Croly v Good & Ors

By his petition presented on 30 June 2008 Mr Croly seeks relief under s 994 Companies Act 2006, alleging that the affairs of the third respondent company FP Mailing (Windsor) Ltd (which I will call "the Company") have been conducted in a manner unfairly prejudicial to his interests as a member. He seeks an order that the first and/ or second respondents should buy out his shares at a value determined as at November 2007, being the date when he says he was excluded from management of the Company. The retrospective valuation is material because since that date the Company's fortunes have declined to the point where on 11 August 2009, some two months before the trial, it was put into administration by Mr Good, who was then the sole director, for the purposes of implementing a pre-pack sale of its assets to a new company which is owned by Mr & Mrs Good. The Company is a nominal respondent to the petition and its administrator has consented to the continuation of the proceedings for that purpose.

The issued share capital of the Company throughout has been 100 Ordinary shares of £1 each, of which 75 are designated A shares and 25 B shares. The Articles provide that the two classes rank pari passu but that shareholders may declare different dividends on them. At present Mr Croly is the registered holder of 30 A shares. The balance of the A shares, and all the B shares, are held between Mr & Mrs Good. Mr Croly thus holds 40% of the A shares and 30% of the entire issued capital. Mrs Good has played no part in these proceedings, and it is clear from the evidence that she played little active part in the affairs of the Company. Her shares are effectively under Mr Good’s control so that he and Mr Croly may be regarded for practical purposes as the two shareholders.

Mr Croly alleges that although he was not initially a shareholder, at some point after he acquired shares the Company became a quasi partnership between himself and Mr Good, that it was agreed he would be entitled to participate in managing the Company, and that they reached an agreement to divide the profit it made equally between them and to draw equal amounts of cash as remuneration, of which a large proportion in his case (and substantially all in Mr Good’s case) would be payments on account of dividends to be declared at the year end. In November 2007 however he alleges he was excluded from the Company’s premises and any effective role in it. By that date, no dividends had in fact been declared on the A shares he held, and a balance of over £200,000 had accrued on his loan account (part of which he disputes) in respect of the payments received on account of dividend and other matters.

Since that date, Mr Good has continued to run the Company and draw large amounts of cash from it, notionally on account of future dividends. Mr Croly alleges that Mr Good’s drawings both before and after his expulsion exceeded the amount agreed between them, and (to that extent at least) are in any event breaches of Mr Good’s duties as director. He alleges unfair prejudice in a number of matters, principally (i) his expulsion (ii) the excessive drawings and (iii) the failure to finalise accounts and declare a dividend that would have at least reduced the amount of his director’s loan account.

Section 994(1) provides as follows:

“(1)

A member of a company may apply to the court by petition for an order under this Part on the ground-

“(a)

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

(b)

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. ”

In order to succeed, the petitioner must establish that the conduct complained of is both prejudicial to his interests and unfair. Further, the necessary element of prejudice must be suffered in his capacity as member rather than in any other capacity, such as employee. The element of unfairness is generally established by reference to a breach of the basis upon which he agreed that the affairs of the company would be conducted. In establishing what that basis is, the starting point is that the company is a separate legal entity established under and required to be operated in accordance with the Companies Acts and its constitution, most particularly its Articles of Association which formed the basis of the contract between the members.

There are some companies however, usually referred to as quasi partnership companies, in which additional equitable considerations arise by virtue of the nature of the relationship which the parties have entered into with a view to carrying on business through the company. In O'Neill v Phillips [1999] 1 WLR 1092, Lord Hoffmann said this, referring to section 459 of the Companies Act 1985, which is the statutory predecessor of the present section 994:

“This approach to the concept of unfairness in section 459 runs parallel to that which your Lordships' House, in In re Westbourne Galleries Ltd. [1973] A.C. 360, adopted in giving content to the concept of "just and equitable" as a ground for winding up. After referring to cases on the equitable jurisdiction to require partners to exercise their powers in good faith, Lord Wilberforce said, at p. 379:

"The words ['just and equitable'] are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act [1948] and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The 'just and equitable' provision does not, as the respondents [the company] suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way."

I would apply the same reasoning to the concept of unfairness in section 459.”

If it is found that the company falls into this quasi partnership category, the court is more likely to conclude that it is unfair to fail to give effect to, or bring to an end, arrangements which have been made on an informal basis, even though they do not give rise to legal entitlements, or to exclude a participator from the management or conduct of the company's business, if it was part of the arrangement that he should take part in it. Furthermore, the most commonly sought remedy in unfair prejudice petitions is an order that the petitioner's shares should be bought out by one or more of the respondents, and the establishment of a quasi partnership is normally a precondition for the court to find that such a buyout should be made without a minority discount.

As to which companies fall into the quasi partnership category, there is no universal definition. Although the concept has developed from partnership law, it does not require that the company is entered into, or run, as if it were a partnership, or that the members regard themselves as being partners. In the Westbourne Galleries case itself, Lord Wilberforce said this (at page 379):

“ it would be impossible, and wholly undesirable, to define the circumstances in which these [ equitable ] considerations may arise. Certainly the fact that the company is a small one, or a private company, is not enough. There are very many of these where the association is a purely commercial one, and in which it can safely be said that the basis of association is adequately and exhaustively laid down in the articles. The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence-this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be "sleeping" members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members' interest in the company-so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere. ”

It is an important part of Mr Croly's case that the Company falls into this quasi partnership category.

There are many areas of factual dispute between the parties, and before dealing with the facts in detail, I give my overall impression of the main witnesses and the way in which Mr Good and Mr Croly approached the Company and each other.

Mr Good presented himself as having been in ultimate authority and effective sole control of the business throughout. He portrayed Mr Croly purely as an employee to whom various concessions such as shares and job titles had been granted to encourage him to stay involved and motivate his performance. He regarded Mr Croly’s role as wholly subordinate to his own- although he conceded that Mr Croly had a leading role to play in the sales team, he maintained that when any decision of substance came to be taken, they might discuss it but the final decision would be his alone. He denied in particular that Mr Croly was ever presented or regarded by third parties as a principal in the business, notwithstanding a considerable amount of documentation suggesting that he was.

Mr Good clearly treated the Company structure as largely irrelevant and its money as his to do with as he pleased, relying on his accountant Mr Brown to produce paperwork after the fact, or write up the books, to put an acceptable presentation on whatever he had done. Thus for instance he accepted that when on holiday he would pay for things either on his own credit card or a company card, with ‘no rhyme or reason’ as to what went on which. When another salesman, Mark Steele, left and wished to be repaid what he had paid for shares, Mr Good wrote a company cheque for £30,000 without considering whether the Company could legally make such a payment. This was later apparently charged to Mr Croly’s loan account but cleared off with a fictitious entry ‘credit to clear invoice’ (258). The company was entitled to a commission from a leasing company of about 9% on the value of sales financed by it; Mr Good had no qualms (and nor did Mr Croly) about a scheme to divert some of this into accounts for credit cards they were given personally, thereby bypassing the Company’s accounts and no doubt its returns to the Revenue.

Since the falling out between Mr Croly and Mr Good, Mr Good has continued to draw money from the Company. He accepted that he had simply done so as he pleased, and that it resulted in an increase in the amount due on his loan account of a further £200,000. Further, despite his evidence of the deteriorating financial position and advice that the Company was insolvent, he continued to draw right up to the date of administration with no regard whatever to the interests of its creditors.

Mr Good therefore was a man used to seeing things in his own terms, doing what he wanted and presenting matters as they suited him. In my view this requires his recollection of events to be treated with caution.

Mr Croly was by his own admission a forceful personality and highly motivated by money. This no doubt contributed to his success as a salesman. I have no doubt that Mr Good was right to regard him as demanding; he regularly demanded a greater shareholding in the Company and greater remuneration from it and made full use in his negotiations with Mr Good of the success of his personal sales efforts, which he contrasted with what he regarded as Mr Good's unsatisfactory contribution. He too completely ignored the separate identity of the Company, never seeking to participate in any aspect of its corporate administration such as the holding of board meetings, shareholders meetings, preparation of accounts and formalities for payment of dividends. In so far as he considered these at all, he appears to have simply assumed that Mr Good would sort everything out.

Giving his evidence, Mr Croly confined himself often to the briefest of answers. When a proposition was put to him with which he did not wholly agree, he on occasions simply gave a flat denial even if, as it later turned out when the proposition was broken down, he disagreed with only a small part of it.

This approach created an impression of being obstructive, and contributed to my impression that he had a great aversion to conceding anything which might be in any degree unfavourable to him. A good example of this approach was that although it is an essential part of his case that he drew a very substantial amount of remuneration by way of payment on account of dividends, he refused to accept until the opening of the case that the necessary counterpart to this was that until a dividend was validly declared, it was correct to charge the amount of the payments on account to a loan account, and that they constituted debts payable by him to the Company.

He steadfastly ignored requests in correspondence between solicitors to acknowledge that this was the case, and in response to the averral (at paragraph 38(2) of the Points of Defence) of indebtedness of some £205,000 and allegation that Mr Croly had refused to acknowledge this debt, his pleaded reply (paragraph 26.2) was "save that it is admitted that Mr Croly has not accepted that he is indebted to the Company in the sums alleged… paragraph 38(2) is denied". This plainly was a denial of the existence of the debt, although Mr Davies attempted to explain it as a non-admission.

