Kohli v Lit & Ors

The Petitioner (“Ms Kohli”) holds shares in the Fourth Respondent (“Sunrise”) whose affairs she claims have been and continue to be conducted in a manner unfairly prejudicial to her. She seeks relief from unfair prejudice under section 994 of the Companies Act 2006.

Section 994(1) provides as follows:

that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or

that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.”

The general approach of the Court towards an unfair prejudice petition is now reasonably well established on the authorities, and was not a matter of great controversy before me: see, generally Saul D Harrison & Son plc [1995] 1 BCLC 14, especially at 17b-20b, and O’Neill v Phillips [1999] 1 WLR 1092, especially at 1098d-1102f.

There must be both prejudice and unfairness. Prejudice will most often be established by reference to conduct having a depressive effect (actual or threatened) on the value of the petitioner’s shareholding, which will in most cases be a minority holding, typically in a private company with restrictions on transfer. Unfairness, in turn, most often connotes some breach of the articles, statute, or general principles of company law. However, the operation of the section is not necessarily limited to such cases. The test is an objective one. There may be mutual understandings between shareholders giving rise to special rights of a quasi-partnership kind. Even without that, the conduct of the company’s directors may, whether by reason of malevolence, crass stupidity, or something in between, fall so far short of the standards to be expected of them as to lead to the conclusion that the petitioning shareholder cannot reasonably be expected to have the minimum of trust and confidence in the integrity or basic competence of the board that any shareholder is entitled ordinarily to expect. This is so irrespective of any impact on the value of his or her shares, and irrespective of whether any specific breach of the articles, statute, or the general principles of company law is involved.

Companies are nowadays regulated to such an extent that many of the requisite standards of behaviour have a statutory foundation. (This is apart from the statutory enactment of directors’ duties introduced by the Companies Act 2006, which has no impact in this case as the relevant provisions were not in force at the material times.) This is particularly so when considering the amount and frequency of information which should be made available to shareholders and other members of the public. Companies are required to lay annual accounts before their shareholders. Accounts, annual returns, and details of share allotments, changes of officers, and special resolutions, have to be filed with the registrar of companies so as to become publicly available. Strict time limits are laid down, with appropriate sanctions for default. The contents of company accounts are also subject to detailed statutory requirements, likewise backed by sanctions. The requirements vary according to the nature, status and size of the company in question. The freedom of directors to act as they wish is also circumscribed by statute in some significant respects, requiring them (for example) to renew at regular intervals their powers of allotment from the shareholders, and to obtain shareholder approval before entering into significant property transactions with one of their number. In addition, the memorandum and articles of association of a company generally contain limitations and conditions which can all too easily be overlooked.

Being a director is not an easy matter, and requires a responsible approach. The degree of regulation can catch even the most sophisticated of directors unawares, and most directors do not have the requisite level of sophistication and skill to cope unaided with the extensive statutory framework to which they are subject, or the niceties of the company’s constitution. Many become directors of companies to take advantage of limited liability, so as to exploit their entrepreneurial skills and instincts, and may not be temperamentally suited to statutory control or constitutional restraint. There is a strong public interest in encouraging entrepeneurial activity. There is equally a strong public interest in combating abuse which limited liability too often engenders.

It is with such considerations in mind that the principle has evolved that in judging the issue of unfair prejudice, isolated trivial complaints, even when in breach of some legal requirement, having no impact on the value of the petitioner’s shares, or upon any realistic objective assessment of the integrity and competence of the board, will not be visited by the threat of an unfair prejudice petition, but should be left to be dealt with by the regime of sanctions and other remedies the law provides. Likewise, irregularities are more likely to be ignored if the outcome would have been no different if the directors had scrupulously observed their duties, or the constitution (see, for example, Rock (Nominees) Ltd v RCO Holdings Plc [2003] 2 BCLC 493 , paras 139-141, upheld on appeal at [2004] 1 BCLC 439). There is nothing new in this. As Lindley LJ observed in Browne v La Trinidad (1887) 37 Chancery Division 1 at page 17:

Nevertheless, the Court has to have some rational starting point before embarking upon the determination of what is, or is not, unfair prejudice. In Saul D. Harrison , Hoffmannn LJ rejected the proposition that the “reasonable company watcher” should set the relevant standard in any given case, adding that it was more useful to examine the factors which the law actually takes into account in setting the standard. The factors which the law takes into account include the requirements of statute and the company’s constitution, and departures from those requirements have the potential to found a complaint of unfair prejudice if the Court concludes that the departures are sufficiently serious (which will more likely be so in the case of repeated defaults) to undermine trust and confidence in the board, even though there are no enduring adverse financial consequences for the shareholder in question, and even though a particular omitted requirement (for example, to seek shareholder approval) would have been a mere formality. Where, moreover, statute or the constitution lay down absolute standards, not dependent on impropriety or even negligence, the Court should respect those standards, which are there for a purpose, and not be too ready to dismiss anything other than minor, inadvertent departures as “trivial”.

The point I have made can be illustrated by reference to section 994(1)(A) of the Companies Act 2006, introduced by the Statutory Auditors and Third Country Auditors Regulations 2007 (regulation 42) with effect from 6^th April 2008. That provides:-

Thus, there can (and, in the case specified in section 994(1)(A), must) be a finding of unfair prejudice even though the effect of the conduct complained of has no necessary impact on the value of the complaining shareholders’ investment. Moreover, a board acting in good faith may genuinely, and correctly, disagree with (say) the accounting treatments, but removal of the auditor on those grounds will be unfairly prejudicial, reflecting the importance the law attaches to absolute standards of behaviour in the accounting process. Whilst this particular provision is new, I regard it as declaratory (except as to its mandatory application) of the kind of conduct that can amount to unfair prejudice, both today, and in a case concerning events before 2008, as this case does. Having said that, it does not follow, even where unfair prejudice is established, that the Court will necessarily grant relief. There will be cases where the Court concludes that the unfair prejudice is not sufficiently serious to justify its intervention, or its intervention may be limited.

I make these observations because the submissions in this case have ranged between two extremes. On the one hand, Mr Harris for Ms Kohli has portrayed most if not all of the conduct of which Ms Kohli complains as deliberately designed to harm her, which is an allegation of bad faith, made worse by her position as a so-called quasi-partner, as mutual trust and confidence has been destroyed. Mr Griffiths, on the other hand, has understandably set out to rebut the allegations of bad faith, urging me to conclude that, stripped of that label, the complaints do not matter, and that Ms Kohli had no special rights or expectations as a quasi-partner, which she never was, or is no longer. These extremes give rise to the risk that the Court will miss the point. I have to decide whether the conduct of which Ms Kohli complains, objectively viewed in the light of the standards the law recognises, was unfair, and (if so) whether she was prejudiced. Of course, if bad faith is made out, Ms Kohli will in all likelihood succeed. If she had additional rights as a quasi-partner, that also may make success more assured. But if she does not make out her case of bad faith, and is not a quasi-partner, she may still succeed. As Hoffmannn LJ explained in Saul D Harrison:-

It is also worth remembering that in Saul D Harrison, Neill LJ said this:-

I also note what Arden J (as she then was) said in Re BSB Holdings Plc (No 2) [1996] 1 BCLC 155 at 242:-

The sentiments expressed in this passage are unaffected by the subsequent decision of the House of Lords in O’Neill v Phillips, as that case was concerned principally with more precisely identifying the circumstances in which conduct which is otherwise lawful should be proscribed by reference to equitable considerations, and in rejecting (a point I have very much in mind in the present case) the concept of no-fault divorce in the company context.

With those preliminary observations in mind, I turn to consider the complaints made in the present case

Immediately before the share allotment following the rights issue in 2005 mentioned below, Ms Kohli held 15% of the issued shares of Sunrise. As a result of that allotment, her shareholding was diluted, so that she now holds approximately 8.33% of the Sunrise shares. One of the principal (but by no means the only) complaint in the petition relates to the propriety of that allotment. Ms Kohli claims that she did not know about the rights issue and ensuing allotment until well after they had taken place. The shares in question were allotted to a company, Asian Broadcasting Corporation Ltd (“ABC”), then owned by the First Respondent (“Dr Lit”), and now owned by a Lit family trust. Other companies associated with Dr Lit and the family trust are a UAE company, Global Radio Services (“GRS”) and a Gibaltarian company, Leviathan Associates International Ltd, which now apparently holds all the issued shares of ABC. ABC has now been renamed Litt Corporation Ltd. I shall refer to that company hereafter (despite the change of name) as ABC for consistency’s sake and in order to avoid confusion. ABC acquired the shares allotted to it in 2005 at, Ms Kohli complains, substantially less than their true value. Its intended and actual effect was to dilute and diminish the value of her shareholding. She also complains of a later increase of share capital in 2007 as a preliminary (she says) to a further improper dilution of her shares. Moreover, the 2007 increase was (she says) effected deceptively, after she was untruthfully told that the EGM to consider the resolution to increase the share capital would not take place. After it occurred, she was untruthfully told (in the Respondents’ defence and in Dr Lit’s witness statement) that it had not.

Amongst other relief, Ms Kohli claims that she should be bought out by the individual respondents upon an undiscounted basis valuing her shareholding as 15% of the value of Sunrise as a whole – that is to say, as if the 2005 share allotment had not occurred, and treating her as a quasi-partner. She also seeks relief (including where appropriate an upwards adjustment of the purchase price of her shares) to remedy other instances of alleged unfair prejudice, in particular, non-payment of dividends, improper payments to Dr Lit or companies associated with him, improper treatment of those payments in the accounts, the understatement of the 2004 profits in the accounts, the late filing of accounts, general lack of accounting transparency, the failure down to and including 2006 to hold duly convened AGMs on notice to Ms Kohli to consider the accounts, occupation by Dr Lit and his wife of a company property (“Jersey House”) without payment, and the circumstances of the subsequent purchase by Dr Lit of Jersey House from Sunrise.

In the early to mid-1980s, Ms Kohli and Dr Lit struck up what was delicately described before me as a “romantic” relationship. The extent and duration of the “romantic” aspect of the relationship is in issue. Suffice it to say that Ms Kohli’s degree of emotional commitment (or, as Dr Lit would see it, aspiration) comfortably outstripped his, and she was deeply upset when Dr Lit eventually came to marry someone else in May 1995. Until then, and even afterwards until 1999, they were at least for the most part close associates and friends, though the relationship became severely strained over time. Whether and to what extent they were anything else is not something I need to decide.

Sunrise was incorporated on 23^rd January 1989 under the name Vethit Limited. It is a private company whose Articles embody restrictions on transfer. Its name was changed to West London Radio Limited on 17^th February 1989 and to its present name on 9^th December 1992. It was acquired by Dr Lit off the shelf as a vehicle for a group of individuals describing themselves as the West London Radio Consortium, which included Dr Lit and Ms Kohli. The idea was to obtain a radio licence from the Independent Broadcasting Authority (subsequently the Radio Authority). Dr Lit says that Ms Kohli’s involvement in the Consortium (and subsequently in the affairs of Sunrise) was merely as a typist, though I consider this to be an understatement. She clearly did have typing skills, which she used, but she was also involved in determining the content of the licence application and (subsequently) in staff recruitment and training. She also took responsibility initially for Sunrise’s general administration, and answered listener correspondence. She was never more than part-time (she chose not to leave her full time job with British Airways) but her contribution was real, and she came to be substantially remunerated, latterly in excess of £40,000 per annum. In addition, she appears to have invested significant sums in Sunrise. She also gave (with others) a guarantee to Sunrise’s bankers. Dr Lit initially denied that any guarantee was given, but this denial was wrong.

Although Ms Kohli’s initial contribution to Sunrise was real, it was not as great as she claimed. In her witness statement of 11^th April 2008, she claimed to be “largely responsible” for the initial application for a radio licence, although assisted to a significant extent by Dr John Walshe (“Dr Walshe”). In fact, as Ms Kohli accepted in cross-examination, Dr Walshe was largely responsible for the licence application, with assistance from her. The truth was therefore in this respect the reverse of what she said in her witness statement. This exaggeration was, I felt, a reflection of the sense of grievance she feels about having been gradually side-lined, as she sees it, in both her personal relationship with Dr Lit, and in her involvement with Sunrise, from which she feels forced out. Although she gave every appearance of telling the truth generally, I did consider that her grievances may have caused her to approach history with a warped sense of perspective, or even to tell untruths. Apart from the evidence of her own input into the licence application measured against that of Dr Walshe, I formed the view, during her cross-examination, that the extent of her involvement in recruitment and training (though she undoubtedly had some input) was probably exaggerated also. In addition, she endeavoured to persuade me that she had received important assurances at the time of the settlement of previous proceedings in 2002 when manifestly she had not. Most important of all, in one important respect, concerning the service of notices (including those for the 2005 rights issue) I consider, for reasons I shall explain, that her evidence was simply untrue. For this reason alone, I have approached the remainder of her evidence with caution, despite her truthful demeanour.

The principal witness on the Respondents’ side was Dr Lit. His evidence was described by the Respondents’ Counsel (Mr Griffiths) in closing submissions as a “stream of consciousness”, which I think was meant to be a good thing. It came out more in a torrent than a stream, and was often difficult if not impossible to follow. Dr Lit was incapable of sticking to the point and appeared at times to be evasive. He clearly harboured a major grudge towards Ms Kohli. He described her as a “financial stalker” in one breath, whilst claiming to wish her well in the next. He also justified various alleged actions and inactions on his or Sunrise’s part by overstating the extent of his majority shareholding, which, though admittedly large, grew in his evidence to as much as 99%. The impression he gave (though he denied this) was that he could do more or less what he wanted with that shareholding, and therefore with Sunrise. He also unjustifiably belittled, as I have already noted, Ms Kohli’s contributions to Sunrise early on, just as she herself was guilty of overstatement. His evidence lacked careful thought (for example his denial that any guarantee was ever given) and was occasionally incredible (for example his denial that he had read an October 2003 report on restructuring prepared by a solicitor, Anita Preston). He was also responsible for the false statements concerning the 2007 EGM to which I have referred in paragraph 16 above, which he could not plausibly excuse. I have approached much of his evidence with caution, though it is fair to say that he obviously has entrepreneurial talent and drive in abundance. I did also find his evidence on the business strategies and direction of Sunrise and its subsidiaries, including his dealings with Sunrise’s bankers, helpful.

On 17^th February 1989, directors of Sunrise were appointed: the Second Respondent (“Mr Jain”), Dr Walshe, Ms Kohli and Dr Lit. Ms Kohli also became company secretary. Dr Lit became Chief Executive Officer.

The directors at the date of the petition were Dr Lit, Mr Jain and the Third Respondent (“Tony Lit”), who is Dr Lit’s son. Mr Jain is a long-standing friend of Dr Lit, as was Dr Walshe. Dr Walshe is no longer associated with Sunrise. Tony Lit was managing director for a while, though he stood down from that post to fight a by-election in 2007. He has now rejoined Sunrise as group sales director. There were in the past other directors, independent in the sense of having no prior connection with Dr Lit, but none of them remain.

Ms Kohli ceased to be company secretary on 18^th October 1998, and resigned as a director on 23^rd April 1999. The present company secretary is Sonia Daggar (“Ms Daggar”). Whilst a director, Ms Kohli attended directors’ meetings and thereby participated in many significant decisions affecting Sunrise. Sunrise started broadcasting as Sunrise Radio on 5^th November 1989.

The original shareholders of Sunrise were Dr Lit and Ms Kohli, though others soon followed. All those shareholders acquired their shares at par, and no further shares were issued until 2005. Sunrise now has an issued share capital (following the 2005 share allotment to which I have referred) of 22,500,000 ordinary shares with a nominal value of £0.02p per share. They are currently held as follows:

Immediately before the 2005 allotment, the only difference was that ABC held 6,264,700 rather than the 16,264,700 shares it came to hold afterwards. Before that allotment, therefore, Dr Lit and ABC between them held 78.33% of the shares, which was enough to give them effective control, including the ability to pass special resolutions. ABC subscribed under the rights issue at par for a further 10,000,000 shares, which cost it £200,000. The combined shareholdings of Dr Lit and ABC accordingly now amount to 87.89% of the total shares in issue.

There were formerly a dozen or so other shareholders, all friends or business associates of Dr Lit, being chosen (apparently) to give credibility to licence applications. With the exception of the individuals appointed directors, they played no active part in the affairs of Sunrise. They have subsequently been bought out by Dr Lit or ABC, or their shares have been forfeited in circumstances which are not at all clear to me. Mr Chana’s shareholding has also reduced over time, but has not been eliminated entirely. Tony Lit and Paramjit (known as “Bobby”) Lit (another child of Dr Lit) were not shareholders originally. They were given shares by Dr Lit subsequently. If their shares are added to those held by Dr Lit and ABC, the combined shareholdings of the Lit family including those held in the family trust amount to 91.23% of the total shares in issue.

Ms Kohli set out a list of the shareholdings as she says they were in 1991 in paragraph 24 of her witness statement of 11^th April 2008. According to that list, she and Dr Lit then held a similar number of shares, but they were by no means in a majority at that stage. 8 of the individuals in that list apparently ceased to be shareholders in 1991.

Also at around this time, Dr Lit set up ABC. Many of his and the bulk of Ms Kohli’s shares were subsequently transferred into ABC (though Annual Returns continued to show Ms Kohli as still registered in respect of 50 of her shares) which in turn issued shares to the 2 of them. The idea was that ABC would acquire others’ shares (as in fact occurred) and effectively take control of Sunrise. According to Ms Kohli, Dr Lit told her on many occasions that Sunrise was their business. I do not however think this can have been more than an aspiration, as there were other shareholders (and directors) who were not privy to statements of this kind. Nevertheless, the fact that Ms Kohli and Dr Lit both placed their shares in ABC may be seen as an indication of the relationship of trust and confidence then extant between them. Despite the transfers to ABC, Ms Kohli claims to have remained beneficially entitled to the shares she transferred, and she was so held out by or on behalf of Dr Lit to the Radio Authority and the Inland Revenue. Dr Lit in his evidence sought to distance himself from these instances of holding out, blaming Ms Kohli for documentation sent by him or on his behalf. I was not impressed by this evidence, though it is odd that Ms Kohli should have had shares in ABC as well as (according to her) remaining beneficially entitled to the Sunrise shares transferred in return. Be that as it may, a claim subsequently brought by Ms Kohli for the return of her shares was eventually compromised in 2002 on the basis that ABC held Sunrise shares for her as nominee. The shares she now holds (apart from the 50 shares which remained registered in her name) were transferred to her in consequence of that compromise. She gave up her entitlement to ABC shares at the same time. The total number of shares she obtained under the compromise was less than her previous entitlement, the difference being referable to financial adjustments in relation to other claims. Claims in relation to a property known as 89 St Stephen’s Road, Hounslow, were also compromised in 2002, though Dr Lit inexcusably failed to comply with his obligation to transfer that property to Ms Kohli until 2007, and then did so only in response to an application for summary judgment. This failure reflects, I think, the degree of enmity now harboured by Dr Lit towards Ms Kohli.

Ms Kohli claims that Sunrise was a quasi-partnership in which she was to have a management role, and that her status as shareholder was dependent on a continuing relationship of trust and confidence.

It is well established by the authorities I have already referred to that a shareholder may, as well as relying upon shareholder rights under the general law and the Memorandum and Articles of Association, pray in aid, in the context of section 994 and its predecessors, equitable considerations arising from understandings between the shareholders (formed at the inception of the relationship or subsequently) as to the basis of association between them, a departure from or frustration of which may give rise either to “just and equitable” grounds for winding-up, or a finding of “unfair prejudice”, or both. This has particular significance in the case of a private company which has no ready market for its shares, and where (as in this case) the articles contain restrictions on transfer.

I accept that Sunrise was formed originally on the basis that Ms Kohli and the other directors then appointed should have a management role, and that the continuing association between the shareholders was initially dependent on a continuing relationship of mutual trust and confidence. All the original shareholders must have understood this, including the various other friends and associates of Dr Lit who became shareholders, as he must have explained to them what the intended management set-up and basis of association was. However, the petition is not based on Ms Kohli’s exclusion from management, she having resigned as a director in 1999, remaining a shareholder. It is thus difficult to see the relevance of the quasi-partnership point so far as any issue of unfair prejudice is concerned. Nor is it enough for Ms Kohli simply to declare that she has lost trust and confidence in Dr Lit and the other directors, as no-fault divorce is not available in this context. The failure of trust and confidence must be justified by reference to some unfair conduct on the part of those in control, and that conduct, if otherwise lawful and proper, will not be unfair simply because Ms Kohli disapproves of it.

Ms Kohli did also claim in her evidence that she received assurances at the time of the 2002 settlement that she would be kept fully informed, and be treated fairly. She attributed this at one stage to the terms of a Tomlin Order of 6^th June 2002 effecting the compromise, though perusal of the Order itself contradicts that assertion.

