwill, debtors and a freehold property from which it traded), plant, stock and cash. The partnership liabilities were assumed by the company. The purchase price was the value of the assets as they appeared in the accounts. The transfer date was 1^st June 2001, but it is common ground that this document was signed much later than that (precisely when is again disputed).

20. I can now return to the narrative. Mr Waldock and Mr Hale have been the two directors of the company at all material times since it started trading. At the beginning of October 2001 draft figures for the partnership for its last period (to May 31^st 2001) were prepared by Mrs Carter. She produced a trial balance on 3^rd October but did not give it to Mr Waldock. In a witness statement served late in the trial (in order to deal with this point, itself responding to a late amendment by Mr Hale) Mr Waldock says that he did not see the figures prepared by Mrs Carter until 21^st November. He was not cross-examined on that evidence and I accept it. However, I think that he probably saw some figures. He told me that he did know that the draft accounts showed a sharp drop in profitability for that period because Miss Lewis told him towards the end of the month when she was working on payroll matters. He was expecting a drop in profits, but the amount came as a shock to him. He told me he believed that the profit figure was less than £50,000. In the preceding full year (to 31^st October 2000) it had been £436,000. As a result he realised he would have to reduce overheads and told Miss Lewis to reduce his monthly salary to £5,000 (from £7,000). This took effect at the end of October. It would be a curious state of affairs had he really not seen any figures in this context. At one stage in his evidence he suggested that he might have seen some management figures, but they have not been produced. I consider it more plausible that he did see some figures – I do not believe that he would have received this bad news (bad enough for him to take an immediate and voluntary cut in salary), and not be so concerned as to want to see some figures at that point himself. If he did not see them then he must have waited about a month, until a meeting which took place on 21st November with Mrs Carter. That sort of delay is not particularly credible in the circumstances.

21. It is at about this time that Mr Waldock says that some of the key documents were signed. In particular, Mr Waldock says the signed minute purportedly dated 10^th October was signed by both him and Mr Hale, along with the form 88(3), on the same occasion and at a meeting in October 2001 (in fact on 15^th October, not the 10^th). No-one suggested that the minute was accurate in recording the presence of Mrs Carter, and she was clearly not there. Mr Hale’s evidence was that these documents were signed in November, when he signed the agreements for the transfer of assets and goodwill. Miss Lewis supports Mr Waldock’s evidence by saying that on the 19^th November only the transfer documents were signed; the company documents had already been signed.

22. I find that Mr Waldock’s recollection about this is to be preferred. It is supported by contemporaneous documentation. On 10^th October Mrs Carter sent a letter to Mr Waldock stating that it enclosed “various forms in respect of the increase in Share Capital to 1,000,000 Ordinary Shares of £1 each”, and inviting them to be signed and returned “for appropriate filing”. Her retained copy has a manuscript addition in her handwriting on the right hand side, opposite the signature, of the words “88/2”, above “88/3” with “Encs” written by the side of the latter entry. The retained copy has three copy documents stapled to it – unsigned versions of the documents referred to at (vi), (vii) and (viii) above. Mrs Carter thought that the manuscript additions that I have described were added after signature, but she agreed that they suggested that forms 88(2) and 88(3) were included with that letter. I find that she is correct about that – I do not think that there is any other sensible explanation of the manuscript addition. I also find that the three stapled documents were also sent with the letter. Those documents would therefore have been received on that day (if couriered) or the next if sent by post. There is no documentary record of their receipt back into the hands of the accountants, but there is a copy of a letter from Mrs Carter to Mr Reynolds of Transamerica dated 18th October enclosing a copy of the forms 88(2) and 88(3). They were presumably sent to Transamerica to verify that the capitalisation which it insisted on had taken place. It would logically follow, and I find, that those forms were signed by that date, and the probabilities are that the other documents enclosed with Mrs Carter’s letter were also signed then. In those circumstances I accept Mr Waldock’s evidence that they were signed at a meeting which he put at on or about 15^th October. They were certainly not signed a month later, as suggested by Mr Hale.

23. Mr Waldock’s first witness statement gives some evidence as to what happened at the meeting when the signing took place. His account of this meeting has to be treated with some caution, because it starts by saying that the finalised partnership accounts were then available so they knew the exact closing figures. He did not maintain that line in his subsequent evidence – his third witness statement said that he did not have full figures until over a month later. However, despite that, I find that there is truth in some of the rest of his account. He says that Mr Hale did not understand the amounts of the share capital shown on the documents, and he (Mr Waldock) explained that the bank and Transamerica wanted an increase in the share capital to £600,000 and if Mr Hale wanted 42% of the company, he had to have 42% of the shares, and would have to pay for this from his partnership capital account, which was now to be shown as a director’s loan account. Mr Waldock said that he explained that Mr Hale would be able to access any surplus moneys in his loan account, subject to cashflow, and that his share capital was locked in. The only alternative was to give a guarantee. Mr Hale appeared reluctant, so Mr Waldock asked him if he wanted to own 42% of company or to own less and invest less. Mr Hale is said to have understood and to have said that he wanted to own 42%, so he signed the forms. I do not think that all this detail is accurate. In particular I do not think it likely that Mr Waldock explained to Mr Hale that his money was locked in. However, on his own evidence Mr Hale appreciated that anyway – he admitted as much – so that may not matter. I do, however, think it likely that Mr Waldock explained generally how the figures worked out, because while my view is that Mr Hale was not the sort of person to be interested in a lot of detail, and Mr Waldock is not the sort of person who would volunteer it unbidden, I do think that Mr Hale would have required some explanation of the numbers and I think that Mr Waldock is likely to have given him a sort of generalised explanation of how they worked out.

24. Other documents were probably signed at or about this time. In particular the document identified at (iv) above (consent to short notice) was signed by Mr Hale and Mr Waldock. It is not immediately apparent that it was sent with Mrs Carter’s letter of 10^th October, though it refers to a (non-existent) meeting of the same date (18^th September on other documents). It bears the date 31^st August 2001, but it is unlikely to have been created then. It seems to me to be likely that a batch of documents had been generated by Mrs Carter’s firm, including this one, and they had found their way to Mr Waldock by the time of his meeting with Mr Hale. There is no other candidate for an occasion on which Mr Hale would have signed this consent, and I find that he signed this on the same occasion as he signed the two Companies House forms and the board resolution. It is also likely (though it does not matter) that Mr Waldock signed the other documents signed by him relating to those events as listed above at about the same time. The purpose of this exercise was to generate documents which formalised the increase of share capital. The dating on the documents demonstrates that it was not particularly well done, but that was its purpose.

25. Thus at this stage of the events the following was the state of play:

(i) The partnership had stopped trading and the company had been trading for 4½ months.

(ii) Mr Hale and Mr Waldock had intended this. Mr Hale was keen that it should happen, and it had.

(iii) It had been accepted that the share capital should be increased, in accordance with the requirements of the bank and Transamerica. Mr Hale was again content with this, if not keen on it, because it avoided the need for personal guarantees. If neither the guarantees nor the share capital increase had been provided then it is likely that at least Transamerica, if not the bank as well, would have withdrawn the facilities, which would have created serious if not fatal consequences for the business.

(iv) Transamerica had been pressing for the share capital increase; the documents produced in October 2001 were sent to them to satisfy them that their requirements had been met.

(v) There had not yet been a formal transfer of the assets of the partnership into the company, but it was accepted that that had to happen.

(vi) While Mr Hale might not have appreciated some of the detailed technicalities underlying the documents that he and Mr Waldock signed, he understood that he was acquiring a significant number of shares in the company, and he appreciated that that meant that the money used to pay for those shares was being locked up. He described himself as “writing a cheque for £252,000 for the company” when giving evidence of the circumstances of his signing the Companies House forms, and although he put that at a later date I consider that at all relevant times during this capitalisation exercise he appreciated the significance of what he was doing in terms of locking in capital.

(vii) The result of the exercise hitherto was to implement the arrangement between the partners that the business would be incorporated. Once the October documents had been signed Mr Hale and Mr Waldock came under a liability to pay for the shares, and it was obviously anticipated they would do so via the assets coming in from the partnership and their interest in those assets (whether or not they actually rationalised that to themselves as involving their partnership capital accounts).

26. The formal documentation for the transfer of the partnership assets was completed on 19^th November, but before that happened Mr Waldock acquired a growing realisation that the finances of the enterprise were not as good as they once had been. His evidence in his third witness statement was that when he had received the bad news about the trading profits of the last partnership period he considered ways of reducing overheads in addition to his own salary reduction. He did not immediately think of reducing Mr Hale’s drawings, but the thought had occurred to him by 15^th November, though he wished to have the opportunity of having the facts confirmed in a forthcoming meeting with Mrs Carter fixed for 21^st November. The significance of the 15^th November is that on that date Mr Waldock met Mr Kieran, the solicitor who had acted for the partnership from time to time in the past.

27. On 13^th November Miss Lewis sent Mr Kieran an e-mail. Attached to it was a draft of an asset sale agreement (the agreement referred to above), and it also enclosed what it described as the minutes of the board of directors relating to the sale of the business from the partnership to the company. She asked him to “draw up the enclosed draft Agreement prepared by our firm of accountants”. The letter goes on to say that: “As there is some urgency, if possible, Ian would like to collect the document when he meets with you on Thursday morning.” That suggests that there was a pre-arranged appointment, but Mr Kieran told me that when he received the document he did not know what was required of him. He rang Miss Lewis to ask and he was asked to witness Mr Waldock’s signature. Mr Waldock duly attended his office on 15^th November and Mr Kieran witnessed his signature. While he was there Mr Waldock tried to discuss the sale agreement with Mr Kieran, in such a way as gave Mr Kieran the impression that his endorsement was sought, but Mr Kieran’s attendance note records that he was not going to accept responsibility for it. Mr Kieran’s attendance note also records that Mr Waldock felt he had a problem with Mr Hale. Mr Hale had been withdrawing large regular sums which were unsustainable because of the downturn in the business, and seemed unable to accept that “the good times had come to an end”. Mr Kieran told me that Mr Waldock wanted to put a “mechanism” in place which would persuade Mr Hale to go to a meeting so that the whole position of Mr Hale and his share in the business could be discussed with the possibility of some agreement being reached. Mr Waldock apparently felt that Mr Hale would be more prepared to go to a meeting if he knew that Mr Kieran knew what was happening. Mr Waldock foresaw that if Mr Hale could not withdraw significant sums from the company then he ought to have a job in the company, but the problem was that there was no position for him to fill. Mr Kieran told me that he had the impression that there had been a falling out.