It is part of Mr Croly's case that Mr Good was in breach of the arrangements between them by not declaring dividends that would have eliminated at least some of this debt, but the refusal to acknowledge the existence of the debt was at best sticking his head in the sand. Mr Davies in submissions mentioned the possibility that the payments could have been made not on account of future dividends but by way of a declaration of interim dividends, but did not pursue this as part of his case at trial, since he accepted that there was no evidence that the directors had in fact considered payment of interim dividends. Mr Croly's evidence did not say that he believed any such interim dividends to have been declared, nor did it refer to any steps taken to declare such a dividend, such as the holding of a meeting of directors and the preparation and consideration of relevant accounts. Furthermore, I do not believe that Mr Croly honestly thought that interim dividends had actually been declared, since I accept the evidence of Mr Brown the auditor that he drew the attention of both directors to the existence of the large balances on their loan accounts at a meeting in the autumn of 2006, in the context of the tax charge they gave rise to on the Company under section 419 of the Taxes Act.

My conclusion in relation to Mr Croly's evidence was that it also should be treated with caution. There is an obvious temptation for any witness with an interest in the outcome to persuade himself that events in the past occurred in a manner which assists the case he is now putting forward. Each of the parties in this case, in my view, was exposed to that temptation and, to a greater or lesser degree, succumbed to it.

The Company's business is or was in the sale of postal franking machines and associated items, pursuant to franchise agreements with Francotyp Postalia Ltd, a subsidiary of a German company. There were two such agreements, for sales areas in south east England referred to as Areas 7 and 10. Mr Good and his wife acquired the shares in 2001 from the previous owner Mr Cornell, and shortly thereafter in March 2001 took on Mr Croly as an employed salesman. He was paid on a commission only basis, receiving a commission of 70% of the markup made on each machine he sold. From early 2002 he was treated as self employed, but paid on the same basis and still working full time for the Company.

In November 2003 Mr Good offered 15% of the shares each to Mr Croly and another salesman, Mark Steele, as an incentive to bind them in to the Company. They each agreed to pay £30,000, which in Mr Croly's case was paid as to £25,000 from a personal loan and £5,000 in instalments deducted from future commission. The register of transfers shows that Mr & Mrs Good between them transferred 15 A shares each to put this into effect, so presumably the purchase money was paid to them rather than the Company.

In August 2004 Mr Steele left the Company and Mr Good paid him £30,000, using a company cheque, to buy back his shares. It is common ground that there were then discussions between Mr Good and Mr Croly as to the latter's future role in the Company, including a crucial meeting at the Riverside restaurant in Windsor. For the moment I deal only with what happened to Mr Croly's shareholding as a result; he agreed with Mr Good that he would acquire a further 15 shares for the same price, £30,000. Mr Croly was issued with a share certificate, and paid no attention to the mechanics behind the transaction. In his Points of Defence, Mr Good pleaded (paragraph 13(1)) that the Company had purchased the shares and "allotted" them to Mr Croly, and that Mr Croly "owed the Company a debt of £30,000 in respect of the purchase of the shares." None of the formalities required for a company to purchase its own shares were gone through. No return of allotments was made. The registers of members and transfers were made up by Mr Brown to show a transfer direct from Mr Steele to Mr Croly. Minutes of a board meeting were prepared, again by Mr Brown, signed by Mr Good, recording the production of a share transfer form. Mr Good accepted that there must have been such a form, although he could not recall it. He said that at the time he paid Mr Steele, he had not decided whether the shares would go to himself or Mr Croly. I conclude that what is most likely to have happened is that he obtained a signed blank transfer form from Mr Steele in exchange for the cheque, and once he had agreed that the shares would go to Mr Croly, Mr Croly's name was filled in and the form was passed to Mr Brown for him to prepare whatever documentation was required to have it reflected in the books.

The use of the Company's money in this way was of course unlawful but reflects Mr Good's attitude that the Company's money was his to do with as he wished. The attempt to portray the transaction as a purchase by the Company and re-allotment of shares, in the face of the documents showing a transfer, was an example of Mr Good seeking to reinterpret the past in a manner which, I assume, was regarded as more favourable to his present case.

Mr Croly accepted in his Reply that he incurred a liability of £30,000 to pay for the shares. He also accepts that he has not himself paid that amount but his case is that he was told by Mr Good in November 2004 that his share of the dividend to be declared for the present financial year (ie the year ending 31 March 2005) would be sufficient to cover this, and later was told that such a dividend had in fact been paid. The company's accounts for the year ended 31 March 2005 (578) show that equity dividends were paid for the year of some £160,560, and for the previous year £67,700. Mr Good accepted that all of these dividends had been paid to himself and his wife, even though Mr Croly was a shareholder during both years, and Mr Steele had been a shareholder during the 2004 accounting year.

The dividends appear to have been paid pursuant to a series of minutes recording board meetings throughout 2004 and early 2005 between Mr and Mrs Good at which interim dividends were declared on the B shares only. It was not suggested that they had no power to do so, but Mr Croly's evidence was that he had been promised, and expected, dividends on his shares and had not agreed any policy of payment solely to Mr and Mrs Good. I accept that evidence.

The 2005 accounts were not signed until January 2006. Note 10 to the accounts records that "during the year the Company paid sales commissions of £169,694 to C Croly, a shareholder. At the balance sheet date £30,000 was due from C Croly." Mr Good accepts that this refers to the payment due for Mr Steele's shares. By the time the accounts for the year ended 31 March 2006 were signed, in January 2007, they recorded that "at the balance sheet date £nil (2005:£30,000) was due from C Croly", so that the liability had apparently been discharged during the 2005-6 accounting year. Mr Good's evidence was that Mr Croly had agreed to pay over time but did not do so, and that in order that it should not become an issue he had authorised an additional payment of commission, to which Mr Croly had no contractual entitlement, to discharge the debt.

The bundle includes a computer ledger print out of a "Chris Croly Loan Account" (243). It was apparently opened in 2000, but has no substantial entries until 27.1.06 when a credit for "dividend" of £6667 is shown. There are a number of entries referring to the £30,000 share payment; firstly a debit of £30,000 recorded as having happened on 31 March 2005, by way of three entries described as "year end account journals", the first being a credit, the second a debit to reverse the first, and the third a debit so that the net result was a debit entry of £30,000. It appears that these entries were backdated because the computerised ledger shows entries in the order of a transaction number generated sequentially by the accounting system, and they appear after various entries with dates in 2006. There is a later credit of £30,000 labelled "open balance adjustment 01.04.06" stated to have been made on 1 April 2006, but appearing after other entries with dates in May 2007, which of course wiped out the earlier debit. None of these entries is apt to describe the true transaction in which the Company paid £30,000 to Mr Steele.

A separate ledger account was kept in respect of payments made to Mr Croly as a self-employed sales agent, which appears at page 257 of the bundle. This largely shows entries in respect of commissions paid, the last of which was in December 2005. The concluding two lines of this ledger however are each of £30,000 and are labelled "share capital due" (though the amount appears in the credit column) dated 31 December 2005 and "credit to clear invoice" (though the amount appears in the debit column), dated 31 March 2006. Even if "share capital due" could be said to be a loose way of referring to a loan made to Mr Croly to purchase shares, it was not true that he had raised any "invoice" to justify the counter entry.

Mr Brown's witness statement says that he was advised by Mr Good that Mr Croly had agreed to purchase Mr Steele's shares for £30,000 but that by 31 March 2005 Mr Croly had still not paid any of the purchase price and he therefore noted in the accounts a shareholder's loan for £30,000. He goes on to say that he advised Mr Good that the loan needed to be cleared by 31 December 2005 in order to avoid a tax charge on the Company and Mr Good "therefore paid additional commission to Mr Croly in the amount of £30,000" which was set off against the liability. This was not of course how it was described in the records and it is not clear when this advice was given. It appears likely that it was only in November 2005, since a meeting was held then to discuss the 2005 accounts, which of course were signed off the following January. Mr Brown accepted in evidence that he should have realised that using the Company's money to pay Mr Steele, and making a payment of otherwise unjustified commission to Mr Croly to pay the purchase price of shares was unlawful.

Mr Good maintained that it had always been intended that Mr Croly would pay the £30,000, and he had not been promised that the Company would provide the funds, whether by way of dividend or otherwise. However he accepted that when advised by Mr Brown that the outstanding liability had to be discharged, he had arranged for this to be shown by entries in the records which he did not discuss with Mr Croly, and that he did this specifically in order not to have to ask Mr Croly for payment. I do not think he would have done this unless he knew that Mr Croly had reason not to expect to pay from his own pocket. I conclude therefore on the balance of probabilities that Mr Good had given Mr Croly an assurance that the £30,000 would be discharged by payment of a dividend, but when the time came for dividends to be declared he went back on this and chose to present the liability as having been settled in some other way.

This episode in itself is of minor importance in the scheme of things, but I have dealt with it at length because it seems to me to illustrate the attitude of both parties to the Company. Mr Croly's was that the Company should be the source of funds for any substantial payment that had to be made. He paid no real attention to how it might be achieved or what the legal or accounting consequences would be, he simply required that it should be done and left it up to Mr Good to sort it out. Mr Good's attitude was that whenever funds were needed he could simply take them from the Company without any consideration of whether the Company was lawfully able to pay them, and that he could make, retrospectively if need be, whatever accounting entries were deemed to be required, whether or not they bore any relation to what had happened.