Ms Kohli also sought to rely on solicitors’ correspondence in April and May 2002. I admitted this correspondence in evidence, though expressed to be “without prejudice”, following the decision of the Court of Appeal in Muller v Linsley and Mortimer [1996] 1 PNLR 74, a decision that has only partially survived the subsequent decision of the House of Lords in Ofulue v Bossert [2009] 2 WLR 749. In allowing the evidence in, I relied on both of the grounds for the decision in Muller. As one of the grounds survives (implied waiver) I have not needed to review my decision to admit the evidence. I held that there had been an implied waiver, as Dr Lit in paragraph 10 of his 2nd witness statement said that he assumed that Ms Kohli shared his view of the future (namely a future sale of the group to a bigger company or a flotation) asking the question:-

Ms Kohli was allowed to rely on the “without prejudice” correspondence to show amongst other things that rather than wishing to settle the litigation in return for a minority interest she really wanted to be bought out. I held that the reference by Dr Lit to Ms Kohli’s wish in settling the litigation on the terms eventually reached operated as an implied waiver of the “without prejudice” negotiations. The reasons for the settlement had been put in issue by the Respondents, and the resolution of that issue could not fairly be considered without reference to the negotiations revealing the true reasons. I also allowed the evidence in on the footing (derived from the judgment of Hoffmannn LJ in Muller, with which the other 2 members of the Court agreed) that the correspondence contained statements which were relevant independently of any admission. However, the approach of Hoffmannn LJ in that case is now no longer good law.

Ms Kohli also sought permission to amend her petition during the course of the trial to allege that “in the light of” the correspondence to which I have referred, she assumed that Dr Lit would treat her fairly and in accordance with the law and Sunrise’s articles in future and that while she would no longer be involved in the operations of the Company she would be kept informed of such matters. In fact, the correspondence tended to show the reverse, as Ms Kohli was asking to be bought out by Dr Lit on the grounds that he could not be trusted, and might dilute her shareholding or pay himself large amounts to deprive her of dividends. I accordingly refused to allow the words “in the light of” to be introduced by way of amendment, though I did allow the correspondence, and Ms Kohli’s alleged assumption, to be pleaded. In the event, Dr Lit declined to buy her out, so Ms Kohli received Sunrise shares from ABC under the compromise. She told me that she decided to give Dr Lit (and his associates within Sunrise) the benefit of the doubt and take them on trust. In reality, she had no choice. This did not give rise to a relationship of special trust and confidence creating rights or expectations outside the general rights enjoyed by any shareholder.

Ms Kohli’s attitude of taking Dr Lit and his associates “on trust” was no more than a reflection of the fact that all shareholders are entitled to expect the board to act in a way which is both trustworthy and “fair” in the section 994 sense. In deciding what is “fair”, the court has regard to the fiduciary obligations that directors owe to the general body of shareholders, the terms of the memorandum and articles of association, and the general requirements of company law, including the statutory framework. Ms Kohli had, in the circumstances of this case, no general expectation after the 2002 compromise to be treated any better, or worse, than that.

This conclusion is however subject to one qualification. The intention of Dr Lit and the other directors has (since well before 2002) been to build up a thriving group with a view to its ultimate sale or flotation at some point in the future. In addition to the passage in Dr Lit’s witness statement to which I have referred, the intention was specifically pleaded in paragraph 26B of the Respondents’ re-amended defence, and is, according to the Respondents, why Sunrise has not adopted a dividend policy. Dr Lit says this was the strategy known to all within the company, including Ms Kohli. Thus, Sunrise has acquired shares in other companies and established a number of operating subsidiaries in expanding the radio and other businesses of the Sunrise group of companies. This process of expansion started while Ms Kohli was still a director, with her apparent approval. Dr Lit told me in evidence that he hopes to exit in this way in the next 2 years, though later on in his oral evidence he stated that the difficulties Sunrise is now facing (attributable largely to too rapid an expansion coupled with the growth of competition, the collapse in demand for radio licences and delays in the DAB roll-out) would be over in 3-4 years. By contrast, Ms Kohli, in complaining about the non-payment of dividends, denied that she was ever told of the aim of a sale or flotation. She also denied the intention of a sale or flotation in her reply.

I accept that the expansion of the business, with a view to its ultimate sale or flotation, has always been the medium to long-term aim. I also have no doubt that this aim was understood and accepted by Ms Kohli (despite her denials) and all others within Sunrise. In this respect, I prefer Dr Lit’s evidence, which was confirmed by the way business was built up, including during Ms Kohli’s time as a director. Dr Lit’s evidence was also corroborated by discussions within the business. Thus, item 3 of the board minutes of 6^th March 1991 record an intention “to go ahead and get ourselves listed”. Later, a company called Asian Radio Plc was apparently set up as a vehicle for a takeover, which would release both cash and shares in the Plc for the then shareholders of Sunrise: see the Sunrise board minutes dated 10^th January 1992. In similar vein, item 8 of the minutes of 26^th April 1992 contains the expression “… bearing in mind we are going for Plc”. This did not materialise at the time. However, a public offer was made which failed to meet the minimum subscription, and a sale and purchase agreement between Sunrise and a company called Asian Radio & Television Plc was in consequence regarded as no longer binding: see the Sunrise board minutes dated 4^th and 9^th August 1992. Ms Kohli was present at all the above meetings. In addition, a version of the minutes of a further board meeting held on 18^th October 1998 prepared by Ms Kohli records the following:-

In retaining her 50 shares in 2002, and taking a transfer of the remainder of her shares from ABC, Ms Kohli must (despite, or even because of, her fears as expressed in the solicitors’ correspondence) have harboured at least a hope that she would eventually be able to exit from her shareholding, which was otherwise an uncomfortable position to be in, via a sale or flotation of the Sunrise group. It can fairly be said that this was one of the expectations she had when her relationship with Sunrise and Dr Lit was a happier one, and that, whilst the expectation of a management role did not survive her ceasing to be a director, or the 2002 compromise, this expectation, of having the opportunity as shareholder to enjoy the fruits of a sale or flotation, did. It was in fact the only realistic expectation she can have had, even though she had no wish to be a minority shareholder after 2002, for the reasons set out in paragraph 10 of Dr Lit’s 2^nd witness statement. Ms Kohli does not of course complain in her petition of a failure to organise a flotation or sale hitherto, and could hardly do so on the evidence, as current economic conditions do not favour that course. There would in any event be great difficulties in bringing any such complaint within the terms of section 994. Whilst I have labelled her only hope of an exit as an expectation (a dangerous word, perhaps, given the doubts expressed by Lord Hoffmann in O’Neill v Phillips over the wisdom of his own introduction of the term “legitimate expectations” in Saul D Harrison) I am not saying that this gave Ms Kohli any right to insist on a sale or take-over being arranged. This may however be a relevant consideration when I come to determine whether the normal expectation of a shareholder that profits would be distributed as dividend was abrogated or qualified: see Fisher v Cadman [2006] 1 BCLC 499 at 528, paragraph [90]. This consideration may also be relevant (if the point arises) to the terms of any buy-out order.

I turn to consider the specific matters of which complaint is made in the petition. Some of them overlap. For example, the need for the 2005 rights issue is challenged by Ms Kohli. She also says, to the extent that the need is made out, that it was caused or significantly contributed to by overdrawings of Dr Lit or companies associated with him. In addition, the 2004 accounts are alleged to have understated the true profits of Sunrise. I shall deal with all of the petition points in as orderly a sequence as possible. In doing so, I shall not necessarily mention every instance of overlap. I have however had the overlap very much in mind when expressing the conclusions I set out later.

On 16^th August 2005 a special resolution of Sunrise was passed increasing the nominal share capital of Sunrise from £270,000 to £570,000. On 19^th October 2005 another special resolution was passed authorising the directors of Sunrise unconditionally to allot and issue further shares. On the same day the directors agreed to allot 10,000,000 further shares to ABC at par, realising the sum of £200,000.

Under Sunrise’s articles, the shares had to be offered in the first instance pro rata to existing shareholders. Ms Kohli should have had the opportunity to subscribe for her proportion of this rights issue (assuming it otherwise to have been a proper step for the directors to embark upon). She complains that she was not offered the opportunity to subscribe, and additionally says that it was unnecessary, having as its object the dilution of her shareholding. The Respondents say she was given that opportunity, and that the rights issue had the genuine object of raising much-needed capital. Ms Kohli also complains that she did not have sufficient information to make an informed decision, as the last audited accounts were to December 2003. However, the Respondents claim that Tony Lit sent management accounts for 2004 to Ms Kohli in August 2005, together with information for the first 5 months of 2005, which was sufficient to enable her to make an informed decision.

The first issue therefore is whether Ms Kohli received notice of the relevant shareholders’ meetings, together with notice of her right to subscribe for the rights issue shares, and the management accounts and other information. She says that she did not. The Respondents say she did.

I should put this allegation into a broader context. Ms Kohli says that she received no notice of any meeting after the 2002 settlement until 2007. She also says that she did not receive other significant communications in 2005, namely 2 letters from the then company secretary Shammy Batra (“Mr Batra”) and Tony Lit (dated 7^th April 2005 and 4^th May 2005 respectively) requiring Ms Kohli to pay up her partly-paid shares (which were only 75% paid up) and a further letter from Tony Lit (dated 3^rd August 2005) sending her the management accounts and information to which I have referred.

Despite this, documents exist suggesting that notices of the 2005 meetings, and of most at any rate of the AGMs since 2002, were sent to Ms Kohli. Copies of the notices that have survived are addressed to her at the correct address. Likewise, copies of the 2005 letters (mentioned in the previous paragraph) addressed to her exist, and the first of those letters was referred to in a board minute dated 3^rd May 2005. The same minute also records the decision that Tony Lit should send another letter. The letter he claims to have sent in this connection is dated the next day.

I am invited to conclude that none of these notices or letters was sent, but that copies (and, presumably, the minutes of 3^rd May 2005) have been prepared to create the impression of their having been sent.

It is a sad reality that from time to time letters and notices, though sent, may not arrive. However, in the present case, Ms Kohli’s address was known. It is simply inconceivable (as both Counsel accepted) that all of these letters and notices went astray in the post. They were either not sent, and a deceptive record was created giving the appearance of their having been sent, or they were both sent and (in all probability) received. The first possibility suggests a deliberate policy (fairly described by Mr Griffiths for the Respondents as a conspiracy) to which a number of people in Sunrise were parties. The second possibility suggests that Ms Kohli is not telling the truth about their non-receipt.

Ms Daggar and Tony Lit gave evidence of posting. Ms Daggar said that she put duly addressed letters and notices regarding the 2005 meetings to Ms Kohli in Sunrise’s post room. There was no evidence from anyone in the post room to confirm posting, but in the nature of things I would not expect any individual responsible for the routine posting of letters to remember any particular letter (I deal with the suggestion that the lady in the post room was acting under Dr Lit’s instructions below). Further, I do not think (despite contrary suggestions in her oral evidence) that Ms Daggar remembered putting these particular letters and notices in the post room, and I treat her evidence as being evidence of what she would have done. Similarly, Tony Lit claimed to remember the actual posting of the letters he sent, but I doubt that he did have a specific recollection of posting. Again, I treat his evidence as indicating what his practice was, which was to post important letters he wrote in a post box near his home. He got into a muddle over whether the management accounts and other information he claimed to have sent were posted on the way home, or from home, but that was I consider a reflection of his lack of genuine recall rather than disingenuity on his part.

Despite my reluctance to accept that Ms Daggar or Tony Lit had an actual recollection of posting, they did come across as honest witnesses, who were doing their best to help me. I do not think it at all likely that they were part of a conspiracy to cheat Ms Kohli. In saying this, I do not overlook the fact that Ms Daggar’s witness statement was flawed in one other significant respect – she agreed with everything Dr Lit said in his draft witness statement, which included (judged by the final signed version) the incorrect assertion that the 2007 EGM (increasing the share capital further) did not take place. Her explanation that this statement was not in the draft lacked conviction. The more likely explanation is that she did not read the draft carefully enough. I do not however think she was telling a deliberate untruth. Dr Lit’s explanation was that he thought he was merely saying that the rights issue did not take place (which it did not). On this hypothesis, he clearly did not read his own witness statement carefully enough. I regard that explanation as lamentable, albeit probably true. I think it most unlikely that he would deliberately have told a lie about something which was so readily detectable, and was in fact detected as this resolution was filed timeously with the registrar of companies. I am not prepared to find, as Mr Harris for Ms Kohli invited me to do, that the filing of the resolution was a mistake.

So far as Dr Lit is concerned, he regarded the notion that Ms Kohli did not receive any of these letters and notices as preposterous. He seemed genuine in that stance. I do not think he was party to some sort of conspiracy deliberately to withhold notices from Ms Kohli. He was not himself involved in the administrative side of Sunrise’s business, so could not give any evidence as to the sending of the notices and letters, though he was able to confirm that he received all relevant letters and notices himself. Moreover, for much of the time between 2002 and 2006, he was living abroad, though coming to England at regular intervals.

Surprisingly, when pressed in cross-examination with the proposition that her evidence meant that 3 people were lying, Ms Kohli stated that she was not saying that anyone was lying, only that she had not received notices of the particular meetings. I found this answer somewhat disingenuous. Less surprisingly, this was not the approach of Mr Harris. He rightly submitted in his written closing submissions that it is simply incapable of belief that all of the letters or notices were lost in the post, and invited me to conclude that the non-posting was deliberate. This must have accorded with his instructions, which makes Ms Kohli’s answer in cross-examination even more surprising.

I would add that, as the pattern of alleged non-posting extended from 2003 down to 2007, the number of parties who must have been privy to this practice was not simply 3 (Dr Lit, Tony Lit and Ms Daggar) but included Mr Batra (Ms Daggar’s predecessor as company secretary, who, as well as sending out routine notices, sent the letter of 7^th April 2005 and reported its lack of response to the board on 3^rd May 2005). It was suggested in closing submissions by Mr Harris (I think as an alternative) that the “lady in the post room” may have been acting under Dr Lit’s instructions not to post the rights issue notices and letters, even if they were placed in the post tray by Ms Daggar, and that Ms Daggar would be none the wiser. The same observation presumably applies to other notices and letters between 2003 and 2006 inclusive, and possibly to Mr Batra as Ms Daggar’s predecessor. I consider this to be implausible in the extreme, and do not consider that the failure to call the lady in the post room or Mr Batra comes near to counterbalancing this implausibility.

For the sake of completeness, I mention that Mr Jain (though a respondent) was not said to be a party to the deliberate non-sending of notices, and nothing was put to him in that connection in cross-examination. Nor, though Tony Lit was questioned about the letters he claimed to have sent, was it put to him that he was party to a decision not to send the rights issue notices and letters. I also place no weight on the fact (relied upon my Mr Harris) that one of the copies of Tony Lit’s 2005 letters was signed, and the other not. I regard this as a matter of chance. Moreover, Ms Kohli does not suggest that the one was sent, and the other not. She says neither was sent, whatever the form of the copy.

In the absence of some sort of conspiracy, it is inherently improbable that all the letters and notices to Ms Kohli would not have been received by her. This infects her allegations concerning the 2005 rights issue. I do not accept that there was such a conspiracy in this case, and reject her evidence that she did not receive the notices and letters regarding that rights issue. The probability is that she did receive them. Her evidence was to the effect that had she received notice of the rights issue, she would have given serious consideration, following advice, to subscribing for the shares, as she had the resources needed for that purpose (approximately £30,000). I accept that she could have subscribed had she chosen to do so, but, as I am persuaded that she did receive the notices and letters in question, find that she chose not to.

The same conclusion applies to other notices of AGMs in the period 2003-2006, and to the letters concerning the call on Ms Kohli’s shares, as well as Tony Lit’s letter sending management accounts and other information to Ms Kohli. I am satisfied on a balance of probabilities that the notices were sent to all shareholders, including Ms Kohli, and that she received the 3 letters to which I have referred. I reach this conclusion notwithstanding my later finding that another purported EGM, on 26^th June 2004, replacing Sunrise’s Memorandum and Articles of Association, was not validly convened. That particular meeting was not the focus of any oral evidence, and I should draw no general conclusions about the other meetings and letters from my later finding.

I also reach this conclusion without placing any reliance on 2 other items of evidence. The first is the evidence of Dr Lit of 2 telephone conversations he claimed to have had with Ms Kohli in the summer of 2005 about the rights issue. The second is the evidence of a Mr Sabharwal, who claimed to visit Ms Kohli’s house in October 2005 where she discussed, in his presence and in the presence of a “Sikh” financial adviser, a communication on Sunrise-headed notepaper demanding money.

I have severe doubts about the veracity of each of these items of evidence, and Mr Harris submits that they are concocted (in Mr Sabharwal’s case in collusion with Dr Lit) which throws light on the falsity of the entirety of the Respondents’ evidence on the point.

Dr Lit’s evidence was strange. Ms Kohli is supposed to have rung him to have urged herself to take up the rights issue, a point which makes no sense. Moreover, I would have expected him to mention any significant telephone call to Tony Lit, yet Tony Lit’s letter to Ms Kohli’s solicitors of 15^th May 2006 said that Ms Kohli had not replied to any Sunrise correspondence in the previous 12 months. The point only emerged in Dr Lit’s second witness statement. On the other hand, Ms Daggar remembered Dr Lit telling her that Ms Kohli might subscribe for shares, which she attributed to a telephone call which Dr Lit told her he had had with Ms Kohli. However, this particular piece of evidence was given without much conviction, and I was under the impression that Ms Daggar had no clear recollection on the point. Moreover, the impression Ms Daggar was under (that Ms Kohli “might” subscribe) was at odds with Dr Lit’s evidence, which was to the effect that Ms Kohli said she would subscribe. In the circumstances, I cannot safely rely upon Dr Lit’s evidence on this point.

As to Mr Sabharwal, his evidence was flawed in a fundamental respect. He insisted that the meeting he had with Ms Kohli in her home was in the early part of October 2005. Yet by this time the rights issue offer had lapsed. I can see no occasion for Ms Kohli discussing the rights issue at this stage, and can see no reason at all for her discussing it at any stage in the presence of a virtual stranger (she says he was a complete stranger). Mr Sabharwal also insisted that the Sikh financial adviser rang the door bell before coming in. Ms Kohli did not have a Sikh financial adviser, and had no door bell. Mr Sabharwal was however able to describe the internal lay-out of Ms Kohli’s home. Nevertheless, it was apparent that he had a grudge to bear against Ms Kohli as a result of money he had lost in a failed business venture with Ms Kohli’s sister and her partner. He lied about previous proceedings arising out of that failed business venture. Both Ms Kohli and her financial adviser denied that there was any meeting with Mr Sabharwal. In the circumstances, I cannot safely rely upon Mr Sabharwal’s evidence either.

I reject the submission that Dr Lit was a party to the concoction of Mr Sabharwal’s evidence. The evidence came to light when Mr Sabharwal (whose wife works at Sunrise) approached Dr Lit in Sunrise’s car park and discussed his grievances, which in turn resulted in Dr Lit discussing his own litigation concerning Ms Kohli. Dr Lit gave some contradictory evidence about exactly what was discussed. However, I do not consider that Mr Sabharwal’s evidence was a put-up job. He gave the evidence he gave against the background of the grudge he bore. He no doubt thought it was helpful to Dr Lit, and harmful to Ms Kohli. It was not, but that did not make it Dr Lit’s concoction, in whole or in part.

Even if I had found that Dr Lit was a party to the concoction of Mr Sabharwal’s evidence, that would not, whether taken alone or in conjunction with my rejection of Dr Lit’s own evidence of the 2 phone calls, overcome the inherent improbability of none of the notices and letters having been sent to and received by Ms Kohli, including the rights issue letters and notices.

Mr Harris also suggested that Tony Lit’s letter of 15^th May 2006, which (as I have said) stated that Ms Kohli had not been answering Sunrise correspondence, was self-serving and therefore demonstrative of the fact that there had been no such correspondence. This point only has force, however, if one assumes some sort of conspiracy, and does not prove a conspiracy.

Mr Harris also said that there was no sufficient explanation of why no-one from Sunrise chased Ms Kohli up about the rights issue. I agree that if Dr Lit was, as he insisted, keen to get others to subscribe, one might ordinarily have expected him (or others within Sunrise) to follow the matter up with Ms Kohli. However, there is some unreality in this point. Relationships with Ms Kohli were not happy following the earlier litigation, to which Sunrise, as well as Dr Lit and ABC, were parties. That was one of the points made by Mr Harris against the existence of the 2 telephone calls to which I have referred. The same point would also explain why no-one, least of all Dr Lit, would follow the matter up with Ms Kohli. There was no requirement under the articles or under the general law that this should be done, though it may be (for reasons I consider later) that it would have been prudent for someone within Sunrise to have made contact with Ms Kohli concerning the rights issue. I cannot however fairly regard their not having done so as an indication that the original notices and letters were not sent. The only formal requirement was that Ms Kohli should be given due notice. I find that she was.

Mr Harris also pointed to the fact that Ms Kohli did not complain of the rights issue until much later, as she surely would have done had she known about it earlier. Specifically, no mention was made of the rights issue in the letter from Ms Kohli’s solicitors, dated 16^th March 2006, to Sunrise, complaining of the late filing of the 2004 accounts, and an Annual Return due in February 2006. I do not regard this, either alone or with the other points I have already mentioned and those I shall mention, as sufficient to outweigh the inherent improbability to which I have referred. The letter of 16^th March 2006, apart from raising a query concerning the status of one of Sunrise’s subsidiaries, was about the late filing of documents. Ms Kohli had other complaints which she did not then raise, namely the failure (as she alleges) to hold duly convened AGMs on notice to her, and the late filing of earlier accounts. Moreover, she did not know at that stage that any shares had in fact been allotted following the 2005 increase of capital, as the requisite returns to the registrar of companies had not been filed (a point which is the subject matter of a further submission which I deal with below). Ms Kohli from time to time checked the company’s public records on the internet. It is not especially surprising therefore that she did not complain of something of which she then had no certain knowledge.