28. Mr Kieran was an honest and careful witness and I accept his evidence about all this. What his evidence showed was that Mr Waldock’s misgivings about Mr Hale and what his attitude would be were stronger than had appeared in the evidence before then.

29. Four days later, on 19^th November, Mr Hale signed the asset transfer agreement and the gift holdover relief document. It was Miss Lewis’s clear evidence that this occurred on 19^th November. Mr Hale was adamant that it occurred earlier – at one time he said it was on about 5^th or 6^th November, and at another he said it was on 12^th November. I reject his evidence on this. Miss Lewis’s diary for the 15^th November has an entry: “Get Andy to sign – Mon 19/11”. No suggestion was made as to what this could have referred to if it was not the transfer documents. The entry for 19^th November has “A/H” at the top and “A/H forms” half way down the page, which she said were references to Mr Hale. The document was certainly not executed on 13^th November when it was sent to Mr Kieran for printing out prior to Mr Waldock’s executing it, and there is no evidence that it had been executed by Mr Hale on 15^th November when Mr Waldock attended on Mr Kieran for execution. I think that it is quite clear that Mr Hale’s insistence that he executed it before 19^th November was completely wrong.

30. The circumstances in which Mr Hale executed the document are also in dispute. He says that when Miss Lewis arranged for him to come to the company’s premises to execute it she told him that it was urgent and if it was not completed by him and Mr Waldock then Transamerica would take possession of the stock. That statement is said to be untrue. Miss Lewis denied saying it; she admitted that it would have been untrue if it had been said. Having heard the witnesses on the point, I am completely satisfied that no such thing was said. Miss Lewis denied it, and she is a credible witness. Furthermore, I can see no reason for her telling what would have been a lie. It is not apparent what her motivation would have been. If Mr Hale had been demonstrating a reluctance which had to be overcome then one can perhaps imagine a motive for embellishing the truth, but there is no evidence from anyone that he was demonstrating reluctance before he went to meet her to sign the document. I therefore reject this part of Mr Hale’s factual case, which was effectively one of duress or misrepresentation.

31. There was also a difference between Mr Hale and Miss Lewis as to what passed between them at the meeting. Her evidence was that in the discussion at the time that she arranged (on the telephone) that Mr Hale would come in to execute the forms, she talked about the share capital increase and said she did not fully understand it and so could not explain it. Mr Hale told her that he had already had it explained to him by “the accountant” and that he understood. When he came in to sign he expressed himself to be unsure as to whether to sign and asked Miss Lewis what she thought. She could not see anything untoward in it because it was merely formalising what had been agreed. She told him again that unless the share capital was increased Transamerica would not provide the credit line, but if he did not want to sign the forms he should not do so. She even suggested that he take the forms away to get a second opinion or take them to the forthcoming meeting with accountants. Mr Hale decided to sign. Mr Hale could recall virtually none of that exchange, but was able to deny very little of it save that he denied that she said he did not have to sign if he did not want to or that he could take the forms away and get a second opinion. I think that Miss Lewis’s account of the meeting is largely correct.

32. Two days later, on 21^st November, there was a meeting involving Mrs Carter, Mr Waldock and Mr Hale. The purpose of this meeting was to discuss the partnership accounts (which would form the basis of the transfer of assets into the company). Mrs Carter said, and I accept and find, that she told the partners that they had been over-drawing in excess of profits. The profits to the end of May were much reduced – they stood at just over £29,000, which was an annualised rate of £45,000, compared with profits for the preceding year of £412,000. As at 31^st May 2001 Mr Hale’s capital account stood at just over £267,000. Subject to his having to pay for his shares, that would have been credited to his director’s loan account with the company, but once the value of his shareholding was taken out of it there would be little left for other drawings, and his director’s loan account would soon be, or had already been, extinguished. Management accounts up to the end of September (which were also apparently available at the meeting) showed that substantial profits were not being made by the company. Mrs Carter said that alarm bells had not rung on the basis of the May figures, but she was much more concerned when she saw those management figures. These considerations led her to warn the directors that the business could not sustain the sort of drawings they had historically enjoyed. She told Mr Hale that there were not enough funds in his director’s loan account to pay his forthcoming January tax bill of over £20,000.

33. This was the start of the serious rift between Mr Hale and Mr Waldock that has led to this petition. Mr Hale says that it was at this point that the penny dropped and he realised that he had been prejudiced by signing the documents that he had signed. It was arranged between Mr Waldock and Mr Hale that they would meet two days later, on the 23^rd, to discuss where they went from there. They duly did so. Mr Waldock asked Mr Hale to reduce his monthly drawings to £5,000. They were in fact reduced. Mr Waldock says Mr Hale agreed; Mr Hale said he was given no choice and did not agree freely. I find that Mr Hale did not agree in the sense of agreeing willingly as part of a negotiation. He did not in fact accept the situation in which he found himself. Mr Waldock went on to indicate that if things did not improve his drawings might have to be further cut back or even cease completely. Mr Hale responded angrily (as I find) and said that in that case he wanted to come back and work in the business and when asked what job he could do (because it was not immediately obvious to Mr Waldock that there was a function he could usefully or appropriately fulfil) Mr Hale said he would do Mr Waldock’s job. That was an impractical suggestion in the circumstances, and it may well have been made more out of frustration and irritation (or anger) than an appreciation of the realities. There was some reference to the possibility of his having a sales job, but not in a particularly senior position. It is significant for his case that it had allegedly been agreed at the October 2000 meeting that he could come back whenever he wanted to that Mr Hale did not refer to any such arrangement at this meeting. That factor points firmly away from Mr Hale’s case on the October 2000 agreement. At Mr Waldock’s suggestion they went round to see Mr Kieran, and he explained to them how a company board worked in terms of voting and director and shareholder control. I do not think that the detail of this meeting matters. This may have been the meeting foreshadowed by Mr Waldock’s remarks on 15^th November, but if it was intended to facilitate an agreement with Hale it did not work.

34. The meeting with Mr Kieran broke up and the two directors agreed to meet again on the following Monday (26^th November) to discuss Mr Hale’s future with the company. They duly met. Mr Hale had no recollection of this meeting in the witness box, but was unable to dispute Mr Waldock’s account of it. No level of agreement was achieved. Mr Hale again expressed his dissatisfaction at the prospect of his drawings ceasing and said he would go and get independent advice, which he did.

35. There are minutes of the meetings on 21^st and 26^th November, describing both as meetings of directors. That is probably an adequate description of the first of those meetings, but it is does not properly describe the second. The first set of minutes was prepared by Mrs Carter and signed by Mr Waldock. It does not really begin to give the flavour of the meeting, simply recording, as it does, a review of the trading position, a report of poor trading conditions, accounting policies as to goodwill and depreciation and a note that Mr Hale’s loan account was overdrawn and needed addressing. The second set was not prepared by Mrs Carter. It must have been prepared by Mr Waldock. It notes the reduction of Mr Waldock’s salary to £5,000 net (8,333.20 gross) per month, and a purported agreement to continue “the advance” to Mr Hale at £5,000 until January 2002, with the directors agreeing a further review would take place following the close of the January 2002 accounts. Those things did not happen; these minutes are a contrivance by Mr Waldock which does him little credit.

36. Thereafter there were no direct meetings between the two men. Mr Hale was allowed drawings, debited to his director’s loan account, until January 2002, when they stopped. Mr Waldock carried on running the business without reference to Mr Hale and continued to draw a salary. It is said that this salary was at the rate of £5,000 net after tax; the accounts show that he had gross sums which look as though they may net down to something slightly in excess of this, but no-one could explain the difference and I doubt if it matters much. What is important for this litigation is that Mr Waldock continued to have his salary and Mr Hale did not have any share of the profits thereafter. The accounts for the period ended 31^st January 2002 show a profit after tax of just £62,985; in the next year the profit was almost exactly the same; and the figures for the year ended 31^st January 2004 show a loss of £37,876. In the last two years the figures were arrived at after deducting large charges for writing off goodwill, about which complaint is made by Mr Hale.

37. No dividend has been paid. Mr Waldock told me that he considered that the state of the company’s finances, and its cashflow requirements, led him to consider that a dividend was inappropriate. This was not based on any real calculation on his part; it was (at most) a back of the envelope calculation without the benefit of an envelope. He also said at one point that the banking covenants would have been broken by the declaration of a dividend, but he retracted that evidence when it was suggested (by me) that it was not apparent from the numbers how that could be so, and he turned this into a desire not to give a bad impression to the bankers. I think that this was a piece of evidential opportunism on his part.