Mr Good and Mr Croly differed as to the reasons for Mr Steele's departure. According to Mr Croly, the relationship between Mr Steele and Mr Good deteriorated and Mr Steele decided to leave in about August or September 2004. So far as his own position was concerned he said that he was also contemplating leaving "as I knew a lot of things had to change yet Bob had the key to changing these things", and that Mr Good knew this. Mr Good's somewhat fuller account, which has the ring of truth, is that there were continual arguments between Mr Steele and Mr Croly which related to the amounts they were earning and their perception that they were not being treated equally. Mr Steele was not happy that Mr Croly had the more lucrative territories. Mr Croly objected to a request from Mr Steele that he should be paid his petrol expenses for travel from home, (he lived further from his sales territory than Mr Croly did from his) and wanted an equal payment to himself. The dispute came to a head when they both came to him and asked how much he was earning from the business. He accepted in cross-examination that this was because they felt they were putting in more effort than he was. He responded that it was none of their business and when they threatened to leave if they were not given greater input into the business, he said that he had had enough of their demands and if they felt like that they should leave. He telephoned Mr Steele the next day who confirmed that this was his intention, and Mr Good agreed that he would repay the £30,000 Mr Steele had paid for his shares. He then telephoned Mr Croly, who took a different line, saying that he may have been hasty and would be willing to stay. It was after that that they arranged to meet at the Riverside Restaurant.

At the Riverside restaurant meeting, Mr Croly's pleaded case is that a number of matters were agreed, in addition to the acquisition of Mr Steele's shares, these being that Mr Croly would be entitled to participate in the management of the Company, would be designated Sales Director, and would be entitled to be fully informed and consulted in relation to matters material to the Company's business and affairs. He also pleads that it was "anticipated by and understood between Mr Croly and Mr Good that Mr Croly's shareholding would in future be increased to 40% of the Company's issued share capital." Following the meeting, Mr Croly's case is that staff of the Company were told of his increased role and responsibilities, and Mr Good also told the franchisor that the business was now being run by them jointly and Mr Croly should be invited to any future meetings between them.

I am satisfied that Mr Croly did take an increased role in the management of the Company, particularly in relation to sales affairs. He was responsible for the recruitment and training of sales staff and played a role in updating the sales database, amongst other matters. He became a signatory on the Company's bank account and was closely involved in arrangements for relocation of the head office premises. He proposed that the Company should enter into a contract to pay a substantial monthly fee to a marketing company, Cognition, for promotional purposes, and this proposal was agreed and adopted.

Mr Good takes the view that Mr Croly is exaggerating his role, which he regarded only as Sales Manager rather than Sales Director. Substantially all of the management functions exercised, in his view, related to that sales role rather than being an equal or substantially equal role in the direction of the Company as a whole. He did however accept that for a business running a franchise of the sort that the Company did, the sales operation was absolutely key to its success. On Mr Good's account, although he had discussed the business with Mr Croly and Mr Croly had had input on a number of important decisions, the final decision was his alone. He called evidence from Mr David Smith, who was the Office Manager both before and during Mr Croly's time with the Company and after 2007 became the Sales Manager. His evidence was that he had been concerned about his position in relation to Mr Croly and Mr Steele when they acquired shares, and was reassured by Mr Good that he should continue to report to Mr Good. Mr Croly had not sought to exercise any authority over him in the role of office manager and he had always regarded Mr Good as being in ultimate control and having the final say in all decisions. He did not regard Mr Croly has been an equal partner in the business.

According to Mr Good, Mr Croly was only made a signatory on the bank account to provide cover in case cheques needed to be signed whilst Mr Good was out of the office, and he had only ever done so for amounts authorised by Mr Good. Mr Croly denied this, but neither party produced any documents or other evidence to support their version. Mr Good maintained that Mr Croly had never had the authority, or sought, to commit the Company to any substantial transaction on his own. Mr Croly asserted that he had, giving the example of a finance agreement for a Range Rover which was provided to his wife, and which he had signed on behalf of the Company and as personal guarantor. Mr Good's explanation of that, which again has the ring of truth, is that the first he knew of it was when he received a telephone call from Mr Croly at the car dealers saying that he had negotiated the purchase of the Range Rover, including a part exchange for his own private car, and wanting to know if he could put it on the Company. Mr Good agreed that he could. Mr Croly had no other examples of exercise of substantial independent executive authority outside the sales sphere.

As for the question whether Mr Croly was regarded as Sales Manager or Sales Director, the latter implying a greater degree of authority in relation to sales matters, Mr Good's position was that although Mr Croly was not the Sales Director he had not objected to Mr Croly's arranging to have two sets of cards printed, one with each designation, so that he could present himself to customers as being the Sales Director if he thought that would impress them more. Mr Croly's position was the exact reverse; he was in truth the Sales Director but also had cards with "Sales Manager" printed on them which he would produce if in a particular sales situation he wanted to pretend that he needed to consult his superior before something could be agreed.

In my judgment, the overall picture which emerges is that Mr Croly held the most senior role amongst those in the Company dealing directly with sales, exercising a substantial degree of autonomy and management responsibility in that area. The term "Sales Director" is not one which has any fixed meaning and may well have been appropriate for the role he played. I am satisfied that he used the title in dealings with customers, and that Mr Good was content that he should do so, but the point in itself is only a small part of the overall assessment I must make. I am not satisfied that outside that area Mr Croly exercised any substantial degree of decision-making independently of Mr Good. Rather, the picture appears to be of his being involved in discussions and consultations as a result of which decisions were come to. It is clear that there were important areas of the business in which Mr Croly had little or no involvement at a decision taking level, such as the management of the general office staff, relationship with the Company's bank (he did not for instance provide security for borrowings, as Mr Good did) and dealing with the accounts, VAT and tax affairs of the Company. Mr Croly had a senior and important role, but it was in many respects limited.

Of great importance, in my judgment, is the question whether Mr Croly's role and seniority was held out as being that of a "principal" in the business. The franchise agreements provide that the franchise contract is between the franchisor and the Company, but Mr Good is also a party as an individual, for the purpose of giving a personal guarantee of all the obligations of the Company under the agreement, and also certain personal covenants in relation to matters such as non-competition and use of confidential information. This is a common arrangement, and no doubt reflects the view of the franchisor as to which individual or individuals are truly behind and controlling the limited companies that enter into the contract. This is not just a matter of economic ownership; Mrs Good is a very substantial shareholder but not party to the agreement, no doubt reflecting the fact that she was not actively involved to any material extent in the Company's business. Nor is it sufficient that an individual may hold a senior management or sales position, as will appear below.

It is clear that the management of the franchisor dealt mainly with those who were regarded as "principals". The documents in the bundle includes a substantial number of letters and e-mails circulating to and between the franchise principals, most of which include Mr Croly in that circulation after late 2004. The franchisor held regular meetings of franchise principals and provided benefits for them including what were no doubt fairly expensive overseas trips. Mr Croly was included in these trips and benefits. Mr Good was not able to identify with certainty any other individuals from any other franchise who were treated similarly.

Although he suggested that the only reason for Mr Croly's involvement in the meetings was that they mainly related to sales, and that Mr Croly was a key sales manager, I am satisfied that the franchisor regarded them as proceeding on a higher plane, suitable for frank discussions between the franchisor and the key executive owners of the franchisee businesses. No one from other franchisees was involved purely on the basis that he was a sales manager or company director, even though many if not all of the other franchisees must have had people in such capacities who were not also owners of the business. It is also clear that there were other functions organised and incentives provided to reward sales staff at the franchises, such staff being put forward by the principals for invitation on the basis of their sales performance. It is clear that a distinction was drawn between the principals and the sales staff and that Mr Croly and Mr Good were both regarded as being principals.

One matter in particular, in my judgment, makes the franchisor's view of Mr Croly's position clear. On 3 September 2007 the franchisor sent to Mr Good a document described as a "Deed of Adherence" by which Mr Croly would become a party to the franchise agreements in the same capacity as Mr Good; that is to say as giving the personal guarantee and personal covenants of a principal. The covering letter (188) begins "as discussed some time ago, we need to get Chris Croly properly added as a party to your Franchise Agreement. In order to enable this, our solicitors have prepared the attached Deed of Adherence which needs signing by yourself and Chris." The penultimate paragraph reads "we also need you to enter on page 2, section 1.1 the effective date. That is the date that Chris Croly became a joint Franchise Principal."

In the end, the Deed of Adherence was not executed. It appears that it was taken away by Mr Croly in order to obtain advice on it, but he never made any response to it before his final rupture with Mr Good on 9 November of that year.

I was not persuaded by Mr Good's attempt to portray this request by the franchisor as a mere formality so that Mr Croly could attend the meetings of franchise principals without complaint from the other franchisees. The letter in my judgment makes it clear that the franchisor had been given to understand that at a date "some time ago" Mr Croly had become a "joint franchise principal". This can only have been because Mr Good had made it known to them that Mr Croly had a sufficient combination of ownership and management responsibility for him to be regarded as a principal.

I regard this as of considerably more significance than the precise nature of the internal arrangements at the Company or the detailed areas of responsibility given to individuals. I do not doubt Mr Smith when he says that he regarded Mr Good as being in ultimate control, and it may well be the case that Mr Good so regarded himself. But in the context of his most important business relationship, Mr Good, as I find, presented Mr Croly's position and role as being comparable, if not necessarily equal, to his own.

So far as the potential acquisition of further shares was concerned, in his oral evidence Mr Croly went beyond his pleaded case. The pleading, at paragraph 26 of the Petition was that at the Riverside Restaurant meeting it was "anticipated by and understood between" himself and Mr Croly that his shareholding "would in the future be increased to 40%". This falls short of a pleading of a definite or binding agreement, but in evidence Mr Croly maintained that there was a definite agreement, which was that he would immediately acquire shares to take him up to 40%, and at some time later he would acquire further shares so that he held 50% of the equity. He did not however set out any terms on which this acquisition was to take place, and there is no supporting evidence of any kind for such an agreement. Mr Good's evidence was that no further shareholding had been discussed at the time of the Riverside restaurant meeting, and although it was a topic that had been raised subsequently by Mr Croly on numerous occasions this was all part of what he regarded as Mr Croly's continual demands to improve his position, which he never agreed to and which ultimately led to the breakdown of their relationship.