It might be said to be more telling that the letter of 16^th March did not complain of the failure to give notice of any meetings since 2002, as this now forms a significant part of Ms Kohli’s complaints, and this was something she knew about (if it was true) then. However, I draw no inferences adverse to Ms Kohli in this connection, as the letter of 16^th March 2006 was dealing with current, not past, defaults. I do, however, find for other reasons (set out in this judgment) that she received notices of all meetings, the 2 letters concerning the call on her shares, and Tony Lit’s letter sending the management accounts and other information.

It was also said that the late filings (on 4^th and 16^th May 2006) of the 2005 Special Resolutions were deliberate, indicating that the Respondents were acting covertly, and keeping Ms Kohli in the dark for as long as possible, a course of action which would be pointless if Ms Kohli had been told of the proposed increase in advance. I am however satisfied that the reason for the late filings was not deliberation, but incompetence on the part of Ms Daggar, who did not fully understand what was required of her, and omitted even to mention the further issue of shares in the next Annual Return filed in March 2006. No return of allotments was made timeously either. Regrettably, some attempt was made by the Respondents to blame an assistant solicitor who prepared the documentation, who was in my judgment blameless. There is no doubt that the necessary filings were late. However, any prejudice to Ms Kohli in this regard has been minimal, and not enough (by itself or in combination with other matters) to justify relief.

Mr Harris also suggested that it was telling that no explanation was given as to what triggered the ultimate filing of the Special Resolution. In her oral evidence, Ms Daggar could not remember when she filed it, and, though asked why it was late, she was not pressed with any particular triggering event, nor did she give one. I place no reliance on this point.

It was also said that the letters requiring Ms Kohli to pay up her shares were not pursued, which is indicative of their never having been sent. I am, however, satisfied that the letters were sent. The reason the matter was not pursued was explained by Tony Lit. He thought initially from what Dr Lit told him that only Ms Kohli’s shares were partly paid, but he could not verify this, the accounts clearly indicating the contrary, and it was left to Dr Lit to clarify matters with the auditors, which he never did. In the meantime, the matter was left in abeyance. I accept this evidence, which gained some support from the auditor (Mr Jasani).

Although I have, for the reasons I have indicated, rejected Ms Kohli’s case that she was ignorant of the rights issue offer in 2005, and was not offered her due proportion of the shares under that offer, that is not an end of her complaints. It is said that Sunrise did not need the cash, and that the main or principal motive was dilution of her shareholding (both in terms of overall percentage and value).

I have no doubt that the reason for the rights issue offer was a genuine need for cash. Sunrise had been under pressure from its bankers, and from 2 major creditors, the Inland Revenue and the Performing Rights Society. Those creditors were paid, but with the result of putting additional strain on the cash flow. I was invited to and did pre-read the correspondence with Sunrise’s Bank (Allied Irish Bank) and have re-read that correspondence. The Bank was prepared to grant improved facilities in a substantial amount, but required Sunrise to sell £300,000 worth of shares and inject £200,000 from a rights issue. I have no reason to believe that the Bank was put up to adopting this stance. Further, Ms Hindson (the Respondents accountancy expert) demonstrated in her Report that the Sunrise group’s ability to continue in operation was wholly dependent on the support of the Bank.

Mr Harris says that if there was a genuine need for cash, Sunrise would have raised much more than £200,000. This is slightly misleading, as the raising of £200,000 was combined with the sale of listed shares, resulting in total additional funds of £500,000, and improved banking facilities. Mr Harris may well be right, with the benefit of hindsight, that more than £200,000 additional capital was ideally needed, but the conclusion that points to is that the Sunrise board should have raised more money by way of rights issue, rather than none at all, which is Ms Kohli’s case.

Mr Harris says (with the support of his expert Mr Thompson) that other methods of raising cash could and should have been explored. It is said first that the money should have been borrowed from elsewhere. I do not agree. Where a company is undercapitalised, as Sunrise clearly was, the obvious source of further capital is the shareholders. The Court should not do anything to encourage capital inadequacy by raising the spectre of an unfair prejudice petition in response to genuine rights issues, even (or especially) in the case of a small private company. If an unfair prejudice petition is encouraged where directors choose not to borrow up to and beyond the hilt, but choose the rights issue route instead, the obvious losers are likely to be the creditors, whose interests must as a rule come ahead of the interests of the shareholders.

In any event, it is not clear where the further borrowings were to come from. Ms Kohli’s expert (Mr Thompson) suggested factoring from the Bank’s subsidiary (or perhaps from another factor) or invoice discounting, but there was no reliable evidence that either of these was a viable option. I felt that Mr Thompson’s evidence was more than a little speculative in this respect. The suggestion was also advanced that the necessary working capital should have been borrowed from GRS, Leviathan or the directors. However, there is no obligation on directors, shareholders, or their associates to provide further monies by way of loan. The fact that a shareholder or a shareholder’s associate may also be (or be closely associated with) a director does not increase the burden on that shareholder or the associate in this respect.

It was also suggested that Sunrise should have realised monies by a sale of assets including one or more of its subsidiaries. However, the purpose of obtaining the improved banking facilities (which necessitated the raising of liquid funds) was to enable Sunrise to operate and develop its business and the businesses of its subsidiaries. There is no duty on directors to sell the company’s business when the aim is to stay in business, unless that aim is in some way improper. That was not this case. Moreover, listed shares were sold to provide liquid funds, and I do not think the directors acted improperly, or without due consideration of the alternatives open to them, in endeavouring to obtain money by a rights issue.

A rights issue may be an appropriate route if the foreseeable or inevitable effect is the dilution of the percentage holding of a minority shareholder because (for example) it is known or foreseen that the minority in question is unlikely to or cannot subscribe. This may even be so where the impact of the rights issue will dilute the value of that minority’s remaining shareholding. A rights issue must however be priced at a level which is fair to all. The value of the rights issue shares offered to the majority in a private company will often be greater than the value of the rights issue shares offered to the minority. This reflects the fact that minority holdings will usually attract a discount. In the case of an undercapitalised company in cash flow difficulties, however, the price must also be sufficiently attractive to encourage shareholders to subscribe in the first place. In the case of listed companies in such circumstances, a discount on the market price is commonly found, as the Respondents’ expert accountancy evidence of Ms Hindson confirmed. Likewise, in the case of a private company, a discount may be appropriate. But a discount on what? As there is no market in the shares, the value of the shares will not be readily ascertainable, and may vary according to the size of the different holdings. Yet the offer price on a rights issue should be the same for everyone. If, in such a case, the company as a whole is valued, and the new shares offered at a price which, taken together with the shares already in issue, approximates to that value, this will appear unfair to minority shareholders wishing to subscribe, unless they have an undiscounted exit route under the articles. If, on the other hand, the shares are offered at a substantial discount, this will also appear unfair to those shareholders who are unwilling or unable to subscribe, as the remaining shareholders will be acquiring the offer shares at an advantageous price, and those not subscribing (or not subscribing in full) will suffer a dilution in value and not just a dilution in percentage holding. Moreover, in the case of a private company, a dilution in value may occur simply on account of the dilution in percentage holding. By way of example, a shareholder unwilling or unable to subscribe with an existing holding of (say) 30%, which is enough to block a special resolution, may well suffer a dilution in value, even if the rights issue shares are carefully priced, if the percentage holding following the rights issue drops below 25%.

Considerations such as these caused Hoffmannn J. (as he then was) to consider whether an apparently proper decision on the part of the board to make a rights issue could found an unfair prejudice petition by a minority shareholder in Re a Company [1986] BCLC 362. At p. 366h-367c, he said this:-

Mr Griffiths for the Respondents submitted that this approach can no longer stand with the later observations of the same Judge (as he progressed through the legal firmament) in the passages in Saul D Harrison & Son plc and O’Neill v Phillips, to which I have already referred. I do not agree, although the reasoning may possibly require some reformulation in the light of subsequent authority.

Hoffmannn J’s observations were specifically based on the premise that the majority knew that the petitioner did not have the money to take up the rights issue, and that the shares offered at par were worth much more than that as part of a majority holding but very little as a minority holding. The majority shareholders were acting in unison. In those circumstances, there is much to be said for the view that directors offering shares at par would be unfairly favouring the majority to the prejudice of the minority, and that the shares should in those circumstances have been offered at a price approximating to (or at least closer to) their value in the hands of the majority. The fact that the decision to raise further capital was unimpeachable and was offered to all shareholders alike would not necessarily be determinative. The power to allot shares was a fiduciary one, and the decision as to whether or not capital needed to be raised was separate from the price at which the shares should be offered. The fiduciary duties of the board extended to determining a proper price also.

A similar point was considered by Harman J in another case also called (as so many are in this area) Re a Company [1985] BCLC 80. In the context of a proposed rights issue at par to all shareholders alike during the currency of an unfair prejudice petition, Harman J said this:-

These cases were considered by the Court of Session (Outer House) in West Coast Capital (Lios) Limited [2008] CSOH 72, where the following appears:-

The Court of Session based its observations in the foregoing passage upon the availability of an inference of improper purpose, a point well illustrated by the well known and much cited decision of the Privy Council in Howard Smith Ltd v Ampol Petroleum Ltd, [1974] AC 821. This approach commonly leads to a discussion and factual analysis of what was the “substantial” purpose. If an improper purpose is found to be the substantial purpose, the allotment may be challenged and (in the context of what is now section 994) unfair prejudice established. The inquiry in such a case is not, however, in my judgment limited to cases where the substantial purpose is found to be improper. A rights issue may be motivated solely or mainly by the desire to raise further capital, yet still unfairly discriminate in its effect against one group of shareholders, including shareholders holding shares of the same class as other shareholders who are advantaged by the same exercise. This will commonly be so in the case of a minority shareholder in a small private company, who is unable or disinclined to invest further in a business in which that shareholder has no active role.

For completeness, the petition before Harman J in Re a Company [1985] BCLC 80 subsequently came to trial, and the proposed rights issue was found to be part of a scheme to reduce the petitioner’s shareholding, and therefore unfairly prejudicial to the petitioner’s interests, a conclusion upheld by the Court of Appeal: Re Cumana Ltd [1986] BCLC 430.

The correct approach of the Court towards the duties of directors to shareholders having the same rights but with different interests was considered by Goulding J in Mutual Life Insurance Co of New York v Rank Organisation Ltd [1985] BCLC 11 . He held (at 21) that the directors' power of allotment was limited by two considerations only:

This passage was cited by Arden J (as she then was) approvingly in Re BSB Holdings (No 2) [1996] 1 BCLC 155 at 247. Later on in the same judgment (at 249) Arden J considered a submission by Mr David Oliver QC that there could be no breach of duty by the directors unless the substantial purpose of their acts was to discriminate improperly against a group of shareholders. In rejecting that submission she commented as follows:-

In considering the nature and extent of the directors’ duties in a case such as the present, I have also had regard to the decision (in the context of dividends) of Harman J in Ex parte Glossop [1988] 1 WLR 1068. At 1076 Harman J said this:-

Whilst those passages are concerned primarily with the exercise of a fiduciary power for an improper purpose, the reference to Wednesbury suggests that wider considerations may be relevant. That case concerned the power of a local authority to grant a licence on such conditions as it thought fit for cinematographic exhibitions on a Sunday. In considering a challenge to the exercise of that power, the Court of Appeal refused to intervene, Lord Greene MR observing, in a celebrated passage, as follows (at 233 and 234):-

I have also been assisted by the approach adopted in Re McCarthy Surfacing Ltd [2009] 1 BCLC 622 by Mr Michael Furness QC, sitting as a Deputy High Court Judge. Among other rulings, the Deputy Judge held that certain bonus payments, and the non-declaration of dividends, amounted to unfair prejudice.

The bonus payments had deprived shareholders of 81% of net profits estimated at £1.4million. One of the Deputy Judge’s grounds for finding unfair prejudice was that the directors had acted in breach of the duty to act fairly between shareholders, citing the decision of Goulding J in the Mutual Life Insurance Co of New York decision to which I have referred.

In dealing with the non-payment of dividends, the Deputy Judge, having earlier cited the passage in Ex parte Glossop to which I have referred, found that the directors had acted improperly by failing to consider whether or not to declare dividends, observing that the commercial justifications for the non-payment of dividends advanced in evidence were not the actual reasons for their non-payment, and that no-one had in fact given any thought to the possibility of declaring dividends out of profits not covered by the bonus agreements.

The requirement of the board fairly to consider all relevant matters is in line with the duty of trustees acting in the exercise of fiduciary powers: see, for example, Abacus Trust Co v Barr [2003] Ch 409 at [28] –[33]. In considering the analogy of a trustee, the Court must of course heed the words of Dixon J in Mills v Mills (1938) 60 CLR at 185, 186, in a passage cited by Lord Wilberforce in the Ampol decision:-

Nevertheless, the principles applicable to trustees in the strict sense and directors exercising fiduciary powers, though differing in their application, are essentially the same.

Ex Parte Glossop and Abacus were (amongst other useful authorities and commentary bearing on the point) considered and applied by Mr John Randall QC, sitting as a Deputy High Court Judge, in setting aside a forfeiture of shares for non-payment of a call: Hunter v Senate Support Services Ltd and others [2005] 1 BCLC 175.

The decisions of the directors in that case to forfeit the shares and to transfer the forfeited shares to the group holding company were flawed, though not improperly motivated, because the directors regarded forfeiture to be the inevitable result of non-payment of the call and had acted without giving any consideration to possible alternative courses of action or exercising a genuine discretion whether to forfeit, as they were bound to do. It seems to me that this approach is amply justified on the authorities, and I turn now to consider how the principles I have been considering apply to the exercise by directors of their power of allotment in the case of a private company such as the present.

In a case where it is known or foreseen that the minority shareholder or shareholders will or may not have the money or inclination to subscribe, the directors should, in fulfilment of the requirement of even-handedness and fairness, consider what price could and should be extracted from those willing and able to subscribe. They should not unthinkingly issue shares at par. In a simple case where the majority are acting in unison, full value may be required. In other cases, a discount for the assumption of increased risk, or to make the offer attractive to those interested in subscribing, may be appropriate. Quite where the price will fall within the permissible range will depend on the particular circumstances of any given case. What is clear to my mind, however, is that the fiduciary nature of the power requires a board to consider these matters fairly, in the interests of all groups of shareholders and having regard to the foreseeable range of responses. The impact of that duty may be more acute if the board members, or those in a position to control or influence them, stand to benefit appreciably from the exercise of the power in a particular way. Any failure to give proper consideration to the price in the light of the factors I have mentioned may, and ordinarily will, amount to a breach of fiduciary duty.

Where there are a limited number of shareholders, it will often be prudent to inquire in advance of any share offer as to their attitude to subscribing for more shares, and any views they may have as to price. The offer can then be priced in the light of the known likely responses, though the decision will remain for the commercial judgment of the directors, after taking all relevant factors into account. Whilst it would be wrong to be prescriptive on the point, a failure to make such inquiries of shareholders as are reasonable in the circumstances may incline the Court towards holding that there has been a failure to take all relevant matters into account. The deliberations of the board should also be carefully minuted or otherwise recorded. If genuine difficulty is encountered in determining an appropriate price, as will commonly be so in the case of a private company, advice from an independent share valuer (usually an accountant) should be sought. If (as happened in this case) the minority shareholders are unable or unwilling to subscribe, but the majority shareholder is so willing, the duty of the directors will ordinarily be to get the best price they can from the shareholder willing to subscribe. The other shareholders will, in those circumstances, inevitably suffer a dilution in the proportion of shares held by them, but the adverse impact on the value of their shareholdings will be minimised, if not wholly avoided.

I now turn to consider whether there was a breach of the directors’ duties in this case.

The relevant decision was taken at the board meeting of 19^th October 2005, when 10,000,000 shares were issued to ABC at par. As the shares had a par value of 2p each, the issue price was £200,000 in total.

The shares had previously been offered to shareholders at par in their due proportions in letters dated 31^st August 2005. According to Dr Lit’s witness statement and the Respondents’ pleading, none of the shareholders (which would include ABC) accepted the offer to subscribe for any of the rights issue shares. Therefore, the shares were, as at 19^th October 2005, at the free disposal of the directors.

The power of the directors to allot shares derived from both Article 2(b) and the special resolution dated 19^th October 2005 (I assume, as both Counsel did, that purported new articles, said to have been adopted in June 2004, have no application, a point I refer to later).

Article 2(b) was in the following terms:-

Section 80 of the Act (which was a reference to the Companies Act 1985) required the directors to renew the authority conferred on them by the articles (or otherwise) after the expiration of 5 years. This, I assume, was the reason for the second Special Resolution of 19^th October 2005, though strictly an Ordinary Resolution would have been sufficient.

Neither the articles nor the Special Resolution required the shares to be issued at par. As not even ABC had accepted the rights issue offer, there was no obligation on the directors under article 2(b) to allot the offer shares to ABC at par either, even though the original (unaccepted) offer price was par. The directors did however have the power to offer the shares to whomsoever they chose (which in the event was ABC) on terms which were no more favourable to ABC than par. That did not preclude them from offering the shares at a premium over par. The Special Resolution passed on 19^th October 2005 did not alter the position.

In those circumstances, the issue I have to decide is whether it was a proper exercise of the directors’ power to allot the 10,000,000 shares to ABC at par.

The case of the Respondents, initially, was that Sunrise’s cash flow difficulties were such that par was an appropriate price, as the shares were worthless. However, this did not survive the expert evidence, either that led on behalf of Ms Kohli, or the Respondents’ expert evidence. The rapid expansion of Sunrise’s business, including the establishment and acquisition of subsidiary undertakings, had certainly put Sunrise in severe cash flow difficulties, but the purpose of the share issue was to resolve those difficulties. The negotiations with the Bank, who required the injection of funds, were led by Dr Lit and I have no doubt that he and the other directors saw the injection of £200,000 not simply as necessary but as sufficient for Sunrise’s purpose. Moreover, both before and after the rights issue, the accounts for Sunrise and its subsidiaries were prepared on a going concern basis. Dr Lit confirmed in his evidence that the appropriateness of this course, and the decision not to write down the investments in subsidiaries, were specifically considered at the time the accounts were prepared. On that footing, the 10,000,000 shares were worth considerably in excess of par. Ms Hindson (the Respondents’ expert) put a value of £8,000,000 on the 10,000,000 shares. Mr Thompson (Ms Kohli’s expert) put a higher value on the shares. I have not been asked at this stage of the proceedings to determine who is right. It is sufficient to say that the discrepancy between price and value was on any view significant. As I have said, ABC paid £200,000.

It is apparent that the effect of the issue of shares to ABC was not simply to dilute the proportionate shareholding of Ms Kohli (and all other shareholders apart from ABC). There was a significant dilution in value also. This was of no significance to Dr Lit in his capacity as an individual shareholder, as he also owned ABC. It was of no significance to Mr Jain, who voted in favour of the issue of shares to ABC, as he did not himself own any shares. It was of some significance to Tony Lit, who held a small number of shares and likewise voted in favour. There was, however, a close community of interest between himself and Dr Lit, his father. There was a similar community of interest between Dr and Bobby Lit. Bobby Lit was not a director, but he worked for Sunrise. The only other shareholder (apart from Ms Kohli) was Mr Chana, who I have not heard from, but who was said to be a good friend of Dr Lit, and apparently remains so.

Ms Hindson (the Respondents’ expert) expressed the view that, even after taking into account a discount of 80% to reflect the fact that Ms Kohli had a minority shareholding, the value of those shares was depleted in 2005 by approximately £133,400. If no discount was appropriate, the depletion was far greater, approximately £667,000. On Mr Thompson’s valuation, the depletion was greater still, partly because he valued Sunrise at a higher value than Ms Hindson, and partly (on the issue of minority discount, if applicable) because he considered a 60%, rather than 80%, discount to be appropriate. As I have mentioned, I have not been asked to choose between the 2 experts on valuation issues at this stage, including the appropriate discount. It was common ground between Counsel that the precise determination of such issues should await the determination of whether there should be a buy-out order at all, and, if so, at what date and on what basis the shares should be valued.

The directors did not in 2005 give any consideration to issuing the shares at more than par. The board minutes (though professionally prepared) reveal that there was no discussion of price. Dr Lit’s explanation was that Sunrise shares had always been offered at par, and the directors did not consider any alternative. This may be contrasted with the approach set out in the much earlier board minutes of 22^nd May 1991, when proposals to increase the share capital by 10% and to convert the shares from £1 shares to 2p shares were considered. The minutes note that the increased 10% could be sold at the rate of £1 per share, and offered to staff at 25p each. Though circumstances were then different, and I am not aware of any allotment other than at par, the minutes do show that there was nothing inevitable about par in Sunrise.

