IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
NEWCASTLE-UPON-TYNE DISTRICT REGISTRY
Law Courts
The Quayside
Newcastle-upon-Tyne NE1 3LA
BEFORE:
THE HONOURABLE MR JUSTICE BARLING
BETWEEN:
LEE GOODCHILD
Petitioner
- and -
(1) SCOTT TAYLOR
(2) TAYLOR GOODCHILD LIMITED
Respondents
MR S GOLDBERG (instructed by Endeavour Partnership) appeared on behalf of the Petitioner
MR D MURRAY (instructed by DWF LLP) appeared on behalf of the Respondents
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JUDGMENT
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MR JUSTICE BARLING:
Introduction
This is the trial of a petition under section 994 of the Companies Act 2006 whereby the petitioner, Mr Lee Goodchild, alleges that the business of a company has been conducted in a manner that is unfairly prejudicial to his interest as a shareholder in that company. The company is the second respondent to the petition, a firm of solicitors called Taylor Goodchild Limited, of which the petitioner and the first respondent are the only directors and in which they are the only and equal shareholders.
Both the petitioner and the first respondent are solicitors, and the company's business is the provision of legal services. The company was incorporated in 2011 specifically to take over the business of a solicitor partnership which had been formed by the petitioner and the first respondent in 2003.
Mr Simon Goldberg of counsel appears for the petitioner and Mr David Murray of counsel appears for the respondents.
Section 994 (so far as relevant) provides:
A member of a company may apply to the court by petition for an order under this Part on the ground -
that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself) ..."
The court's remedial powers are set out in section 996 of the Act, which (so far as relevant) provides:
If the court is satisfied that a petition under this Part is well founded, it may make such order as it thinks fit for giving relief in respect of the matters complained of.
Without prejudice to the generality of subsection (1), the court's order may -
...
provide for the purchase of the shares of any members of the company by other members or by the company itself ..."
The relief sought by the petitioner is that provided for in subsection 996(2)(e), namely that there should be an order that the petitioner purchase the first respondent's 50 per cent shareholding in the company at a fair value.
Both parties, through their respective counsel, agree that such relief as is sought here is somewhat unusual, as the order for purchase of shares is usually that the respondent purchases the petitioner's shares. But it is accepted by the respondents that the court has jurisdiction to make the order if other criteria are satisfied.
The Case Law
As to the principles to be applied in considering a petition alleging unfair prejudice, both sides referred to the decision of the House of Lords in O'Neill v Phillips [1999] 1 WLR 1092 as the leading case. This case concerned the predecessor provision to section 994, namely section 459 of the Companies Act 1989. Certain passages in the speech of Lord Hoffmann have been emphasised. At page 1098D to 1099B he said:
"In section 459 Parliament has chosen fairness as the criterion by which the court must decide whether it has jurisdiction to grant relief. It is clear from the legislative history (which I discussed in In re Saul D Harrison & Sons Plc [1995] 1 BCLC 14, 17-20) that it chose this concept to free the court from technical considerations of legal right and to confer a wide power to do what appeared just and equitable. But this does not mean that the court can do whatever the individual judge happens to think fair. The concept of fairness must be applied judicially and the content which it is given by the courts must be based upon rational principles. As Warner J said in In re JE Cade & Son Ltd [1992] BCLC 213, 227: 'The court ... has a very wide discretion, but it does not sit under a palm tree.'
Although fairness is a notion which can be applied to all kinds of activities, its content will depend upon the context in which it is being used. Conduct which is perfectly fair between competing businessmen may not be fair between members of a family. In some sports it may require, at best, observance of the rules, in others ... it may be unfair in some circumstances to take advantage of them. All is said to be fair in love and war. So the context and background are very important.
In the case of section 459, the background has the following two features. First, a company is an association of persons for an economic purpose, usually entered into with legal advice and some degree of formality. The terms of the association are contained in the articles of association and sometimes in collateral agreements between the shareholders. Thus the manner in which the affairs of the company may be conducted is closely regulated by rules to which the shareholders have agreed. Secondly, company law has developed seamlessly from the law of partnership, which was treated by equity, like the Roman societas, as a contract of good faith. One of the traditional roles of equity, as a separate jurisdiction, was to restrain the exercise of strict legal rights in certain relationships in which it considered that this would be contrary to good faith. These principles have, with appropriate modification, been carried over into company law.
The first of these two features leads to the conclusion that a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted. But the second leads to the conclusion that there will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers. Thus unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith."
And at page 1101H to 1102B, he said:
"I do not suggest that exercising rights in breach of some promise or undertaking is the only form of conduct which will be regarded as unfair for the purposes of section 459. For example, there may be some event which puts an end to the basis upon which the parties entered into association with each other, making it unfair that one shareholder should insist upon the continuance of the association. The analogy of contractual frustration suggests itself. The unfairness may arise not from what the parties have positively agreed but from a majority using its legal powers to maintain the association in circumstances to which the minority can reasonably say it did not agree: non haec in foedera veni. It is well recognised that in such a case there would be power to wind up the company on the just and equitable ground ... and it seems to me that, in the absence of a winding up, it could equally be said to come within section 459."
I was also taken to In re Tobian Properties Ltd [2013] Bus LR 753, a decision of the Court of Appeal, in which Arden LJ said at page 759A to B:
"The key phrase in section 994(1), 'unfairly prejudicial', comprises two elements, unfairness and prejudice but both of these must be understood in the context of company law. The concept of fairness inherent in this phrase is flexible and open-textured but it is not unbounded. The courts must act on a principled basis even though the concept is to be approached flexibly. They cannot decide whether to grant or refuse relief from unfair prejudice on the basis of palm-tree justice."
Having then referred to the passages from Lord Hoffmann's speech in O'Neill, she continued at page 759H to 760B:
"One of the most important matters to which the courts will have regard is thus the terms on which the parties agreed to do business together. These are commonly found in the company's articles. They also include any applicable rights conferred by statute. In addition, the terms on which the parties agreed to do business together include by implication an agreement that any party who is a director will perform his duties as a director. Primary among these duties are the seven duties now codified in sections 171 to 177 of the Companies Act 2006. Under these duties, a director must act in the way which he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. There is also the well-known duty to avoid conflicts of interest and duty: a director must avoid a situation in which he has an interest which conflicts with that of the company. Six out of seven of these duties are fiduciary duties, that is, duties imposed by law on persons who exercise powers for the benefit of others. Non-compliance by the respondent shareholders with their duties will generally indicate that unfair prejudice has occurred.
Moreover, fiduciary duties are stringent."
The Facts
One of the striking and unusual features of this case is that there is almost no factual dispute about anything which really matters. I will identify the key points on which the parties are, in effect, in agreement as to what has happened and also as to what should happen. It will become clear that, at least as far as this unfair prejudice petition is concerned, the matters which fall to be decided are of limited compass. Notwithstanding the narrowness of the real issues, the case has extended over six days, including one reading day, and I have heard oral evidence from ten witnesses, including the two parties. Several of these witnesses' evidence was at best of marginal assistance to me in dealing with the essential questions. That of course is not in any way their fault. I shall refer to their evidence relatively briefly in due course.