Mr Croly's unsupported evidence is not sufficient for me to be satisfied that any definite agreement was reached on the subject. I do not doubt that he raised the topic, probably on numerous occasions. Mr Good may well have given an indication that this might be something he would be prepared to consider in the future. But the fact that no terms for price or payment can be pointed to as having been agreed strongly suggests that whatever discussions they had went no further than this. Mr Croly in my view would be likely to have regarded any such indication, however qualified, as a concession of the point in his favour, but in my judgment he would be wrong to do so and I do not find that any degree of agreement or understanding was reached which would be sufficient either to form a contract enforceable in law or a commitment which the court would regard as affecting Mr Good's conscience.

It is also pleaded, at paragraph 25.1 of the Petition that it was agreed and/or understood between Mr Croly and Mr Good "that the relationship between them was and would continue to be one of mutual trust and confidence and that the Company would be operated as a partnership between them." Mr Adair ridiculed this proposition and indeed it is hard to conceive that two laymen would have held a discussion in anything like those terms. I have no evidence that any of the terms "trust", "confidence" or "partnership" formed part of the discussion at all; specifically Mr Croly's witness statement (at paragraph 23) does not use any of those terms, the nearest approach being that in setting out his position he had "made it clear that… we needed to run the Company jointly so [Mr Good] needed to be around more". In referring to the matters that he says were agreed, he does not say that this included a "partnership" or "joint control", although later (in paragraph 25) he says that Mr Good had told the franchisor "that we were now running the business together" this was said to have been at a meeting at which he was not himself present, so I can place little reliance on his evidence of what transpired. I am not satisfied on the evidence that there was any express agreement that the business would be run as a partnership. Whether the relationship between the parties in relation to the business amounted to one of trust and confidence is in my judgment a conclusion for the court in all the circumstances, and most unlikely to be a matter agreed in terms between the parties.

The next, and probably most, significant episode in the evidence concerns the development towards the end of 2005 and/or beginning of 2006 of what was referred to as the "Remuneration Strategy". Mr Croly's pleaded case (at paragraph 37 of the Petition) is that in or about September 2005 Mr Good made a proposal that Mr Croly should give up the 70% commission he was presently receiving (from which he had earned some £160,000 in the previous financial year) in exchange for a share of profits, and that after discussion they reached a number of points of agreement in which they:

“37.1

reaffirmed that the relationship between them was one of mutual trust and confidence and that the company was a partnership between them;

37.2

agreed that they would share all of the profits of the company in any financial year equally between them, with such agreement to have retrospective effect from 1April 2005 ("the Profit Share Agreement")

37.3

agreed that they would each be entitled to a monthly income from the company of £10,000, subject to them each having the ability, in case of need and with the informed consent of the other to draw additional sums over the course of the year which would then be taken into account in the calculation after the end of the amounts to which they were each entitled out of the surplus profits retained by the company pursuant to the Profit Share Agreement;

37.4

agreed that they would share equally in bonus payments due to the company from its leasing company, C F Capital Plc;

37.5

agreed that Mr Croly and his wife, and Mr Good and Mrs Good would all receive the benefit of company cars of similar value to each other;

37.6

agreed that Mr Croly and Mr Good would for December 2005 receive a Christmas bonus of £2500

37.7

agreed that Mr Croly would be entitled to be a director of the company.”

The following paragraphs plead that the Remuneration Strategy was devised by the two of them, with the assistance of Mr Brown, and pursuant to that strategy each of them would receive an income from the Company of £10,000 per month "comprising in the case of Mr Croly £3333 by way of salary and £6667 by way of dividend, and, in the case of Mr Good, £10,000 by way of dividend" , that any additional sums would only be drawn if they both agreed, and at the end of the year any remaining funds would be divided so that, taking account of all these sums, they received equal amounts. Finally, "given that Mr Croly was agreeing to give up his commission earnings for the rest of the year to 31 March 2006, it was agreed that the profit share agreement would take effect retrospectively from 1 April 2005".

Mr Croly's own evidence did not support a number of the items alleged to have been agreed. Firstly, there was nothing to suggest any discussion of a relationship of mutual trust, confidence or partnership, and as I have said above I think it highly unlikely that any discussion in such terms would have been entered into. Secondly, he accepted that there had been no discussion or agreement at that stage about company cars for the wives. The position in relation to his appointment as a company director was somewhat muddled; Mr Adair pointed out that Mr Croly's own witness statement contradicts the pleading by saying that this was a matter raised by Mr Brown at the meeting in January 2006. I am satisfied however that it must have been discussed before that between Mr Croly and Mr Good, because Mr Brown's witness statement records that he was told about it by Mr Good in November 2005.

So far as the monthly amounts of £10,000 were concerned, Mr Croly's evidence was that he and Mr Good had agreed that they would each receive that amount per month, starting October 2005, and that they had held a meeting with Mr Brown in September or October 2005 and asked him to advise on a tax efficient way of paying that income. Mr Brown produced a note setting out his proposed mechanism for payment (295), which was discussed at a meeting at the Company on 26 January 2006, at which Mr Croly signed the Companies Registry forms to notify his appointment as a director.

Mr Brown's evidence, confirming that of Mr Good, was that there had been no meeting in September or October of 2005, and the first he knew of the proposal was when he met Mr Good (but not Mr Croly) in November of that year. Mr Good had then told him that Mr Croly wanted to change from being a commission-based salesman to a company director on a fixed income per month. He said that he could not recall discussing the matter further until next January, although he believed that Mr Croly and Mr Good had reached an agreement in principle between themselves. When the matter was raised again in January, all that had been discussed with him was a tax efficient method of paying £10,000 per month, and there had been no mention of distribution of any excess profits, or arrangements if the profits at the end of the year turned out not to be sufficient to support the payments made, a point on which he expressed some concern. He had not met Mr Croly prior to the meeting in January. I accept Mr Brown's evidence on these points. Mr Croly must in my view be mistaken in referring to any earlier meetings with Mr Brown, and I find that if there were any discussions in relation to sharing profits apart from the £10,000 payments per month they can only have been between Mr Croly and Mr Good, and did not involve Mr Brown.

Mr Brown's proposed mechanism starts with payment of a monthly amount described as "dividend" of £10,000 to Mr Good and £6667 to Mr Croly (£120,000 per annum and £80,000 per annum respectively). It is accepted that this is likely to have been predicated on a dividend to be declared on the A shares (of which Mr Croly held 40% and Mr and Mrs Good 60%), to the exclusion of the B shares. Below this is a line showing a "difference to be covered" to make the monthly receipt up to £10,000 each, that difference being £3333 per month or £40,000 per annum in the case of Mr Croly. There is then a calculation showing that if he were paid a gross salary of £60,000 he would receive £40,703 net of tax and national insurance. There then appears a calculation of the additional tax liability on Mr Good by virtue of his receiving dividends of £40,000 per annum more than Mr Croly, and a proposal "to cover this… continue Bob's salary of £6600". At the foot of the page are manuscript notes made by Mr Brown that this was discussed with Mr Good and Mr Croly on 26 January 2006, that the dividends and salary referred to would be paid "from 1/1/06" and finally "payments to Chris up to 31/12/05 = Commission".

The effect of the mechanism proposed was that in round terms each of Mr Croly and Mr Good would receive £10,000 net per month, and be responsible for their own higher rate tax on the first £80,000 of that part which was paid by way of dividend. The company would in effect pay the tax on the top slice of £40,000 paid to each of them, which in the case of Mr Good was by way of dividend and in the case of Mr Croly was salary. There is nothing in Mr Brown's note which deals with any additional amounts which may be available to be paid out, or with what the position would be if the Company failed to produce the cash flow or profitability needed to support these payments.

The gross cost to the Company of these payments of salary and dividends would be some £266,600 per annum. Mr Brown's evidence was that he expressed some concern about whether the Company could support this level of payment, but was told by Mr Croly and Mr Good that they thought it could since as part of the new arrangement Mr Croly would no longer be receiving commission which, in the year to December, had amounted to approximately £129,000 (and in the previous financial year £160,000). He also said that Mr Croly assured him and Mr Good that he would continue to make sales at this level.

I accept Mr Brown's evidence that there was no discussion with him of any retrospective operation of these arrangements. It is part of Mr Croly's case that he and Mr Good had begun to implement the arrangements between them by his taking round sum payments of £10,000 from October onwards, rather than the variable commission he previously received. The account showing those payments is at page 258 of the bundle and it does indeed show payments of £10,000 described as "October commission", "November commission" and "December commission". The picture is not straightforward however; amongst other commission payments there is a round sum of £10,000 described as "June commission" and there are further payments described as commission in October of £4060 and in December of £12,500.