There is one other point I should mention. The minutes of the meeting dated 19^th October 2005 record that ABC (but no-one else) had taken up the rights issue offer. In the light of Dr Lit’s evidence and the pleaded defence, the minutes must have been prepared in error. The probability is that ABC had not formally responded to the rights issue offer. Even if, however, ABC had subscribed for its due proportion of the rights issue shares, and I were to allow the Respondents to depart from their pleaded case and Dr Lit’s evidence, this would make no difference to my conclusion. The rights issue offer was also priced at par unthinkingly. No other price was considered. No valuation advice was sought. As Mr Griffiths for the Respondents put it in his written closing submissions:-

The directors must have realised that Ms Kohli was unlikely to subscribe for the shares, as she had not paid the call of a little over £9,000 which had previously been made. Moreover, she was known from the 2002 compromise of litigation (in which Sunrise was one of the parties) to have remained a shareholder reluctantly, expressing a preference to be bought out. It would be surprising, in the light of that stance, to find her willing to subscribe a substantial sum for additional shares in a company in which she no longer had any role and, just as important in the present context, from which she was no longer receiving the substantial remuneration she had previously received, and from which she received no dividend. Whilst I have found that she did have the resources which would have enabled her to subscribe to the 2005 rights issue, her liquid resources would have been exhausted, and her ability to raise further monies can have been made no easier by Dr Lit’s failure, which persisted through to 2007, to transfer 89 St Stephens Road to her in accordance with the terms of the 2002 compromise. Although Ms Kohli claimed in her evidence that there would have been no difficulty in raising funds against St Stephens Road, or from family or friends, I do not accept this evidence, which was too general to be of any real use, save to the extent that any minor shortfall in her liquid resources might have been met by borrowings from family or friends. She received public funding for the purpose of the earlier litigation, a point well known to all the Respondents, so cannot have been thought to be independently wealthy.

In the circumstances, it must have been evident to the Respondents that Ms Kohli was unlikely to subscribe for the 2005 rights issue. This is confirmed by their defence (verified by Dr Lit’s statement of truth) which pleaded, presumably in case the rights issue offer was never received by Ms Kohli, that she would not in any event have accepted the shares offered to her. Had the directors felt any doubt on this score, they could and should, before the rights issue offer was made, have made inquiries of her, as well as (to the extent that they did not) the other shareholders. In Ms Kohli’s case, she had solicitors, who were in contact with Dr Lit over his failure to transfer St Stephens Road, and any inquiry could have been made to them if unease was felt about dealing with Ms Kohli direct. I am not prepared to assume that Ms Kohli would not have answered an inquiry directed towards the terms of a proposed rights issue, and as to whether or not she might wish to subscribe. It is clear that her answer would have been that she did not wish to subscribe, as she chose not to subscribe for the offer in fact made at par, and the price could not have been any lower. As it was, the rights issue and accompanying offer price was presented as a fait accompli, and Ms Kohli chose (on my findings) to bury her head in the sand. This was unwise, but does not preclude her from complaining now. Had all the shareholders been consulted in advance, she would have had the opportunity to confirm that she did not wish to subscribe, as would the other shareholders, and that would in turn have confirmed to the directors the need to fix a realistic price for the shares which (in the events which happened) ABC as the existing majority shareholder alone subscribed for.

Even had Ms Kohli remained silent, or the directors had, after due consideration, decided that it was not appropriate to approach her, the duty of the directors was to give proper consideration to the question of the offer price. They might plausibly have taken the view that an undiscounted price for all the shares (or a relatively small discount) was appropriate, given the medium to long term aim of a sale or flotation.

Whether or not they would have gone that far, I cannot be sure. It may be enough to ground a complaint if proper consideration might have led them to a different conclusion (see, for example, Abacus at [21]), though the point was expressly left open in Hunter at [184], and Lloyd LJ (sitting as a Judge of the Chancery Division) considered (in the case of trustees) that only in a case where the beneficiary is entitled to require them to act should it suffice to show that they might have acted differently: Sieff v Fox [2005] 1 WLR 3811. However, the issue in those cases was whether an impugned transaction should be set aside. In the present context of section 994, the issue is whether Ms Kohli has suffered unfair prejudice by reason of the directors’ failure to give proper consideration to the issue price of the shares. It seems to me that a failure to take relevant matters into account may amount to unfair prejudice even if the most the Court can say is that the decision might have been different had the matters in question been considered. The failure to take all relevant considerations into account was (in the present case) a breach of fiduciary duty and therefore unfair to Ms Kohli as a shareholder, and prejudice is established as the directors have in consequence denied Sunrise the opportunity it should have had of fixing for the rights issue, or negotiating with ABC, a more suitable price following proper consideration, which would have reduced or eliminated the extent of the dilution in the value of the minority shareholdings, including Ms Kohli’s. Ms Kohli can only be said not to have been prejudiced if the Court concludes that had they taken the unconsidered relevant matters into account, the decision would have been no different. As it happens, the point is academic in the present case, as the probability is, for the reasons appearing below, that the directors (or at least Mr Jain and Tony Lit) would not have considered issuing the shares at par had they given considered thought to the factors I have held it was their duty to have regard to. They would instead have issued the shares at a price significantly in excess of par. On Ms Hindson’s expert evidence (which was the most favourable to the Respondents) a discount down to anything like par could not be justified.

There were also other shareholders, but they did not subscribe for the rights issue shares either. Their intentions could readily have been ascertained (to the extent that they were not) in advance of the offer, as the relationship between all of the remaining shareholders was, on the evidence, harmonious. I include in this observation Mr Chana. I note that he, along with the other shareholders apart from Ms Kohli, was according to Sunrise’s minutes willing to subscribe for the 2007 rights issue to which I refer later. In any event, the interests of the shareholders as a body, and the different interests within them, were not properly considered, as the rights issue shares were offered and (subsequently) allotted unthinkingly at par. Dr and Tony Lit cannot of course (and do not) complain, as they were parties to the offer and subsequent issue of shares at par. Bobby Lit and Mr Chana have not chosen to complain. Ms Kohli has, and is entitled to do so. Whilst, therefore, it is correct (as Mr Griffiths submitted) that par was the only candidate, it should not have been.

Mr Harris for Ms Kohli also drew my attention to a report of 5^th October 2003 prepared by Anita Preston, a solicitor, apparently for Dr Lit, which spoke of a rights issue that could effectively dilute the minority shareholding. She recommended dilution to the extent of 10%. Anita Preston or her assistant prepared the documentation for both the 2005 rights issue, and the 2007 proposed rights issue to which I refer below. The inference I am invited to draw, made more telling by the Respondents’ failure to call Anita Preston to give evidence, and the initial (incorrect) insistence when disclosure of her file was sought that it did not exist, is that both rights issues were substantially motivated by the purpose of diluting Ms Kohli. Dr Lit told me that he had never read this report, an assertion which I found incredible.

The directors approving the 2005 rights issue and subsequent allotment were not only Dr Lit, but Mr Jain and Tony Lit. Had they been motivated by a desire to dilute the value of Ms Kohli’s shareholding, this may have been an additional reason for finding that the board acted in breach of fiduciary duty, for then the board would, in fixing the price at par, have taken irrelevant considerations into account. That would be so even though that was not the substantial purpose of the rights issue, for the setting of the price was a separate question from the decision to have a rights issue in the first place. The Ampol decision was not about price; it was about whether the issue of further shares had been pursued for a purpose which was foreign to the power of allotment. Where the substantial purpose behind the decision to issue further shares is the raising of capital for which there is a genuine need, the presence of additional irrelevant considerations (once found to be subsidiary) will not ordinarily undermine that decision, as the genuine need for further capital will in most if not all cases lead the Court to conclude that the irrelevant considerations had no impact on the decision, which would have been the same if only relevant considerations had been taken into account. When considering the issue of price, however, the taking into account of irrelevant considerations may have a greater impact, as the substantial purpose of raising capital may be achievable by offering a different number of shares at the appropriate price. The Court may in those circumstances more readily infer that the decision as to price would or might have been different had the irrelevant considerations been excluded.

Mr Jain and Tony Lit were not cross-examined on their purpose in approving the rights issue or the price, and it would be wrong of me to attribute base motives to them in those circumstances. Their votes were sufficient, without the vote of Dr Lit as director, to approve the rights issues and the subsequent allotments. I prefer therefore to base my decision on their failure, as well as that of Dr Lit, to give any proper consideration, in fixing the price at par, to the interests of shareholders who were or were likely to be unwilling or unable to subscribe, including especially Ms Kohli. Had Mr Jain and Tony Lit given proper consideration to the factors which it was their duty to consider, it is highly unlikely that they would have agreed to the issue of shares at par. The probability is that they would have offered the shares at a much higher price. Mr Jain, who came across in evidence as genuinely independent albeit a close friend of Dr Lit, took his duties as director seriously, and would not have wished to breach his duty had he appreciated what his duty entailed, or act unfairly towards Ms Kohli. Tony Lit, despite his community of interest with Dr Lit, would not have wished to act in this way either. Neither of them had anything to gain from doing so, and Tony Lit stood to lose as regards his own shareholding. Moreover, neither Tony Lit nor Mr Jain pursued the call on Ms Kohli’s shares when it could not be verified that she was the only shareholder holding partly-paid shares. That shows an awareness on their and therefore the board’s part that any action which might be viewed as discriminatory towards Ms Kohli was to be avoided.

Dr Lit in his written and oral evidence insisted that he would have been more than happy for Ms Kohli to subscribe for the 2005 rights issue, as well as the 2007 rights issue, as he would not (whether by himself or through ABC) have been bearing all the risk and burden of providing further capital alone. He reinforced this by offering to transfer (or procure ABC to transfer) to Ms Kohli her proportion of the 2005 rights issue shares at par, should Ms Kohli now wish to subscribe, and to ensure that she was offered the opportunity to subscribe for her proportion of the shares offered in 2007, notwithstanding the disapplication of the pre-emption rights to which I refer below. Unsurprisingly, Ms Kohli was unwilling to countenance this course, as she wishes to sever her connection with Sunrise (on proper terms as to price) completely. I am bound to say that I regard Dr Lit’s offer as a tactical ploy in response to the reality of finding himself sued. I accept that had Ms Kohli taken up her rights, Dr Lit would have put up with the situation, but I do not think he ever thought that was likely, or that he really wanted it to happen. On the contrary, the probability is (in the light of the dilution advice previously received) that his preference was that Ms Kohli would not take up her rights and would therefore suffer a dilution. This was not the substantial purpose of the transactions, but it was (from Dr Lit’s perspective) a desired effect. In the circumstances, I discount this offer, which comes too late to repair the damage that has been done. Nevertheless, I do not think that even he, had he given considered thought to the factors I have mentioned, would have sought to insist on par as the appropriate price, whether in 2005 or 2007. His principal concern on each occasion was to fund Sunrise’s ongoing business, and ensure its success, a point reinforced by the facts that, between the 2005 allotment and the 2007 increase, he gave a personal guarantee in respect of Sunrise’s indebtedness to the bank of £500,000, and, following the 2007 increase, caused ABC to lend the £400,000 needed by Sunrise. Had the fulfilment of his desire to promote Sunrise necessitated ABC subscribing, in 2005, for a smaller number of shares for the same overall price, the probability is that Dr Lit would have ensured that ABC did so, up to the full value of the shares in ABC’s hands. Likewise, he would have agreed to a higher price in respect of the 2007 rights issue. In addition, he would not (had he thought about it properly) have wished to expose himself, in 2005, to another round of litigation from Ms Kohli, or to provide Ms Kohli with further grounds for her petition in 2007.

I accordingly find that ABC (then owned as well as controlled by Dr Lit) would have paid a significantly higher price for the 10,000,000 shares issued to it in 2005, had a higher price been sought. Dr Lit, both in his own name and through ABC, had made a substantial investment in Sunrise. He had led the negotiations with the Bank and was anxious to continue the success of the business. Dr Lit through ABC always intended to subscribe through ABC for the 2005 rights issue. His negotiations with the Bank did not make much sense otherwise, as he was going along with the Bank’s requirement for additional funds to be injected, including the £200,000. The likely source of additional capital was always ABC or Dr Lit. That was substantially so even if all other shareholders had subscribed for their due proportions. Thus, although the rights issue was not underwritten (one of the points relied upon by Ms Hindson in justifying a discount) the rights issue was never going to fail. The same was true for 2007.

In the circumstances, the allotment of shares to ABC on 19^th October 2005 at par was in my judgment the product of a breach or breaches of fiduciary duty and this was unfairly prejudicial to Ms Kohli. This is so whether the focus of attack is on the allotment of the shares at par, or the previous offer of a rights issue on the same terms.

I shall now consider the circumstances of the 2007 increase of share capital.

By a letter dated 30^th July 2007 (that is to say, after the petition was presented complaining of, among other things, the 2005 allotment), Ms Kohli was notified by Ms Daggar of Sunrise of an EGM at which it was proposed to increase the authorised share capital of Sunrise from £570,000 to £950,000. The same letter offered Ms Kohli the opportunity to subscribe at par (2 pence per share) for a further 2,075,000 shares. Had she subscribed for these shares, the cost would have been £41,500. Her current shareholding, as already noted, is 1,875,000 shares. The closing date for the share offer was 6^th September 2007, which was also the date of the proposed EGM.

Ms Kohli was subsequently notified by a letter dated 13^th September 2007 (copied to her solicitors) that the EGM had been adjourned (as it was) to 27^th September 2007. I infer that there must have been some debate about this before 6^th September 2007, as there was otherwise no reason for adjourning the EGM.

Following that letter, Ms Kohli’s solicitors were told by the Respondents’ solicitors during a telephone conversation that the meeting on 27^th September 2007 would not now be taking place.

In Amended Points of Defence verified by Dr Lit’s statement of truth, it was pleaded that the 6^th September EGM was adjourned (which was literally true) and that Sunrise had not resolved to increase its authorised or issued share capital and had not issued any further shares. Further, Dr Lit’s first witness statement stated that the EGM did not take place.

It is correct that no further shares have been issued. However, the adjourned EGM did take place on 27^th September 2007, at which not only was the share capital increased, but the directors were also authorised to disapply the pre-emption rights in Sunrise’s articles of association.

These points were made in Ms Kohli’s solicitors’ letter of 8^th May 2008, to which the reply from the Respondents’ solicitors on 9^th May 2008 was that contrary to their previous understanding the EGM did take place and the share capital was increased, though no shares were then allotted. They also gave on behalf of the Respondents an undertaking not to allot or otherwise deal with the newly issued shares or any of them prior to the conclusion of these proceedings or order of the court in the meantime.

These facts speak for themselves. I have acquitted Dr Lit of conscious untruthfulness in his statement of truth and witness statement, but the lack of conscientious study and thought in allowing those documents to go out in that form is breathtaking and inexcusable. Moreoever, the giving through the Respondents’ solicitors of false information to Ms Kohli’s solicitors is likewise inexcusable, and impacts directly on Dr Lit’s and the other directors’ integrity and trustworthiness in the conduct of Sunrise’s affairs.

I am prepared to accept, as the evidence amply confirms, that Sunrise was then, as it was in 2005, under pressure from its bank and in need of an injection of further working capital. Nevertheless, the circumstances in which Ms Kohli was lulled into thinking that the meeting would not take place when it did and that the share capital would not be increased when it was were unacceptable by any standards.

Whether and to what extent Ms Kohli would have attended the meeting had she known it was taking place is doubtful, as she could not by that attendance have done anything to stop the process. She might have obtained an interim injunction, though it is far from certain that she would be in a better position than she is now as a result of the undertakings given by the Respondents’ solicitors. Nor, in a case where she was seeking to be bought out and not to buy the Respondents or ABC out, am I convinced that she would necessarily have obtained an injunction, as the Court might have taken the view that she was adequately protected by the ability to order a buy-out on the hypothesis that the rights issue, if it turned out to be improper, should be treated as not having occurred, or as having been made at an appropriate price and therefore with no (or at least less) dilution in value as regards her own shareholding. This point was not considered by Harman J (and may not have been argued) in the Re A Company decision (or Cumana, which it became known as) to which I have referred.

None of that detracts from the impact of the misleading way in which the Respondents proceeded. The statements in the amended defence and Dr Lit’s witness statement compounded this state of affairs. Further, the disapplication of the pre-emption rights (which does not appear to have been foreshadowed and for which the lame excuse has been proffered of their disapplication being needed in case of emergency) means that the risk of the shares being re-offered, so as to by-pass Ms Kohli entirely, is real, if her claim for a buy-out is dismissed and she changes her mind. In this connection, I do not think that Ms Kohli can reasonably be expected to have any confidence in the protestations from Dr Lit that he is more than willing for Ms Kohli to subscribe. Although she was initially offered the opportunity to do so, the subsequent disapplication of the pre-emption rights, coupled with the remarkable way in which she was misled about the EGM, makes it more than reasonable for her to regard whatever she is told with disbelief, and to increase her resolve to wish to sever all connection with Sunrise.

No attempt was made on the occasion of this proposed rights issue to consider a fair price for the offer shares. They were, again, unthinkingly offered at par, so that anyone taking up their rights (especially ABC) would benefit to the disadvantage of Ms Kohli, who, by her petition, had already made plain her desire to be bought out. It was likely that Ms Kohli would not take up any rights she might be offered, as she was by this stage seeking by her petition an exit, and not to make a further investment. Moreover, she had declined to subscribe for the previous rights issue, which the Respondents were convinced (rightly) had been offered to her, so was unlikely to subscribe for this rights issue, even if she had the money. It was also obvious that her resources needed to be devoted to fighting the petition.

In the events which happened, further working capital was provided on loan (as a temporary measure instead of the further rights issue pending the outcome of these proceedings) by a BVI company on behalf of ABC, repayable with interest on short notice. Dr Lit told me that the rate of interest charged to Sunrise was commensurate with what he was paying for the funds (thus identifying himself with the BVI company and ABC). Although there has been no disclosure of the terms upon which the money was made available to the BVI company, it would be wrong of me (despite Mr Harris’s invitation to do so) to base my decision on any criticisms of the terms of the loan, as this is not part of Ms Kohli’s pleaded case.

I also reject, for reasons similar to those that I have given in relation to the 2005 rights issue, the submission that Sunrise should never have considered a rights issue, but should only have considered borrowing the money instead, or raising it from a sale of non-performing assets, or recoupment of loans to its subsidiaries. It did borrow the money as things turned out (but only as a temporary measure) in an endeavour to head off Ms Kohli’s complaint about the proposed rights issue. Moreover, it was evident from Dr Lit’s evidence (which in this respect I accept) that real steps have been taken under his stewardship as Chief Executive to improve the business, including the closure of 2 radio stations, the attempted sale of other assets and the renovation and return to profit in 2007 of Club Concorde (owned by a subsidiary). However, market conditions have not been at all favourable for alternative fund-raising activities, and the route of a rights issue, on appropriate terms, is something that the directors were, in my judgment, entitled to go down. They did not however give any considered thought to what the price should be (as they should have done, for reasons similar to those I have given in relation to the 2005 rights issue). Nor were they entitled to mislead Ms Kohli, or her solicitors, but that is what they did, misleading their own solicitors (who were blameless in the matter) for good measure. I am not surprised therefore that Ms Kohli, in both her pleaded case and in her oral evidence, maintained the position that she did not know whether the further shares had or had not been issued. They had not, but she was, in the circumstances, entitled to take the position that she did not know any longer what, or who, to believe.

In my judgment, the circumstances of the 2007 share increase were unfairly prejudicial to Ms Kohli. The fact that no shares have yet been allotted is irrelevant. The consequence of the way in which the increase was carried out, and pre-emption rights disapplied, is that such chance as there was of restoring in Ms Kohli any semblance of the necessary minimum of trust in the integrity of the board (and the majority shareholders) has been fatally undermined. Ms Kohli is entitled to regard her continued position as shareholder intolerable for this additional reason. Moreover, as Vinelott J observed in Re Kenyon Swansea Ltd [1987] BCLC 514 at 521:-

Only one dividend has ever been paid by Sunrise, in 1999. Yet substantial profits have been made. Those bare facts suggest, in line with the decision in Ex Parte Glossop, that Ms Kohli has been unfairly prejudiced on this additional ground.

I do not however think that the matter is as simple as that. Sunrise followed the policy of going for growth through the establishment and acquisition of subsidiary companies, with a view to eventual sale or flotation. This process started in Ms Kohli’s time as a director, and continued, albeit on a larger scale, after her departure. As Mr Griffiths for the Respondents pointed out, there is no allegation in the petition that the policy in investing in subsidiaries was a breach of fiduciary duty or even that no reasonable director could make the decision to invest in subsidiaries.

Mr Harris for Ms Kohli pointed to the fact that the profits of Sunrise available for distribution were at least as follows:-

The retained profits of Sunrise (viewed separately from its subsidiaries) as at 31^st December 2006 were, according to Ms Hindson, the Respondents’ accountancy expert, £10,342,617.

These figures give a misleading picture as they ignore the impact of the investments in subsidiaries. As Ms Hindson pointed out in her report, for a company to pay dividends, it must not merely have profits available for distribution, but cash resources to enable the dividend to be paid. She reviewed all the financial statements for Sunrise and its subsidiaries for the period 2002-2006 inclusive, and concluded that there was no possibility of Sunrise being in a position to pay dividends to shareholders during the period under review. Mr Thompson (Ms Kohli’s expert) did not seriously dispute this conclusion, and I agree with it. From the retained profits of £10,342,617 in 2006, Sunrise had applied £5,668,927 towards investments, and had additionally made loans of £9,619,985 to its subsidiaries. The group as a whole has made losses in recent years. The retained profits have therefore been used to support the loss-making subsidiaries.