As with many disputes, I rely very much on the contemporaneous documents as, in all probability, providing more reliable material than that produced by a witness seeking to cast his or her mind back to events several months or even years ago. For that reason, in setting out the factual background to the dispute, I shall make frequent references to and quote from some of those documents. To set out the material facts and evidence will take a little time notwithstanding the limited area of controversy. In doing this, and in dealing with the parties' submissions, I do not propose to refer to each and every point made or to each and every aspect of the evidence put before me, but only such as is necessary to explain my conclusions. I have, of course, had regard to all the evidence and submissions.
The company was incorporated in 2011 and purchased the business of the partnership for a sum of about £900,000. The articles of association of the company are in the form of Table A. Thus, if the 50/50 shareholders and directors did not agree, there would be a deadlock. In effect, each had a veto over the running of the company. On the purchase, each of the two directors' loan accounts were credited with about £400,000. By May 2016 the directors' loan accounts were in debit: the first respondent's loan account for over £200,000 and the petitioner's for over £180,000, reflecting the fact that the directors were drawing down more than the profits of the company.
It is clear from the evidence and a perusal of the contemporaneous documents that for some time before the end of 2016, when matters came to a head, relations between the two partners had been deteriorating. The evidence shows that there were complaints by each about the other. The petitioner was alleging that the first respondent was not supervising his civil area of work competently, and that there were many complaints and claims from clients due to the way in which the first respondent was carrying out, or not carrying out, his duties. For his part, the first respondent complained that the petitioner was not pulling his weight, and that his billing of fees had dropped well below that which would have been expected of him. Matters deteriorated to the extent that staff began to talk about the situation, and the atmosphere in the offices, in particular in the Middlesbrough office, became very tense.
I do not need to, and I do not, attempt to determine the rights and wrongs of all these complaints and counter-complaints made by the parties against each other. In my view, it does not matter for present purposes who was in the right and who was in the wrong so far as the breakdown in relations is concerned. The first respondent suggested in evidence (and Mr Murray cross-examined the petitioner on this basis) that the petitioner had been fabricating complaints against the first respondent from a motive of jealousy and/or for other purposes of his own. I believe it was put to him that he had done so at various stages in order to bolster his case for a split of the business on terms which were advantageous to him, and perhaps to deflect attention away from his own shortcomings. I can say at the outset that, in the light of the evidence, I do not consider that this allegation is established. The evidence does not justify my reaching any such conclusion regardless of whether or not the nature of the complaints made by the petitioner were justified, as to which I make no finding.
The fact remains that by 1 November 2016, relations between them had reached the stage where the petitioner wrote an email which ended as follows:
"This is not just hard for me, it is painful. I simply cannot see how we can work together when these concerns and issues keep on coming round periodically, even after previously agreeing between ourselves as to how to proceed. You are prioritising your own needs over and above those of the firm and your actions/inactions impact significantly on all staff and departments within the firm. My own health is being impacted by this.
I have voiced my concerns on a number of occasions and I don't seek to go over them again as this would be unhelpful. Despite your assurances and our agreement, you simply revert back to a position that suits you.
I suggest the following, which will save costs and ensure both of us are armed with the same information to avoid the risk of any unpleasantness. This will need to be acted upon quickly to minimise any impact upon the firm.
We jointly instruct independent accounts to value the firm. The letter of instruction and terms of the same to be agreed between ourselves. Such instruction of the accountants to be by the appropriate regulatory body whom we'll instruct from a panel independently of ourselves.
We independently instruct our own lawyers to advise on our individual respective positions.
We jointly instruct an expert to advise on the contract ramifications with the LAA that a split will have for both of us.
I'm happy we can resolve matters in as amicable and timely a manner as possible so that we can both move forward in our own respective directions."
Thereafter, the parties attempted to find time for a meeting to try to thrash things out. One or two such meetings did take place at the Tontine Hotel towards the end of November 2016. In an email to the respondent on 29 November 2016, the petitioner said:
"I felt our chat last week at the Tontine was helpful. We agreed that we should pursue an honest and open approach to our separation so that our respective legal teams did not benefit in significant financial terms. It would also make our day-to-day contact more comfortable."
There is no other record of this meeting. Neither party took a note. It is common ground, as the first respondent said in his evidence, that everything could not be agreed. In particular, they could not agree the financial arrangements as that would depend on the value of the properties. They could not agree what staff would come with them as that would be up to the members of staff. They could not agree the value of the first respondent's shares as that depended on many other as yet unascertained matters. The first respondent also accepts that they did not discuss what would happen if they were unable to agree the terms of the split. But it is common ground that financial matters would be finalised "at the appropriate time". The first respondent also said that the parties intended a final written agreement incorporating all the terms of the split.
Matters were then put in hand. Eventually, both parties instructed their own external solicitors to advise them. Valuations of the company's two properties at Eston and Middlesbrough were obtained in about December 2016 or early 2017, and the petitioner asked for the potential redundancy costs of all staff employed by the company to be obtained. The petitioner said in evidence that the Eston and Middlesbrough buildings were the biggest hurdles to be surmounted. Each property had its own legal aid contract attached to it. Plus, if the petitioner was to stay in the Middlesbrough building, as was apparently envisaged, then the value of that property and the funding to buy out the first respondent's interests had to be arranged. Neither party thought that the Eston office should be retained, but they needed to know the effect on the legal aid contract of letting the Eston property go.
On 13 December 2016, the petitioner emailed the respondent as follows:
"We need to discuss a number of important issues ASAP with Michelle, and I propose that we do it tomorrow, ie Wednesday, at the latest. I'm happy to deal with it early morning or any other time during the day to fit around yourself and Michelle. Can I suggest that, as a basic agenda, we discuss the following:
Staffing issues to include redundancy payments and the cost to the firm along with the continuing concerns regarding Mel's conduct ...
We need to agree between ourselves that Michelle can look into the consequences and ramifications of contract termination of all such contracts with the LAA.
We agree that we both proceed in as gentlemanly a fashion as possible to resolve our differences and, in that respect, Michelle will be requested, no doubt, from both ourselves to provide analytical/financial and other information to each of us without any consequence ... I had hoped that we would have proceeded, in other words, to keep our respective legal teams at arm's length to avoid significant costs to both ourselves. Accordingly, we need a documented record of the respective rights of ourselves and obligations to each other, and in particular the firm.
I intend to sit down with the figures and approach the Legal Aid Agency regarding a potential increase in the criminal contract, as I believe we are heading in that direction.
We need to discuss cash flow and the firm's immediate financial position.
I'm extremely concerned as to the next six weeks or so ...
If there is anything else you can think of then please let me know so I can try and look into it before the meeting. We simply need to get our skates on to resolve this matter with as little disruption and consequences as possible."