Each party contended that the other had instigated these arrangements. Mr Croly said that Mr Good regarded as unfair that he (Mr Croly) should receive 70% commission on sales and a 30% dividend in addition, and that as they were running the Company jointly they should divide all the profits generated equally. After discussion, they had agreed the arrangements for drawings of £10,000 monthly, additional drawings by agreement between them and a balancing arrangement at the end of the year to distribute any surplus. Mr Good's evidence was that it had been Mr Croly who had wanted to change the previous arrangements, because his commission-based income could vary significantly from month to month, being for instance much lower in the period immediately after a holiday. He said that Mr Croly was dissatisfied that previous dividends had only been declared on the B shares, which Mr Good regarded as fair because Mr Croly received sales commission and he did not. Having reached agreement on payment of £10,000 per month each, it was his position that this represented the entirety of Mr Croly's entitlement, and was a good deal for the Company because it was less than the £160,000 of commission Mr Croly had taken in the preceding financial year. There was thus no arrangement either restricting any further amounts to be drawn by him, or for any surplus profits to be shared at the year end. Furthermore, his evidence was that following Mr Brown's concern about whether the Company would generate sufficient to support the level of payments envisaged, the payments to Mr Croly were conditional upon his continuing to make sales at his previous level. He appeared to take the extreme position that if Mr Croly did not do so, he was not entitled to anything at all.

Mr Croly denied that there was any such condition attached to his remuneration. He denied any concern about variability of his commission income and said that he would certainly not have agreed a reduction in his income from £160,000 to £120,000 in any circumstances, let alone simply to achieve regular monthly payments. In making this calculation, he appeared to have forgotten that he would be liable for tax on the commission payments of £160,000. The true differential if he was entitled to nothing more than the basic payments of £10,000 per month would be between a gross income previously of £160,000 and one of £140,000, certainly a substantial reduction but not as great as he had claimed.

In resolving this conflict of evidence I place some weight on the way in which the parties dealt with the somewhat unusual commission payments receivable from the finance leasing company CF Capital. Many customers purchasing franking machines required finance to do so, and it appears that wherever possible they were told that it could be provided by CF Capital. I infer that this was lucrative business for the leasing company because it rewarded the introductions by provision of benefits including overseas holidays for the individuals involved, and payment of a commission of 9.5% of the value of transactions to the Company as introducer. This commission was provided on the somewhat remarkable basis that, at the option of the Company, part of it could be satisfied by crediting it to credit card accounts held by one or more individuals nominated by the Company, where it would be available to be spent by them as they pleased. This of course has all the hallmarks of a scheme designed to offer the opportunity for tax evasion, in that the Company's accounts would only show a reduced amount of commission received and it would be left up to the individual receiving the benefit on his credit card account to include that benefit in his tax return.

It appears that prior to 2006, the only person receiving such a credit card benefit was Mr Good. From then on however he accepted that he had asked the leasing company to provide a similar card for Mr Croly, and to place equal amounts on both of them. Mr Good's evidence was that the amount paid through this mechanism was entirely at his discretion, and could have been none, some or all of the total. He was not obliged to give anything to Mr Croly or, if he chose to do so, to make it an amount equal to his own.

It would not be safe in my judgment to seek to reach conclusions in relation to this conflict in evidence by accepting the evidence of one party or the other on all the matters on which they disagree. As I have indicated, each of them was in my view subject to the temptation to recall or construe matters after the fact in a manner which would be to his own advantage. I proceed therefore by taking such matters as can be supported by external evidence or contemporary documents, and drawing inferences where necessary to fill in the gaps.

Taken as a whole, the arrangements that were actually put in place in my judgment indicate strongly that they agreed they would distribute such money as was available to be taken from the Company broadly equally between them. It is evident that there had previously been a considerable history of jealousy on the part of each of them about the amounts that the other was taking from the business. Mr Croly was not satisfied with a 70% commission on his own sales when, in his view, Mr Good was not working as hard but nevertheless receiving the whole of any remaining profit. This led him to want to acquire shares, but he was not satisfied with the 30% shareholding that he had, and wanted to progress to a position of equality. It was also clear from his evidence that he was dissatisfied with the way in which Mr Good simply took cash from the business as and when he wanted it. My impression from his evidence was that this was not because it was an improper use of the Company's funds, but because it meant that Mr Good was getting more than he did.

Mr Croly referred to Mr Good as having a salary entitlement of £60,000 per annum, but it was plain that Mr Good did not pay himself by way of salary nor regard a figure of £60,000 as representing in any way a limit on what he was entitled to draw. Mr Good felt that the business was his and he should be entitled to take what he wanted from it, conceding to Mr Croly only what he felt was necessary to keep him involved and motivated. Consequently, when Mr Croly acquired shares, Mr Good did not perceive that this gave him any entitlement to share in profits or revenues beyond his sales commission.

Against this background, an agreement for structured drawings of £10,000 per month each represents a compromise between the positions that each of them was adopting. I have no doubt that the whole subject area was one they discussed on many occasions, and that what each of them now recalls as the reasons why the other put forward the proposal that was eventually reached in fact represents simply the arguments and issues that were deployed in the course of these discussions. The essential part of the £10,000 per month mechanism was that each of them would have that amount in his pocket every month. I have no doubt that this was the most important point for them both; they were not looking at the gross cost to the Company of these arrangements but only the amount received by themselves. They started from that figure and instructed Mr Brown to find a way of paying it to themselves with the least possible tax cost, rather than starting from the proposition that the Company should pay out an equal amount to them both which might, because of their different tax positions, result in an unequal net receipt. Mr Croly was clearly aware that Mr Good was withdrawing his money as dividends and that this was regarded as more tax efficient, and wanted some equivalent advantage to be available to him. If he paid any regard at all to the fact that in order for him to receive his £10,000 a company would incur and pay a PAYE tax liability it was a secondary matter to ensuring that he received a net payment equal to that of Mr Good.

Mr Good was evidently prepared to concede this position of equality. It is consistent with his allowing Mr Croly to be presented to the franchisor as a principal that he should do so. It is also consistent with the equal division of the bonuses from the leasing company. I do not accept that it is likely that Mr Good distributed these entirely at his own discretion; that may have been the position as between himself and the leasing company, but in practice I have no doubt that Mr Croly was aware that Mr Good was receiving the substantial personal benefit and wanted a share of it, which was conceded to him.

As to the drawing of other amounts from the Company in addition to the £10,000 per month, I do not think it is credible that these discussions would have taken place without taking the possibility into account. It was plainly a matter of grievance to Mr Croly that whatever previous arrangements were in place, Mr Good simply topped up his own income to what he wanted by drawing any additional amount he wished. I do not think it is credible that he would settle on the new arrangement, which was plainly based on equality of net receipts, and yet be in a position that he was entitled to no more himself and Mr Good could continue to take any other amount that he wished, subject only to its availability. This is particularly so where the amount of the regular payments would involve a reduction from his previous level of income, which is evidently something of prime concern to him. In my judgment it is more likely than not that he did receive an assurance from Mr Good that he would no longer, as Mr Croly saw it, abuse his position by drawing further amounts without agreement, and that at the end of the year there would be an adjustment between them to achieve equality.

Having said that, I doubt if the parties expected to operate any rigid or precise controls on spending during the year. It is plain that each of them used their company credit card with a considerable degree of freedom to pay for expenditure that was either purely personal or related only in a tangential way to the business, and that this continued as much after the Remuneration Strategy came into place as it had before. Nor do I believe that they addressed in any detail how the end of year balance would be struck, or how any further distribution would be made. For instance, as noted above the making of apparently equal monthly payments to the two individuals incurred a substantially higher cost to the Company in the case of Mr Croly, by virtue of the tax paid. This was not addressed in evidence, but given his general approach, I doubt if he would have readily conceded if they had ever come to strike a year end balance that this additional tax cost should have been treated as a distribution to him. He certainly did not do so in respect of the calculations he put forward purporting to show that excessive amounts had been drawn by Mr Good in later financial years.

Neither party gave any evidence of any discussion of what the position would be if at the end of the year the Company had not made sufficient money to cover the monthly payments. If they considered it at all, it must have been left as a matter that would be negotiated between them if the situation arose. I do not accept Mr Good's contention that the amounts to be paid to Mr Croly were entirely conditional on his continuing to achieve personal sales at the previous level. Such an arrangement would clearly represent a serious risk for Mr Croly and I do not believe for a moment that he would have agreed it. It is more likely that any discussion on this topic was as described by Mr Brown; namely an expression of concern by him as to the Company's ability overall to support these payments. It is likely that he may have referred specifically to Mr Croly's continuing personal level of sales as being important, because under the new arrangements sales by Mr Croly would not result in any commission, the whole margin therefore being profit which could be distributed. It would not be sufficient to replace sales by Mr Croly with the same level of sales by another salesman, since that salesman would be entitled to commission of up to 70% of the margin.

I do not accept Mr Croly's case that it was agreed that the Remuneration Strategy would be backdated to 1 April 2005, or any other date. It is clear that the discussions started before the end of 2005, but nothing was done to seek to achieve any sort of equalisation in respect of payments prior to 31 December 2005. It was established in cross-examination that whereas Mr Croly complained that Mr Good had drawn more than he should have done in that year, in fact the position was that over the year to 31 March 2006 Mr Croly had received substantially more than Mr Good. Mr Croly then maintained that the arrangement had in fact been that he would be entitled to receive and retain all the commission he had earned prior to September, and that for the six months to that date Mr Good would only be entitled to a notional salary at the rate £60,000 per annum. The equal distributions would apply to the months from September onwards. Insofar as he had received more than £10,000 in these months, it was because it was attributable to earlier periods. It was on this basis that he made his complaint, which I shall return to below, that Mr Good had drawn some £38,000 more than he was entitled to for the year. Mr Good denied that he had ever agreed that he would only be entitled to receive £30,000 for six months in which Mr Croly would be entitled to his full commission, or to the highly selective and one-sided method of computation that would be necessary to reach Mr Croly's figures. Mr Croly's position was completely inconsistent with his pleaded case and involved a substantial element of having his cake and eating it. I did not find it credible that Mr Good would have agreed to it, and conclude that the Remuneration Strategy (including the broad policy of equal drawings from the Company) came into effect from 1 January 2006 only.