38. The parties’ legal advisers entered into correspondence almost immediately. The correspondence adopted firm lines on each side, with Mr Hale’s advisers from an early stage making his case that he had been misled into signing the transfer agreement by a misrepresentation by Miss Lewis. An issue then arose as to the ownership of the Northfields Avenue property. It had appeared in the accounts as a partnership asset, but it was in Mr Waldock’s sole name. The legal title had been transferred to him when Mr Batcheler left the partnership. Mr Waldock asserted sole ownership on the footing that he had owned it with Mr Batcheler and acquired Mr Batcheler’s share. Proceedings were commenced relating to this and other partnership affairs. The present petition was presented on 9^th August 2002. On 23th August 2002 Mr Hale commenced a Part 7 claim (“the 02 action”) seeking a declaration that the partnership still owned the business on the basis that the transfer of the assets and liabilities to the company was void, or was voidable and has been avoided. On 4^th December 2003 Mr Hale commenced Part 8 proceedings (“the 03 action”) claiming partnership accounts, inquiries and orders for sale. In his Defence in the 02 action, served in December 2002, Mr Waldock conceded for the first time that the Ealing property was partnership property. In May 2004 Mr Waldock conceded that the Ealing property should be sold, and Master Bowman made an order for sale in the 03 action on 26^th May 2004. The sale took place on 15^th March 2005 and the net proceeds of sale (£494,875) were held by Lionel J Lewis & Co pending an agreement or order as to their fate. By an application dated 22^nd June 2005 Mr Hale sought what he described as an interim payment out of that account of an amount that he said was inevitably going to be due to him, and the matter came before Deputy Master Lloyd on 1^st August 2005 along with another application by Mr Hale for summary judgment seeking a dissolution account and ancillary orders. The order made by the Deputy Master on 1^st August was as follows:

“… And Upon the claimant abandoning his claims to the relief sought in

(1) paragraph 2 of the Prayer for Relief in the claim form herein [viz an application for an order for sale of partnership assets]

(2) paragraph 1 of the claim form in [the 02 action] [viz claims for declarations or ownership and an order for transfer of property]

(3) paragraphs 1 and 2 of the Prayer for Relief in the Particulars of Claim in the 02 claim [viz an undue influence claim]

and his counsel stating that the claimant will apply, before 31^st August 2005, for an order under CPR 38.6(1) to disapply the otherwise automatic costs consequences upon the Claimant serving a notice of discontinuance in the 02 Claim discontinuing those parts of the 02 claim set out above.

It Is Ordered that:

[partnership accounts be taken and payments shown due shall be made]

(3) £147,918.21 shall be paid the claimant and £198,494.45 shall be paid to the defendant out of the sum of £494,875.25 [held by Lionel J Lewis & Co], such payments to be made by 15^th August 2005” …

The sums of money to be paid out pursuant to paragraph 3 are the net proceeds of sale of the Ealing property divided by the partnership shares. The Master’s order was left to be drawn up on the basis of minutes signed by counsel. A minute was sent by Mr Hale’s solicitors to those acting for Mr Waldock and it was returned signed on 15^th August (by fax). On that day Mr Hale’s solicitors sent a copy of the signed minute to Lionel J Lewis and asked them for the release of Mr Hale’s money. Under the terms of the order the money ought to have been paid out that day. It was not, and the reason for that is that Lionel J Lewis (who were acting in the sale, and whose client was technically Mr Waldock) took the point that they required to receive a sealed order, and not merely a signed minute. They explained that that was their “client’s instructions” in a letter of 19^th August. Mr Waldock had indeed given them those instructions. There was then a debate in correspondence as to the necessity or appropriateness of that course. The order was not drawn until 7^th September, at which time the money was paid out to Mr Hale. Mr Waldock told me that Mr Kieran had asked him whether he could release the money on the basis of the signed minute, he had asked Mr Kieran whether he was comfortable doing that on that basis and was told by Mr Kieran that normally one would wait for a sealed order. Mr Kieran’s evidence, which I accept on the point, is that when he sought instructions Mr Waldock’s instructions were that the final form should be awaited. Mr Kieran had confirmed that his colleagues in the firm told him that strictly one should wait until the order was formally drawn; until that time one could not be certain of its terms. He told Mr Waldock that he could authorise payment if he wished, or he could wait for the order, and he told Mr Waldock that the consequences of adopting the latter course (which he regarded as the “strict” position) which would be to “frustrate” Mr Hale. His instructions, without reasons, were to wait for the final form of the order. Mr Hale was therefore kept out of his money for 3 weeks. Having heard and seen Mr Waldock, I am satisfied that he adopted this course deliberately, in order to try to irritate or cause difficulty to Mr Hale, knowing that Mr Hale probably needed the cash. He knew that he could safely release the money once the minute was signed and relied on a technicality to avoid doing so. This is probably typical of his attitude – he is not going to let Mr Hale have something unless and until he has to. He is not disposed to be generous or helpful to Mr Hale.

39. As I have already indicated, since the parting of the ways in 2001 Mr Waldock has continued to run the company without Mr Hale. As well as carrying on the business in the normal way, he has done the following things:

(i) GKP were the first auditors, and he has purported to change the auditors twice. I say “purported” because a change of auditors requires a resolution of the shareholders and no such resolution has been passed (or even proposed), and Mr Hale was not consulted at all. Mr Waldock said that the change occurred because Mr Hale was complaining about the accounts, so he thought it better to show impartiality by changing. The accounts audited by the new auditors also attracted criticism, so he changed them again. I am afraid that I do not consider this to be convincing. If he were that keen to demonstrate “impartiality” on the point then he would have consulted Mr Hale, but he did not. He must have had other reasons for changing them which he was not prepared to tell Mr Hale (or me).

(ii) He has increased some staff salaries, including those of Mr Powell (the service manager) and Miss Patel. The latter has had her salary increased from £26,250 in the year ended 2002 to £30,000, £39,211, £41,366 and to £42,500 in successive years. Mr Powell’s were less striking though still significant.

(iii) He has reduced the size of the premises occupied at one of the retail outlets in Barnet.

(iv) He has carried out a major refurbishment and consolidation of premises at Vauxhall, spending over £250,000 in the process.

(v) He has closed premises at Dowgate Hill.

(vi) Before the Ealing premises were finally sold, they had been closed temporarily and then re-opened.

(vii) Mr Waldock procured that the company pay him rent in respect of the Ealing property for the years ended 31^st January 2002 and 31^st January 2003 in the sums of £20,000 and £30,000 respectively. Adjustments were duly made when Mr Hale’s interest in this property was acknowledged, but these were acts done prior to then with no consultation with Mr Hale. The amount of rent was not agreed.

All these things were done without consulting Mr Hale.

40. According to its accounts, the company made profits in the periods ended 31^st January 2002 and 31^st January 2003 of (in round terms) £63,000 and £62,000 respectively. In the year ended 31^st January 2004 the accounts show a loss of £37,800 and the 2005 draft accounts show a loss of £52,251. Those accounts were affected by changes in accounting policies, about which Mr Hale was not consulted. In the y/e 31^st January 2003 the treatment of goodwill was changed from writing it off over 10 years to writing it off over its (stated) useful life of 3 years. This increased the rate of writing it off from £10,000 odd per year to £71,000, which impacted on the profits. In the year ended 31^st January 2005 the depreciation policy in relation to improvements to property was also changed. It is not clear what practical difference this made to the depreciation which would otherwise have been charged to the profit and loss account, but depreciation was charged in relation to the Vauxhall property consolidation and improvements, being over £40,000 in the year ended 31^st January 2005.

41. Not only was there no consultation with Mr Hale about any of this, there was not even any attempt at consultation. It had been agreed in October 2000 that there would be monthly meetings, or monthly attempts to “touch base”, but with one exception that had never happened. This is not necessarily Mr Waldock’s fault. For his part Mr Hale did not attempt to meet, or express any need for consultation, up until the rift in November 2001. Thereafter that state of affairs continued. Mr Waldock claimed to have called a directors’ meeting to approve the 2002 accounts some time in mid to late 2002, but no copies of any notices survive and Mr Waldock said that his notebook computer (on which they would have been created) was stolen. He claimed that he had sent notices to Mr Hale in Wales because he did not have any other address for him. Mr Hale says he never received any notice, and that Mr Waldock could have sent the notice to his solicitors who were acting for him at the time if he had really wanted to communicate with him. The accounts were signed off by Mr Waldock on 29^th November 2002. His evidence as to the giving of notice to Mr Hale in Wales was not particularly satisfactory, but I think that he probably overlooked the need to send notice to Mr Hale. He was not at all concerned to have Mr Hale involved since he regarded himself as entitled to get on with running the company. He knew that Mr Hale had solicitors acting for him, and indeed that he had accountants acting for him as well. I doubt that he thought that Mr Hale simply did not care about approving the accounts, and had he been in the least bit concerned to have Mr Hale’s input he could easily have contacted him through his solicitors or accountants. The fact is that he was not interested in that input.

42. The next year there was an attempt to hold an AGM. On 25^th July 2003 Mrs Waldock, as company secretary, gave notice of an AGM to be held on 28^th August to receive and adopt the accounts, to confirm Directors’ remuneration for the year ended 31^st January 2003 and to reappoint the auditors and fix their remuneration. She also sent out a notice headed “Notice of a Meeting of Directors”, giving notice of “the Annual General Meeting” for 28^th August 2003, “to receive and approve the audited Accounts for the year ended 31^st January 2003 for submission to the shareholders at the Annual General meeting.” This confusing document was presumably intended to be notice of a prior directors’ meeting to approve the accounts, but it can hardly be accused of being clear. Mr Hale’s response seems to have been to call his own meeting of the directors to consider the accounts “for submission to the shareholders at the Annual General Meeting” for 4^th September. His solicitors supplied a copy of the notice to Mr Waldock’s (and the company’s) then solicitors (Lionel J Lewis) stating that Mr Hale did not accept the accounts but not explaining why there was an attempt to call a different meeting, and one occurring after the date for which Mr Waldock claimed to have summoned the AGM. Their letter observed that accountants’ observations on the accounts had been sent. In the witness box Mr Hale told me that he was on holiday on 28^th August, but that was not pointed out to Lionel J Lewis. The result of all this was that neither director attended the other’s meeting or meetings. Mr Waldock produced some minutes of a directors’ meeting purportedly held on 25^th August, noting Mr Hale’s non-attendance despite notice, approving the accounts, approving the Directors’ remuneration for the year, not recommending a dividend, and noting a couple of immaterial matters. On the same day (28^th August) he also signed minutes of an AGM attended by him and his wife, recording that all members present consented to short notice, adopting the accounts, approving the directors’ remuneration shown in the accounts and resolving to re-appoint GKP as auditors for the ensuing year and authorising “the Director” to fix their remuneration. I think that this episode demonstrates a level of disdain on the part of Mr Waldock, and something of a failure by Mr Hale to get a grip on the situation and express himself clearly, which does not reflect well on either man. However, it has to be observed that by this time these proceedings were well under way and it is unrealistic to assume a large scale meeting of minds.