On 3 January 2017, the Legal Aid Authority emailed the first respondent as follows:
"Please see attached the business reorganisation form that would need to be completed. The legal documents come after, as it depends on what is in this form as to which documents you would need to sign.
I've just clarified in regards to the contracts that you could in fact split the civil and crime contracts - one would have to take either or you couldn't split them down the middle, ie you would take civil (AAP, family) and Lee would take crime, or vice versa. Give me a call back if you want to chat this through."
By email on 4 January 2017, the petitioner wrote to the first respondent:
"Further to my discussions with my lawyers yesterday, I need to raise a couple of points. If there is to be any possibility of an agreement between ourselves, a number of enquiries need to be made before significant costs arise. Could you please confirm that your lawyers have been formally instructed to represent you in this matter and that you have no objections to my lawyers contacting them direct with a view to progressing matters? The company has significant debt/liabilities and it is not in receipt of income sufficient to deal with pressing expenses such as a £30,000 VAT bill due soon. Accordingly, to address the needs of the firm before our own, I will instruct Michelle that, in light of there being no realistic prospect of this bill being met, we will forego our drawings/wages this month. This will alleviate at least half of the outstanding amount and we can then look at how we can best discharge the full amount. We had discussed and agreed before the Christmas break that you had no objection to me approaching staff that I would need if the business was to continue. Please confirm that position has not changed. Without assurances from staff as to their relative positions, we cannot even begin to try to resolve our outstanding difficulties."
By 18 January, the staff were beginning to talk, and so the petitioner emailed the first respondent as follows:
"Following what was said and disclosed at the firm's Christmas function, staff are starting to leave as they were made aware of the difficulties between us. We cannot delay formally announcing to the staff what is going on. Can I suggest Friday morning to assemble the staff and to tell them the position through agreed wording?"
The next day the petitioner suggested the following wording for a staff announcement in an email to the first respondent:
"Scott, can I suggest the following be put to the staff on the basis as discussed?
ST and LG have different views as to the direction that the firm should be heading.
They have not been able to agree a way forward together so they are going through the legalities of formally splitting the firm.
ST will be taking the civil department and LG crime.
It is not envisaged that there will be the need for any redundancies and that all staff will remain employed after the separation.
Staff are reminded that it is a requirement of their employment that sensitive commercial information not be disclosed as it is likely to impact upon the firm and their own personal circumstances.
Should any member of staff feel they need to discuss their own individual situation, please speak to the relevant partner or Michelle.
Are we all in agreement to the above? Please let me know this morning of any concerns/issues so they can be resolved before the staff come over."
The meeting was called and virtually all staff attended it, including the parties. The petitioner read the agreed notice. There is some small controversy about whether the petitioner left after the notice was read and the first respondent stayed to answer questions. The petitioner said he did leave and, as far as he was concerned, the meeting lasted only two or three minutes. There is a note of the meeting taken by Ms Carling-Bell, one of the witnesses. She said she made notes on her iPhone and typed it up a day or so later. The witnesses who were asked about it agreed that the note was a broadly accurate one.
I do not propose to quote all of the note but just the passages which relate to the presence of the parties:
"ST then asked if any staff had any questions. JN started by wishing luck to both ST and LG ...
JN then asked when they thought that the split would commence. ST stated that he believed and was working towards the start of the new financial year, when the new crime contract was due to start. ST believed that it could be around end of March/beginning of April 2017.
JN then asked what was happening to the firm, ie who was taking the name, would either of them be rebranding. ST stated that finer details were yet to be agreed and there was a lot to talk about which had not yet been discussed. ST then stated that if any individual person felt that they needed to ask questions or discuss their specific individual role then they could speak to any partner or personnel privately.
LG asked if anyone had any more questions. No more questions were asked.
LG then reiterated and reminded all staff of the sensitive nature of this announcement and that all staff were not to talk about anything outside of the business ..."
The petitioner said in evidence that he was not in the meeting room when the first respondent is said to have told staff that the split was aiming for the new financial year. The petitioner said it would have been impossible to achieve that timing but he was aware that this was what the first respondent wanted because that was when the legal aid contracts were up for renewal. He says he was not shown a copy of this note at the time or asked to comment on it.
At some point in January 2017, the petitioner and the first respondent agreed that they would stop taking drawings from the company in view of its somewhat precarious financial position. Up to that point their practice had been to take drawings during the year and then declare a dividend when the accounts were finalised, thereby reducing to that extent their directors' loan accounts.
On 31 January 2017, Scott Taylor Law Limited was incorporated by the first respondent. The petitioner said in evidence that he knew nothing about this incorporation but that the first respondent was away from the office a lot at this time. The petitioner accepts that at some point the first respondent had referred to the costs of setting up a law firm as being high.
Relations did not improve. On 2 March 2017, we see a letter from the petitioner's former external solicitors accusing the first respondent of setting up in competition to the company, of removing files and other documents owned by the company, of encouraging clients to move to a new business and encouraging staff to leave with him. This letter also alleges a breach by the first respondent of his fiduciary duties to the company and suggests that an immediate resignation or walkout by the first respondent would damage the company further, particularly in relation to legal aid contracts and clients.
The following day, the petitioner emailed the first respondent and various members of staff in the following way:
"I also wish to make everyone aware as to the current position regarding myself and Scott as I appreciate that uncertainty is not the most conducive atmosphere to have at work. The position as at the 19 January 2017 staff meeting remains the same in that no agreement between the partners has been reached. Effectively, it is business as usual, and until such time as an agreement has been reached, all staff remain subject to their contracts of employment. As and when an agreement is reached, staff will be spoken to and advised as to timescales and generally how the transition will occur. Any impact upon each member of staff will also be explained. Until then, we are all part of Taylor Goodchild Solicitors and we continue to act in accordance with that position, ie all part of the same firm.
Discussions regarding the firm remain highly confidential, and I take this opportunity to remind staff of their contractual obligations in that regard, and I would recommend that if any member of staff is unsure as to their own respective position and obligations, that they take the time to read their individual contracts of employment ...
Concerning security in general, no files or any other documents/information concerning this firm or its clients is to leave either the Eston or Middlesbrough office. The exception, of course, are files which are being directly worked on with the knowledge and consent of both partners. As of now, we have a file booking out and booking in form at both Eston and Middlesbrough reception. All staff, including LG and ST, will fill in the form so that the location of any file leaving or returning to the office is known. As well as file security, it will assist in locating missing files."
This elicited the following response the next day from the first respondent:
"Dear all, you may have seen the attached email from Lee. It seeks to impose changes to the way we work as a firm and purports to come from the board of the company. This is not the case. Lee has no authority to send this and this was done without my knowledge. Please disregard its content until you hear from the board further."
The petitioner's evidence (which is not challenged) is that the first respondent was removing files from the company's premises at this time. The first respondent said in evidence that he eventually removed between 90 and 100 files from the company's premises, initially to his home and, from there, to his new firm's premises.
