Steele v Stuart

The primary application before the Court is an application by the individual Respondents summarily to dismiss or strike out a petition presented on 23 July 2007 under section 459 of the Companies Act 1985 (now replaced, with effect from 1 October 2007, by section 994 of the Companies Act 2006). The petition sought a buy-out of the Petitioner’s shares in JHS Land Limited (“the company”), with winding-up of the company under the Insolvency Act 1986 in the alternative.

The Petitioner also applies to amend his Petition, and for orders restraining the Respondents from using company funds in defending and counterclaiming in a related action (“the property action”) brought against the company in the Chancery Division in Birmingham raising issues in relation to the various plots of land owned by (on the one part) the Petitioner and his wife and (on the other part) the company.

The relevant background can be stated shortly. The company was set up as a vehicle to enable 3 individuals (the Petitioner and the individual Respondents) to engage in property development. In the events which happened, there was only one project taken on relating to land at Staunton in Gloucestershire. .

The Petitioner complains chiefly (though not only) that he has been excluded from management, culminating in his removal as a director. The Respondents complain that the Petitioner has exploited his (and his wife’s) ownership of land adjoining the company’s so as to prejudice the company’s development plans.

The Respondents have made 2 open offers to buy the Petitioner’s shares which the Petitioner has not accepted. The pursuit of the Petition in the face of these offers is (the Respondents say) an abuse of process. The abuse is further confirmed (they say) by the inclusion without good reason of a prayer for winding-up in the Petition, contrary to Practice Direction No. 1 of 1990 [1990] 1 WLR 490. I am invited to conclude that the Petition is brought to bring improper pressure. This conclusion is said to be supported by the timing of the petition and its declared aim to activate stalled negotiations, coincident with the service of a defence and counterclaim by the company in the property action.

The Petitioner’s case on the Petition is that the company is a small private company where all the shareholders placed mutual trust and confidence in each other and all were expected to take part in the management of the business. His exclusion therefore was wrongful and is the primary foundation for the relief he seeks.

The Respondents point to the decision of the House of Lords in O’Neill v Phillips [1999] 1 WLR 1092 at 1107-8, where Lord Hoffmann set out the elements of an open offer made in response to an unfair prejudice petition which, once made, should preclude any complaint of unfair prejudice by an excluded petitioner. I bear those passages very much in mind when considering the open offers that have been made in this case. In broad outline, the requirements are that the offer should be for a purchase at an undiscounted pro rata value to be determined by a competent independent valuer acting as expert, and for provision to be made for the Petitioner’s costs.

I also have in mind the oft-repeated statement that the court’s jurisdiction to strike out a petition is to be exercised very sparingly and only where the clearest grounds are shown for doing so: per Bingham LJ (as he then was) in In re Copeland and Craddock [1997] BCC 294, 300C-D. Specifically in the context of open offers, I was referred to the observation of Lord Millett in the Privy Council in CVC Opportunity Equity Partners Ltd v Demarco Almeida [2002] 2 BCLC 108, 117H to the effect that a respondent is not entitled to have the petition restrained or struck out if the reasonableness of the offer is open to question. Whilst that statement was made in the context of a winding-up petition on just and equitable grounds, I have no doubt that it applies just as much to an unfair prejudice petition. As Lord Millett said at the foot of the same page, there is no difference in principle. Furthermore, a just and equitable winding-up is sought in the alternative in this case.

I turn then to the open offers that have been made.

The first was dated 13^th August 2007. The Respondents by their solicitors on that date offered to buy the Petitioner’s shares “at a full and proper pro rata value of the company”. It was also proposed that the valuation be asset-based, given the nature of the company’s business (and also having regard to the alternative prayer for winding-up), that there be no discount, and that the valuer be agreed between the parties or, in default, nominated by the Court and be appointed as an expert.

The letter, after explaining at some length why according to the writer the Petitioner was not in the particular circumstances entitled to his costs, offered to pay them so long as the Petition was withdrawn (which it would be were the offer accepted).

The offer was expressed to remain open until 4:00PM on 27^th August 2007.