In November 2006 draft accounts for the year ended 31 March 2006 became available. Mr Croly then raised with Mr Good his complaint that Mr Good had drawn more than his entitlement for that year. This is pleaded as a breach of the Remuneration Strategy. It is further pleaded that the excessive amount was just under £38,000, and that the dispute was resolved by Mr Good agreeing to make a personal payment of £19,000 to Mr Croly to equalise matters. In breach of that agreement, it is said, Mr Good issued a company cheque rather than a personal cheque to pay that amount to Mr Croly, and caused the amount to be debited to Mr Croly's loan account.

In his evidence Mr Good accepted that Mr Croly had confronted him about the amount of his drawings, and produced a calculation showing the £38,000 figure. This was based on Mr Croly's contention that while he was entitled to his full commission for either the first six or nine months of the year, Mr Good was only entitled to a notional salary at the annual rate of £60,000 for that period, an idea which he regarded as insulting. Mr Good also disputed the idea that he was limited to drawings of £10,000 a month after the Remuneration Strategy came into force. There had been a heated argument about it. Mr Croly could see that he had received additional amounts, and wanted some further amounts for himself. Mr Good regarded this as another negotiation with a greedy salesman. Mr Croly had started off asking for a further £38,000, then reduced his demand to £25,000. He had offered Mr Croly £19,000, which he accepted. There had never been any discussion of his making this payment personally. All the payments to Mr Good had been debited to his loan account, so it was to be expected that amounts paid to Mr Croly would be treated in the same way.

In my judgment, Mr Good's explanation is more likely to be the correct one. As I have indicated above, I do not think it likely that Mr Good would have agreed to be limited to a notional salary at the rate of £60,000 for any part of the year, or to the one-sided method of calculation put forward by Mr Croly. It is entirely consistent with my general view of the approach of both the parties that Mr Croly should nevertheless raise an argument about the amounts drawn by Mr Good seeking to improve his own position; they would then have a negotiation and Mr Good would concede some additional payment to Mr Croly. I do not think it is at all likely that he would have agreed to make this payment personally, as each of them regarded the Company as being the source of all the money they required. Mr Croly regarded Mr Good as having had more out of the Company than he had, and they reached an agreement as to an additional amount that Mr Croly could take. If they considered at all whether the Company could afford to make the payment, it would have gone no further than asking themselves whether there was cash in the bank, or enough headroom in its facilities, to do so. The amounts Mr Good had taken had been debited to his loan account, as was everything else that either of them drew, and it would have been consistent for the compromise amount taken by Mr Croly to be likewise debited to his account. Of course this means that the issue was not fully resolved and would not be until dividends are declared, but I do not think either of these parties thought in any detail beyond the immediate receipt of cash.

It follows that I reject Mr Croly's claim that the £19,000 has been wrongly debited to his loan account, and should be charged to Mr Good instead.

In paragraphs 48 and 49 of the petition, it is pleaded that in the year ended 31 March 2007 Mr Good drew from the Company £34,919.40 in excess of the £10,000 a month he was entitled to pursuant to the Remuneration Strategy, and an additional £673.53 in respect of life insurance premiums. It was conceded that these drawings had been made and that Mr Croly had not consented to them, but not that Mr Good was acting improperly in doing so.

The life assurance premiums appear to be a continuation of previous regular payments, and I am not satisfied that the arrangement between the parties was sufficiently precisely articulated to require that they should be taken into account. Further, it is accepted that the Remuneration Strategy provided for a salary of £6600 in addition to the £10,000 monthly payments to Mr Good. It follows that the amount that he received over the year which was in excess of the Remuneration Strategy and about which complaint might potentially be made was £28,319.40.

The defence pleads that in the same year Mr Croly received advances from the Company in excess of the £80,000 payable to him under the Remuneration Strategy amounting to £50,634. Of this amount, Mr Croly objects to £6666 which was paid in April 2007 but was in fact a late payment of the monthly amount on account of dividend he was due for the preceding March, which should therefore have been accounted for in the previous financial year. He also objects that it includes the charge of £19,000 made on the basis referred to above, but I have rejected that complaint. It follows that in the financial year ended March 2007, the extra amounts received by Mr Croly were £43,968, while those paid to Mr Good were £28,319.40, a balance in favour of Mr Croly of £15,649. Mr Croly thus has no legitimate complaint in respect of unequal distributions during that year. Mr Good has accepted that he authorised the additional amounts paid to Mr Croly, and makes no complaint about them.

Based on these figures, the amounts drawn by Mr Croly and debited to his loan account in respect of the financial year ended 31 March 2007 were, in round terms, £124,000 and those drawn by Mr Good were, again in round terms, £148,000. In the same year, the accounts show a net profit of £149,000 so that even if the maximum amount of dividends had been declared, it would have been nowhere near sufficient to clear off the amounts which had been drawn. Mr Croly of course had his gross salary of £60,000 in addition, and the net profit figure is struck after accounting for that salary.

Mr Brown's evidence is that at a meeting on 18 October 2006 he met Mr Good and Mr Croly to discuss the results for the previous financial year, ended 31 March 2006. They discussed Mr Good's overdrawn director's loan account, the importance of not taking excessive amounts of money out of the Company and the need to repay the amount owed on directors loan accounts so that tax charged on those amounts could be recovered. There is no mention in Mr Brown's evidence that there was any discussion about declaration of dividends for the 2006 financial year. I accept Mr Brown's evidence, but there is no evidence that either of the directors paid any heed to the warnings he gave. They do not appear to have abated in any respect the amounts they continued to draw from the Company in the year to March 2007 and there is no evidence that they even discussed whether they ought to do so.

At paragraphs 52 and 53 of the petition it is pleaded that in the year ended 31 March 2008 Mr Good withdrew from the Company £80,532.99 in excess of the £10,000 per month payable under the Remuneration Strategy. Of this, £6600 would have been his additional salary. After allowing for that, it is pleaded that the amounts he received were £52,826 more than those received by Mr Croly. Paragraph 26 of the defence admits the receipts by Mr Good but does not admit that they amounted to £52,826 more than Mr Croly received. No alternative calculation is put forward, however, and I conclude that Mr Croly's calculation is correct, and that this disparity cannot have been in accordance with the agreement for broad equality that I have found.

It was of course during this financial year that the rupture between the two parties occurred. It is accepted that matters came to a head at a meeting at the Company's offices on Friday 9 November. Mr Good's evidence was that he was fed up with Mr Croly's continual demands for more shares. He had demanded that he should be given shares to take him up to 50%, without payment. At the meeting on that day, Mr Croly had said that he would pay for the additional shares required to take him up to 40%, and would leave if he was not given them. Mr Good told him that he had his own idea, which was that Mr Croly should indeed leave. He accepted that Mr Croly had been taken aback by this, and that he had the impression that Mr Croly thought he would always get his own way.

Mr Croly alleged that Mr Good had said to him "the partnership is over", which would of course support his general contention that the Company was a quasi partnership. Mr Good said that he had not said anything like that, and the first he heard of this allegation was after Mr Croly had received legal advice. He had told Mr Croly that he would like to buy his shares and that they would need to get advice in that connection. He had envisaged that there would be negotiation about it and they would reach an agreement.

Mr Good was surprised when Mr Croly came to the office the following Monday morning and said that he was "presenting himself for work" and wanted something in writing if he was not to attend the offices. He had typed out the short letter that appears in the bundle at page C236, requesting Mr Croly to work from home. Mr Good had not seriously expected him to work from home, but he had refused to leave the office until he received a written request to do so. There is no evidence that Mr Croly actually did any work from home, or expected to do so. His request was, presumably, as a result of having received advice on how to protect his position.

Mr Good also took advice, and shortly afterwards wrote a letter to Mr Croly indicating that following a review his position as sales manager was likely to become redundant. There was nothing to support the suggestion that any review was in fact carried out, and it appears that Mr Smith was subsequently appointed as sales manager, so the position cannot have been redundant. Each of them was striking an artificial posture. I have no doubt that this was with a view to the potential future legal dispute between them. As should be apparent from what I have said above, each of them has continued to take artificial positions in the course of that dispute.

I am satisfied that the reality of what took place at these two meetings was that Mr Croly was expelled from the Company.

I turn to the question whether these facts demonstrate the necessary elements of conduct which is prejudicial and unfair. It is convenient to consider first whether, as Mr Croly contends, the Company should be considered to be one of those in respect of which considerations of a quasi partnership nature arise. It was not of course formed as such. Nor is it contended that it became a quasi partnership when Mr Croly first acquired shares in it, or even when he acquired the shares previously held by Mr Steele. In my judgment, it does not particularly matter precisely when the Company became a quasi partnership, provided that it did so before the time of the conduct complained of, or at least that part of it which is alleged to be unfair because the Company was a quasi partnership. In this case, in my view the appropriate question is to ask whether the Company had become a quasi partnership by the time the relationship between Mr Croly and Mr Good reached its fully developed form, i.e. in the early part of 2006 when the Remuneration Strategy was put into effect. Was Mr Croly by that stage entitled to be treated as a quasi partner or was he merely (as Lord Hoffmann put it in O'Neill v Phillips) an employee who happened to have been given some shares?