Moving on to 31 March 2017, there is an email from the petitioner to the first respondent:
"Julie and Carol are clearly unsettled ... I have spoken to Julie and Carol separately. They both tell me the same thing, that you have informed them that we have an agreement to split the firm and that there is an agreed position regarding the transfer of family work. That, as you are aware, is not and has never been the position.
The position as it stands and as I have informed them is:
we have not come to any agreement between ourselves, be it in principle or otherwise;
all staff remain subject to their contracts of employment to Taylor Goodchild to include notice periods, not seeking alternative work and not to work in any other way other than in this firm's best interests;
we are all to work in the best interests of Taylor Goodchild both in and out of work in accordance with individuals' contracts of employment ...
both the civil and criminal contracts remain with Taylor Goodchild and will not be subject to transfer or novation without both mine and your written consent;
all files, work in progress et cetera remain the property of Taylor Goodchild at all times until an express agreement to the contrary is agreed between ourselves."
The first respondent emailed the petitioner on 4 April:
"At meeting of all staff 19/1/2017 called at your request, all the staff were told of the split in the firm. Your email at 0907 hours on the same day was unambiguous, set the agenda for that meeting and rightly referred to our previous discussions agreeing this way forward. The split between civil and crime was agreed between us as directors. Only the financial terms regarding your acquisition of my shares were to be resolved. To say otherwise is ludicrous. After that meeting, as suggested in your own email, the respective staff spoke to their respective future partner. Staff agreed to go with you and others with me. You now seek to state that was not the position and seek to state no such agreement as directors was reached and tried to suggest this was the case in email from you to all staff purporting to be from us both."
On 7 April 2017, the petitioner sent to the first respondent for his views a draft of an email he proposed should be sent to the company's accountants. The draft reads as follows:
"Good afternoon, it is with regret that myself and Scott see our future heading in different areas. Scott wishes to pursue his career along the lines of civil law, leaving me to continue with crime. Clearly such a separation involves complex discussions between ourselves and legal teams, but we are proceeding to explore how best this can be achieved in as amicable a fashion as possible. Whilst no agreement has been reached as yet, we are both working towards this and hope to have a binding agreement in place in the next few weeks. With that timescale in mind, we would be obliged if this request could be given the appropriate level of urgency which is required. Can you please supply to both myself and Scott a profit and loss account, along with a balance sheet covering the period 1/12/16 to 31/3/17. This is necessary in order for ourselves to predict as accurately as possible the firm's profitability or otherwise during this period. We will then make further enquiries of yourselves re clarification of both our directors loan accounts and tax implications regarding potential proposals currently under discussion."
The first respondent's reply was:
"Lee, it also needs to include a request for a forecast for the end of April as well."
The respondent's reply is interesting. It does not appear to take issue with the way the situation is being described to the accountants. An email in the form of the draft was in due course sent to them. Similarly, the petitioner wrote this to the office manager, Ms Michelle Hunter, on 10 April 2017, copied to the first respondent:
"Michelle, I don't want to go into the details of mine and Scott's discussions other than to say nothing has been agreed at this time. Do not alter any existing payment regime until Scott and me agree. The firm will continue to pay into the joint account as per the firm's relationship with me and Scott. Unless notified by both myself and Scott to the contrary, the firm carries on as normal and the payment arrangements remain the same."
Thereafter negotiations continued with occasional flare-ups between the partners until on 12 May 2017 the first respondent emailed the following letter to the petitioner:
"In accordance with the unanimous agreement of the company's board reached in January 2017, announced to the company's staff on 19 January 2017, I confirm the company will cease carrying on with any civil work and I will cease carrying out any civil work for the company with effect from Friday, 16 June 2017.
With effect from that date, I will be under no obligation to the company to provide any executive services, fee-earning function or regulatory role (which includes the positions of COLP and COLF). This is entirely without prejudice to my position as a director and shareholder in the company.
In addition, as unanimously agreed by the company's board in January 2017 and announced to the company by Lee Goodchild, Hayley Carling-Bell, Melanie Scott-Burns, Julietta Nattrass and Carol Bradford will be leaving the company's employment on 16 June 2017. They will cease to be bound by any post-termination restrictions or obligations in relation to continuing to provide legal services to any clients. They will also not be required to give the required notice under their employment contract with the company, as was agreed by the board of the company and announced to each of them on 19 January 2017.
With effect from 16 June 2017, the legal aid contract for family law and actions against the police will be novated to my new law company. I will hold the company and any defaulting director personally responsible for any loss that I or my new company suffers as a result of any failure by the company to execute the relevant novation documentation."
The first respondent was asked in cross-examination what he meant by "without prejudice to my position as a director and shareholder in the company". His evidence was that he meant that he was going to remain a director and shareholder. This was because the petitioner would require his consent to make any decision re management and control of the company, and the reason this was important was because he would be in a position to protect himself in relation to the directors' loan account. He expanded on this in his witness statement at paragraph 131, where he said:
"As a result of the petitioner's actions since my resignation from the company, I have remained a director of the company. I was already nervous of what steps the petitioner would take on my departure, and I was of the view that if I remained a director I may be able to prevent further hardship to the company and myself since the company was deadlocked. Save for preventing the filing of incorrect accounts, my hopes in that regard have been thwarted by the petitioner, who has acted with total contempt for the interests of the company."
The first respondent also said that in June 2017 it looked as though the company was running out of money and he had taken advice from an insolvency practitioner. He told me that he thought the company was going bust.
On the same date (namely12 May 2017) Ms Bradford, Ms Scott-Burns and Ms Carling-Bell also gave notice of termination of their employment with the company in identical terms to each other and within a very short time of each other. None indicated in their notice the length of notice that was being given. It appears from the evidence that they were provided with some template for their resignation letter. In cross-examination the first respondent agreed that under their contracts of employment at least eight weeks' notice was required if they wished to leave and that there were post-termination restrictions in those contracts. He also agreed that in the absence of the waiver that he gave unilaterally, these employees would have been in breach of their contracts with the company in leaving before the end of their required notice and in starting work for Taylor Law Limited. All those employees, in fact, went to work at the new law firm.
On 15 May 2017, the petitioner emailed each of the three employees expressing sorrow that they were terminating their employment with the company and informing them of their final date of work in accordance with their contracts. In Ms Bradford's case, this was 4 August 2017, and in the two other cases it was 7 July 2017.
On 16 May 2017, the first respondent wrote to the employees in an email copied to the petitioner as follows:
"You have received an email from Mr Goodchild regarding your notice period purportedly on the company's behalf. As with some previous emails from him, this email was not authorised by the company's board of directors and is of no effect. Please disregard it.
Please also disregard any emails or other communications regarding your employment (or any other matter concerning the company) unless it comes with the express approval of both Mr Goodchild and me."