The state of account between Mr Hale and the company

43. As at the date when the partnership stopped trading Mr Hale’s capital account in the partnership stood at £267,838. That reflected a share in the Ealing property which the partnership accounts showed to be a partnership asset (contrary to Mr Waldock’s position at the time, but that is what the partnership accounts showed). That balance was transferred over to constitute his directors’ loan account. Mr Hale’s shareholding price (£252,000) was in due course debited to that account. That, of course reduces the balance very severely. After two or three monthly drawings it would move into deficit. The account needs to be adjusted to reflect various events. First, there are debits in the form of his periodic drawings, up to January 2002. Next there are adjustments to reflect the fact that the Ealing property was not transferred to the Company. That requires that Mr Hale’s equity share be taken out of his directors loan account, but it is also to be credited with sums for rent. Other debits have to be made. The net effect of all this is that Mr Hale’s account with the company is over £100,000 in debit before any interest is debited. To this debit from time to time Mr Waldock has sought to add interest at the rate of base rate plus 3%. He did not obtain (or even ask for) Mr Hale’s consent to this charge. It is something that Mr Waldock considers Mr Hale should pay. If he is right about this then Mr Hale’s directors’ loan account is in debit in a sum exceeding £145,000. The precise figures do not matter. What matters is the overall effect in general terms of what has happened.

The witnesses and credibility

44. In making my findings I have had in mind my view of the credibility of the various witnesses. In that respect my findings are as follows:

Mr Hale

45. He was the only witness called by his side. Having heard him give evidence I do not think that he lied to me. He honestly believed the evidence that he gave me. However, I think that he is probably a little naïve or unreal in business dealings, and his recollection of many events is poor. His evidence from time to time was strongly subject to what one might call litigation-related wishful thinking – an honest belief in facts that would support his case engendered by the litigation and a desire that they be true, but which were in fact inaccurate. It was a badge of his essential honesty that he said that he did not have a recollection of significant meetings of which others less honest might have manufactured a recollection. Nevertheless the quality of his recollection, and of his evidence generally, was such that one had to be careful before accepting it. His ability to distort facts in his own mind is shown by his misrepresentation claim. A statement by Miss Lewis that Transamerica would not allow the credit line unless the share capital were increased has turned into a positive misrepresentation that they would repossess stock. This was an unjustified transition.

Mr Waldock

46. Mr Waldock is obviously an astute businessman with an eye for a good deal. I think he was fair to his partners, as is demonstrated by his conduct towards Mr Hale when Mr Hale had his difficulties in 1997/98. However, more recent events (since 2001) have led him to get impatient with Mr Hale, and that impatience, coupled with this litigation, has caused him to behave high-handedly towards him and, more significantly in terms of credibility, to seek to justify the unjustifiable if it was in his commercial interests to do so. Thus his production of the minutes for 23^rd November 2001 were an improper contrivance, and his conduct over the release of the proceeds of sale of the Ealing property was less than straightforward. I considered that at times I had to be wary of his putting a slant on evidence which would favour his case (which I consider he did on occasion), particularly in relation to recent events. In relation to more historic events the overall quality of his evidence, and his credibility, was better.

Miss Lewis

47. Miss Lewis was an honest and straightforward witness whose evidence I was happy to rely on.

Mr Batchelor

48. As with Miss Lewis, his evidence was straightforward and reliable

Mr Kieran

49. Again, his evidence was honest, reliable and plainly very carefully given.

Mrs Carter

50. Mrs Carter gave her evidence carefully and reliably. There was no suggestion that it was in any way affected by the fact that she was Mr Waldock’s sister. I found it helpful and corroborative on significant matters.

Ms Patel

51. Miss Patel is still employed by the company in a significant managerial and administrative role, having moved up the company over the years in terms of responsibility. She gave evidence of certain limited company related matters. Again, she did so carefully and reliably.

Unfair prejudice and the applicability of section 459

52. Section 459 reads:

“A member of a company may apply to the court by petition for an order under this Part on the ground that the company’s affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members (including at least himself) or that any actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.”

There was not much debate about the concept of prejudice. Most of the dispute concerned fairness. In considering how to apply that concept it is not necessary to look beyond two cases, namely Re Saul D Harrison & Son plc [1995] BCLC 14, and O’Neill v Phillips [1999] 1 WLR 1092. Both were cited to me by Mr Griffiths, who placed particular reliance on them. In the former case it was held:

“In deciding what is fair or unfair for the purposes of s.459, it is important to have in mind that fairness is being used in the context of a commercial relationship. The articles of association are just what their name implies: the contractual terms which govern the relationship of the shareholders with the company and each other. They determine the powers of the board and the company in general meeting and everyone who becomes a member of a company is taken to have agreed to them. Since keeping promises and honouring agreements is probably the most important element of commercial fairness, the starting point in any case under s.459 will be to ask whether the conduct of which the shareholder complains was in accordance with the articles of association.

“Not only may conduct be technically unlawful without being unfair: it can also be unfair without being unlawful. In a commercial context this may at first seem surprising. How can it be unfair to act in accordance with what the parties have agreed: as a general rule, it is not. There are cases in which the letter of the articles does not fully reflect the understandings upon which the shareholders are associated. Lord Wilberforce drew attention to such cases in a celebrated passage of his judgment in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 at 379, which discusses what seems to me the identical concept of injustice or unfairness which can form the basis of a just and equitable winding up:

‘The words [just and equitable] are a recognition of the fact that a limited company is more than a legal entity, with a personality in law of its own: there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure ... The [just and equitable] provision ... does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.’

“Thus the personal relationship between a shareholder and those who control the company may entitle him to say that it would in certain circumstances be unfair for them to exercise a power conferred by the articles upon the board or the company in general meeting..... It often arises out of fundamental understanding between the shareholders which form the basis of their association but was not put into contractual form, such as an assumption that each of the parties who had ventured his capital will also participate in the management of the company and receive the return on his investment in the form of salary rather than dividend.” (Hoffman LJ at pp 17-18).

53. In O’Neill Lord Hoffman said (at page 1101-2):

“In section 459 Parliament has chosen fairness as the criterion by which the court must decide whether it has jurisdiction to grant relief. It is clear from the legislative history (which I discussed in In re Saul D. Harrison & Sons Plc. [1995] 1 B.C.L.C. 14, 17-20) that it chose this concept to free the court from technical considerations of legal right and to confer a wide power to do what appeared just and equitable. But this does not mean that the court can do whatever the individual judge happens to think fair. The concept of fairness must be applied judicially and the content which it is given by the courts must be based upon rational principles. As Warner J. said in In re J.E. Cade & Son Ltd. [1992] B.C.L.C. 213, 227: "The court . . . has a very wide discretion, but it does not sit under a palm tree.’” (p 1089)

“... So I agree with Jonathan Parker J when he said in Re Astec (BSR) plc [1998] 2 BCLC 556 at 558:

‘... in order to give rise to an equitable constraint based on “legitimate expectation” what is required is a personal relationship or personal dealings of some kind between the party seeking to exercise the legal right and the party seeking to restrain such exercise, such as will affect the conscience of the former.’

“This is putting the matter in very traditional language reflecting in the word “conscience” the ecclesiastical origins of the long departed Court of Chancery. As I have said, I have no difficulty with this formulation. I think that one useful cross check in a case like this is to ask whether the exercise of the power in question will be contrary to what the parties, by words or conduct, have actually agreed. Would it conflict with the promises which they appear to have exchanged? In Blissett v Daniel the limits were found in the “general meaning” of the partnership articles themselves. In a quasi-partnership company, they will usually be found in the understandings between the members at the time they entered into association but there may be later promises, by words or conduct, which it would be unfair to allow a member to ignore. Nor is it necessary that such promises should be independently enforceable as a matter of contract. A promise may be binding as a matter of justice and equity although for some reason or another (for example, in favour of a third party) it would not be enforceable in law.

“ I do not suggest that exercising rights in breach of some promise or undertaking is the only form of conduct which will be regarded as unfair for the purposes of s.459. For example, there may be some event which puts an end to the basis on which the parties entered into association with each other, making it unfair that one shareholder should insist upon the continuance of the association. The analogy of contractual frustration suggests itself. The unfairness may arise not from what the parties may have positively agreed but from the majority using its legal powers to maintain the association in circumstances in which the majority can say it did not agree: non haec in foedera veni. It is well recognised that in such a case there would be power to wind up the company on the just and equitable ground (see Virdi v. Abbey Leisure Ltd. [1990] B.C.L.C. 342) and it seems to me that, in the absence of a winding up, it could equally be said to come within section 459.”

54. Of particular importance in the present case are the following ingredients:

(i) Whether there is something in the nature of an agreement or arrangement between the parties which has not been and is not being complied with.

(ii) Whether there is something in the nature of a legitimate expectation falling short of an agreement which is not being complied with.

(iii) Whether events have moved on so that there is something falling within Lord Hoffman’s frustration analogy. This was particularly relied on by Mr Griffiths for Mr Hale.

(iv) The court does not administer some form of palm tree justice. The concept of fairness must be applied according to rational principles.

(v) The court looks beyond the actual contractual relationship between the parties arising out of the Articles of Association. I mention this point only because at one point Mrs Talbot-Rice for Mr Waldock submitted that Mr Hale was not locked in to this company because the Articles in this case did not prevent Mr Hale from selling his shares. That may be true, but it is unrealistic to suppose that there would be a genuine third party buyer. He might be able to sell them to Mr Waldock at a knock down price, but that is hardly the point. In this case, as in most section 459 petitions, the unfairness is said to arise because the existing contractual position generates it. It is no answer to that to say that the contractual position provides the solution to the case; it is part of the supposed problem, not the solution.