No substantive reply was received within the time limited, nor was any extension sought, though there was ongoing correspondence and activity in relation to both sets of proceedings. By a letter dated 29^th August 2007, the Respondents’ solicitors threatened to apply to strike out the Petition unless it was withdrawn.

Eventually, on 14^th September 2007, the Petitioner’s solicitors replied substantively to the open offer. The letter was inappropriately intemperate and verbose. It complained amongst other things of the “ridiculously short time frame” in the letter of 13^th August, though it is evident from the rest of the reply that further time (which was never sought) would have made no difference. Searching between the forensic barbs, what the letter ultimately said was that any valuation should take place following the conclusion of the property action. A current valuation was inappropriate. Subject to that, the Petitioner’s solicitors confirmed that he wanted to be bought out.

In order to gauge this belated response, it is necessary to consider the property action.

In the property action, the Petitioner and his wife contend:-

It is evident that the value of the company, and therefore of the shares, may be greater or lesser dependent upon the outcome of the property action (which includes a counterclaim for breach of fiduciary duty). Hence the suggestion on the Petitioner’s part that the shares should be valued at the conclusion of the property action.

The Petitioner’s attitude as expressed in the letter of 14^th September 2007 is at odds with the Petition in at least one respect. One of the complaints in the Petition is that the Respondents have taken no steps to sell the company’s property subject to whatever rights the Petitioner and his wife have. This is said to be a prime reason for seeking winding up on the just and equitable ground. The proposed valuation process in the first open offer would no doubt have been on the same basis, i.e., the valuer would on an asset-based valuation have to consider the value of the company’s property subject to whatever rights the Petitioner and his wife may have. The open offer would seem therefore to achieve through the valuation route what the Petitioner was asking to achieve by sale. By his solicitors’ letter of 14^th September 2007, however, the Petitioner now says that the valuation should await the outcome of the property action. This apparent change of position does smack of tactical manoeuvring, and gives rise to at least the suspicion that the Petition is being used to apply improper pressure.

Returning to the chronology of events, on 14^th September 2007 (the same day as the Petitioner’s solicitors’ belated response to the first open offer), the Respondents’ solicitors wrote enclosing an application to strike out (though curiously the copy in the Bundle is dated 17^th September 2007).

I have to say that I do consider that the first offer was a reasonable offer to make in the light of the allegations made in the Petition as presented. It appeared on its face to deal with all the criteria set out in O’Neill v Phillips. However, the Petitioner has now taken the stance that the valuation process could work unfairly to him if (say) he loses the property action but his shares are valued on the basis that the claims he and his wife make in the property action have some prospect of success. Equally, the valuation process might work in his favour if those claims are discounted when ultimately they succeed. Approaching the matter in this way does however undermine the only justification for the winding-up alternative stated in the Petition itself, and makes it for practical purposes very difficult if not impossible for the Respondents to put forward any offer that the Petitioner cannot find some justification for not accepting at this stage.

These considerations raise, to my mind, serious issues as to whether the Petition ought to have been presented at all, at the time it was presented, and whether the Petitioner was earnest in his assertion that he wanted to be bought out at that stage, ahead of resolution of the property action. Anyone who is on the receiving end of section 994 proceedings ought to be able to concede liability at the outset. That means that the proceedings must embody relief which is capable of being identified, formulated and accepted. If, as now appears to be the case, section 994 and winding-up proceedings are pursued without any present intention of accepting an offer which mirrors the relief sought, the only fair conclusion is that they are at best premature and at worst a device for applying improper pressure. Whichever conclusion is correct, the proceedings amount to an abuse of process. Either the first offer should have been accepted, or, if it was too soon to do so, no Petition should have been presented until the Petitioner, following the conclusion of the property action, was in a position to specify what he wanted.

Before expressing a final view, however, I should consider the remaining correspondence.

After further inconclusive exchanges, the Respondents’solicitors made a second open offer on 10^th October 2007.

The 10^th October letter recorded that the earlier offer was an offer of all that the Petitioner had sought (by way of primary relief) on the Petition. The letter went on to deal with the new proposal that the shares should be valued at a price reflecting the outcome of the property action. Alternative offers were put forward:-

These offers were to remain open for 21 days, and were put forward on the basis that the Petitioner’s reasonable costs incurred prior to 27^th August 2007 (the day when the first open offer expired) would be met and that another costs order (arising from a discrete issue) would stand. If either offer was accepted, the Petition would be dismissed.