The removal of files from the company's premises became more problematic as time went on. I have already referred to the first respondent's acceptance that some 90 to 100 were removed. A row blew up on 13 June, when the petitioner asked Ms Carling-Bell to find certain named files for him. The first respondent emailed Ms Carling-Bell, again copied to the petitioner, as follows:
"Hayley, further to the email you have received, you are not authorised to act or supply materials/files from my room without both directors agreeing.
I must not be bypassed in this way. For the avoidance of doubt, no one has permission to enter my room and search for files with [I interpose to say that might have been intended to be 'without'] my direct authority.
Please do not feel pressurised into carrying out this action as you do not have my authority to do it. I've copied Michelle into this email to ensure all staff are aware."
The petitioner rejoined on the same date as follows:
"Hayley, I emailed you at 10.46 and 11.26 this morning regarding the recovery and supply of a number of files to myself. I asked you to get back to me straightaway. As at the time of this email you have ignored my instructions to you as a partner and director of Taylor Goodchild Solicitors Limited acting in the company's best interests. I have spoken to you previously reminding that the same applies to you as all staff in that you are an employee of Taylor Goodchild Solicitors Limited and all contractual obligations attached to your employment to Taylor Goodchild Solicitors Limited and not Scott Taylor Law apply at this time."
The matter continued as on 26 June 2017 we see the petitioner writing to the first respondent:
"Scott, I have acted consistently in the best interests of Taylor Goodchild at all times and in a gentlemanly and restrained manner despite your aggressive and emotive approach. You promised me that you would not remove any client files from the office. Despite this personal assurance, you have, without my or the client's consent/knowledge removed the vast majority of civil files from the office. Please confirm that you have the express instructions from each client authorising this and their relocation to Scott Taylor Law offices in the Cleveland Business Centre. They are to be returned immediately. My actions do nothing other than to protect the firm's and the clients' best interests. To suggest otherwise is nonsense. It seems bizarre, where there are active complaints against yourself and your departments, that you deliberately withhold the relevant files and prevent me from responding to such complaints."
After he had left the company, the first respondent wrote to clients of the company stating that he "will no longer be working for" the company and inviting the clients to instruct his new firm. One such letter was dated 30 June 2017. The first respondent states that this was in accordance with what had been agreed with the petitioner. He accepts, however, that he was then and is still a director of the company. He states that it had been agreed in November 2016, or at a meeting at about that time with the petitioner, that he would take work in progress on civil files, which he would take with him. The same would apply, he states, to criminal files as far as the petitioner was concerned.
The first respondent's evidence was that there was about £100,000 worth of fee costs of work in progress owing on CFA files relating to the period before the files were taken to his new firm. He accepts that the terms of the CFAs were that if the client contract came to an end then the client was obliged to pay the outstanding fees and disbursements at that stage. The petitioner sought to act upon those terms and did in some cases seek to bill some of the company's CFA clients upon their indicating that they were transferring the case to the new firm. The first respondent said that this action by the petitioner was a breach of their November 2016 agreement.
In August 2017, the first respondent's solicitors threatened the petitioner that if he continued to pursue such fees they would inform any court that became involved and also inform the clients that the action taken by the petitioner was taken without authority. This, it is accepted, was a threatened use of the first respondent's veto as a director of the company and was done two months after the first respondent had left the company and was practising elsewhere.
In July 2017, nearly a month after having left, the first respondent emailed the petitioner complaining about the closure of the Eston premises as being without his authority and stating:
"For the avoidance of doubt, I am a director and 50 per cent shareholder of Taylor Goodchild Limited and entitled to all information/data I require and come and go as I please to the office. No action re recruitment/contracts or any other business decision can be taken without my approval. As you are aware, I am seriously concerned regarding the future of the firm and protection of its creditors. So far you have failed to engage in any action to avoid such problems. This message has been passed to Michelle to ensure that any data dealing with the finances of the company are passed to [me] in accordance with her duty to me as a director of Taylor Goodchild Limited."
In cross-examination about this, the first respondent said that he did not in fact follow through on it. However, it is consistent with the first respondent's solicitors' letter sent to the petitioner as early as 1 March 2017.
The first respondent accepts that, naturally enough, some clients preferred to stay with the company. It appears that one such was a Ms Linsey Duggan who had instructed the company in a family matter and who provided a signed statement. On 11 July 2017 she received a letter from Ms Bradford dated 3 July 2017, inviting her to transfer the case to the first respondent's new firm. On receipt of this letter on the 11th, she phoned Ms Bradford, who could give her no up-to-date information about the state of her case. She then phoned the petitioner who explained that Ms Bradford had moved firm and that the file had been taken and that Ms Duggan could choose whether to stay with the company or go to the new firm. He said he was content if she wanted to move but she said she would stay. She complained that her file had been removed without her consent and she was worried about a court hearing which may have taken place in her case on 3 July 2017 because she had heard nothing about it. The petitioner made enquiries on 12 July in her presence and spoke to various of the people involved. While she was at the petitioner's office, she received a phone call from Ms Bradford, who told her that her case had been before the district judge and she would get in touch later and give her an update. Ms Duggan complained that her file had been taken without her consent.
It does appear from this that some work, if only a review of the file, was carried out by the new firm without the client's consent. It also follows that the assurance given by the first respondent to the Solicitors' Regulation Authority on 1 November 2017 was not accurate. In an email to the SRA in response to a question from that body on 31 October 2017, the first respondent wrote:
"I confirm no work was carried out on any client matter under Scott Taylor Law Limited prior to receiving express consent from the client. We did not open a file for the client till we received the form of authority from the individual client."
When asked about this in cross-examination, the first respondent said he did not know whether Ms Bradford carried out work before obtaining the client's consent.
I should just now refer to another matter. It does not appear to be in dispute that the first respondent's new firm is potentially at least a competitor of the company. This is for a number of reasons. The new firm's website offers to act in criminal cases and the first respondent says that this is only to comply with his agreement with the Police Federation. The first respondent accepts that he would accept private criminal work if a client wished, and the first respondent has extensive experience of criminal practice.
I also mention a matter relating to the company's overdraft. The first respondent accepted in cross-examination that the reason the company's bank overdraft was not renewed in April 2017 was because he had refused to agree with the petitioner to renew it. He said that he did not want an overdraft to be attached to him once he had left the company. He spoke to the company's bank manager in June 2017 to inform the bank about the dispute. The bank then wrote to the petitioner on 3 July 2017, stating that there would be no overdraft facility available to the company until the dispute was resolved. The first respondent said in evidence that he was concerned about the company's solvency at the time of leaving in June and he thought that it would go bust.
On 18 August 2017, with effect from 1 August, the petitioner paid himself a salary of £8,000 per calendar month. This was the first time that either the petitioner or the first respondent had taken salary. The petitioner told me that he did not really approve of the previous practice of taking drawings and then recouping some of it by declaration of a dividend. He said that he was at this time doing all the work at the company, the first respondent having left with effect from 23 June 2017. The first respondent said that he did not take issue with the petitioner having a salary, although he did not think that £8,000 per calendar month was a reasonable sum.