55. A number of factors were relied on by Mr Griffiths for Mr Hale as coming within those principles and as demonstrating unfair prejudice calling for the court’s intervention. I shall deal with them separately because that is the only sensible way that they can be dealt with as a matter of exposition. However, what is important at the end of the day is the overall picture, to which they are all capable of contributing so far as they demonstrate or contribute towards unfair prejudice.

The effect of the circumstances of the signing of the capitalisation and transfer documents

56. As part of his case of unfairness Mr Griffiths relies on the circumstances surrounding Mr Hale’s signature of the various documents in October and November, and seeks to demonstrate unfairness by praying in aid principles and analogies from other areas of the law where equitable principles of unconscionability are invoked. They are the duties of loyalty owed by one partner to another, the duty of good faith owed by one party to another, the principles of law under which one partner must make proper disclosure where that partner seeks to buy out the interest of another and (rather more remotely) undue influence. He does not seek to apply any of these principles directly. If they applied directly he would be seeking to set aside some element or elements of the transaction, and Mr Griffiths expressly disavowed this. Rather, he seeks to say they demonstrate and require a level of honour in conduct which was seriously lacking on the facts of the present case, and which I should take into account in assessing whether there was unfair prejudice in this case. He also relies on a misrepresentation by Miss Lewis which induced him to sign the two transfer documents in November, and again invites me to say that this is an equitable consideration which makes Mr Hale’s prejudice unfair.

57. First the misrepresentation. This can be dealt with shortly. Mr Hale says he was induced to sign the two transfer documents in November 2001 by falsities uttered by Miss Lewis. I have already dealt with this above. I have found that she said no such thing, so this part of the case fails on the facts.

58. Next there is the allegation of a form of undue influence. In his opening Mr Griffiths disclaimed any undue influence in the normal sense. However, the description re-surfaced in his final speech, albeit again without relying on undue influence in the normal full equitable sense. This was in fact a description of what Mr Griffiths called unconscionable behaviour. He relied on Mr Hale’s trust of Mr Waldock and Mr Waldock’s duties as a partner, and his trust of GKP and the duties said to be owed to him on the footing that they were the partnership’s and his personal accountants. I consider this reliance, couched in undue influence terms, is misplaced. There was no relevant relationship of trust and confidence, in undue influence terms, in this case. In truth this is no more than another way of relying on what Mr Hale maintains is unfair or unconscionable conduct arising out of the circumstances in which he came to sign the two transfer documents. This, he says, is part of the unfairness on which he is entitled to rely in considering the unfairness of any prejudice which he now suffers. I do not consider that this particular analysis, or deployment of analogy, is correct. In undue influence terms there was no relevant relationship and GKP did not for these purposes act unconscionably. Neither did Mr Waldock.

59. As another way of putting this part of the case Mr Griffiths relied on a line of cases dealing with the duties owed when one partner buys the share of another. In those circumstances:

“… there is a duty resting upon the purchaser who knows, and is aware that he knows, more about the partnership accounts than the vendor, to put the vendor on possession of all material facts with reference to the partnership assets, and not to conceal what he alone knows; and that, unless such information has been furnished, the sale is voidable and may be set aside.” (per Cozens-Hardy LJ in Law v Law [1905] 1 Ch 140 at 157).

Mr Griffiths invites me to have regard to those principles. I say “have regard to” because he does not seek to deploy them directly so as to set aside any part of the overall transaction by which the business of the partnership was incorporated, but he does say that the duties of disclosure embodied in the principle were applicable in this case so as to render non-disclosure by Mr Waldock of certain matters an important factor in assessing unfairness in the context of section 459. He also relied on partnership duties of good faith in the same way and in the same context.

60. The context is this. I have set out above the sequence of events which led from an agreement to incorporate, through the incorporation, the de facto assumption of the partnership’s business by the company on 1^st June 2001, the taking of shares by the partners and to the actual transfer of partnership assets to the company. Mr Griffiths says that the evidence shows that towards the end of that process Mr Waldock became aware that there was a significant drop in profits in the partnership and that there was a need to act. His own immediate act was to reduce his salary from £7,000 to £5,000 per month. Between 22^nd October 2001 and 15^th November it occurred to him that he might have to ask Mr Hale to reduce his drawings, as is demonstrated by his conversation with Mr Kieran. He knew more about the accounts than did Mr Hale and he was therefore under a duty to put the material facts before Mr Hale. It was only after these events that Mr Hale signed the transfer agreements. Mr Waldock signed them knowing the true facts (or at least more about the overall situation); Mr Hale did not, and did not know that Mr Waldock knew. As a result of signing the agreement Mr Hale transferred his share of the partnership assets to the company, and his money was gone.

61. Much of the factual background is as Mr Griffiths submitted it was. The evidence on this came rather late in the day, in the form of late witness statements. I have summarised and found the relevant facts above, moving from Mrs Carter’s realisation of the partnership’s reduced profits, through Mr Waldock’s being told something of this and seeing some figures, to the meeting of 21^st November when the draft partnership accounts were produced. By the time Mr Hale signed the documents Mr Waldock anticipated that the figures might lead to disputes or difficulties. It should be noted that no case was advanced to the effect that Mr Waldock realised that he needed to get the transfer of assets finalised before dealing with Mr Hale, or that he prompted the finalisation of the transfer with awareness of that background. In the absence of such a case the fact that Mr Hale was asked to sign the documents at a time shortly before the important meeting of 21^st November and not long after Mr Waldock became aware of the financial problems looming must be treated a matter of coincidence and not contrivance.

62. The transaction in question was not a sale by one partner to another. It was a sale by both partners to a company in which they were both to be interested in the same proportions. However, even in those circumstances I consider that the principles of good faith which underlie the partnership duty of good faith and the decision in Law v Law would be capable of operating were it to be sought to apply the principles to a situation where the mismatch of the partners’ awareness arose before the transaction in question. That is not the present case of course – the process of transfer was partially accomplished by the time the point arises in the present case. The company had started trading several months before, and the partnership had ceased trading. Everyone was acting as though the company had taken over the business, and what was required was the formalisation of what had de facto taken place. There is no question now of any attempt to invoke the traditional principles so as to have any part of the overall transaction (and in particular the transfer of assets) set aside. They are invoked so as to demonstrate unfairness – Mr Hale is said to have taken a commercially fatal step, in the nature of transferring his share in partnership assets, at a time when Mr Waldock knew more about the accounts than Mr Hale did, and when Mr Waldock knew that there were problems which he did not tell Mr Hale about, and which might impact on Mr Hale’s financial interests in relation to the venture.

63. I think that Mr Hale has a limited point here, but only a limited point. This is not a case where a partner is aware of a relevant but undisclosed fact before a dealing is entered into. The partners were a long way through the agreed process of transferring the business into the company, a process which I have found Mr Hale was keen to achieve. The partnership had ceased trading as such on 31^st May, and the company assumed trading on 1^st June. The need to have a substantial paid up share capital had been established, again to avoid personal liabilities. The share capital side of things had been formalised in October. The shares needed to be paid for. The transfer of the assets was the means of achieving this, as well as being a step necessary in its own right. The process could not simply have been halted immediately before the date that Mr Hale signed the transfer agreements. Had that happened there would have been all sorts of complications, and a very undesirable limbo. The transfer transaction was the last stage, and a necessary stage, of a process that had been agreed long before the financial problems became apparent. I do not consider that Mr Hale could have regarded himself as being free to decide not to sign after all. The position was much more complicated than that.

64. The position was therefore not on all fours with a situation in which non-disclosure occurs before a transaction is entered into. If there was non-disclosure it occurred at a time when the parties were implementing a transaction which had been agreed for some time. It is true that Mr Hale was not necessarily obliged to sign a document in the precise terms which he did, but the bigger picture is important. The purpose of the document was to achieve that which he had already agreed as part of a course of conduct and business which had been embarked on some time previously. It is therefore not accurate to regard the transfer signing as a transaction which Mr Hale did not have to enter into and which he only entered into after non-disclosure of material information by Mr Hale. The fact that the timing was coincidental is also an important part of the picture.

65. The circumstances were therefore very significantly removed from those arising in a Law v Law case, where the non-disclosing partner knows something that the other partner does not know and which is likely to be germane to a transaction in which that other is not yet bound. In the present case Mr Waldock knew something that Mr Hale did not know, but in circumstances in which the contemplated transaction was something to which Mr Hale was practically, if not legally, bound. In fact he may even have been legally bound to complete. If I had to decide that I think I would decide that he was, but the point was not argued before me. Since the timing was coincidental the need to disclose (if any) was not so obvious as to bind Mr Waldock’s conscience. Having said that, I think that there is an element of objective unfairness to Mr Hale in the timing. Had he known that the state of the business was such that he was, or might, be asked to forgo some or all of his drawings then he might have been able to postpone signing up until the position was resolved. He could not, in my view, simply have refused to sign and walked away. Nor would he have been likely to have done so, because that would not have achieved his aims. It would have achieved an impasse as a result of which the business would probably have collapsed unless it were resolved, and that would probably not have suited Mr Hale. What Mr Hale probably lost was a negotiating position, no more. That may be of some significance, but it is not as significant as the loss of an opportunity to withdraw from the whole transaction. The element of unfairness is commensurately reduced. I therefore conclude that there is some element of unfairness arising out of the sequence of events, but it is not all that great.