In the circumstances, I reject the complaint that the directors acted improperly, or unfairly towards Ms Kohli, in not declaring dividends. It may perhaps be that the consideration by the directors of whether a dividend should be declared was not as anxious as it might have been, but the answer to the question of whether any dividend should be declared would have been no different had more detailed consideration been given, as the answer was obvious.

Finally on this point, I would not in the circumstances of this case have upheld a complaint of failure to pay dividends in circumstances where the growth policy was adopted and acquiesced in at a time when Ms Kohli was a director. In that respect, the normal expectation of shareholders was abrogated or qualified.

Between January 2003 and May 2006 inclusive, Dr Lit caused GRS to invoice Sunrise at the rate of £25,000 per month for his services as a consultant, which amounts to £300,000 per annum. He additionally caused GRS to charge Sunrise for 10 months’ consultancy at the lower rate of £15,000 per month for the period March to December 2002 inclusive, totalling £150,000.

Since June 2006, Dr Lit has caused ABC to invoice Sunrise at the rate of £20,000 per month, and 2 of its subsidiaries at the rate of £15,000 per month and £10,000 per month respectively, which amounts in total to £540,000 per annum.

The complaint in the petition is that these invoices for the benefit of Dr Lit were unauthorised. Mr Harris described them as a sham, being an illegitimate device to extract monies from Sunrise. From early 2003, Dr Lit was based in Dubai, though still devoting himself to aspects of Sunrise’s business from there, returning at regular intervals to England. In June 2006, Dr Lit returned to the UK, effectively taking the Sunrise helm again, though Tony Lit remained Managing Director until the 2007 by-election which he fought.

Although the GRS sums were invoiced, they were not timeously paid. £10,000 was paid in February 2004. By the end of 2004, therefore, a further £590,000 had accrued in respect of the monthly payments of £25,000 (appropriating, for reasons I come to, the £10,000 to those monthly fees) and this £590,000 remained unpaid. In addition, there was the £150,000 invoice for 2002, which also remained unpaid. Sunrise sold a number of properties in Strood at the end of 2004 realising £487,357. The proceeds were paid to GRS in part payment of the outstanding consultancy invoices.

Mr Harris fairly made the point that the payment out of these sums was a significant contributory factor towards the cash flow problems resulting in the 2005 allotment, and impeding the payment of a dividend. A similar point was made in relation to later payments to ABC (following Dr Lit’s return to England to take the helm in mid-2006) in the context again of non-payment of dividends and the proposed 2007 rights issue. However, none of that made the payments, or the ensuing cash flow difficulties, unfairly prejudicial. Just as it was no duty of the directors or their associates to advance monies by way of loan to fund the cash flow difficulties, it was likewise not their duty to provide extended credit in respect of continuing services. The fact they did so, both down to the end of 2004 and beyond, did not give rise to an obligation, or even an expectation, that this would continue indefinitely. The real issue, therefore, is whether the payment and accrual of consultancy fees was justified. I shall now consider that issue.

At the commencement of Sunrise’s business, Dr Lit was in receipt of salary and benefits, initially capped at £35,000 per annum. A formal service contract appears to have been entered into, though I have not seen it, in 1989. The directors were (or became) aware that the contract could not (without the approval of a general meeting) be for more than 5 years: section 319 of the Companies Act 1985 (now 2 years: Companies Act 2006, sections 188 , 189 ). Pension benefits and private health insurance were included. All these points appear from the Sunrise board minutes of 1^st March 1999 (item 2), 9^th September 1989 (item 3), 10^th January 1990 (item 3) and 20^th November 1990 (item 4).

Dr Lit told me that until 2002, he had since 1991 been paid through ABC as a consultant, and that this remained the case until the GRS arrangements supervened: see the minutes of the Sunrise board dated 9^th July 1991. However, as appears later, he also received substantial emoluments in 2002 from Sunrise direct.

The minutes of 9^th July 1991 are in the following terms:

Item 2 of the minutes of the next Sunrise board meeting held on 9^th August 1991 records as follows:

Ms Kohli’s salary was also from 1991 paid as a consultancy fee, either to her, ABC, or another service company. Item 7 of the Sunrise board minutes of 9^th August 1991 records an arrangement similar to that then pertaining to Dr Lit, and her pleadings in the earlier litigation confirm the arrangements from time to time in place.

The consultancy payments were thus made outside the Schedule E regime so as to avoid (or, depending on one’s perception, evade) deduction of tax and national insurance contributions. When Ms Kohli was (according to the Sunrise minutes) asked in a board meeting of 16^th April 1999 whether she had taken the necessary action in relation to national insurance contributions and tax returns, she was unable to provide an immediate answer.

On 8^th November 1994, the Sunrise board approved for Dr Lit what the board minutes describe as “an Employment contract fixing his salary at £100,000 basic plus £25,000 car, + 2% bonus based on profitable results and 1% if not profitable”. The contract was to run from 1^st November 1994 for 3 years. Despite the language of employment, the salary payments were in fact made to ABC as consultancy fees. It does not seem, however, that any bonus was ever paid, and I have seen no written contract. Nor was it suggested that the bonus was accrued in the accounts. On the terms of the minutes, the arrangement expired at the end of October 1997.

On 29^th March 1997, the board minutes of Sunrise indicate that an entitlement to basic salary plus 5% of turnover was apparently approved for Dr Lit. Again, he was in fact being paid through ABC, and continued to be so paid. Dr Lit is recorded as having absented himself from consideration of his salary. Whilst he clearly knew about it, he is not recorded as having accepted the arrangement. He did however tell me that it took a year to negotiate.

Though Ms Kohli was not at the meeting of 29^th March 1997, she did prepare one of 2 versions of the minutes of a later meeting held on 18^th October 1998 at which the minutes of the earlier meeting were circulated and discussed. She must therefore have known at the time of the 5% turnover arrangement, though she clearly had no recollection of it in the witness box. Her lack of recollection is not that surprising. Not only was 1997 a long time ago, but the 5% of turnover arrangement never was put into effect.

Neither Dr Lit nor ABC ever received the 5% of turnover, nor was it suggested that it was accrued in the accounts. Dr Lit confirmed that it was never paid in his written and oral evidence.

The version of the minutes of the meeting held on 18^th October 1998 (signed by the directors other than Ms Kohli) records that Dr Lit reported that he had not yet taken up the revised remuneration package applicable to his position. The alternative version of the same minutes prepared by Ms Kohli records that Dr Lit “had not taken the pay rise but will be talking to the accountants to do so”.

Neither version of the minutes supports the case that Dr Lit unequivocally accepted the terms of the new arrangement as to bonus, and Ms Kohli’s version suggests a reason, namely the need for Dr Lit to talk to his accountants. What the result was of those talks has not emerged in evidence. As, however, Sunrise was never invoiced by ABC (or anyone else) for the bonus, and made no accrual in its accounts, prepared under the auspices of, amongst others, Dr Lit, I am not prepared to find that the 5% bonus arrangement ever matured into a contractual obligation. Even if it did, Dr Lit and ABC waived their entitlement by never taking the 5% (or the previous bonus entitlement of 2% or 1%, depending upon whether or not Sunrise was in profit) and by allowing Sunrise (in ABC’s case via Dr Lit, whose services it was providing) to prepare accounts showing no accrual for those sums, thereby enabling it to carry on and expand its business when its ability to do so would otherwise have been in doubt: compare Re William Porter & Co Ltd [1937] 2 All ER 361.

The point is of potential significance in this respect: Ms Kohli challenges, as I have mentioned, the authority of the invoices subsequently charged to Sunrise by GRS from for the period 2003-6 inclusive, and the 10-month invoice of £150,000 for 2002. Dr Lit’s riposte was that, even if there was something wrong with any of those invoices, the underlying obligation was to reward him at a greater level, under the salary + 5% of turnover formula. I reject this case. That formula never took effect. Moreover, the entitlement of GRS to its consultancy fees must be judged by reference to the authorities given by the directors in relation to GRS, and not by reference to real or imagined shortfalls in the payment of remuneration or consultancy fees to Dr Lit or ABC in the past. The same applies to consultancy fees claimed by ABC after May 2006.

In Guinness Plc v Saunders [1990] 2 A.C. 663 at 690, Lord Templeman approvingly cited the following passages from the then (24^th) edition of Palmer:-

As that case reaffirms, the primary rule is that no fiduciary, however much he may be acting in good faith, may profit from his position of trust. In the case of directors, that means that they must give their services without reward unless they are properly authorised to receive remuneration. They cannot claim a quantum meruit instead, as the rule might thereby be evaded. It is therefore incumbent upon Dr Lit in the present case to point to some proper authority that he should raise invoices for and receive payment for the services in question. That is so, notwithstanding that the invoices were raised by and the payments were made to an entity (GRS or ABC as the case may be) controlled by him, rather than there being invoices raised by or payments made to himself. That also was the case in Guinness, and the non-profit rule extends to parties controlled by the fiduciary: see, for example, CMS Dolphin Ltd v Simonet and another [2001] 2 BCLC 704 (Lawrence Collins J).

I shall consider first the invoice of £150,000 raised on 5^th January 2003 in the name of GRS (in respect of services rendered in 2002). GRS was not incorporated until 12^th January 2003, so cannot have provided any services before that date. Dr Lit’s evidence was that, until then, GRS was himself by another name. It would seem to follow from this that any claimed entitlement to payment for services prior to that date was properly to be characterised as directors’ remuneration, and did not lose its character by being branded “consultancy”.

Dr Lit’s case was that he had been travelling abroad more and more in 2002, and neither he nor ABC was receiving the whole of what he perceived was his salary entitlement. He explained in his 2^nd witness statement that he received salary at the rate of £150,000 per annum prior to April 2002. Thereafter he received £68,750 gross (£46,370.69 net of tax and personal expenditure paid by Sunrise on his behalf) between December 2002 and February 2003, a figure apparently derived from a P45 Sunrise gave him after he relocated to Dubai. This, he thought, was largely accrued holiday pay, meaning that down to the end of December 2002, after which the new GRS arrangements took effect for the future, he was effectively working for nothing. This was strange evidence, as he told me also that his salary was paid (though it obviously was not on this occasion) through ABC as a consultant, which would not therefore (if genuine) be subject to deduction of tax at source. Dr Lit described the period from April down to the end of 2002 as a “cross over period” in his 2^nd witness statement. He referred to it as a “transitional period” in his oral evidence. Those descriptions, coupled with the fact that subsequent payments were made to him, and invoices were raised (in January 2003) in the name of GRS, indicates that the ABC arrangement was at an end. I think, however, that it must (if the first GRS invoice is correct) have ended by March 2002, and not April, as Dr Lit stated in his 2^nd witness statement.

In his oral evidence, Dr Lit said his salary was reduced to £75,000 per annum when he started travelling a lot in 2002, again explaining that this was mostly holiday pay. This seems to recognise that the previous arrangement (whatever it was) had come to an end. I was not entirely sure whether, in referring to holiday pay, he was talking about the £75,000, or the first invoice of £150,000 charged by GRS. In the light of what he said in his 2^nd witness statement, I think he must have been talking about the £75,000, although that amount (even when apportioned over 10 months) does not square exactly with the figures in his 2^nd witness statement.

None of this is directly reflected in any board minute. On the evidence of the board minutes, no entitlement to remuneration prior to the GRS board resolutions (to which I shall shortly come) subsisted. Even on the assumption that Dr Lit’s previous basic entitlement (which was £100,000, not £150,000) impliedly continued once the arrangement sanctioned by the board in November 1994 expired in 1997, there is no evidence authorising an increase in that basic entitlement, and any continuing arrangement was treated as coming to an end when Dr Lit started spending more time abroad, and the next payments that were made between December 2002 and February 2003 were made not to ABC but to Dr Lit. ABC was off the scene as the provider of services after February 2002.

I should add that I am not prepared to infer that the directors sanctioned a revision to the previous arrangements by informal unanimous approval. There were 8 directors of Sunrise in both 2001 and 2002 (a figure confirmed by the published accounts and annual returns for those years), some of whom were on any view independent. There were regular board meetings in both years. There is no evidence that they met as a body away from the boardroom, as one lived in Wiltshire (and before that in Hampshire) another in the West Midlands, and a third in SW18. Sunrise’s operation was based in Southall, Middlesex. Whilst their continued use of Dr Lit’s services might imply that the terms previously in force relating to ABC continued, more would be needed to justify an improvement in, or variation of, those terms. Once ABC stopped providing his services, there was nothing, and Guinness applies.

ABC had from 1991 down to February 2002 been charging for Dr Lit’s services as a consultant. ABC in the nature of things did not take holidays, which a consultant would not normally expect to be paid for anyway. The minutes of 9^th July 1991 do, however, record that ABC was to charge an annual fee, payable by instalments, for 46 weeks work. That is an indication that 6 weeks annual holiday for Dr Lit was built into the arrangement. If, however, Dr Lit worked for more than 46 weeks, ABC could not, without more, charge a higher annual fee. The minutes of 9^th August 1991 do, it is true, record an intention to document the payment in lieu arrangement, but I have seen no documentation about it, and structuring it within a consultancy arrangement would not be entirely straightforward. This may also be one of the reasons why the figure Dr Lit mentioned (£68,750), and which he said was largely holiday pay, was paid to him, and not to ABC. However that may be, that sum was paid, and Dr Lit is not now claiming that he or ABC has an unsatisfied accrued right to payment in lieu of holiday. On the evidence I have read and heard, neither he nor ABC had any outstanding entitlement to salary (or consultancy fees) apart perhaps from the £68,750 which was paid to Dr Lit between December 2002 and February 2003. The payment of that sum settled the account between him and Sunrise.

I now turn to the Sunrise board minutes of 3^rd December 2002. On that day, the Sunrise board approved a proposal that Tony Lit would be appointed as the new Managing Director and that Dr Lit would be the Chairman & Chief Executive and act as a Consultant to Sunrise drawing a consultancy fee of £25,000 per month. Dr Lit was to change his residency to “an appropriate overseas country” and establish an overseas office which would be on a shared basis between Sunrise and “his consultancy vehicle (Global Radio Services)”. (I interpose to note that Dr Lit explained in evidence that he moved initially to Sri Lanka in October 2002, but then moved to Dubai, after spending some time in Mauritius, in early 2003.) Dr Lit was freed from all day to day operational aspects of the business and thus enabled to spend time exploring and developing new business overseas. He was to be available in the UK when required, however, and would be present at board meetings, via telephone conference call when not in the UK.

It is noteworthy that the minute does not say anything about any consultancy fee being paid, whether at the rate of £15,000 per month or any other rate, for the 10 month period starting in March 2002. The minute is all about the future.

A draft agreement was drawn up at some stage, bearing the date 3^rd January 2003, between “Avtar Lit & Associates” (again, Dr Lit by another name) and Sunrise. This draft, as well as referring to a future monthly consultancy fee of £200 per hour with a maximum of £25,000 per month, also provided for a reduced consultancy fee of £15,000 per month for the 10 month period to December 2002, and a “reduced salary” for the supplier from April 2002 to February 2003 of “£6,250 on the PAYE” (which is an annual rate of £75,000, squaring with the figure referred to by Dr Lit in his evidence). This was not put before the board, and I am not persuaded that it was ever executed. If it had been executed, it would not have bound Sunrise in the absence of board approval. I doubt also whether the date of 3^rd January 2003 is a reflection of anything which happened on that date, as opposed to being inserted in the draft (prepared some time before) in anticipation of its being executed on that date, as the new arrangements were meant to start in January 2003. Dr Lit told me that he was in Mauritius on 3^rd January 2003. He was not around therefore to sign the agreement on that date, which he said was prepared by either (or both of) Mr Batra and Mr Davis, other directors of Sunrise, presumably in the UK. He also told me that the original of this agreement, duly executed, was in a safe in Sri Lanka, to which he alone had the key, and that a change of travel plans prevented him from collecting it for the trial. I regard this as an inadequate excuse. He also told me that another copy or counterpart may have been lost in storage in Hayes Gate House (owned by a Sunrise subsidiary) which was ransacked (as it undoubtedly was) by intruders. I am not persuaded that there ever was a copy or counterpart at Hayes Gate House (which was not Sunrise’s registered office or principal place of business: compare section 318(1) of the Companies Act 1985) or (in the absence of production) that there is or ever was a signed original in a safe in Sri Lanka. I thought Dr Lit’s evidence on the point was guesswork at best.

The idea, apparently, had Dr Lit chosen to relocate to Sri Lanka permanently, was that the consultancy would have been operated under the name “Avtar Lit & Associates”, though the draft agreement was expressed to be transferrable. The existence of this document, even as a draft, therefore contradicts Dr Lit’s evidence that “Global Radio Services” was around as a trading name earlier in 2002, and would have been the chosen vehicle had he chosen to relocate permanently to Sri Lanka. If that evidence was true, I see no reason why the name “Avtar Lit & Associates” rather than “Global Radio Services” should have appeared on the draft. The inference I draw is that by the time of the board meeting of 3^rd December 2002, GRS had only recently come on to the scene as a trading style. There is no reliable evidence of its prior use. Dr Lit’s evidence was that he incorporated GRS in Dubai so as to give him residency status there. Inferentially, therefore, a corporate entity was not otherwise needed.

The board minutes themselves do not authorise the payment to Dr Lit, GRS, Avtar Lit & Associates or anyone else connected with him, of any monthly sum by way of directors’ remuneration, consultancy, or otherwise, for his services from March 2002. I therefore conclude that the GRS invoice for £150,000 was unauthorised and that, as Guinness confirms, there is no justification for allowing that or any other charge to stand for the period it covers on the basis of a quantum meruit. The charging of this sum to Sunrise was accordingly wrongful and unfairly prejudicial to Ms Kohli. The fact that it may not yet have been paid is irrelevant, as the Respondents claim that it is justified, and the threat of payment remains.

In this connection, I mention also the evidence of Mr Jain, who in his 3^rd witness statement said that the minutes of the board meeting of 3^rd December 2002 could have been better worded because the GRS arrangement had been in place since in or about March 2002. The clear impression was that the same arrangement had previously been in place. He failed, however, to address the difference between £15,000 per month and £25,000 per month. On any footing, the arrangement was not the same, and Mr Jain did not satisfactorily explain how it came to be put in place for the earlier period. Mr Jain went on to state that he and the other members of the board were aware of the arrangement and were quite content with it, not only in relation to the past but also going forward. I have no doubt that the 6 board members present on 3^rd December 2002 were content with the future arrangements that were then made, because the board minutes say so. I am not however prepared to find that the board members present, still less those not present, approved an arrangement for the past, or had previously sanctioned such an arrangement, which would have to be minuted. Mr Jain may have known about the proposed payment for the past (which was not invoiced until January 2003) and thought it fair and reasonable, but he cannot speak for others. I therefore reject his evidence on this point.

As to Dr Lit, he suggested that there had been a previous board meeting back in March 2002 which approved the arrangement. There was not. All the minutes for 2002 down to a meeting held on 1^st September of that year refer to, and correctly date, the previous meeting, and approve its minutes. I am satisfied therefore that the minutes for this period are complete. The next meeting was the 3^rd December meeting, which approved the minutes of the previous meeting without identifying its date. No-one has suggested that there was another board meeting between 1^st September and 3^rd December 2002. There is no reference in any of these minutes (or elsewhere) to GRS until 3^rd December 2002, and the minutes of that meeting relate only to the future.

Dr Lit also mentioned that Tony Lit was the Managing Director in March 2002, but he did not become Managing Director until December 3^rd, as the minutes of that day confirm. I am not sure what the relevance of this point was. Dr Lit was presumably suggesting that he had agreed something about GRS with Tony Lit, but, even if he had done so, he could not have claimed that Tony Lit had actual authority, as he knew that he did not, and he was not an outsider relying on ostensible authority. Tony Lit did not give any evidence on this point, or any other aspect of the consultancy arrangements, but he made common cause with the other Respondents, and must be taken (where he has not given evidence of his own) to associate himself with the position they have adopted. The pleaded defence common to all the Respondents was that the GRS payments were authorised. To the extent of the £150,000, that defence is rejected.

What the 3^rd December minutes do indicate, however, is that for future services, consultancy payments were to be made at the specified rate of £25,000 per month.

Dr Lit told me that the figure of £25,000 per month was calculated on the basis of a rate of £200 per hour (a rate confirmed by a later board minute of 30^th May 2003) so that he would be expected, on that footing, to be working 125 hours per month. On the basis of a 5-day week, that is approximately 6 hours per day on average. I am not sure that Dr Lit would ever limit himself to working only on weekdays, as his entrepeneurial drive appears to be limitless, and business is his life. Dr Lit told me that he is currently working 14-15 hours per day for the Sunrise group. That may be an exaggeration, as he appears to have outside business interests as well, but I do not doubt that he works long hours for Sunrise. He has now relocated to the UK, so I expect his hours are greater so far as Sunrise is concerned than they were when he was based in Dubai. Nonetheless, I am satisfied that he continued to devote substantial time and effort to the affairs of Sunrise after his relocation to Dubai, and that he did the work required of him. I note by way of example that, though based in Dubai, he led the negotiations with the Bank both before and in the time leading up to the 2005 rights issue. His explanations in the witness box of the development of Sunrise’s business over the years, including during the period under review, also showed that he remained very involved in the business throughout.