No dividend was in fact declared for the year ended November 2016. The accountants prepared draft accounts for that period. The petitioner said that the first respondent had refused to sign off on those accounts unless his director's loan account was written off in full by declaration of dividend. The petitioner did not consider that that was appropriate, but by an email of 14 September 2017, he offered to declare a dividend for each of the partners of £89,500 in order to enable the accounts to be signed off and to avoid a further payment of tax to HMRC.
The first respondent initially said that he would consider that proposal. A little later, in an email of 27 September 2017, the first respondent said that the dividend could not be agreed until he had all the information he required, and he complained that he did not have information which he had been requesting, including the up-to-date position on the directors' loan accounts.
As a result of the impasse, no dividend was or could be declared. The petitioner said that this had the effect of increasing the company's tax liability by about £29,000. As I understand it, that is not, as such, disputed.
In cross-examination, the first respondent accepted that he was not willing to sign the accounts, which were in fact overdue, without a dividend declaration at a level that he was happy with. He wanted, he said, a dividend declared which would extinguish his directors' loan account. That, it seems clear, would have required a dividend declaration in the order of £400,000. The first respondent, as I understand it, accepted that the balance sheet showed shareholders' funds of only £242,000 at this time.
At about this time, the first of two controversial payments was made by the first respondent to himself. In mid-September 2017, he paid himself £8,000 from the company's account, of which he remained an authorised signatory. He informed the petitioner of what he had done and said that he was doing it "to keep our positions equal" in the light of the petitioner's decision in August to pay himself a salary of that amount.
The first respondent later made a further similar drawing from the company's bank account, this time of £8,500. The petitioner points out that from the end of June 2017 he had been working alone for the company whereas the first respondent had been working for his new firm.
The Proceedings
On 9 October 2017, mediation in June having failed, the petitioner's solicitors sent a draft petition for unfair prejudice to the first respondent's solicitors and also made an open offer to purchase the first respondent's shares in the company "at a fair value to be assessed by an independent valuer". The first respondent's solicitors responded positively, saying that the offer was accepted in principle. There was, however, no agreement as to the basis of valuation. The first respondent's solicitors suggested that the petitioner nominate three independent valuers one of which the parties could instruct. This was done. A valuer was chosen and the date as at which the shares should be valued was agreed.
Some three weeks later the first respondent changed his mind about the identity of the chosen valuer. In cross-examination, he told me that he could not now remember why he had done that. The petitioner therefore began these proceedings in November 2017. The first respondent agreed to the instruction of a single joint expert to value his shares. However, the parties could not agree the identity of the valuer, and HHJudge Kramer, by an order of 22 January 2018, nominated one.
In the event, the single joint expert jointly instructed by the parties was Mr Andy Poole of Armstrong Watson LLP Chartered Accountants. His report is dated 22 May 2018. He answered various questions put to him by the parties in writing after he delivered his report, but I have not been referred to these addenda at any stage during the hearing.
In summary, Mr Poole valued the first respondent's 50 per cent shareholding in the company at £184,486 on what was called a continuing basis, and at £157,311 on what was called an exiting basis. These values did not change whether the valuation was at 31 March 2018 or 30 June 2017. The continuing basis assumed that the first respondent and certain employees and certain work had not left the practice in June 2017. The exiting basis was on the basis of what actually happened in June 2017.
Based on these valuations, the petitioner has made two open offers to purchase the first respondent's shares, in June 2018 and during this trial. Neither offer has been accepted. The real problem in agreeing anything apparently relates to the treatment of the first respondent's outstanding director’s loan account, currently standing at about £230,000 owing to the company.
Evidence
In addition to the parties, who both gave evidence and were cross-examined at length, other witnesses called by one or other of them gave evidence too. None of this additional evidence was particularly significant. Each of these additional witnesses was, in my view, honest and doing his or her best to assist the court. I consider that this comment also applies to the petitioner and the first respondent in general terms. Understandably, each placed emphasis on matters they considered helpful to their case, but I consider that they were essentially frank and honest witnesses.
I have not summarised the petitioner’s and the first respondent's evidence in the same way that I propose now to do briefly with that of the other witnesses. I have endeavoured to refer to what I regard as significant in the parties' evidence as I go through the judgment.
David Burke gave evidence for the petitioner. He is a solicitor who remains at the company, having joined in 2010 and trained there. He does mainly criminal work but also some civil work. He gave evidence relating to complaints and claims against the company relating primarily to the actions against the police department. He described the 19 January 2017 meeting at which he was present and how the split was postponed thereafter and postponed again and again until one day in June he came to the office and found that the first respondent had left and that there were files missing. He was asked to help the petitioner in collating information about files which were taken and files which were left.
Ross Tismond was called by the petitioner. He works as a trainee solicitor at the company, having joined in 2016. His main work was in the actions against the police. I think it is fair to summarise his evidence as being critical of the lack of training, supervision and support he was given by the first respondent, who was in charge of the actions against the police work. He states that he was not told how to bill work and was generally overloaded with work.
Melanie Scott-Burns was called by the first respondent. She started at the company as a receptionist in 2012 and was promoted to a billing clerk. Her evidence spoke to the deteriorating atmosphere in the company due to the relations between the parties being so bad. She said that she was not aware of any specific date for the split but, after speaking to the first respondent, had put in her notice on 12 May.
Hayley Carling-Bell was called by the first respondent. Her evidence was similar to Ms Scott-Burns's evidence in respect of the deteriorating atmosphere at work. She had taken the note of the staff meeting on 19 January 2017. She had not been aware that the firm was in fact a company. She did not believe that anything was said at that meeting about staff who left on the split taking place not being required to serve out their notice. She submitted her notice on 12 May after receiving advice from the first respondent about whether it should be a resignation or a notice of termination. She thinks she was told how it should be worded. The first respondent told her that 16 June 2017 would be the date for her to leave.
Ms Carol Bradford is a solicitor who worked as such for the company, joining them in 2014 and mainly working in family work at Eston. She did not attend the 19 January meeting as she was at home that day. She gave her notice on 12 May 2017 with the two other employees. She was told by the first respondent that if there was no agreement between himself and the petitioner, they would be leaving in June. She went on holiday in June and came back to work straight to the first respondent's new law firm. Up to leaving on holiday, she had been working on family files, mainly legal aid ones.
She said she could not have sent the letter which was referred to by the client, Ms Duggan, inviting Ms Duggan to instruct the first respondent's new firm, as she had been on holiday, and someone at the new firm must have sent it. When she returned from holiday, Ms Duggan's file was at the new law firm with the other family files. She herself had not taken any files from the company. She confirmed that Ms Duggan's hearing before the district judge on 3 July 2017 may have been unattended and that she had reviewed the file on her coming to work at the new firm. The lack of representation at court she thought might have been because no notice had been received of the hearing, but she did not know.