The cesser of drawings

66. Mr Hale’s case is that it was unfairly prejudicial to him to stop his drawings, particularly when Mr Waldock continued to have his salary. He alleges that he was promised drawings of £6,000 per month on account of profits and that has ceased, contrary to the agreement between the parties. The incorporation of the business makes no difference to that agreement, or at least no difference while there are profits out of which the payments can be made, and there were profits in the company out of which dividends could be paid, and the profits were reduced by what Mr Griffiths described as excessive remuneration paid to Mr Waldock (presumably a reference to the fact that he took a gross rather than a net salary out of the company). The banking covenants were not a bar to payments being made. Mr Waldock had continued to take his salary. If it was no longer possible to make the payments to Mr Hale then this amounted to the analogous frustration that Lord Hoffman referred to in O’Neill v Phillips which meant that the association of Mr Hale and Mr Waldock in the company should not be continued.

67. That is an overly-simplified way of looking at matters. One has to go back to the nature of the arrangement between the two partners as at October 2000. At that date they arrived at a modus vivendi and a way of operating the business. Mr Waldock was to run the business, for the benefit of both of them, and was to be entitled to a salary (before profit division) for doing so. What Mr Hale was to have was drawings on account of profits. The parties presumably thought that profit levels would continue at a level which would permit those sort of drawings, but nonetheless the nature of the drawings was a profit share. The two men never gave proper (or probably any) consideration as to how that would operate on a technical level after incorporation, but they doubtless considered that technically it would be possible, and indeed Mr Waldock procured that it did operate once the company started to operate. However, there was nothing in the nature of a promise by Mr Waldock to Mr Hale. The arrangement was looser, though still important. Since it was a payment on account of profits, it would have to give way to something else if the profits were not sufficient to pay them. What might stand in the way of it would be an insufficiency of profit, or the exigencies of the business. In neither event would Mr Waldock necessarily be in breach of an agreement if he failed to procure the payment of Mr Hale’s periodic sums. This is what happened in 2001 and 2002. By January 2002, when the payments stopped, Mr Hale had received some £52,000 from the company. So far as profits went, the profits of the company in that period were not sufficient to pay that on account of his share of the profits, if one assumes a division of profits by way of dividends in the proportions of the two men’s shareholdings. I do not consider that the arrangement between the two of them required Mr Waldock to allow Mr Hale more than 42% of the profits of the company so far as it required anything at all. The arrangement implicitly carried on into the company was that he would be paid on account of profits. In the next year there were some profits, but the exigencies of business arguably intervened, and if one had drawn up the directors’ accounts with the company on the correct basis in that year (taking out the value of the Ealing property) Mr Hale would have been in debit anyway and that would have justified not paying him cash (as opposed to reducing the debit on his account, which might have been more arguably correct).

68. The fact that Mr Hale does not have drawings is therefore not contrary to any agreement or understanding between the parties. Had the circumstances remained unchanged (ie had there been sufficient profits to allow drawings) then the position might well have been different, but the situation is more complicated than that because circumstances have changed. One cannot simply say that Mr Waldock is acting contrary to the original understanding.

69. Mr Griffiths, for Mr Hale, also relied on a technical point in relation to Mr Waldock’s remuneration. He pointed out that on Mr Waldock’s own case, the agreement of October 2000 was for the payment of gross remuneration, ie for payment of £72,000 (at the time) plus tax. However, that agreement, when transposed to the company, became unlawful under section 311 of the Companies Act 1985, which provides:

“311(1) It is not lawful for a company to pay a director remuneration (whether as a director or otherwise) free of income tax, or otherwise calculated by reference to or varying with the amount of his income tax, or to or with any rate of income tax.

(2) Any provision contained in a company’s articles, or in any contract, or in any resolution of a company or a company’s directors, for payment to a director of remuneration as above mentioned has effect as if it provided for payment , as a gross sum subject to income tax, of the net sum for which it actually provides.”

That being the case, it is said to be unfairly prejudicial to Mr Hale that Mr Waldock is receiving more than £72,000 gross. In anticipation of the objection that this is a rather technical point, Mr Griffiths seeks to point out that Mr Hale is subject to the technical points that he can only partake of distributable profits and that a loan to a director is illegal. It cannot, he says, be right to ignore the provisions operating against Mr Waldock but give effect to the provisions restrictively binding Mr Hale, and it is unfairly prejudicial on Mr Hale that Mr Waldock receives more than £60,000 gross.

70. This point was made only in Mr Griffiths’ written submissions in reply, submitted after the close of the oral hearing. It was therefore not considered or debated in court. So far as it may demonstrate that Mr Waldock is not entitled to benefits that he has been drawing calculated in the manner in which he has drawn them it may be a good one, though I make no formal ruling on that because counter-arguments have not been put. However, even assuming that it is, on the facts of this case it does not, as things stand at present and as they stood at the date of the presentation of the petition, make the payment of Mr Waldock’s remuneration unfairly prejudicial. If it is a good point in law then Mr Waldock may have to pay some money back to the company. It was not, however, a point of which anyone was aware until it was raised in Mr Griffiths’ written reply submissions. If there has been a mistake then it has been made bona fide, and it was made by all parties. Since, on my findings, it was agreed and understood that Mr Waldock would have a net sum from the company, I do not consider that that was unfair hitherto, at a time when what was being done was implementing the parties’ arrangements. The position may become different for the future, but I am dealing with the past in this respect.

71. Accordingly it seems to me that the mere fact that Mr Hale is not receiving £5,000 (or £7,000) per month from the company is not contrary to the arrangements between the parties and is therefore not of itself unfairly prejudicial for the purposes of section 459.

72. However, it is also necessary to consider whether Mr Hale can claim to be prejudiced by virtue of the fact that he is not receiving the benefit of any profit share at all at present, and has not received it since the “drawings” stopped in January 2002. His investment in the share capital of the company was substantial, and at one level the failure to pay him anything at all in respect of his investment can be said to be prejudicial. When he agreed not to involve himself in the business of the partnership (and company), and when he agreed that Mr Waldock should have a salary out of it before the profits were divided, it was in the expectation that he would receive a return on those assets. So far as those assets have generated profits in the company, or could have generated more profits than they did, and so far as Mr Hale has not been paid a return, then he could claim to have been prejudiced (unfairness being, of course, a different matter). Could he legitimately make that claim in this case?

73. I think that it might just be possible. The company generated profits for two years. No dividends were declared out of the profits, and looking at the matter fairly it must be remembered that Mr Hale had some drawings from the company up to January 2002. However, he did not have the benefit of actual dividends, and the profits have stayed in the company. For the last two years the company has not made profits, and the amount of retained profits has been reduced commensurately, so unless a complaint can be made that the affairs of the company have been conducted in such a way as to remove profits that would otherwise have been earned, the same complaint cannot be made in relation to those latter years. While some complaints were made in this respect in this action (for example, the complaints about accounting policies) I do not consider that prejudice of that nature has been established over those years. Nevertheless, I think that Mr Hale can probably just maintain a complaint that he has suffered prejudice insofar as he has not had any share of the profit allocated to him over the last 4 or 5 years (even if the only effect of allocation would have been to reduce the debt that he owed the company and would not have generated a cash sum payable to him).

74. However I find it impossible to find that that, of itself, is unfair, or unfair to a significant extent. While he could legitimately have expected a proper share of the profits, his stake, and his position in the business, was that any such share would depend on the state of the business. Mr Waldock was also entitled to a first slice by way of his salary – Mr Hale could not complain about this. While Mr Waldock’s decision not to declare a dividend was a casual calculation, there was no real investigation at the trial before me as to whether it was reasonable. It might well have been justifiable on the state of the business at the time, and I cannot find that it was not, so that I cannot find that the failure to pay any dividend was, in itself, unfair. In the last two years losses were made, and unless Mr Hale can establish that those losses should not have been made then he cannot complain about a failure to pay him income on his investment in respect of those years.

75. Accordingly, taking an overall view of this part of the case, I therefore consider that the failure to pay or allocate to Mr Hale any part of the profits of the company is not, in itself, unfair conduct. If I were wrong about this then I would have found that on the facts it was not sufficiently unfair, by itself, to require any relief to be granted. However, I have several times referred to this factor “in itself”. That is to reflect the need to return to it as a factor when making an overall assessment, and in other contexts, which I do below.

The failure to consult

76. Mr Hale relies on a failure to consult on a number of matters. There has been no real attempt to consult in any meaningful sense since the breakdown of relations in 2001. In essence Mr Waldock has just got on with running the business. The following are relied on as being matters in respect of which consultation should have taken place:

(i) A failure to consult on senior management salary increases. Two people are relied on for these purposes – Ms Minal Patel, who is now the financial director (though not a board director), and Mr Martin Powell, the service manager. As to Ms Patel, her salary has increased year on year from November 2001 to October 2005, moving from £25,000 to £42,500. It is, however, questionable as to whether and when she became senior management for the purposes of the expressed part of the understanding reached between the shareholders in October 2000. She has taken over part of Miss Lewis’s role, so she might have become senior management, but so far as Mr Waldock failed to appreciate that I do not think that that is necessarily, by itself, particularly culpable (or unfair) if one is looking in section 459 terms at the express part of the consultation obligation. Mr Powell is also only debatably senior management, and in any event his only increase in salary took place late in the day, at some point (probably) in 2005, at a time when the two men were locked in litigation which did not include that particular factor. It, too, therefore, taken by itself is not a particularly telling factor for section 459 purposes.

(ii) An alleged failure to consult on what is said to be an increase in Mr Waldock’s remuneration over the years. The accounts show a figure of £79,626 for the period ended January 2002 (which annualises to £119,439), £104,299 for the year ended 31^st January 2003, £113,138 in the year ended 31^st January 2004 and £110,346 in the year ended 31^st January 2005. Mr Waldock denied that these represented increases over the salary that he was entitled to draw. Ms Patel believed that the figures shown in the accounts represented the grossed up amount which Mr Waldock would have to receive in order to receive his £5,000 per month net. The mathematics and tax calculations of all this were not really investigated or probed in any depth at all, and I do not think that these figures demonstrate that Mr Waldock helped himself to more than the salary which he claims to be entitled to and which was referred to above. I do not consider it to have been proved that Mr Waldock took an impermissible salary increase on which Mr Hale was not consulted.