His continuing involvement is apparent, also, from the ensuing board minutes from the beginning of 2003 through to May 2006. He is recorded as attending all the meetings in person or by conference call, though one set of minutes (for 18^th October 2004) as well as recording his attendance, also records his apologies. The minutes became more truncated as time went by, coincident with a reduction of board members, but I note that the minutes of 5^th April 2004 record that GRS (which must mean Dr Lit) was negotiating acquisitions (Active FM and Tristar) which subsequent minutes confirm came to fruition. He also appears to have been involved in dealing with acquisitions or proposed acquisitions by subsidiaries, as this was one of the reasons behind Sunrise changing bankers in 2004: minutes of 5^th October 2004 and item 3 of the minutes of 30^th December 2005. The minutes of 30^th January 2006 record that GRS had been asked to review the market and come up with a solution to provided edge over rivals and combat low prices. Perhaps surprisingly, the minutes for this period contain no references (so far as I can see) to overseas business, though it seems probable that the increasing cash flow problems of the group at home precluded meaningful business development overseas, which was why GRS was asked to come up with a solution to Sunrise’s problems in January 2006.

As, also, the minutes of 3^rd December 2002 identified GRS (then unincorporated) as Dr Lit’s, I regard those minutes as authorising payments in respect of future services to GRS. The matter was further confirmed by the minutes of 30^th May 2003 when Dr Lit advised the board (before any payments to GRS were made) that he was no longer formally employed by Sunrise but provided his services through GRS at the rate of £200 per hour but kept to a maximum of £25,000 per month plus expenses. As by this time GRS had been incorporated (on 12^th January 2003) I have no doubt that the invoices, for services which were rendered after January 2003, all of which post-dated the incorporation of GRS, and the payment of those invoices (to the extent that they were paid) were authorised. If the board minutes are not to be read as authorising payment to GRS, they must be read, instead, as authorising payment to Dr Lit. He in turn was entitled to direct payment to his recipient of choice, which is what he and Ms Kohli had both done in the past.

Moreover, as I am satisfied that Dr Lit did the work required of him, there was no element of sham in the GRS invoices for 2003 onwards. Finally, whilst I have found that the £150,000 invoice was unauthorised, the amounts outstanding under authorised GRS invoices when the sums totalling £497,357 were paid comfortably exceeded that sum. It follows from this that the payment of those sums was authorised and cannot form the basis of a further complaint that the 2005 allotment was occasioned by depredations, and does not bolster the complaint about non-payment of dividends. What also follows from this is that the payments in fact made by Sunrise to GRS must be appropriated to authorised invoices, and not to the invoice of £150,000 for 2002. In all other respects, the payments to and accruals in favour of GRS were properly authorised, and cannot be challenged.

I now consider the arrangements that replaced the GRS arrangements in 2006. The Sunrise board minutes of 30^th May 2006 record that Dr Lit had agreed to come back to be the Group Chief Executive and to be more hands on in the UK, on the basis that he would be working for his own company ABC but effectively act as Chief Executive “for the following fees divided into 3 areas:

The board accepted these terms. “Asian Radio Network” was a reference to the business of Sunrise and some of its subsidiaries. Any liability under the arrangements then approved would be Sunrise’s, though the relevant subsidiaries may have been jointly and severally liable, or at least liable to make an appropriate contribution to Sunrise’s outlay. “Metra Club” and “London Media Company” were references to the businesses of other subsidiaries, Club Concorde Limited (“CCL”) and London Media Club Limited (“LMC”). Dr Lit was not present at this meeting, though, as the minutes record, Mr Jain had spoken to him. The fees totalled £45,000 per month, or £540,000 per annum. At the rate of £200 per hour, and assuming (probably contrary to the fact) that Dr Lit worked only 46 weeks per year, and not at all at weekends, the average working day would be 10-11 hours.

For reasons similar to those I have already expressed in relation to the GRS arrangements, these minutes clearly authorised the payment to and accruals in favour of ABC that have since been made. The arrangements as regards Sunrise were confirmed in a written agreement dated 1^st July 2007 expressed to be between ABC and Sunrise and its “Asian Radio Subsidiaries”, but as this received no separate authorisation from the board, the relevant authorisation is to be found not in that agreement, but in the minutes of 30^th May 2006.

Mr Harris, by the choice of well-chosen epithets ranging from “large” to “exorbitant”, criticised the decision of the board to pay GRS and ABC the sums they agreed to pay. He claimed in effect that the board were in breach of fiduciary duty in doing so, acting at Dr Lit’s behest.

The amounts were indeed substantial, but the case was not (as Mr Griffiths repeatedly pointed out from an early stage) pleaded on the basis that the sums were excessive. It was pleaded on the basis that the amounts paid or accrued were unauthorised, which Mr Harris sought to reinforce by saying that the payments and accruals in question were not a genuine reward for services but a device to extract cash from Sunrise (the “sham” argument). The evidence may have been different or fuller had there been a pleaded case of the board agreeing to an excessive remuneration in breach of fiduciary duty. I would in that event have expected expert evidence to be called on the appropriate level of reward for someone providing Dr Lit’s services. Ms Hindson (the Respondents’ accountancy expert) disclaimed relevant expertise on the point. Such (or similar) evidence may still become relevant on any valuation exercise if I make a buy-out order, as was presaged in Mr Thompson’s expert report for Ms Kohli (in paragraph 4.9), as valuers commonly do look at what it would cost a purchaser to replace the existing management. It will not however (on any valuation exercise) be open to Ms Kohli to reopen past payments and accruals, to the extent they were authorised. Other directors authorising the arrangements may also have been called had there been a plea of breach of fiduciary duty. So far as any issue of unfair prejudice is concerned, therefore, fairness requires that I should limit Mr Harris to the pleaded issues.

I could not stop cross-examination on the point during the trial, as obviously exorbitant sums would be evidence that the sums falling due were not in truth a reward for services rendered, and the cloak of a consultancy arrangement if no or no significant services were provided could not in those circumstances stand as a valid authority, for the company would, on this hypothesis, be a victim of fraud. The payments made would then have the status of gratuitous dispositions of Sunrise’s money unrelated to any proper purpose of Sunrise’s business, which would be beyond the powers of the board to authorise. However, I conclude on the evidence that Dr Lit did provide the services he was required to perform, though precisely how many hours he put in (and for what particular company following the revised arrangements in 2006) has not been established one way or the other. As regards sums falling due for all periods after 1^st January 2003, therefore, the sham argument fails, and does not undermine the authorities given by the board in relation to the payments and accruals of consultancy fees. The separate issue of breach of fiduciary duty in authorising the arrangements does not arise on the pleadings, and I would not in any event be persuaded by the evidence I have heard that the case is made out. Dr Lit was always a pivotal figure in Sunrise, and a Judge should be slow to assess the appropriate reward of someone in Dr Lit’s position by the standards of a public servant, remembering instead that he was not always that. Moreover, I am satisfied by the evidence of Mr Jain alone that Dr Lit’s return in 2006 was requested and genuinely thought to be necessary, and that without him back at the helm Sunrise’s future was unpromising. I was not under the impression that Tony Lit has yet developed his own business skills to an extent anywhere near matching his father’s.

Similar observations apply to another complaint of Mr Harris, namely, that the accruals of monthly invoices were not backed up by time sheets, or any other form of narrative, justifying the amounts charged. On the face of the minutes of 3^rd December 2002, this was not necessary in the case of the GRS payments, as a flat rate was provided for, though the later minutes of 30^th May 2003 indicate that an hourly rate subject to a cap was in fact being charged. The later payments to ABC from June 2006 were also based on an hourly rate with a cap. Both Dr Lit and Mr Jain confirmed that no time sheets or other proof of the hourly rate were submitted or requested. This was regrettable, but did not make the payments unauthorised or a sham. There was no contractual obligation to provide the underlying time records. Had a dispute arisen, Dr Lit may (without time records) have had difficulty in proving his case, but that did not happen. The invoices can only have been submitted on the basis that the requisite time had been spent and must have been accepted on trust by whoever authorised their payment or accrual (I do not know who authorised actual payment, or who made the actual accounting entries recording the accruals). The authority for their acceptance was in the board minutes authorising the basic arrangements. If Dr Lit claimed for time that he knew he did not work, that would have been reprehensible conduct, but it would not make acceptance of the invoices by someone taking them on trust unauthorised, though Sunrise would (on this hypothesis) be the victim of a fraud.

It was never put to Dr Lit that he did not work the requisite number of hours, and this was not the pleaded case. If Ms Kohli’s case was that Dr Lit had caused GRS or ABC to invoice for sums which he knew his hours did not justify, this should have been pleaded and put. Nor was it put to Mr Jain or Tony Lit that they did not believe that Dr Lit had worked the requisite number of hours.

The pleading was that the payments were unauthorised. All that was put in cross-examination to Dr Lit (and Mr Jain) was that no time sheets or other time recording material were provided to or requested by Sunrise. The complaint was in this respect about the monitoring of the arrangements, not about their substance. Nothing on this issue was put to Tony Lit, even though he remained (nominally) Managing Director after Dr Lit’s return. Moreover, Dr Lit’s evidence (as I have said) was that, at least since his return to the UK, he had been working 14-15 hours per day. Even allowing for some exaggeration in that figure, I cannot properly conclude that Sunrise has been short-changed. Similar observations apply in relation to the period of Dr Lit’s relocation to Dubai, when the overall monthly sum was lower. I have already explained why I consider his involvement during that period was both real and substantial.

A separate complaint of Mr Harris was that Sunrise’s articles required the payments in question to be authorised by the company in general meeting, which they were not. This requires consideration of Sunrise’s articles. That is not as straightforward as it should be, as the Sunrise Articles are something of a moveable feast.

There is no doubt that down to June 2004, the articles incorporated Table A in the Companies (Tables A to F) Regulations 1985 (“Table A”).

The records filed with the registrar of companies include what purports to be a special resolution dated 2 ^nd March 2004 amending the original articles. No meeting to consider this resolution is said on the face of the resolution to have taken place, and the resolution was signed only by Dr Lit. In addition, new Articles of Association were filed, said to have been adopted by a Special Written Resolution also dated 2 ^nd March 2004. As there was no resolution signed by or on behalf of all the shareholders entitled to attend and vote, as required (then) by section 381A Companies Act 1985, I can ignore these alterations. I am surprised that they were filed, but, as these did not form part of Ms Kohli’s complaints, will not labour the point.

The filed records also include a Special Resolution, said to have been passed at an EGM held on 26 ^th June 2004, adopting new Memorandum and Articles of Association. This resolution was not filed until 18 ^th October 2007, in accordance with the direction given to Ms Daggar at the further EGM held on 27 ^th September 2007.

There is no record in the board minutes in 2004 that the convening of the EGM to amend the articles was ever considered by the directors, and there are no extant notices actually convening it. It seems unlikely that the resolution was validly passed, a conclusion which the late filing supports. The purported new articles excluded Table A, substituting other detailed provisions.

Both Counsel addressed me on the basis that Table A applied both before and after 2004, and I shall proceed on the same basis. It is, however, manifestly unsatisfactory that the status of Sunrise’s current Memorandum and Articles of Association should be in doubt, though this also does not form one of Ms Kohli’s complaints. I should also add that, even if the new Articles applied, the provisions of those articles, though not identical to Table A, would produce the same result so far as any issue relevant to the present case is concerned.. As, however, neither side relies on the new articles, I shall not deal with them specifically.

The relevant parts of Table A provided as follows:-

If the payments and accruals in favour of GRS and ABC successively were not genuine payments in respect of Dr Lit’s services, I agree with Mr Harris that the authority of a general meeting was required under regulation 82. As, however, I have found that the payments and accruals were genuinely made in respect of Dr Lit’s services, the authority rested with the board. This is so whether they were to be characterised as consultancy fees or emoluments of Dr Lit’s employment. Regulation 70 was apt to cover the former; regulation 84 the latter. I do not accept Mr Harris’ further submission that it is necessary to extract from the total consultancy fees sums paid in respect of the ordinary activities of a director. Dr Lit was not, save for the interim period I have mentioned in 2002, charging or receiving directors fees over and above his consultancy fees, and his attendance at board meetings and the like was properly regarded as part of his executive duties.

Ms Hindson (the Respondents’ accountancy expert) has calculated that the total sums invoiced by GRS were £1,175,000. This includes the £150,000 improperly charged on my findings. The amount showed as outstanding to GRS as at 31 ^st December 2007 was £677,643. It follows from my ruling that, assuming the outstanding amount has not subsequently been reduced, any buy-out order that I make requiring a valuation after 2007 should be on the basis (amongst other things) that the sum outstanding to GRS is £527,643.

The sum of £527,643 appears to be less than the maximum GRS could have charged on the assumption that the maximum hours were in every month devoted by Dr Lit to the affairs of Sunrise. The substituted ABC arrangements appear to have started on 1 ^st July 2007 (I take this date from the agreement which was executed on that date which, though not itself separately authorised, is evidence of when the new arrangements came into effect.) On that footing, GRS might properly have charged amounts, after giving credits for the payments made, amounting to £552,643. There is thus the equivalent of one monthly invoice of £25,000 short. As, however, GRS did not charge this sum, and the accounts have been prepared upon the footing that it is not due, I see no warrant for adding it back in. This may reflect the fact that for one of the months the hours were not spent, or there may have been a waiver to the extent of £25,000.

If any of the outstanding GRS sums have been paid since 2007 (the evidence was that none had been paid at the date of the trial) the figure of £527,643 will require adjustment.

As regards the sums charged by ABC to Sunrise, payments were made of £120,000 in 2006 and £240,000 in 2007, totalling £360,000. This equates to 18 months consultancy fees at the authorised rate of £20,000 per month. These payments were accordingly authorised.

As regards CCL and LMC, £270,000 and £180,000 respectively were invoiced by ABC down to the end of December 2007. These are significantly less in each case than the maximum chargeable over the 18 months in question. As in the case of GRS, I see no warrant for increasing the accruals down to that date. As the actual accruals were within the capped limits, they were authorised.

Nothing had been paid by CCL down to the end of December 2007, or at the date of the trial. Accordingly, any post-2007 valuation must be on the footing that £270,000 remains due from CCL, subject to adjustment for further proper accruals and for any sums that have now been paid. Dr Lit told me in February this year that no payments at all for his services had been made since October 2008. It is possible that the position is now different.

The £180,000 invoiced by LMC down to the end of December 2007 has been paid, so any post-2007 valuation will be on the footing that there was nothing further due to LMC in respect of Dr Lit’s services down to that date. Adjustments for further proper accruals (less payments actually made) will be necessary for periods after 2007.

There was a suggestion by Dr Lit in his evidence that other sums were subsequently accruing at the rate of £25,000 per month. If consultancy fees have been invoiced at that rate, they appear to have exceeded the authorised cap and any post-2007 valuation will (subject to the immediately following points) require the later accruals to be adjusted downwards or eliminated to correspond to that cap. I have not located any minute authorising these additional fees (despite the suggestion in Mr Harris’s written closing submissions that there was such a reference in a later minute) and neither Counsel identified such a minute when this judgment was circulated as a draft, accompanied by my request that the relevant minute should be identified. Moreover, Mr Griffiths stated in response to my query not only that there was no further minute, but also that there were no other sums accruing. On that footing, I shall direct that any post-2007 valuation shall down to the valuation date be on the basis that monthly accruals against Sunrise and its subsidiaries shall not exceed the amounts set out in the Sunrise board minutes of 30 ^th May 2006.

I now turn to consider the way in which the consultancy payments after 2002 came to be recorded in the Sunrise accounts. The pleaded complaint was that the directors’ remuneration was not separately recorded in a note in Sunrise’s accounts. Nor was Dr Lit shown as the highest paid director. Therefore, Ms Kohli could not tell from a perusal of the accounts what Dr Lit, who she realised must be the highest paid director, was getting. Nor could anyone else. Some of ABC’s charges were disclosed in notes in the accounts prior to 2002, though is not clear to me that all of them were. Be that as it may, the disclosures stopped completely in the 2002 and later accounts. The payments to GRS and ABC after 2002 were not disclosed at all in any note to the accounts, as they were rolled up into a larger figure for “administrative expenses”. I should add that Sunrise’s accounts were made up to 31^st December each year.

At the material times, the accounting requirements were those relating to a medium-sized company, which Sunrise was for the purposes of Part VII of the Companies Act 1985.

There have long been statutory requirements requiring disclosure of directors’ emoluments in a note. The relevant provisions at the material time were to be found in Schedule 6 of the Companies Act 1985, as substituted (so far as material) by the Companies Act 1989, section 6(4), Schedule 4, paragraphs 1-3, and the Company Accounts (Disclosure of Directors’ Emoluments) Regulations 1977, regulation 2. All the provisions of Schedule 6 as so substituted were repealed and replaced as a result of the coming into effect of the Companies Act 2006 section 1295, Schedule 16 on 6 ^th April 2008: Companies Act 2006 (Commencement No 5, Transitional Provisions and Savings) Order 2007. As the accounts with which I am concerned are for periods prior to that date, Schedule 6 as so amended and substituted applied at all material times.

References to Schedule 6 hereafter are references to the version in force after 2002, until its repeal.

Paragraph 1 of Schedule 6 provided:-

Paragraph 2 of Schedule 6 provided:-

Whilst Schedule 6 went on to exempt small companies from the requirement to show the total of the aggregates attributable to the highest paid director, that exemption did not apply to medium-sized companies such as Sunrise.

It is evident that Dr Lit provided “qualifying services” and that, if the sums payable to (successively) GRS and ABC were required to be aggregated with the payments to other directors, then those sums exceeded £200,000 each year and should have been disclosed as attributable to Dr Lit as the highest paid director. If, however, those sums did not fall to be so aggregated, the amount attributable to Dr Lit as the highest paid director did not need to be shown. The aggregate of the sums attributable to all the remaining directors was, in each year, less than £200,000.

References to amounts paid to or receivable by a person in Schedule 6 included, by virtue of paragraph 10(4) of that Schedule, amounts paid to or receivable by a person connected with him or a body corporate controlled by him.

It follows from this that the aggregate of directors’ remuneration in the notes to the accounts should have included the sums payable to (successively) GRS and ABC. Those sums should also have been separately shown as the amounts payable to the highest paid director. Had that been the case, Ms Kohli would immediately have realised that these were payments to or for the benefit of Dr Lit. She was entitled to ascertain this fact by looking at the accounts. It was, however, only as a result of these proceedings, especially foillowing the work done by the Respondents’ expert, Ms Hindson, that the fog has now been lifted and the true position revealed. I consider this to be inexcusable. The sums involved were large and on any view material. The position is not ameliorated, bur rather aggravated, by the inclusion without explanation of those sums under the general heading of administration expenses.

Mr Griffiths submitted that none of this matters, because Ms Kohli could have asked questions at a shareholders’ meeting. This is no answer to the complaint. Accounts are the principal source of a shareholder’s understanding of a company’s financial affairs. They are also of interest and importance to others, such as creditors, credit agencies, those thinking of advancing monies or credit, and the revenue authorities, who may wish to ascertain what the directors are or have been taking out. Audited accounts, once filed, are public documents, and anyone looking at them is entitled to assume that they are accurate, and reveal everything that should be revealed

Transparency demands that the unvarnished truth should be revealed by the accounts, not hidden, and not left to the shareholder to ask questions at a shareholders’ meeting, still less to engage the services of a forensic accountant. In this case, none of the GRS charges, or the later ABC charges, were mentioned at all in any note to the accounts, though both expert accountants agreed they should have been, as they were on any footing payments to a related party. Instead, they were hidden among “administrative expenses”. Mr Thompson (Ms Kohli’s accountancy expert) when preparing his report, was somewhat in the dark himself. He was able to deduce, nevertheless, that there were irregularities in the filed accounts, in particular in relation to the detailing of directors’ remuneration, and the lack of comment on transactions with GRS and ABC. His conclusion was that the directors had adopted a very careless attitude to their responsibilities. It will be apparent from what I have said that, while my reasoning does not exactly follow that set out in his report, I agree with his conclusion.

Mr Jasani (Sunrise’s auditor) recognised that the accounts were deficient, and sought to shoulder the blame. Whilst he undoubtedly was to blame, he should not shoulder the blame alone. The accounts were the responsibility of the board, including the individual Respondents in this case. Tony Lit was not a director for all of the time, but he was for most of the time, and the accounts approved when he was a director were deficient. Dr Lit and Mr Jain were directors throughout. Some related party transactions had been disclosed by the accounts in the past, but this practice inexplicably stopped.

It would be wrong to expect individual directors to be on top of the detail of the accounting requirements of successive Companies Acts and allied regulations. It is their duty, however, to read the accounts carefully before their approval and query anything that strikes them as odd, or questionable. Any conscientious director knowing what the individual respondents each knew about the extent of the payments and accruals in favour of GRS and ABC, and what they were for, should have noticed the omission of any mention of them in the accounts, and should have observed the contrast with the remainder of the directors’ remuneration, and the disclosure in previous years of charges by related parties, including ABC. A conscientious director would therefore have queried why there was nothing about the relevant charges in the accounts, especially as the disclosed directors’ remuneration was much lower in consequence. The obvious person to raise the query with was Mr Jasani, the auditor, who was clearly embarrassed when the deficiencies in the accounts were drawn to his attention, and did not seek to defend the accounting treatment. Had any director raised a query with him at the time, it is inconceivable that the accounts would have gone out in the form in which they did, with no note at all revealing the payments and charges for the benefit of Dr Lit.