Laura Bowness was called by the first respondent. She had worked as a receptionist at the company's Middlesbrough office from 2013. She left and joined again in the summer of 2016. On 19 January staff meeting she said that the petitioner had made the announcement and then left, leaving the first respondent who answered staff questions. She understood that the aim was to sort things out by April 2017 to coincide with the renewal of the legal aid contracts. She did not know when the first respondent would leave, but when he started working from home more than usual she got the impression that it was imminent.
Sarah Hartley was called by the first respondent. She worked for the company as a receptionist at Middlesbrough in 2006. She said that she was told about the split by the petitioner in November 2016. He had said nothing was agreed but there would be a split. She never understood why the split was delayed until June, but she "knew Scott and Lee had to sort out the financials of the split and how they would split the offices ... the only thing set in stone was that the company would be splitting".
Michelle Hunter did not provide a witness statement to either party but was called by the first respondent and cross-examined by the petitioner. She said she started in 2008 and left the company on 29 June 2018. She worked as an account and practice manager generally in the Middlesbrough office. She spoke every day to the partners. She knew about the split before the rest of the staff. She got on with both of the partners and tried to persuade them to resolve the dispute and remain together. She assumed that the financials would have to be sorted out and agreed at some point. She had helped to collect data for both partners, including potential redundancy costs if the firm had had to close. She could not remember who had asked her to speak to Mr Ford of the Legal Aid Authority about novation of the legal aid contracts. She was asked about searches she made for documents connected with those contracts. The petitioner told her what he had been asked to look for by the court order and she looked for them and there were communications with the Legal Aid Authority and with Mr Ford. She found a communication which she forwarded to the petitioner. She had forgotten about it before. She thought the petitioner was standing near her when she had searched her computer. She confirmed what others had said about the meeting in January. She was unwilling to give evidence when the petitioner asked her, because she thought that her absence might help to bring the matter to a close, and because she got on with both of them.
Issues, Submissions, Discussion and Conclusions
I must first deal with certain factual issues relating to the extent of the agreement between the parties, in particular whether the petitioner consented to the first respondent leaving in these circumstances and setting up a competing firm with the company's staff and its files while remaining a director and shareholder of the company. The first respondent asserts that the petitioner did so consent; the petitioner contends that he did not and never would have done.
I have already said that the issues are narrow because there was clearly agreement in principle as to the following.
(1) The petitioner and the first respondent would go their separate ways.
(2) The petitioner would take crime and the first respondent would take private civil work.
(3) The petitioner would in all probability retain ownership of the company, buying the first respondent's 50 per cent shareholding.
(4) The petitioner would in all probability wish to retain the Middlesbrough office which meant it would have to be valued and the first respondent's interest would have to be funded and bought by the petitioner from the first respondent.
(5) The Eston property would in all probability be released as it was suitable for neither party.
(6) The first respondent would leave and form his own legal firm.
(7) In all probability, the parties would each wish to retain for their separate practices the staff relevant respectively to crime and civil work but it would be up to members of staff to decide what they wanted to do.
(8) The parties would endeavour to arrange that there were no redundancies of staff.
(9) The parties would begin to put in motion the steps necessary to progress these aims. This included valuing the two properties, speaking to the Legal Aid Authority to find out whether, and if so how, the various legal aid contracts could be split between the parties, valuing the firm and the first respondent's shares, instructing independent lawyers to advise each party and obtaining information about the costs of a split, including potential redundancy costs.
I find as a fact on the evidence that these were agreements in principle and no more than that. Further, I find that the agreement in principle did not expressly extend to the first respondent (a) forming a new law firm, and (b) obtaining premises for that new firm. However, I can see no reason why the first respondent should not have done so if he was prepared to take the risk of a failure to reach a satisfactory final agreement on the split. In that regard I accept the petitioner's evidence that he knew nothing about the first respondent's incorporation of his new law firm in January 2017 when it occurred. The petitioner may well have said, "Get on with it," but there was clearly a mass of matters for the parties to attend to, and I do not consider that that remark covered more than getting on with the preparation work which the petitioner had referred to in his November email suggesting a parting of the ways.
More importantly, the agreement in principle, let alone any more final agreement or consent, did not extend to the following: encouraging staff to leave the company for the new firm; taking files from the company to the new firm; inviting clients to leave the company for the new firm; starting to work for the new firm; taking pre-split work-in-progress for the benefit of the new firm; and doing any of these matters while remaining a director and/or a shareholder of the company; and doing any of these while the terms of the split, including the financial terms, remained un-agreed.
I find as a fact that no such matters were agreed to by the petitioner whether in principle or at all at any of the discussions or meetings that took place, nor would such agreement be implied or inferred in all the circumstances. It is common ground that there was no discussion, let alone an agreement, as to what would happen if the terms of the split were unable to be agreed. It is also common ground that at the time of the November 2016 meeting, many important matters could not be agreed and that the parties intended a final written agreement incorporating all the terms.
I find that the petitioner did not renege on the agreed position as the first respondent alleges. I find that the parties had not in fact reached agreement on a number of important financial matters including the value of the first respondent's shares and how the directors' loan account was to be treated on the split. I do not find that either party was more to blame than the other for that failure to agree. I should also say that I do not accept the first respondent's contention that the drop-off in billing in the spring of 2017 was something done deliberately by the petitioner in order to depress the value of the first respondent's shares. The evidence does not bear that out. The petitioner denied any such action and I accept his evidence.
In so far as the first respondent asserts that the petitioner consented to and encouraged the first respondent to leave and set up a potentially competing firm, taking staff, files and clients with him before the outstanding matters were resolved, then I cannot accept his evidence, and I prefer the evidence of the petitioner.
Mr Murray criticised the petitioner as a witness, making much of his conduct in relation to the disclosure of communications with the Legal Aid Authority following an order of the court. I am not able to conclude that the petitioner was not telling the truth about that matter. As I have already said, allowing for some natural partisan emphasis, I consider that he was essentially an honest witness, as was the first respondent.
Mr Murray submits that consent to the first respondent leaving and practising in the circumstances described while still a director and shareholder is not a freestanding issue separate from the issue of unfair prejudice. It is, he says, a factual issue that simply forms part of the overall circumstances in which the question of unfair prejudice must be considered as a unitary question in the light of the conduct of both parties and all the circumstances. I did not understand Mr Goldberg to dissent from that proposition. He submitted that if he succeeded on the issue of consent then what remained for consideration was the quality of the conduct of the first respondent.
Turning to that question, the issue is: were the company's affairs being conducted in a manner unfairly prejudice to the petitioner as a member of the company? The petitioner's case is simply that both prior to and after leaving the company in June 2017, the first respondent used his position as a director and equal shareholder to affect the business arrangements of the company in ways which were clearly unfairly prejudicial to the petitioner. The petitioner relies in particular upon the following.