This is a question which requires an overall judgment on the totality of the arrangements made. No one element is conclusive either way. In my judgment, when one makes that overall assessment, he was a quasi partner. He was participating in management, to an important and significant degree. This is not conclusive on its own of course, an employee may be given management duties and the question is whether in the particular case he is performing management functions in the character of someone who is essentially an owner of the business or someone who is acting under the instruction or delegation of the controlling owners. Nor is it conclusive against his acting in that character that the scope of his management functions is limited, or that he exercises some of his functions in conjunction with others, because the owners of the business may for good reasons agree to divide or share the management responsibilities they exercise. What strongly points in favour of Mr Croly acting in the character of an owner rather than an employee in this case is the fact that in relation to the dealings with the franchisor which were the very heart and foundation of the Company's business, he was held out and considered to be a "principal" in the business.

Mr Croly was to be remunerated very largely by reference to dividends which could only be paid from the profits of the Company, and gave up lucrative commission entitlements in making that arrangement. This made him vitally interested in the overall performance of the Company, and was not an arrangement entered into on a temporary and revocable basis, such as was found on the facts in O'Neill v Phillips.

In entering into these arrangements, Mr Croly and Mr Good in my judgment came to have a relationship which was a personal one rather than a purely commercial one. Insofar as the necessary character of the relationship is referred to in the authorities as one of mutual trust and confidence, in my view what is meant by that is a relationship which requires those qualities for it to work as intended. It is not necessary that the parties expressly articulate any feelings of trust and confidence, and so it does not matter that I have rejected the somewhat unlikely pleading that they did so. Nor does it matter in my view that they may each in fact have had reservations about the extent to which they trusted or had confidence in the other, as I have no doubt they did in this case. They made a relationship which required such qualities, most obviously because the broad arrangement for a quality of division of profits could only operate successfully if neither of them abused his position to achieve a personal advantage, and implied that they should cooperate with each other if it became necessary to deal with the situation in which the Company was not generating the funds necessary to make the payments they anticipated. In the event, of course, neither of them appears to have raised the matter at all and so there was no opportunity to enter into such cooperation, but in my view that does not affect the fact that they would have been required to do so.

Another factor which leads to the conclusion that the relationship was personal rather than based on obligations owed pursuant to the Companies Acts and the Articles of Association is the view that I have come to that to all intents and purposes each of these parties paid no attention to such obligations whatsoever. Insofar as they recognised any limits at all on what they could do in relation to the Company and its assets (and Mr Good recognised few if any), they arose only because of what they had agreed between themselves.

With that conclusion in mind, I consider each of the matters of which Mr Croly complains. His expulsion from the Company was in my judgment prejudicial to his interests as member, in that it prevented him from participating in the management of the Company, and from contributing to the generation of sales which would lead to profits in which he would share by way of dividend, that is to say in his capacity as member. It was unfair given that I have concluded that the Company had become a quasi partnership and that his participation in its business was part of the agreed basis of operation.

I have rejected his complaint that Mr Good drew excessive amounts in respect of the financial year ended March 2006. I have not found any firm agreement or understanding between the two of them that would have limited Mr Good to any lower figure. I have also rejected his complaint of excessive drawings by Mr Good in the 2007 financial year, having found on the facts that Mr Croly drew more than Mr Good. In relation to both these years, Mr Davies put forward an alternative argument that all amounts paid to Mr Good over and above those specifically agreed in the Remuneration Strategy should be regarded as unfair because Mr Croly had not consented to them and they had been made without the approval of the directors or shareholders formally given. I have no doubt that these payments were made in breach of the Companies Acts and without the Company taking the proper internal steps to authorise them. However in circumstances where the shareholders have in effect established a regime in which the Company's affairs are conducted with a wholesale disregard to such obligations none of them is in my judgment in a position to complain that such conduct by another shareholder is unfair on that ground alone.

There were also allegations of excessive use of company credit cards for matters which were personal, or only loosely connected to the Company's business. I do not propose to address the individual items in detail. Mr Croly complained of Mr Good's expenditure, but in my judgment it was abundantly clear that he used his own company credit card with a similar degree of freedom. He does not appear to have made any complaint about this prior to his expulsion, and it must I think be inferred that the loose nature of the arrangement between them permitted a considerable degree of freedom in this respect. As Mr Adair put it, they were both at it, and they both knew it. As a result, in my judgment, this is not a matter which in itself can be regarded as unfairly prejudicial for the purposes of section 994.

I have found that in the financial year to 31 March 2008, Mr Good drew something over £50,000 more than Mr Croly, and that that must be regarded as outside the scope of the broad arrangement between them. Mr Croly did not consent to this and there has been no attempt at reconciliation or adjustment of these amounts. That too, in my judgment, is unfair and it is clearly prejudicial to Mr Croly's interests as member in that it worsens still further the prospect of the Company being able to pay the dividends envisaged by the Remuneration Strategy.

Mr Croly also complains that Mr Good has failed to take any steps necessary to declare the dividends that could have been declared in respect of the financial years ended 31 March 2007 and 2008. They would not have been sufficient to eliminate the amount outstanding on loan account, but would have substantially reduced them. Mr Good was quite candid in admitting that he had elected on the basis of advice not to declare any such dividend while the proceedings were on foot. It was in my view an essential part of the Remuneration Strategy they agreed that dividends would be declared at the end of each year in order to clear down as far as possible the amounts which had been drawn on account of dividend. Failure to declare such dividends was obviously prejudicial to Mr Croly's interest as a member, and it was unfair because it was a breach of what they had agreed.

Curiously, the Petition does not plead any complaint about the dividend of approximately £160,000 for the financial year ended 31 March 2005, though it appeared from the evidence that it was paid entirely to Mr and Mrs Good, by a series of briefly minuted directors' resolutions declaring interim dividends on the B shares, all of which were held by them. Nor is a complaint pleaded about the dividend of approximately £148,000 paid in respect of the year to 31 March 2006. I do not think the evidence addressed who received this dividend and I make no finding about it, though I observe firstly that Mr Good did not seek to suggest that Mr Croly had received a dividend, which he might have been expected to do if it was the case, and secondly that credits described as 'year end accounts journals' were apparently made to the directors loan accounts in early November 2006, backdated to 31 March 2006, of £13,334 in Mr Croly's case and £132,627 in Mr Good's case. These do not quite add up to the amount of the dividend and may or may not represent it.

Finally, there is the question of the further amounts drawn by Mr Good since 31 March 2008 and up to the date of administration. As noted above, it appears that these are of the order of £200,000. None of these payments has been authorised by a proper approval of the directors or shareholders, nor has any of them been individually authorised by Mr Croly. No payments have been made to Mr Croly since his expulsion. In these circumstances, in my judgment these payments cannot be considered to be a continuation of the arrangements agreed between Mr Croly and Mr Good. No doubt it would not have been unfair to pay reasonable amounts by way of remuneration for services provided by Mr Good, but there has been no attempt to justify these payments on that account. They are not supported by any profits made by the Company and in any event are clearly not an equal distribution of such profits. In my judgment they too are prejudicial to Mr Croly's interest as member in that they prejudice the Company's very solvency and survival, and they are unfair in that they are in breach of the arrangement for equal distribution.

I am therefore satisfied that the affairs of the Company have been conducted in a manner unfairly prejudicial to Mr Croly's interests as member.

The relief Mr Croly seeks is that his shares should be purchased by Mr Good, or by Mr and Mrs Good. There is no evidence that Mrs Good has participated actively in this company, or in the matters complained of and it would not in my judgment be appropriate to make an order against her. Any order made should in my judgment be directed instead to Mr Good.

Having concluded that the Company is to be treated as a quasi partnership, it is appropriate that any order to buy Mr Croly's shares should be on the basis of a valuation that is not discounted because his holding is a minority. Mr Good accepted himself in evidence that after Mr Croly left the Company in November 2007 it would have been fair to buy his shares on that basis; indeed it was his case that he had attempted to do so.

There is an issue about the appropriate date for valuation. Mr Davies referred me to Profinance Trust SA v Gladstone [2000] 2 BCLC 516, a decision of Mr Kim Lewison QC, as he then was, in which the authorities dealing with the selection of the appropriate date for valuation were reviewed. That decision was overturned on appeal (see [2001] EWCA Civ 1031), the conclusion of the court being set out in the judgment of the court as follows:

“60 …The starting point should in our view be the general proposition stated by Nourse J in Re London School of Electronics [1986] Ch 211, 224:

"Prima facie an interest in a going concern ought to be valued at the date on which it is ordered to be purchased."

That is, as Nourse J said, subject to the overriding requirement that the valuation should be fair on the facts of the particular case.

61 The general trend of authority over the last 15 years appears to us to support that as the starting point, while recognising that there are many cases in which fairness (to one side or the other) requires the court to take another date. It would be wrong to try to enumerate all those cases but some of them can be illustrated by the authorities already referred to:

i)

Where a company has been deprived of its business, an early valuation date (and compensating adjustments) may be required in fairness to the claimant (Meyer).

ii)

Where a company has been reconstructed or its business has changed significantly, so that it has a new economic identity, an early valuation date may be required in fairness to one or both parties (OC Transport, and to a lesser degree London School of Electronics). But an improper alteration in the issued share capital, unaccompanied by any change in the business, will not necessarily have that outcome (DR Chemicals).

iii)

Where a minority shareholder has a petition on foot and there is a general fall in the market, the court may in fairness to the claimant have the shares valued at an early date, especially if it strongly disapproves of the majority shareholder's prejudicial conduct (Cumana).

iv)

But a claimant is not entitled to what the deputy judge called a one-way bet, and the court will not direct an early valuation date simply to give the claimant the most advantageous exit from the company, especially where severe prejudice has not been made out (Elgindata).

v)

All these points may be heavily influenced by the parties' conduct in making and accepting or rejecting offers either before or during the course of the proceedings (O'Neill v Phillips).”