Mr Harris suggested that this accounting treatment was deliberate, and designed to keep Ms Kohli in the dark. I am unable to reach that conclusion. Mr Jain and Tony Lit were not cross-examined to that effect. Dr Lit was, but I doubt whether he was acting with deliberation either, as I do not think he ever made a secret of the value that he put on his services, both during and after Ms Kohli’s time as a director, and would not have been embarrassed by its disclosure. As it was, he probably left matters of detail to his accounts department (Sunrise had a “finance director”) and Mr Jasani, the auditor.

There is no suggestion that Dr Lit and the other directors deliberately withheld relevant information from Mr Jasani. He clearly knew of the ABC connection, as ABC’s registered office followed Mr Jasani’s address. I am less clear what he knew about the GRS connection. Assuming he knew of it, the directors cannot hide behind Mr Jasani, as the responsibility to read and carefully consider the accounts was theirs.

I am bound to say that I am extremely surprised that the audit procedures did not result in the disclosure by note of the transactions in question. However the payments and accruals were characterised (directors’ remuneration or related party transactions) they were significant and ought, one would have thought, to have featured high upon the list of audit checks. I also doubt very much whether the directors should have left the audit in the hands of a sole practitioner for as long as they did. I reached the clear view from listening to Mr Jasani’s evidence that he was not up to the job, and this view seems (latterly at any rate) to have been shared by the directors of Sunrise. In this connection, the Sunrise board minutes of 30^th January 2006 record that Jasani & Co did not have the resources to deal with a company the size of Sunrise, and the directors discussed seeking an audit firm in the top 20 in the UK. Likewise, the minutes of the AGM held on 20^th October 2006 record, whilst re-appointing Jasani & Co, that a new firm would prepare the 2007 accounts. The next AGM held on 16^th October 2007 (which approved the 2006 accounts) record that a larger firm of auditors was to be selected and appointed by the board. Despite that, the 2007 accounts were prepared by Jasani & Co.

In my judgment, the complaint of unfair prejudice is made out under this head, and it makes no difference that the profit and loss account is unaffected, given that the remuneration (leaving aside the first GRS invoice for £150,000) was all authorised. Although I have found that there was no deliberate plan to conceal the truth from Ms Kohli, it is readily understandable that the improper accounting should cause her to lose all confidence in the competence and integrity of the board, or (which is probably a more realistic appraisal of the situation) that such possibility that there ever was that she should regain trust and confidence in the board has been destroyed. As, also, the directors knew of Ms Kohli’s position as an estranged minority, and the previous litigation, it is all the more surprising that the care and attention that they gave to their consideration of the accounts was, in this respect, as inadequate as it was.

Complaint was also made of the lack of transparency in the accounts generally. It was said to be very difficult to get a true view of Sunrise’s business. There is force in this point, but I do not consider that a case of unfair prejudice is made out under this head. The real problem is that the Sunrise accounts were unconsolidated, so that the real picture of what was happening in the Group could only be ascertained by looking at all the accounts of the subsidiaries. Apart from the inadequate disclosure of directors’ remuneration, the accounts were properly prepared. The Sunrise Group was not required to file consolidated accounts at the time, as that requirement did not apply either to small or medium sized Groups. Thus, the absence of the full picture in the Sunrise accounts was attributable to Parliament, not any wrongful conduct on the part of those responsible for the accounts in question.

A separate complaint was made of the under recording of profits in the 2004 accounts. I deal with this below when considering the reasons for the late filing of those accounts. The complaint is not made out.

Ms Kohli also claims that Jersey House , which was purchased by Sunrise in 1997 for £1,200,000, was occupied by Dr Lit and his wife until its onward sale to Dr Lit in 2002 for £1,300,000.

Jersey House is a substantial 5-bedroomed detached property in Osterley Park, Middlesex, not far from Sunrise’s business premises, with a swimming pool complex and billiards room. It is a gated property with sophisticated security system, and is the largest house in Jersey Road, which consists mainly of semi-detached properties. Dr Lit explained that it was purchased to provide corporate entertainment and marketing facilities for Sunrise, and secure off-street parking for outside broadcasting vehicles, which are expensively equipped. Sunrise, as the operator of an Asian radio station, also had what was perceived to be a need for up-market reception facilities and overnight accommodation for visiting dignitaries and Bollywood celebrities.

There is no doubt that Jersey House was used for these purposes, though not as regularly as might at first have been contemplated. It eventually became surplus to requirements, which is why it was sold in 2002.

Ms Kohli was a director when Jersey House was purchased in 1997. The purchase was reported to the board, when Jersey House was described as “Company House”, and she did not object, or raise any significant query: see item 4 of the minutes of 29^th March 1997 (a meeting at which Ms Kohli was not present) and both versions of the minutes of 18^th October 1998. Moreover, Dr Lit’s unchallenged evidence was that she had day to day conduct of the purchase. It is no longer suggested (though this was originally pleaded) that Sunrise paid anything other than a proper price. Mr Jain, as well as Dr Lit, gave evidence confirming the reasons for Jersey House’s purchase.

I am not persuaded that Jersey House was occupied by Dr Lit and his wife following its purchase by Sunrise. It was used for corporate entertainment, accessing VIPs and staff meetings. Senior management, including Dr Lit, also used it for administrative purposes. Dr Lit readily accepted that he was there a lot, as he regarded it as an extension of the office. This appears to have led to a perception amongst Sunrise’s employees that he was living there. However, he owned and (according to Dr Lit) lived until about April 2001 at West Court, Hounslow, within 1 mile of Jersey House. In 2001, he purchased the house next door to Jersey House. The next door property also had additional parking space which was purchased for Sunrise, a fact confirmed in Sunrise’s 2001 accounts.

Suman Kohli (Ms Kohli’s sister) worked at Sunrise until 1999. She remembered going to Jersey House for a staff party and 2 corporate functions. Her recollection was understandably hazy, after 10 years away from Sunrise, and the number of occasions she claimed to have been to Jersey House varied during the course of her evidence. She said also that she collected Dr Lit from the property on 2 mornings, which suggests that he may have been sleeping there on those 2 occasions, though she did not go in. Even if he was sleeping there on those 2 occasions, it does not follow that he was living there. If he had been working there late on company business, sleeping there would be no different in principle from an overnight stay in a hotel. Dr Lit thought he never slept there, and there is no firm evidence that he did. He said hardly anyone ever slept there. The idea had been, as I have said, that Jersey House would be available for visiting dignitaries and celebrities, but in practice this never materialised on any significant scale.

There is documentary evidence supporting the suggestion that Dr Lit was the occupier. Knight Frank described him as sole occupier in a 1999 valuation report. The valuer was not called, so this could have been (as Dr Lit suggested was the case) an assumption on the valuer’s part, as Dr Lit may have been there at the time of the valuer’s visit. The valuer did not mention Dr Lit’s wife as an occupier, though Suman Kohli said in her evidence that the cleaning staff who went to Jersey House talked of Dr Lit’s wife as being there. No-one was called to give direct evidence of this fact, and (if she was there at all) that may have been in a supervisory capacity.

Council Tax records showed Dr Lit as the occupier. An internal note even suggested that the local authority were told that he was the owner, which was clearly incorrect and casts doubt over the accuracy of the Council Tax records. Dr Lit gave some speculative evidence as to how this came about, which I did not find at all helpful. Nevertheless, there is no reliable evidence that he himself ever told the local authority that he was the occupier or owner. The description could have come from anyone at Sunrise. Moreover, the address for him in the Council Tax records was Sunrise’s address (Sunrise House) and Sunrise paid the Council Tax. As Jersey House was purchased (on Dr Lit’s case) for business purposes, Sunrise should not have been paying Council Tax at the lower (domestic) rate. Dr Lit seemed genuinely surprised when it was drawn to his attention that Sunrise was not paying at the business rate, and could not explain it. I strongly suspect that the decision to stay on the domestic rate was deliberate.

The 2001 electoral register showed both Dr Lit and his wife as occupiers of Jersey House, which was very strange, as Dr Lit and his wife were also registered in that and previous years at 10, West Court. Dr Lit also, as I have said, purchased the neighbouring property in that year (356, Jersey Road) though this would have been after the electoral register was compiled. According to the website of the Office of National Statistics, the 2001 Electoral Register came into effect on 16 February 2001 and was based on a qualifying date of 10 October 2000. This was not formally in evidence before me, but the dates are confirmed by section 4(1) of the Representation of the People Act 1983 (as originally enacted and then in force) so I can take judicial notice of those dates. It follows that Dr Lit must (if the electoral register was correct) have already been occupying Jersey House with his wife when he purchased 356, Jersey Road. It is difficult to understand why he would need to do this if he and his wife were already living next door, though 356 was a smaller, semi-detached property, and Jersey House was (according to Dr Lit) used by him as a mailing address for security reasons because of his high profile in the Asian community.

Earlier electoral registers did not show Dr Lit and his wife, or anyone else, as occupiers of Jersey House. As I have not seen the electoral return for 2001, I do not know who filled it in. Dr Lit told me that someone from Sunrise was at Jersey House every day. Post could therefore have been taken back to Sunrise House and dealt with by someone there in accordance with the perception that Dr Lit was the occupier with his wife, or so as to perpetuate the domestic rate myth. However, no-one was called to give an explanation.

Mr Harris relied on the reluctance, or inability, of Mr Jain, to say when Dr Lit started to occupy Jersey House, as he undoubtedly did once he contracted to buy it from Sunrise. This, Mr Harris suggested, was telling. However, I put this reluctance or inability down to genuine lack of recollection as to dates. Mr Jain also explained that any occupation by Dr Lit could have been on behalf of Sunrise, thus recognising that Dr Lit (as he himself accepted) was there a lot.

Mr Griffiths reminded me that the burden of proof on this issue is on Ms Kohli. The allegation is also a serious one, as Dr Lit must (if Ms Kohli is correct) have deceived the board at the time of or following Jersey House’s purchase, including Ms Kohli herself. I am not satisfied on a balance of probabilities that Dr Lit was occupying Jersey House for his own purposes before he himself purchased it from Sunrise. Whilst there is evidence of corporate functions occurring at Jersey House, there is no direct evidence of actual use by Dr Lit of the kind one would expect of a domestic occupier. No-one has told me of any private function there, such as dinner or birthday parties. The only evidence of use I have heard is for corporate purposes. I accordingly reject this complaint.

In my consideration of the documentary evidence since the trial, I have noticed that the Annual Returns for Sunrise ceased to identify 10, West Court as Dr Lit’s address, instead giving Mr Jasani’s address (against Dr Lit’s entry as a director), or Sunrise’s business address (against his entry as a shareholder). The change to Mr Jasani’s address was said to have been effected on 14^th September 1999 in the Annual Return to 23^rd January 2000, and appeared again (changing with Mr Jasani’s own change of address) in subsequent Annual Returns (signed in 2 cases by Dr Lit) until Jersey House appeared in the Annual Return to 23^rd January 2004. These were strange entries and suggested that Dr Lit was not living at 10, West Court from 14^th September 1999 onwards. However, they did not indicate that he was at Jersey House either, but at Mr Jasani’s address, which seems improbable in the extreme, and was contrary to Dr Lit’s evidence. I heard no evidence explaining these entries, nor was Dr Lit cross-examined about them. In those circumstances, I do not think it would be right for me to make any inference one way or another from those entries as to where Dr Lit was living at the time.

Mr Harris sought to bolster his case by suggesting that the purchase of Jersey House was extravagant, wholly unnecessary for Sunrise’s purposes and a breach of fiduciary duty by its directors (presumably including Ms Kohli). I reject this allegation, which was not pleaded. Dr Lit’s explanations for the purchase (which I have summarised) were genuine, and confirmed by Mr Jain and the minutes of Sunrise to which I have referred. The fact that Jersey House became surplus to requirements, and was not used as much as anticipated, is hindsight.

I now turn to the circumstances of the sale of Jersey House. It was originally pleaded that this was at an undervalue, but this plea was abandoned.

It was also said that the sale to Dr Lit was unauthorised by the directors, who failed also to obtain the approval of shareholders as (then) required by section 320 of the Companies Act 1985. Complaint was also made that the completion date was deferred, and various aspersions were cast on the dating and genuineness of documentation relating to the transaction in question.

As regards board authority, Mr Griffiths submitted (in my judgment correctly) that the matter was properly dealt with by Mr Batra, Mr Jain and Tony Lit.

Regulation 72 of Table A provided:

On 28 ^th February 2002, the board instructed Mr Batra, Paul Davis (“Mr Davis”) and Mr Jain to oversee the sale of Jersey House at £1,300,000 or, if necessary, by auction, at not less than £1,200,000. They were all 3 directors. Mr Davis was also company secretary. The board were entitled to delegate that function under Regulation 72 of Table A. Subsequently, on 17 ^th May 2002, the board authorised the same 3 individuals “to sign the contracts for a sale price of £1.3 million.” Though the minutes did not say so explicitly, the proposed sale was to Dr Lit and his wife. Dr Lit as an interested party abstained from consideration of the proposed sale at this meeting.

The sale was, therefore, properly authorised so far as the board was concerned and the detail properly left to the 3 named individuals.

The contact for the sale of Jersey House to Dr Lit was dated 6 ^th June 2002 with a contractual completion date of 6 ^th December 2002. Dr Lit and his family moved into Jersey House shortly after the date of the contract, though they moved (successively) to Sri Lanka and Dubai in October 2002 and February 2003 respectively.

Dr Lit paid a deposit of £500,000 at the time of the contract, which was significantly greater than the conventional 10%.

Subsequently, the completion date was deferred to 4 ^th April 2003. The variation was not put to the board, but it did not need to be, as the detail had been delegated.

A licence fee of £100 per month was payable, together with interest on the balance of the purchase price at 1% over base down to April 2004. Through oversight, the interest does not appear to have been paid, but is accepted as payable. 1% over base was a fair rate of interest. £100 was low as a licence fee, but was compensated for by the payment of a substantially increased deposit.

I heard evidence of rental values, which were adversely affected at the time by the relatively recent terrorist attack on the World Trade Centre in New York (Jersey House providing suitable executive accommodation for corporate tenants). Jersey House is also close to the A4, which is quite noisy. Overall, I preferred the expert evidence of Mr Adams Cairns for the Respondents, which, though producing a surprisingly low yield, was based in part on actual attempts to let Jersey House as referred to in what he described as an “approved witness statement” of a letting agent. Though the statement was not signed, Mr Adams Cairns had confirmed the information in it, and other information, from the letting agent in question, and had spoken to other local letting agents about broadly comparable lettings. He considered that the market rent in 2002 was £2,000 a month (though elsewhere he said £27,000 per annum). Mr Gould (the Petitioner’s expert) thought that, after discounting the element based on the deposit, there was a rental shortfall of some £2,500 per month between contract and completion. This however was based on Windsor comparables, which were not directly relevant, and the JRF Index of Private Rents and Yields, which was not specific to this type of property or area, relating to Western postal areas generally. Moreover, on the footing (as was the case) that the outstanding purchase price carried interest, and that Jersey House was until completion made available to Sunrise for its own purposes, I find (as Mr Gould appeared to accept) that the overall financial package was fair to Sunrise.

The date of the variation agreement was 4 ^th March 2003, though the signatures of the Sunrise directors were back-dated, and the revised completion date was changed from March to April 2003 after its signature, but with the authority of both sides. Confusing and regrettable as the backdating and revision of the date from March to April 2003 were, they were of no real significance. Mr Harris said that an earlier note of Mr Batra identifying a revised date of April 2003 must have been a forgery. His submission, founding himself on Mr Jain’s oral evidence, was that the April date did not emerge until March 2003. I think it is more likely that Mr Jain forgot the earlier mention of April 2003. His recollection on dates generally was understandably poor, a point he himself made when giving evidence. I find that the date of April 2003 mentioned by Mr Batra was the date originally proposed as the date of deferred completion, and that Mr Batra’s note is a genuine contemporaneous document. The proposed date changed to March, and then back again to April.

The reason for the deferment of completion was that Sunrise wished to continue to have use of Jersey House after 6 ^th December 2002 for Christmas functions, and other corporate purposes in the New Year. The request for a deferment of the completion date was accordingly made by Mr Jain to Dr Lit. This suited Dr Lit, who was by then out of the country. It may have given him longer to arrange a mortgage too. I do not think there was anything sinister about the deferment of the completion date, and the financial arrangements underpinning the deferment were fair to both sides.

As a matter of substance, therefore, the sale of Jersey House to Dr Lit was not unfairly prejudicial to Ms Kohli.

There remains the issue of section 320 of the Companies Act 1985. It was common ground before me that shareholder approval was required under that section. Although Dr Lit thought there may have been a shareholders’ meeting, there was not. It follows that the sale was in breach of the section. Whilst the transaction might have been affirmed by the company in general meeting within a reasonable time - section 322(2)(c) - that has long since elapsed. Even had it been affirmed, that would only affect the remedy, not the underlying wrong.

Mr Jain explained that the directors did not seek legal advice specifically on the implications of a sale to Dr Lit. I find this surprising. Dealings between a company and one of its directors are known to be sensitive matters, which was no doubt why Dr Lit took no part in the board discussions. Mr Jain and his fellow directors should have taken advice specifically on the point. In any event, the requirement of prior approval in section 320 was an absolute one. It is no necessary answer to the point (as Mr Griffiths submitted) that approval was a formality. It was never sought, as it should have been, and cannot now be given. I do not however consider that the failure to seek approval was a deliberate flouting of the section. Rather, it was attributable to ignorance of the section’s requirements. Even so, the breach of the section was real and substantial, and cannot be dismissed as trivial. The requirement of prior approval is not a meaningless formality. It requires the director entering into the transaction to be open and transparent with all the shareholders before committing the company to the transaction in question, a process that concentrates the mind and may lead to a degree of self-restraint which would otherwise not be present.

Mr Griffiths also submitted that Sunrise suffered no loss, given the adequacy of the purchase price, and that its position may be improved, as the sale is voidable under section 322(1) and Dr Lit is accountable under section 322(3)(a) for any direct or indirect gain he has made from the transaction. No-one has suggested that the transaction should have been avoided, or that any valuation of Ms Kohli’s shares should be on the hypothetical basis that the transaction had been or is now avoided.

I do not think these points are determinative. Section 320 appeared in Part X of the Companies Act 1985, which was headed “Enforcement of Fair Dealing by Directors”. Any failure to comply with the requirements of that section was thus vulnerable to the characterisation of unfairness, and that unfairness would be prejudicial, even in the absence of any adverse financial impact, if the complaining shareholder reasonably concluded that the board could not be trusted or relied upon to conduct the affairs of the company in accordance with the requirements of proper corporate governance. That consideration has particular relevance in considering the impact of this failure upon Ms Kohli’s perception of the board.

I nevertheless have serious doubts whether the section 320 complaint, taken alone, would justify a finding of unfair prejudice of a sufficiently serious character to justify relief under section 994: compare Re Metropolis Motorcycles Ltd; Hale v Waldock and another [2007] 1 BCLC 520. I must, however, take an overall view, a point to which I return below.

Complaint is also made of the late filing of audited accounts, which it is said followed a pattern pointing towards a deliberate policy to keep Ms Kohli in the dark, a policy which was exacerbated by the failure to give Ms Kohli notices of the AGMs when the accounts eventually came to be considered.

There is no doubt that accounts were filed late. I do not accept there was anything deliberate about this. This was caused by a combination of the expansion of the businesses of Sunrise and its subsidiaries, and difficulties with integrating the accounting systems, and introducing new systems. There is ample evidence about this, including evidence from the auditor (Mr Jasani) which I am satisfied is true. A board minute of 5^th April 2005 also refers to “major problems with the new accounting system”. As regards Dr Lit, board minutes record his unhappiness at the delays (notably, the minutes of 30^th January 2006, 27^th March 2006 and 24^th July 2006). The latter minute, consistently with the evidence, explains the delays as referable to “the extra load of additional companies and new accounting system”.

I have already stated that I reject the allegation that no notice of any AGM was sent to Ms Kohli after 2002. The first AGM after the June 2002 settlement took place on 11^th August 2003, when the lateness of the 2001 accounts was explained. A similar explanation appears in the minutes for the next AGM held on 5^th August 2004. Notices for those meetings addressed to Ms Kohli have been produced.

A further AGM apparently took place on 6^th December 2004, as notice of the meeting was given to Ms Kohli for that date. The minutes of the 6^th December meeting are not before me, but the meeting must have taken place, as the 2003 accounts were filed a few days later, and the minutes for that meeting were expressly approved at a meeting held on 6^th June 2006.

The 2004 accounts proved to be a real problem. Tony Lit explained the delays in his letter to Ms Kohli of 3^rd August 2005. On 19^th October 2005 (the day of the EGM passing the special resolution authorising the directors to allot the rights issue shares) an AGM was also held, which was adjourned until the 2004 accounts were ready. No copy of any notice convening that AGM is before me, but notices for the EGM held on that date are, and the Sunrise witnesses were not cross-examined about the absence of a copy of the AGM notice. Nothing of significance happened at the AGM, as it was adjourned.

The next relevant communication is Ms Kohli’s solicitors’ letter of 16^th March 2006, complaining of the lateness of the 2004 accounts, to which I have already referred. That was answered by Tony Lit on 15^th May 2006, explaining, in my judgment truthfully, that not everything had gone smoothly due to expansion and acquisition of a number of radio stations in 2004 and initiating new accounting systems.