A substantive reply was dated 25^th October 2007. That reply purportedly reaffirmed that the principle of a purchase of the Petitioner’s shareholding was agreed.

The letter challenged 10^th October 2007 as an appropriate valuation date for the first alternative, because of the impact of further interest charges (a point nowhere taken in the Petition and which could have been avoided or mitigated by acceptance of the first offer).

As to the point that a valuation might take place before the property action was decided, that was roundly rejected (irrespective of the valuation date) because the inherent uncertainty would or might lead a valuer to produce an artificially low valuation. The letter could also have said that the valuation might, with the wisdom of hindsight, have proved artificially high. These considerations merely underline the prematurity of the Petition. Unfair prejudice is not established by exclusion alone, but by exclusion without a fair offer to buy the Petitioner out. Here, an apparently fair offer was made. The Petitioner may have had reasons for not accepting it before the conclusion of the property action, but it follows from this that he cannot complain of unfair prejudice until the outcome of the property action is known.

As regards the second option, a delayed valuation date to the outcome of the property action was also objected to and specific concern was expressed as to the costs of the property action and its potentially depressive effect on the share valuation. Reference was also made to “proven improper pursuit” of the defence and counterclaim in the property action, should the company fail in its defence and counterclaim in those proceedings.

An attempt was made to amend the Petition by complaining of the improper use of company funds in the defence and counterclaim of the property action, and to seek injunctive relief. However, an allegation of breach of fiduciary duty was expressly disclaimed. I cannot see therefore that there can be any grounds for restraining the use of company funds in that respect.

It is said in the proposed amendments that as regards the easements and splay claims, the case against the company is “overwhelming”, although, as regards the option claim, it is conceded that the company’s defence may be arguable. To the extent that the Petitioner and his wife have an “overwhelming” claim (which they have not shown to my satisfaction), the proper course is to apply for summary judgment. If, because of the need to resolve disputed evidence or the like, the overwhelming nature of the claim becomes apparent only at trial, the court has ample power to make a third party costs order under section 51 of the Supreme Court Act 1981, should that be an appropriate course. If that is an appropriate course, relief from unfair prejudice is unnecessary. If it is not an appropriate course, the allegation of unfair prejudice is groundless. I would therefore refuse these amendments were the petition to proceed. It is not legitimate for an unfair prejudice petition to be prayed in aid to remedy real or imagined deficiencies in the Court’s powers to make third party costs orders.

This is not (unlike North Holdings Ltd v Southern Tropics Ltd [1999] 2 BCLC 625) a case where the allegations of unfair prejudice have to be resolved before a valuation can be undertaken, or before the Court can be satisfied that an offer ought to have been accepted. The Petition itself is based on the premise that the company’s property ought to be sold at a price reflecting the property action, so there can be no complaint of a share valuation on the same basis. If however the Petitioner prefers to await the outcome of the property action, the Petition is, as I have said, at best premature.

The letter of 25^th October 2007 also commented on the failure to deal with the Petitioner’s loan account and what was to become of the guarantee he had given. Whilst mention is made in the Petition of the loan account, the only allegation is that repayment has been refused on the grounds that repayment is not due. No relief is sought in this respect, and it is not said that the refusal to repay is wrongful (though the allegation appears in a section of the Petition headed “unfair prejudice”). Were the refusal to repay wrongful, proceedings could no doubt be brought to recover the sums due.

The Petition also mentions the guarantee, but nothing is made of it. Should the Petitioner ever be called upon to pay, he will of course be entitled to an indemnity under the guarantee from the company. I do not see that he can claim entitlement to anything more under section 994, and it presumably remains open to him to cap liability under the guarantee by giving notice.

The letter of 25^th October 2007 also said that the loan account and guarantee were factors which made it more difficult to envisage a fair and proper valuation being carried out. I am bound to say I do not see why this is so, though this could simply be a precursor to the point made in paragraph 38 below. If it is the case that the Petitioner is saying that no fair valuation is possible, one is entitled to ask, as the Respondents do: why he is seeking that relief in the Petition?