(iii) The changes of accounting policies were certainly things on which Mr Hale was not consulted. Technically they ought to have been agreed by the directors. Some decisions relating to the accounts would be within the sort of thing that Mr Waldock was to be able to decide without any reference to Mr Hale, and in relation to which he could legitimately expect Mr Hale to fall into line if his consent as director was required, but I do not think that the depreciation policies (identified above) fall into this category. They were capable of significantly affecting Mr Hale’s interest in the profits of the company, and on the facts of this case they fall within the sort of major point on which Mr Hale was entitled to be consulted in accordance with their arrangement as I have found it to be.

(iv) As a matter of technicality, as a shareholder Mr Hale should have participated in the appointments of auditors. More than that, it was again a major matter (again, particularly bearing in mind the circumstances) which was within the range of decisions on which he could legitimately expect to be consulted within the terms of the underlying arrangement. Although I have not accepted Mr Waldock’s explanation in relation to this, what he said in the witness box is at least an implicit acceptance of the importance of the auditors – he said he changed auditors because Mr Hale had complained about them. If they were that significant then there ought to have been consultation about their identity. The activities of Mr Waldock in this respect were prejudicial, and unfairly so.

(v) In the two periods ending 31^st January 2002 and 31^st January 2003 Mr Waldock caused the company to pay him rent for the premises which at that time he was claiming absolute ownership of. Had he been the owner of those premises I would not have regarded this of itself as a major decision on which there ought to have been consultation. However, he was not the owner, and in the circumstances his actual decision to pay can be regarded as unfairly prejudicial to Mr Hale.

(vi) Mr Waldock has caused the company to charge Mr Hale interest at 3% over base rate on his overdrawn director’s account. Mr Hale complains that this is an important issue on which there should have been consultation. I do not agree. It is not that it is not important; it is just that it is ineffective. Unless interest is actually agreed by Mr Hale, I do not see how it can be contractually charged. It is, however, an example of high-handed behaviour on the part of Mr Waldock.

(vii) Mr Hale complains that the re-opening of the Ealing premises after they had been closed amounted to an opening of new premises for the purposes of the agreement to consult whether the agreement was as narrow as Mr Waldock says it was or whether it was wider. Mr Waldock’s oral evidence was that the closure of these premises was temporary because of a spate of burglaries. When the premises were rendered more secure and when a replacement manager was found they were re-opened. This was therefore said not to be the opening of new premises within the express part of the arrangement of October 2000. If this was indeed the temporary closure of the premises and their re-opening following that temporary closure then I do not think it fell within what was expressly agreed at the meeting. The investigation of the facts at the trial did not demonstrate that Mr Waldock was not telling the truth about this, and Mr Hale has not satisfied me that this was an opening of the kind which it was expressly agreed (on both sides’ evidence) should attract consultation. He must bear the burden of proof on this matter and he has not fulfilled it. Furthermore, despite the fact that the premises made losses thereafter, I do not consider that this re-opening was a major decision of the kind on which consultation was required on the agreement as I have found it to be. A genuine re-opening of established premises after a temporary closure does not fall within that category. Nor is it, in my view, within the spirit of the wider agreement which I have found to have been made.

(viii) As I have set out above, Mr Waldock carried out a refurbishment of the Vauxhall arches premises occupied by the company. The cost was £265,000. This was obviously a large project, which helped to consolidate and improve the premises. It required consultation, in my view, even if (as may well have been the case) the answer was obvious when the facts were considered. One reason that consultation would have been useful is that it would have enabled Mr Hale to reflect on how the project would impact on the profits and therefore on his share. That was, after all, of crucial importance to him.

I conclude therefore that some of these failures to consult were prejudicial to Mr Hale for the purposes of section 459, and they were, to a degree, unfair. The extent of the unfairness, and what it requires, is something I return to below.

The failure to allow Mr Hale to return to work in the business

77. This is relied on as unfair prejudice and a breach of the arrangements between the two men. I have found that there was no such arrangement, so it follows that it cannot have been a breach of such an arrangement. The arrangement at the time was that Mr Hale would not work in the company, and implicitly that he would not have the right to come back. Since that arrangement carried over into the operation of the company he had no right, or no right to expect, that he could come back into the company either. This position is not, in my view, affected by the fact that he is not currently receiving any of the profits of the company. That does not make the arrangements of October 2000 unenforceable, as Mr Griffiths asserted. Mr Griffiths submitted in his final speech that as a former partner with a substantial shareholding Mr Hale had the right to “come back”. There is no basis in law for such a right, but if there was he had already given it up by virtue of the October 2000 arrangements carried over into the corporate situation that obtained from 1^st June 2001. Unlike many of the section 459 cases, this was a case where a complaining shareholder did once have an expectation of day to day involvement in the affairs of the company but he had expressly given them up, so such an expectation was no longer justified.

78. I therefore find that this factor was not on the facts unfair, and therefore cannot be unfairly prejudicial.

An overall assessment

79. That is how the points made work out when they are taken one by one and assessed. However, in addition to that I have to conduct an overall assessment. It was urged upon me that the position was bad, and clearly unlikely to get better because Mr Waldock was going to carry on as he has been doing unless the court intervenes. It was said that whatever the arrangement between the two men was while the partnership was in existence, and up to the date when the true financial state of the business became apparent, that changed when it became apparent that Mr Hale could no longer have the drawings he had hitherto enjoyed and Lord Hoffman’s parallels with frustration came into play. A new situation had arisen, and it was unfair to Mr Hale to keep him locked in the company when Mr Waldock has declined to acknowledge the changed state of affairs and has carried on as though nothing has changed.

80. I find that Mr Waldock’s character, and his attitude to Mr Hale, is such that he will now probably only acknowledge Mr Hale’s interests in the company when he has to. He has no real time for Mr Hale now (I stress “now”), and his conduct of the company’s affairs over the past 4 or 5 years, and his attitude to Mr Hale as demonstrated in the other matters referred to above, tend to demonstrate that he has no real sympathy for Mr Hale’s position and is less likely than he ought to be to procure that Mr Hale has some of the returns that he ought to have in respect of his investment. That would normally be thought of as a promising ingredient in a section 459 claim, but on the facts of this case it is less strong because of the circumstances in which it came about, which are to some extent of Mr Hale’s own making. The reasons for finding that emerge from the facts which followed the breakdown of the relationship between the two men in November 2001. They are as follows.

81. The position with which the parties were faced in late November 2001 was one which removed the background against which they were operating. The drawings and salary which they had enjoyed hitherto could not longer properly be enjoyed. The cake was not as big as they had hitherto believed. Mr Waldock appreciated that and set about doing something about it. There is little to indicate that Mr Hale really appreciated and accepted that. Mr Griffiths would urge upon me that that and Mr Waldock’s conduct afterwards (continuing to draw his salary while denying Mr Hale any benefits and participation) was the sort of quasi-frustrating event which meant that it was unreasonable to accept that the two of them should remain in association. However, that is putting the matter too high. This was not a case where it can be demonstrated that Mr Waldock identified the reduced size of the cake and sought to keep it for himself and use his voting powers to exclude Mr Hale from all participation. The situation that resulted came about, after a fashion, as a result as much of Mr Hale’s attitude and acts as of Mr Waldock’s. What the situation required at that time was a negotiated re-arrangement of their interests, even if that re-negotiation was limited. There is evidence that Mr Waldock appreciated that and began to set about achieving it. He appreciated that Mr Hale’s drawings would have to be reduced, and I think that he was acting bona fide in seeking to get Mr Hale to address this point. He was not prepared to have Mr Hale come back and work in the company, but that was because it had already been accepted that that would have been impractical. Perhaps the key factor was whether he would have been prepared to reduce his salary in the interests of being able to release some funds to Mr Hale, but that was never tested because of the way that the matter developed and because Mr Hale took the matter off down different lines which prevented the testing of that in negotiation. In essence Mr Hale seems to me to have been making unreasonable demands, or putting forward a case which was likely (and which ultimately did) stand in the way of a successful negotiation. What happened was as follows.

82. As appears above, by mid November Mr Waldock realised that the finances of the company meant that things could not go on as they were. He appreciated that the parties would have to reduce their respective takings from the company, and unilaterally reduced his salary to £5,000. He reckoned that Mr Hale would have to reduce his, but he also recognised that Mr Hale would not readily accept that. That was the point that he raised with Mr Kieran on 15^th November. He understood that the trick was going to be to get Mr Hale to agree some form of reduction. He did not, as I find, at that stage plan to reduce Mr Hale’s drawings or benefits to zero. He probably did not know where the matter would end up, but he understood that something would have to happen. This was brought home to both parties at the meeting of 21^st November. It was accepted that a new regime would have to be negotiated. The two men agreed to meet in two days’ time to consider it further. They were both correct in recognising what was required at that stage.

83. However, what probably stood in the way of a successful negotiation was Mr Hale’s perception that somehow he had been conned or misled. It was only a couple of days since he had transferred the partnership assets into the company, and here he was now being asked to reduce his financial drawings. One can perhaps see why he felt that, but it was not realistic to suppose that that would mean that somehow he would be entitled to carry on as before. He was told that his payments might have to cease, and Mr Waldock was perhaps a little high-handed in putting the matter in that way, but Mr Hale was equally unrealistic when he replied that he wanted to come back to work. He made his unrealistic proposal that he could take over Mr Waldock’s function.

84. They then went off to see Mr Kieran. There was a discussion as to how boards of directors work, majority powers and minority oppression. Mr Hale continued to make his point that he wanted to come back into the company, but Mr Waldock continued with his point of view that there was no position open for Mr Hale other than that of a salesman, which Mr Hale did not want. I find that, hard though it may have seemed to Mr Hale, that was a realistic position. The parties had decided back in October 2000 that Mr Hale was not going to work in the company in a senior (or indeed any) capacity, and that was the way in which the business was run thereafter and the basis on which Mr Waldock had run the company. It was neither sensible nor realistic to suppose that a senior management role could be created for Mr Hale at that time merely because the company had run into financial difficulties.