The difficulties that the company’s management got into in operating the accounting systems are highlighted by the adjustments that Sunrise, in conjunction with the auditor, had to make to the company’s internal postings, and the problems encountered in the reconciliation of opening and closing balances, before accurate accounts could be produced for 2004. These matters were explained by Mr Jasani (the auditor) in his evidence, which I accept, although they reflect poorly on the quality of the systems in place, and the competence of the persons responsible for operating them. I think, too, that the size and complexity of the Sunrise group was probably beyond the capacity of Mr Jasani, who is a sole practitioner. The adjustments in question caused Ms Kohli to amend her petition to allege an understatement of profit in the 2004 audited group accounts (when eventually produced) of £826,600, of which £271,509 was attributable to Sunrise alone. I find that the adjustments were properly made, and that there was no understatement of profit in the audited accounts, whether for the group or Sunrise alone.

The accounting difficulties were also explained in the minute of the next AGM adjourned from 19^th October 2005. This adjourned AGM was held on 6^th June 2006. Item 4 of those minutes explained the reasons for the delay in finalising the audit as follows:

Ms Kohli called the expert evidence of Mr Thompson casting doubt upon the explanations that were given for the late filing of accounts. That evidence however concentrated on one aspect only of the cause of the problems, namely the introduction of the Sage accounting system. There were other reasons, more fully considered by the Respondents’ expert, Ms Hindson, whose approach I found in this respect more balanced and fair.

No notice convening the adjourned meeting of 6^th June 2006 (even to the shareholders who attended) has been produced, and the date for the meeting was not mentioned in Tony Lit’s letter of 15^th May 2006. However, no cross-examination was directed to any of Sunrise’s witnesses concerning the absence of any copy of the notice convening this particular meeting, or the previous (adjourned) AGM of 19^th October 2005. Nor was Tony Lit cross-examined on the failure to mention this meeting in his letter. It would be astonishing if there was an omission to give notice, given that Ms Kohli’s solicitors were now on the scene and raising complaints on her behalf. I am not prepared to find in the absence of cross-examination on the point that no notice was given, or (if I am wrong on that point) that any omission to give notice was deliberate rather than inadvertent. There may have been a simple explanation for the fact that no copies of the notices convening those particular meetings were produced, for example, that Ms Daggar overlooked in these instances the desirability of taking copies and was more concerned (so far as the reconvened meeting was concerned) to get out the much delayed 2004 accounts. Or the copies may simply have been mislaid, and cannot now be located. In this connection, it is fair to say that Sunrise’s disclosure has been somewhat haphazard, to say the least, and late, which does not speak well of the administrative standards within Sunrise generally, or of the Respondents’ attitude towards their disclosure obligations. I am not persuaded that I should draw sinister inferences of a general kind, or in this particular instance, from its haphazard nature and lateness, though it is a point I have borne in mind when considering other documents or the lack of them (such as the alleged original of the Avtar Lit & Associates agreement, to which I have previously referred).

There is a copy of the notice to Ms Kohli (dated 27^th July 2006) of the AGM to approve the 2005 accounts. The meeting was held on 20^th October 2006. The minutes correctly note that the significant and thorough work undertaken on the 2004 accounts, whilst having an impact on that filing, ensured that the problems encountered in previous years were to a greater extent avoided in respect of the 2005 filing. The 2005 accounts were filed 2 days late. There is no subsequent complaint of the late filing of accounts.

In the circumstances, I reject the complaint of deliberate late preparation and filing of accounts, and that accounts have not been laid before the members. They have, albeit late, and Ms Kohli had notice of all shareholders’ meetings called to approve the accounts.

The accounts have, nevertheless, been late. I would not regard the 2 days lateness for the 2005 accounts as other than trivial, but the other delays were substantial, and were not occasional, but repeated. They have been explained, but not excused, given that the requirement to file accounts timeously is absolute. The excuses are lame, and reflect an absence of proper management systems and control, for which all the directors must share responsibility.

These were not the only failings. Ms Kohli justifiably complains of the late filings of the 2005 special resolutions, and of the late filing of any details regarding the 2005 share allotment. These also were not deliberate, but the statutory requirements are in this respect also absolute. Nor, given their importance to Ms Kohli, can they be dismissed as trivial. This again was the shared responsibility of the directors, whose attempts to blame an assistant solicitor failed. The direct fault was Ms Daggar’s, but she was appointed company secretary by the directors, though she singularly lacked experience for this position. She was previously employed as PA to Dr Lit, a position she continued to hold after her appointment as company secretary.

Ms Kohli has suffered no prejudice to the value of her shareholding in consequence of these failings, and the situation has now been cured. I do nevertheless consider that the late preparation and filing of accounts, coupled with the late filing of other returns, was, judged objectively, unfairly prejudicial to Ms Kohli, as these failings have significantly contributed to the undermining of any vestige of trust and confidence she might otherwise have in the Sunrise board. If there is added to that the complaints I have upheld concerning the issue of 10,000,000 shares to ABC in 2005 at par, the circumstances of the 2007 increase and proposed further rights issue at par, the unauthorised GRS £150,000 invoice, the improper accounting treatment of the GRS and ABC charges, and the failure to obtain shareholder approval for the sale of Jersey House, the case of unfair prejudice is amply made out. Looked at cumulatively, these failings entitle Ms Kohli to conclude that life as a Sunrise shareholder is intolerable.

Mr Harris also relied upon the alleged failure to keep copies of service contracts at the registered office. As, however, Ms Kohli never sought inspection, and the point was not pleaded, I ignore this point.

Section 996 of the Companies Act 2006 provides as follows:-

It is clear from the terms of the section that I have a broad discretion, which must, of course, be exercised judicially. Ms Kohli seeks a buy-out order, which is the remedy most commonly granted. In my judgment, the appropriate remedy is to order that she be bought out. I do not think it is reasonable to expect her to remain a shareholder in the light of the complaints of unfair prejudice which I have found to be established. I reject Mr Griffiths’ submission that I should tailor the relief more narrowly to remedy the particular acts of which she complains.

Ms Kohli’s complaints are against all three of the individual respondents, and they were, on my findings, all responsible for the complaints which I have found to be justified. They have also all made common cause before me. Nevertheless, overlaying all the individual complaints is the more general one that Dr Lit, as far and away (by himself or through ABC) the majority shareholder has been running and will continue to run Sunrise as his own. Whilst I do not think that this complaint was made out in all the respects enumerated on behalf of Ms Kohli, this was the broad impression I had of Dr Lit in the witness box. In addition, as the de facto majority shareholder, he has the most to gain from a purchase of Ms Kohli’s shares, as the shares will be more valuable in the hands of himself or ABC. It seems to me therefore that Dr Lit should be primarily liable to purchase Ms Kohli’s shares, which he will be at liberty to achieve by procuring ABC (or any other purchaser of his choice) to do so. Mr Jain and Tony Lit will as between themselves and Ms Kohli be jointly and severally liable to purchase her shares to the extent that Dr Lit fails to do so. They also may individually procure any other purchaser of their choice to do so. They will in addition be at liberty to enforce Dr Lit’s primary liability, but this will not in any way limit, or be used as an excuse to delay or defer, their obligations towards Ms Kohli.

I am also asked to give directions as to the valuation exercise now to take place. The principal issues are whether Ms Kohli should be treated as still holding her pre-2005 15% of the issued share capital of Sunrise, the valuation date and whether her shares should be valued on a discounted basis appropriate to a minority shareholding. In deciding these issues, I have in mind that the overriding requirement is that the valuation should be fair on the particular facts of the case.

I do not consider it to be appropriate that Ms Kohli’s shareholding should be treated, for valuation purposes, as 15% of the issued share capital. The complaint on my findings is not that the 2005 allotment should not have occurred at all, but that it should have occurred at a different price. I am not able on the evidence I have heard to determine precisely what a proper price should then have been, as the cross-examination and submissions were directed towards the question of whether or not the issue price of par was appropriate. It became common ground that par was substantially below the value of the shares in ABC’s hands, though Mr Griffiths still submitted that par was the appropriate price as the only candidate. I have rejected Mr Griffith’s submission on this point.

I will therefore direct that the shares of Ms Kohli be valued on the basis of what the issued share capital would have been had £200,000 been raised from ABC by the issue of shares in 2005 at the appropriate issue price

I shall also direct that the appropriate issue price should be fixed by reference to the value of Sunrise as a whole in October 2005. After valuing the whole, the appropriate issue price will be ascertained by reference to the notional value of each share as a rateable proportion of the whole. This, however, makes no allowance for either the additional risk that ABC (as regards the extra £200,000) bore alone, or the fact that the directors might well, had they acted properly, have fixed a price below the notional rateable value of all the shares. However, they did not act properly, and I have found that Dr Lit would have procured ABC to pay at a higher rate if that was necessary, up to the full rateable value.

The Court ultimately has to fix a price that is fair, which is not exclusively a valuation exercise, as the authorities to which I refer below demonstrate. Fairness includes the avoidance of unjust enrichment. It seems to me that for Dr Lit (whether by himself or through ABC) now to acquire Ms Kohli’s shares on the footing that the 2005 allotment was at a discount would be unfair, given that:-

the shares were and are worth more in the hands of ABC (which I equate for these purposes with Dr Lit);

Dr Lit intends to exit by sale of the whole as soon as is reasonably practicable (2 years from February 2009 was Dr Lit’s possibly optimistic estimate);

One of Dr Lit’s desires in the case of the 2005 allotment (though not its substantial purpose) was the achievement of dilution of Ms Kohli and consequential increase of his and ABC’s interest;

To allow ABC to be treated as having acquired the shares at a discount would in those circumstances give rise to a real risk of unjust enrichment.

I was not invited to reach a conclusion on what the value of Sunrise as a whole was in 2005, so this will have to be considered when working out the order I am now making. This is regrettable, as there has already been one round of substantial expert evidence, but unavoidable. There were so many variables potentially affecting the price depending on my findings on liability and rulings on the appropriate basis of valuation that it would have been disproportionate for the valuers to consider every angle, and even then they might have missed the point.

Turning now to the appropriate valuation date, I was referred to Profinance Trust SA v Gladstone [2002] 1 BCLC 141, where Robert Walker LJ said at 160:-

Robert Walker LJ then enumerated a number of examples by reference to the authorities. The strongest example from Ms Kohli’s perspective was the Cumana one, where a fall in the market during the currency of a petition justified an earlier valuation, and the Court strongly disapproved of the Respondents’ conduct.

In my judgment, there is no justification for departing from the usual starting point in the circumstances of this case. An October 2005 valuation might have been appropriate had I accepted Ms Kohli’s case that the 2005 allotment was made behind her back for an improper purpose. I have however rejected that case and, whilst I disapprove of aspects of the Respondents’ conduct, my disapproval of their behaviour, though real, is not severe. There is also no risk of unjust enrichment of the Respondents by choosing this date. On the contrary, if I choose a 2005 date, or some other date, Ms Kohli may be enriched fortuitously. In the ordinary course, she would have remained a shareholder, having decided (because she had no effective choice) to stick it out from 2002 indefinitely, until a sale or flotation would hopefully provide a suitable exit route. As any sale or flotation would have occurred in the aftermath of the changed market conditions of which we are all acutely aware, I see no warrant for compensating Ms Kohli with a one way ticket to relative financial paradise.

I shall accordingly direct that the valuation date shall be as at the date of handing down this judgment, which is Friday 13^th November 2009.

I now turn to the question of whether Ms Kohli’s shares should be discounted as a minority shareholding.

It is well established that an undiscounted valuation is usually appropriate when the successful petitioning shareholder is a quasi-partner as that expression is used in this branch of the law. Moreover, in Strahan v Wilcock [2006] 2 BCLC 555, Arden LJ, with whom Richards and Mummery LJJ agreed, commented at 562 that it was difficult to conceive of circumstances in which a non-discounted basis of valuation would be appropriate where a quasi-partnership relationship did not exist. This point was expressly left open, however.

In Irvine v Irvine (No 2) [2007] 1 BCLC 445 , Blackburne J observed as follows:

The recognition in that case of “some other exceptional circumstance” is a less narrow formulation that that posited by the Court of Appeal in Strahan , and points to the fact that there is no inflexible rule.

In the earlier case of Re a company (No 005134 of 1986), ex parte Harries [1989] BCLC 383, an allotment of shares was unfairly prejudicial both because it contravened what was then section 17 of the Companies Act 1980 and because it was improperly motivated. The parties had been, but were no longer, quasi-partners, the petitioning shareholder having elected to remain an investor following his ceasing to be actively involved. In those circumstances, Peter Gibson J held that a discount should be applied, observing that in the absence of any special features the value of shares must reflect the fact that the petitioner’s holding was only a minority holding. Again, the reference to “special features” indicates, as must be obvious, that there is no inflexible rule.

The decision of Peter Gibson J in Harries was applied by Mr Furness QC in McCarthy , in circumstances where there had been previous proceedings alleging unfair prejudice in which the Petitioners had been unsuccessful. The reasoning was that they themselves destroyed the quasi-partnership by their own acts in bringing the previous proceedings.

That there is no inflexible rule is amply confirmed by the decision, both at first instance and in the Court of Appeal, in Bird Precision Bellows Ltd [1984] 1 Ch 419 (Nourse J); [1986] Ch 658 (CA) concerning a predecessor section. That was a quasi-partnership case, but the comments at both levels were of wider import.

At first instance, Nourse J stated as follows:-

In going on to consider the position relating to quasi-partners generally, Nourse J at first instance was at pains to make clear that there was no rule of universal application. The converse must be true where there is no quasi-partnership relationship. There can in my judgment be no rule of universal application excluding an undiscounted valuation in such a case either.

Nourse J also highlighted the unfairness of requiring a quasi-partner shareholder for whom life had been made intolerable by acts of unfair prejudice to sell shares on “the fictional basis applicable to a free election to sell his shares in accordance with the company's articles of association, or indeed on any other basis which involved a discounted price.” That reflects the unreality of treating the aggrieved minority as a willing seller, a point that, though expressed in the context of quasi-partnerships, has potential application outside that context in an appropriate case.

Nourse J contrasted the quasi-partnership case with that of an investor paying a discounted price on becoming a shareholder. In that case, a shareholder would have no obvious claim to an undiscounted valuation on exit. He said nothing, however, regarding an investor paying an undiscounted price on becoming a shareholder, or providing risk capital on the same terms as all other shareholders (including the majority). Clearly, the particular circumstances of any given case must be considered, and previous examples from the decided cases should not be applied mechanistically. On the other hand, regard should also be had, in this context as in others, to the fact that the Court does not sit under a palm tree, and should (without losing sight of the justice of the particular case) seek so far as practicable to achieve a consistency of approach.

In the Court of Appeal in the same case, Oliver LJ had this to say at 669ff:-

Another relevant factor in any given case may be to consider whether the facts would, apart from section 994, justify a winding-up on the “just and equitable” ground, in which event each shareholder would receive a rateable proportion of the realised assets. A minority in those circumstances should not ordinarily be worse off than in a winding-up. This consideration appears to have been in Peter Gibson J’s mind in Harries , as he commented that he could not see that after his election the Petitioner could have obtained a winding-up order in order to receive a rateable share.

In the winding-up context, the “just and equitable” ground is not limited to cases of quasi-partnership. Thus, in the Privy Council’s decision of Loch v John Blackwood Ltd [1924] A.C. 783, it was said (at 788) that consideration of whether a winding-up order was just and equitable should “proceed upon a sound induction of all the facts of the case, and should not exclude, but should include circumstances which bear upon the problem of continuing or stopping courses of conduct which substantially impair those rights and protections to which shareholders, both under statute and contract, are entitled”. The company itself was a small domestic concern, but not a quasi-partnership. In the subsequent House of Lords decision in Westbourne Galleries , Lord Wilberforce regarded John Blackwood as endorsing, if not enlarging, the width of the just and equitable jurisdiction.

A winding-up, though producing a rateable proportion of the assets for all shareholders, will often be at break-up value, and therefore not necessarily advantageous to the shareholders. Nevertheless, in the case of a solvent company, I do not see why the Court should not direct the liquidator to carry on business in an appropriate case, if necessary appointing a special manager to assist him, thus preserving the value of the business which can be realised on a going concern basis. Given that possible alternative, the Court should not in general put a shareholder in a worse position than would be the case in a winding-up, if the facts would otherwise justify invocation of the “just and equitable” jurisdiction. That does not mean, however, that winding-up should routinely be sought as an alternative in section 994 cases. Rather, the potential availability of relief through the winding-up process should in an appropriate case be taken into account in fashioning the remedy, including the determination of the price, under section 996.

In CVC/Opportunity Equity Partners Ltd and another v Demarco Almeida [2002] 2 BCLC 108, the Privy Council considered, in the context of a just and equitable winding-up petition, what a fair offer would be justifying the strike-out of the petition. The appeal was from the Cayman Islands, which has no equivalent of section 994 or any of its predecessors, though it does have a provision for “just and equitable” winding-up. The case concerned an alleged quasi-partnership, but the observations on what a fair price would be have some limited significance in the present context too. In giving the advice of the Board, Lord Millett said this:-

Those comments were, as I have said, all made in the context of an allegation of quasi-partnership, but I do not think they are wholly irrelevant outside that context. In particular, the value of the shares in the hands of the Respondents to a petition may be a very material factor, for the Respondents may be unjustly enriched by the acquisition of shares at a discount where the acquisition has been triggered by their wrongful conduct, especially if there is reason to suspect or believe that their conduct, or some material part of it, may have been influenced by a desire to buy out or worsen the position (for example, by dilution) of the minority Unjust enrichment is not limited to cases of quasi-partnerships. Moreover, the Courts in England do not labour under any difficulty in making the most suitable order to suit the facts of the particular case before it. The Court must do what is fair.

So far as the present case is concerned, I have already found that Ms Kohli was not a quasi-partner in any relevant sense at the material times, though she was originally a quasi-partner. Mr Harris submitted that because she remained a reluctant shareholder after 2002, the normal rule should not apply, as it is unrealistic to regard her as someone who elected to remain an investor, thus distinguishing the case from Harries . I reject this submission. Harries was applied in McCarthy , where there was no election in any real sense, as there had been previous proceedings. Moreover, this approach begs the question: had Ms Kohli been bought out in 2002, upon what basis would she have been bought out? In my judgment, it is of no help in this case to consider what the position might have been in the past. Either Ms Kohli had grounds for petitioning in 2002 but chose not to, or she then had no grounds. In the former case, she can truly be said to have elected to remain an investor. In the latter case, she had no foundation for seeking an undiscounted price in 2002.

What I have to do is consider not what the position was (or would have been) in 2002, but what the fair basis of a buy-out order is today in the light of the unfairly prejudicial conduct of the Respondents which I have found proved.

In my judgment, the fair course in the circumstances of this particular case is to require Ms Kohli’s shares to be valued on an undiscounted basis. In other words, she will receive a rateable proportion of the value of the Sunrise shares as a whole. (I have already given directions on how the appropriate rate is to be ascertained for the purposes of a 2005 valuation, and the same applies today.) I reach that conclusion for these reasons (which should be read cumulatively):-

Ms Kohli was an original shareholder, who subscribed for shares at the same undiscounted price as everyone else, including Dr Lit The price was par, which was appropriate as, in common with all the other subscribing shareholders, she was assuming the risk of failure. All her shares were issued to her before Sunrise had achieved success.

Though (except as regards 50 shares) she transferred her shares to ABC, those shares were, as ABC subsequently acknowledged, held by ABC as her nominee. She did not (like an outside investor) acquire those shares in 2002 by paying a discounted price, but received them back as an existing beneficial owner.

She is in no realistic sense a willing seller. She decided (because she felt she had no choice in the matter) to stick it out in 2002, and would have continued to stick it out were it not for the acts of unfairly prejudicial conduct which I have found proved.

Had she continued to stick it out, she would have benefited from any future sale or flotation without suffering a discount. She should not be worse off now because her exit has been occasioned by the unfairly prejudicial conduct which I have found proved.

The business of Sunrise has been conducted with a view to capital growth rather than the payment of dividends. It is in all the circumstances unfair that Ms Kohli should be deprived of any part of the fruits of that growth.

Sunrise, though not (or no longer) a quasi-partnership, is a small private company (just as the “domestic” company was in John Blackwood) and the facts I have found would have justified a winding-up order on the “just and equitable” ground, resulting in a rateable distribution.

Though a winding-up might have proved less beneficial than a valuation on a going concern basis, Ms Kohli has by obtaining a buy-out order kept Sunrise alive for the benefit of the remaining shareholders.

The remaining shareholders, especially Dr Lit and ABC, stand to be enriched as a result of any buy-out, as the discount (on a conventional valuation basis) could be as high as 80%.

Dr Lit’s stated aim is to sell Sunrise in the next 2 years, which has the potential of further enrichment to him and any other of the Respondents who may buy Ms Kohli’s shares.

As Dr Lit is primarily liable under the order I am making, the value of the shares to be acquired under the buy-out order in his and ABC’s hands is a material factor, and makes it more just in all the circumstances for an undiscounted price to be paid.

The justice of the case is increased by the fact that Dr Lit desired to dilute Ms Kohli’s shareholding in 2005, even though that was not the substantial purpose of the ABC allotment.

The accounting adjustments summarised in paragraphs 199-206 of this judgment will also be required on any valuation.