Finally, a counter proposal was made in the letter of 25^th October 2007, putting forward (for the first time) a valuation date of 28^th December 2006, but on the assumption that the court had already determined all issues which existed as at that date including the claims in the property action. I am not at all clear what the reference to “all issues … which existed as at that date” means, though they are said, non-exclusively, to include “any recovery in respect of wrongs done as at that date as a result of the counterclaim”. I am not clear what the reference to recovery means either. If it is a reference to whatever may be recovered in the counterclaim in the property action, this again underscores the fact that the process cannot be undertaken until the outcome of the property action is known, as indeed does the assumption that the court had (which it had not) determined at 28^th December 2006 issues which at today’s date still remain to be determined.

Whatever the precise meaning to be attributed to the letter, it seems to be putting forward a different case from that put forward in the Petition, so that the Petition would require significant amendment to raise it. There is a passing reference to December 2006 in the Petition, though no foundation for a valuation at that date is set out, still less a valuation anticipating future events. The letter identifies 28^th December 2006 as the date of the Petitioner’s formal exclusion from management. In the Petition, December 2006 merits mention merely as the date of an (apparently unsuccessful) attempt to remove him, his practical exclusion being said to date back to about September 2006, and his actual removal as a director being April 2007.

The counter-offer is also subject to the proviso that should the company obtain a better planning permission, this should be taken into account in the Petitioner’s favour as the company has had the benefit of the Petitioner’s loan and guarantee. There is however no pleaded case or justification for this relief in the Petition, and as it anticipates future events again indicates prematurity.

I accordingly am of the view that the first offer was one which ought to have been accepted if the Petitioner was serious in his stated wish to be bought out at the time it was presented on the basis which it suggests. I also see no grounds for a just and equitable winding-up in the light of that open offer. None of the answers to the second offer cause me to change that view. On the contrary, the Respondents have endeavoured to meet the Petitioner’s stated concerns, only to be met by a new set of concerns.

It is possible that the Petitioner might at the outset have taken the view that he should be bought out following a resolution of the property action, but that is not the basis upon which the Petition was brought. The present position is, I find, an abuse of process, either because it is premature or because it is being used as a means to exert improper pressure on the company and the majority shareholders, or both. I am therefore satisfied that it should be struck out. I reach this conclusion on the basis of the open offers alone having regard to the terms of the Petition, and not in the light of the declared aim to activate negotiations.

I have considered whether I should invite further amendments to be made to the Petition to allow it to proceed not as a Petition requiring a buy-out on the facts as presently established, but as one requiring a buy-out in the light of whatever may turn out to be the result of the property action and the ultimate planning position. I have already identified the difficulties of pleading a case justifying that result, and how the present Petition fails to do so. The problem with allowing a further opportunity to make the relevant amendments is that the property action and planning position will still require to be resolved before a price can be ascertained. It may be sensible for the Petitioner to await those events, but there is nothing to stop him petitioning then or once the property action is resolved, and that is in my judgment the better course.

Were I to allow the Petition to proceed in an amended form, I would in any event be minded to stay further proceedings on the Petition pending the outcome of the property action. It seems to me highly probable that once the outcome of the property action is known, the parties ought to be able to resolve the question of buy-out, as the major obstacle in the valuation process will have been removed. The prospects of an enhanced planning permission will, it seems to me, be something which will naturally fall for a valuer to determine, whatever the appropriate valuation date.

It is generally undesirable to stay proceedings on a winding-up Petition given that any Order for winding-up dates back to the presentation of the petition. That position is of course ameliorated by the section 127 Order that has been made in the present case, protecting transactions in the ordinary course of business. The amelioration is not complete, however, as there remains scope for dispute as to what is or is not in the ordinary course of business, and the longer the Petition drags on, the more that becomes a potential problem. I therefore do not find this alternative an attractive one. Given my conclusion that the present Petition is an abuse, I am not persuaded that it is right to do anything other than strike it out.

I accordingly strike the Petition out and refuse the injunctive relief sought.

In the light of my primary conclusion, it is not necessary for me to express any view on the impact of Practice Direction No. 1 of 1990.