85. Next there was the meeting of 26^th November. The matter was not advanced much by this meeting. Again, there was reference to the reduction of Mr Hale’s payments to £5,000 and in truth this was more in the nature of a fait accompli than an agreement. However, it was probably financially inevitable. There was no discussion of the future in any meaningful terms, and I find that Mr Hale was so upset at what had happened that he did not really address the situation in any way which would have led to the meaningful negotiation that really needed to occur at that point. On the other hand, Mr Waldock was, as I find, more open to a meaningful negotiation. I find that is what he wanted.

86. Thereafter correspondence took place between solicitors. A letter from Mr Hale’s solicitors dated 30^th November 2001 threatened legal action and asked for confirmation that in the meanwhile the payments to Mr Hale would continue. The various legal actions referred to looked in entirely the wrong direction. They were actions seeking a declaration that the purported sale of the partnership assets to the company was invalid, an account of partnership assets and possibly an action in negligence against the accountants and solicitors involved. The tone of the letter did not begin to address the real problem, and demonstrated that in reality Mr Hale’s eye was firmly off the ball. The letter also enclosed a letter from Mr Hale’s accountants making various points on the accounts and on the figures, which called for clarification but which, again, did not address how the parties might move forward bearing in mind where they then found themselves. A reply to that letter and its enclosure came under cover of a letter from Mr Waldock’s solicitors dated 13^th December 2001. That in turn enclosed a letter from GKP which met the points which had been raised, but did not address the future, or at least not in any meaningful sense. The covering letter from Mr Waldock’s solicitors (Lionel J Lewis) indicated that any further queries would be addressed, and pointed out that what needed to be said was that the business could not support the historically very high level of drawings that the former partners were accustomed to. In making that observation it was obviously right.

87. The response to that was a very firm and long letter from Mr Hale’s solicitors. It took various historical points, some of them completely misguidedly. It challenged the accuracy of some of what purported to be minutes (which was not helpful in taking the matter forward) and positively denied that Mr Waldock had ever been entitled to a salary in addition to his profit-share, either in the partnership or in the company. That distinction was said to be “contrary to the fundamental basis underlying the business relationship between Mr Waldock and Mr Hale”. I do not know how that could have come to have been said, but it has to be said that the original petition and points of claim did not acknowledge Mr Waldock’s original right to a salary. It was not until a rather late amendment to the points of claim that Mr Hale actually accepted that in October 2000 there had been an agreement that Mr Waldock could have a salary to be taken out of the partnership profits before profits were divided. It seems to me that that position inevitably coloured what occurred thereafter. The letter then went on to challenge the transfer of the assets into the partnership on the basis of faulty documentation, failure to comply with the Companies Act 1985, misrepresentation and a form of undue influence. It then asserted that “the partnership still continues and owns all the assets and Mr Hale’s drawings must continue as before”. It said that in the alternative, since Mr Hale had never agreed that Mr Waldock should have a salary, Mr Hale should receive the same drawings as Mr Waldock. Again, that is contrary to the case advanced by Mr Hale in this action, which conceded Mr Waldock’s original rights to a salary. Nothing in the letter suggests that Mr Hale had a set of beliefs or a mindset which was capable of negotiating a redistribution of the smaller cake. While I do not have a full set of the correspondence passing between the parties from that date and the commencement of proceedings, nothing that I have seen or heard demonstrates that that position changed.

88. Against that background Mr Waldock continued to run the company without the participation of Mr Hale. That is what the arrangements of the parties had provided for (subject to the consultation point). He declined to make payments to Mr Hale after January 2002 but that is because the financial state of the company did not allow it (as he saw it). It is true that he did not seek to negotiate a re-division of the cake, but in the light of the line down which Mr Hale was going that is not surprising. He had started to try to do that in November, but Mr Hale’s attitude constituted a firm rebuff. He did not seek to consult Mr Hale, but for his part Mr Hale did not himself indicate that he wanted any consultation. In the light of his attitude it is understandable why Mr Waldock would have not sought to consult him. I think that his attitude was that he was just going to get on with running the company without reference to Mr Hale, but bearing in mind Mr Hale’s apparent lack of desire for consultation before the dispute blew up, and his attitude after the dispute, that is not surprising. At times he arrogated too much to himself – the change of auditors, for example – but by the time he was doing this he was locked in litigation in which Mr Hale was seeking that Mr Waldock buy him out and things were very hostile. Some of Mr Waldock’s more high-handed behaviour can probably be attributed to the high line taken by Mr Hale from the time that the dispute blew up.

89. It follows that the present state of affairs arises out of a new financial world which was not within the contemplation of the parties when they reached their prior arrangements. It is not one in which Mr Waldock can be seen to be wilfully breaking prior understandings despite Mr Hale’s attempts to enforce them. It is true that there is an element of that, but while there are elements of prejudice to Mr Hale in the manner in which the company’s affairs have been conducted, and that prejudice has a certain unfairness about it, when put in the above context, and viewed as a whole, I do not consider that the prejudice and unfairness in aggregate is as great as Mr Hale would have me say it is. As I have already indicated, this is not a relatively straightforward case of a shareholder/director being excluded from participation and benefits which it was understood he would have. It is a case in which the lack of participation was agreed previously, and his financial participation was vulnerable to the sort of events which have happened.

90. Nor are Mr Hale’s arguments advanced by considering whether the case demonstrates the quasi-frustrating events which Lord Hoffman has anticipated. In putting that case Lord Hoffman was demonstrating that unfairness does not arise only out of a failure to comply with prior agreements or to fulfil prior expectations. The relationships between shareholders are more subtle than that, and Lord Hoffman was recognising that unfairness can come out of a situation where the game has moved on so as to involve a situation not covered by the previous arrangements and understanding. In those circumstances the conduct of the affairs of the company can be unfairly prejudicial within the section notwithstanding the absence of the prior arrangements, and the court can thus intervene. However, for the court to intervene the change in circumstances must be such that it is not reasonable or fair to require the former association to remain as it was, and such that the court’s intervention is required to adjust matters. Lord Hoffman’s words have to be borne in mind:

“[circumstances] making it unfair that one shareholder should insist upon the continuance of the association”

In the present case the adjustment that is sought is that Mr Waldock should buy out Mr Hale. While circumstances in the present case have changed, I am not satisfied that they have changed sufficiently to require that as the appropriate way of adjusting the relationship. As appears above, some form of adjustment might well have been called for at the end of 2001 and the beginning of 2002. It might have taken various forms, the main objective of which would probably have been an adjustment of the slices of the cake to be taken by each partner. The possible permutations are vast in number and sophistication and it is not possible for this court to rule on which would have been appropriate. It was certainly not the case that the only adjustment was for Mr Waldock to buy out Mr Hale. A co-existence within the previous framework might well have been possible. It did not happen, of course, and a significant contributing factor to that was Mr Hale’s own failure to try to achieve that. Whether it would have been achieved if the two men had started off on the same road at the same time is something that I cannot judge because they have not given me the opportunity to make that judgment, but I can say that in the circumstances Mr Hale is not entitled to require Mr Waldock to assume the onerous burden of buying him out. Mr Hale had been prepared to assume the role of what was primarily an investor, rather than an active participant, in this business and what had happened was that his investment suddenly turned out to be a worse one than he had previously thought. But that did not, and does not, entitle him to consider that he can cash in his investment, at least at present, which is what he requires.

91. That is not to say that it is necessarily fair for the present situation to remain for ever the same so that Mr Hale is locked in and gets benefits only at the perpetual whim of Mr Waldock. I have already drawn attention to the failures of Mr Waldock to consult fairly, and his somewhat high-handed manner of dealing with some points. If the facts in the future demonstrate that Mr Waldock has sought to keep an unfair portion of the cake for himself, whether by refusing to temper his own benefits, adjusting accounting policies, taking other steps reducing available profits, failing to allow dividends or otherwise, then Mr Hale would have the opportunity of petitioning again on the footing that he will have been able to demonstrate that Mr Waldock can be shown to have behaved unfairly having had a proper opportunity to behave fairly. That will require a proper dialogue, on a mutual and realistic basis. If Mr Waldock refuses to indulge in that, or to give effect to fair claims on the part of Mr Hale, then another petition might be more successful than this one. That will be a matter for the future. Mr Waldock is going to have to recognise that he is running a company which has a large investment of Mr Hale within it, and that investment cannot go unrewarded for ever. Mr Hale can be said to have legitimate claims to some form of return, even though this court cannot, at present, specify what that return is. Mr Hale, for his part, is going to have recognise that the position he is in in relation to this company stems from his own decision to withdraw from active participation and to leave himself in essentially as an investor. This court cannot itself regulate that relationship now, but it will be able to recognise unfairness in the future when it sees it. Of course, litigation such as this is not to be encouraged, and nothing I say should be treated as doing that. However, the fact is that it has not been demonstrated to me on the facts that the present situation is based on a degree of unfairness which requires or justifies the intervention of this court, particularly to order the buyout claimed by Mr Hale.

92. I have not come to this decision lightly. Where there is the degree of separation and distrust that now exists in this matter between two owners of a company it is not an easy conclusion to come to that they should, at least for the time being, not be separated. However, I have to look at the overall position and see why they are in the position they are in. That assessment reveals that, whatever the position may now be or become in the future, it is not right at the moment to grant the relief sought.

Conclusion on the petition

93. I shall therefore not make the order sought on the petition. I heard argument on the appropriate method of calculation for the share price were I to order a buyout. Since I am not ordering a buyout I will not lengthen this judgment with a consideration of a difficult point that has become irrelevant.

The outstanding costs point

94. I have identified above a costs point from the earlier proceedings that I am required to consider. I have not yet heard submissions on it and will deal with it as part of the post-judgment debate.