In Re OC Transport Services Limited [1984] BCLC 251 a valuation date was selected some 18 months before presentation of the petition, on the ground that from that date onwards, the value of the shares might have been affected by the company's relationship with a related company, to which shares had been issued in dilution of the petitioner's holding. It is relevant to note however (see the final paragraph of the judgment at page 258) that in that case no actual adverse effect on the value of the shares had been established, as the process of valuation at the dates contended for had not been performed. There was a risk of such an effect, and it was unfair to make the petitioner bear that risk.

The starting point therefore is a valuation at the date of the court's order, unless I consider that would be unfair to the one or other party in all the circumstances of the case. If I consider another date or dates, I must assess whether they would, overall, be more fair or less fair between the parties.

In the present case, Mr Davies urged me to make an order for a value to be fixed as at the date of the expulsion, because since then the Company's fortunes have declined, he says suspiciously, to the point where it has entered insolvency. Furthermore its assets have been acquired for a nominal value by a new company controlled by Mr Good, following which the business appears to have turned a financial corner and again become profitable, because it is making deferred payments to the administrator which are contingent upon its making a profit.

Mr Good denies that there is anything untoward in the financial decline of the Company, which he attributes to the general state of the economy. He asserts that the insolvency came about following advice from Mr Brown and, on his recommendation, an insolvency practitioner to the effect that the Company was unable to pay its debts by reason of the uncertainty about recovery of the principal item in its balance sheet, the directors' loan accounts. He of course owes the majority of the amount due, something over £400,000. He says that this amount is to be regarded as of uncertain value because he cannot afford to pay it. Mr Croly owes approximately £200,000 and, at the time the insolvency was under consideration, would not confirm that he accepted liability to pay that amount.

Mr Brown gave evidence that he had been concerned about the solvency of the Company for some time, in a situation in which its balance sheet was substantially composed of the amounts due on directors' loan accounts, which were of uncertain value for the reasons given above. Mr Smith gave evidence that he was aware that the Company had for some time been operating at the limits of its facilities. Mr Good produced sales figures showing a decline in turnover and that the Company had performed markedly less well than other franchisees in the relevant period. The only bright spot in its performance was that it had taken over a third franchise area on a rental basis, and sales in that area were apparently doing well. Mr Good asserted that all the sales revenue generated had been credited to the Company, but there was no documentary evidence to back this up.

On behalf of Mr Croly it was complained that no information had been given about this new franchise before it had been taken on, and no financial information had been provided since then. It was not accepted in the absence of supporting evidence that all the turnover and costs of the new franchise area had been correctly reflected in the accounts of the Company. The general economic downturn could not account for the fact that the Company's own franchises were performing much worse than other areas.

Mr Good also denied that he controlled the Company which had acquired the assets from the administrator, notwithstanding the fact that the administrators report states this to be the case. He said that he owned 5% of the shares and his wife held 95%. He is not formally a director, though it is clear he is in control of its management. He admitted that his wife played no substantial executive role in the new company, as she had not in the old one, and that he had been advised that the majority of the shares should be held by her while these proceedings remained on foot. I am satisfied that he is in truth the controlling member of the new company.

The acquisition was, as I have already mentioned, on a "prepack" basis, that is to say the sale had been negotiated before the administrator was appointed. This must evidently have involved some negotiation in advance with the franchise holder, as the administrator's report states (2772) that the franchisor would only consent to a sale to a company operated by Mr Good. It appears from the estimated statement of affairs (2781) that the only substantial creditors of the old company are HMRC, owed approximately £381,000, and the franchisor which is owed approximately £352,000. In previous periods the Company had substantial other creditors, see for example the draft accounts to 31 March 2008 at 2220, but these seem to have all but disappeared. Mr Good gave evidence that the new company has agreed to repay the debt due to the franchisor, and one is bound to wonder whether similar arrangements have been made with others, leaving only HMRC to lose out. This would not be necessarily improper, but suggests that Mr Good is confident the new company can shoulder a considerable burden of debt.

It would of course be part of the administrators' duty to collect the assets of the Company, of which the most substantial is the amount outstanding on directors' loan accounts. Mr Croly gave evidence that no time was lost in demanding the amount due from him. Mr Good however said that he had not received any request to discharge the rather larger amount owed by him. I did not have the benefit of any evidence from the administrator to explain this apparent differential treatment.

In my judgment the combination of all these factors gives rise to a very substantial risk that a valuation of Mr Croly's shares at a date after his expulsion would be seriously unfair to him. Mr Good is a man who regards it as his right to run the affairs of the Company so as to suit his own interest, and has had sole control of it for two years since Mr Croly's expulsion. In all that time, Mr Croly has asserted a claim to have his shares bought out, which has been strongly contested. There is no clear evidence of impropriety in the apparent financial decline of the Company, but the circumstances excite suspicion, which cannot be dispelled because Mr Good has not made available all the financial information that would be necessary to do so. He did allow Mr Croly and his accountant to inspect the records including the computer accounting system, in March 2008, but he accepted that Mr Croly would have no means of knowing about the deterioration in circumstances after that. He does not appear to have consulted or informed Mr Croly before placing the Company into administration. He did not inform Mr Croly before taking on the new franchise area and although he maintains that the financial benefits have gone to the Company, the letter granting him that franchise is in his personal name rather than that of the Company and he has declined to provide the financial information which would verify what he says. If the cause of the insolvency was cash flow difficulties, they would appear to have been caused by Mr Good having drawn some £200,000 from the Company since the expulsion, far in excess of any cash that was generated and an amount which there was no prospect of clearing by payment of any dividend. The prepack sale also gives rise to suspicions, which in my view are legitimate, that it is designed to isolate a business which, despite appearances still has substantial value, from Mr Croly's claims.

It is also relevant to consider, as the Court of Appeal emphasised in Profinance, the conduct of the parties in making offers. I was taken through the exchange of correspondence in which Mr Croly consistently sought an offer on the basis set out by Lord Hoffman in O'Neill v Phillips.

The nearest Mr Good came to such an offer was in a letter written by his solicitors on 26 June 2008. Although this stated that "our client and/or the company is prepared to make an offer to buy your clients shares in accordance with the principles of O'Neill v Phillips based upon a fair valuation as determined by an independent expert", after proposing the terms upon which the expert would be instructed, which included "the determination of the expert to be final and binding on the parties as to value" it went on to say "within 14 days of receipt of a valuation, Mr Good and/or the company will put forward a proposal of the terms upon which he and or the company will purchase Mr Croly's shareholding."

This was not, therefore, an offer capable of acceptance to form a binding contract, but only a proposal which might lead to such an offer being made. This point was immediately taken by Mr Croly's solicitors, in their letter of response dated 17 July 2008 and never satisfactorily answered. There were other objections to the form of Mr Good's "offer" but this seems to me to be the principal one, namely that it was not an offer at all. Although Mr Good maintained in his evidence that he wanted to make an offer to buy Mr Croly's shares immediately after his departure, and thought that he had done so, it would appear that when it came to have it confirmed in writing, he held back from committing himself.

All of the circumstances point, in my view, towards choosing a valuation date at the date of expulsion. Such a date would not be unfair to Mr Good; it reflects what he himself indicated he thought was fair, and to the extent that it is impossible to assess whether the apparent decline of the Company is genuinely due to factors beyond his control, that is because he has not made available the information required.

There remains a final point to consider, which was Mr Adair's submission that the shares were clearly valueless, whatever date was chosen. This was based on the submission that even at the date of expulsion the Company was insolvent unless the director's loan accounts, then amounting to about £400,000, could be collected. It does not however seem to me to be fair that Mr Good should be able to rely on his own inability to pay his debt to the Company to reduce the price that he ought to pay to acquire Mr Croly's shares. Nor does it seem to me right that he should seek to reduce the amount paid by reference to any difficulty Mr Croly might have in repaying the amount he owes, in circumstances where Mr Good has exacerbated that difficulty by failing to declare the dividends that could have been declared which would have reduced this liability and leaving Mr Croly in the situation in which he is exposed to a claim for recovery by the administrators but the asset which he will presumably wish to use to discharge it, that is the price of his shares, is to be reduced in value by virtue of the very existence of the liability in the first place. I propose therefore to direct that in conducting the valuation exercise the valuer should assume that the director's loan accounts will be recoverable in full.

On that basis, Mr Adair's objection to giving any relief falls away. I propose therefore to order that Mr Good should purchase Mr Croly shares, at a valuation to be established, on a non-discounted basis, as at the date of his expulsion, 9 November 2007.

It may be necessary to give further directions as to the basis upon which the valuation will be performed. One matter which I do wish to deal with now however is a claim in the petition that the valuer should assume that Mr Good must repay to the Company all the amounts which are said to have been misappropriated by him from it. These are the amounts paid to Mr Good on account of dividend and other amounts drawn in cash or paid by the Company in respect of his personal expenses. Since all of these amounts have been debited to Mr Good's loan account, he is already liable to repay those amounts to the Company, that liability will be treated as an asset of the Company by virtue of the direction I have referred to above, and no further adjustment is required to be made.

I will list a hearing at which this judgment can be formally handed down. I invite the parties to seek to agree the order which should be made in consequence; if they can do so no attendance will be required. If they are not, I will arrange for the judgment be handed down at a short formal hearing in Birmingham, and a longer hearing at a later date at which the points arising may be argued.