Throughout the discussions in relation to the split, and after leaving and setting up his own company, the first respondent's position had been that he would remain a director and shareholder of the company unless and until the petitioner agreed to his financial demands in relation to the sale of his shares and directors' loan account. Further, he submits it was and is the first respondent's position that, as a director and 50 per cent shareholder in the company, no decision could be taken by or in relation to the company without his prior approval, nor could any action be taken by the company without that approval, nor could any agreement or obligation be entered into by the company without that approval. His position was that he was permitted to remain on the company's bank mandate, and indeed to withdraw equivalent sums to the petitioner's salary from the company's account, even in circumstances where he no longer worked at the company; that he was entitled to (and indeed did) use his effective power of veto to prevent the company from renewing its overdraft facility with its bank; and that he was entitled to (and did) prevent the petitioner from taking recovery action in relation to fees owed to the company by its former clients, particularly under CFAs.
The petitioner also submits that any breach of a fiduciary duty by a director is prima facie unfairly prejudicial conduct sufficient to ground an application under section 994, and that such conduct is the very essence of acts which are contrary to good faith and which undermine the relationship of trust and confidence, and that in the absence of any defence of consent being established, the first respondent's actions in setting up in competition, diverting work and poaching staff from the company for his own benefit are clear examples of a breach by a director of his fiduciary duties, and plainly involve the conduct of the affairs of the company in a manner unfairly prejudicial to the petitioner's interest as a shareholder.
In response, Mr Murray first took what he described as a fundamental point, viz that the petitioner's allegations did not relate to the way in which the affairs of the company were being conducted but rather complained that the first respondent had breached his fiduciary and other duties to the company by leaving the company and working elsewhere. Accordingly, the complaint did not fall within section 994 at all.
Mr Murray did not really develop this point orally, and I do not accept it. It ignores the case law to which I have referred, and in particular the statement of Arden LJ in In re Tobian Properties Ltd (above) that non-compliance with directors' fiduciary duties will normally indicate that unfair prejudice within the meaning of the section has occurred.
Next Mr Murray submitted that it was highly unusual for a petition under section 994 to seek an order that the petitioner should buy the shares of another member, and the fact that a petitioner here wishes to acquire the first respondent's shares rather than getting rid of his own shares indicates that he is not unfairly prejudiced by the manner in which the company's affairs are being conducted.
That point is also, in my view, not a good one. It takes no account of the fact that the agreement in principle was that the petitioner would in all probability obtain full ownership of the company by buying out the first respondent, nor of the fact that the petitioner is the only other shareholder. Conduct of the first respondent which affects the company is therefore calculated to damage the petitioner's interests as a 50 per cent shareholder and a projected sole shareholder.
Mr Murray next pointed out that the court must have regard to the conduct of the petitioner as well as that of the first respondent, because the petitioner's conduct can be such as to make the first respondent's conduct not unfair. It may also affect any relief that may be granted. This submission, it seems to me, is clearly correct, and it is allied to a further argument that unfairness must be found as section 994 does not permit a "no-fault" divorce. That, too, is correct. In reaching my conclusion, I have had regard to both parties' conduct and indeed to all the material before me, bearing in mind that, as Mr Murray emphasised, the burden of establishing unfair prejudice rests on the petitioner.
On the essential issue of unfair prejudice, Mr Murray placed weight on a number of matters, in particular that the first respondent reached a point where he considered the chances of reaching agreement with the petitioner on all the terms were remote, and he felt he had no option but to leave and, as he put it, carry the agreement into effect, taking with him some staff and his privately paid work.
On the important question of why he did not resign his directorship when he stopped working for the company, Mr Murray made the following points. The question of the terms on which he would resign his directorship was one of the unresolved matters, and the agreement with the petitioner extended to his leaving without that being resolved. Mr Murray accepts that if (as I have found) his consent point fails then this point, too, falls away.
Next Mr Murray argued that the first respondent did not in fact use his directors' powers and that de facto the petitioner ran the company after the first respondent left. I do not accept that point is valid. It is clear in the light of the material to which I have referred that the first respondent continued to exercise his directors' powers even after leaving. For example, he used the company's bank account to draw out £16,500; he refused to declare a dividend of £89,000 for each of the shareholders, thereby increasing the company's tax bill; and he effectively prevented the company from renewing its bank overdraft facility. These are simply examples, and I have already referred to some of the other matters that are evidenced. It is also clear that the first respondent retained his directors' powers in order to protect his own position, as he himself accepted in paragraph 131 of his witness statement (see earlier in this judgment).
There is a considerable tension between the insistence of the first respondent on the declaration of a dividend which would extinguish his loan account of some £230,000 and the fact that only a few weeks earlier he was under the impression that the company was going bust and had blocked its overdraft facility renewal. I do not consider that there was anything unreasonable in the petitioner's stance on the declaration of a dividend for 2016. The fact that the £800,000 or £900,000 credit in the directors' loan accounts when the company was formed had turned into an approximately £400,000 debit indicates that the directors had been paying themselves more than the company could afford over the whole of that period. Over the five years or so of the company's existence, it appears that the directors’ loan account had decreased by some £1.2 million.
As to the drawing down from the company's account of £16,500 after he had left, Mr Murray described it as a minor complaint, one which was de minimis and for which no relief would be justified. The money, he said, was not stolen but notified to the company. Also it was done to compensate the first respondent for the fact that the petitioner was taking similar sums of £8,000 per month in salary. The problem with this point is first that the first respondent accepts that the petitioner was entitled to some salary, although he says that £8,000 a month was not reasonable, and secondly that the first respondent is and has been doing no work at all for the company.
I regard this drawdown of funds using the first respondent's bank mandate, when he had left the company and was effectively competing with it, as reprehensible and as contributing more than de minimisto the overall establishment of the petitioner's case, bearing in mind also the company's precarious financial position at the time.
In his closing submissions, Mr Murray referred me to the case of Patel v Ferdinand [2016] EWHC 1524 (Ch), a decision of HHJ Purle QC sitting as a Judge of the High Court in an unfair prejudice case. Mr Murray did not rely on it for any groundbreaking statement of legal principle but as an interesting parallel to the present case, given that there were strikingly similar facts, in particular a breakdown in relations between two partners in a two-partner firm of solicitors. The learned judge found that unfair prejudice had occurred because of unauthorised withdrawal of undistributed profits, but he was inclined to order a just and equitable winding up, given that by then both partners had other companies through which to practise. As Mr Murray said, the case is interesting in view of the parallels to this case. However, it does not provide me with much assistance, because cases of this kind are pre-eminently ones which turn on their own specific facts.
In the light of all the evidence, I have reached the firm conclusion that in the present case the affairs of the company have been conducted in a way which unfairly prejudices the petitioner. In seeking to argue to the contrary, Mr Murray was, in my view seeking to make bricks without straw, notwithstanding his very able presentation of his client’s case.
The actions of the first respondent represent the clearest possible breach of directors' fiduciary and statutory duties. The first respondent has exercised his powers as a director not in the best interests of the company but with a view to safeguarding his own interests before leaving and after he had left the company. His manner of leaving produced a disorderly state of affairs from the company's point of view. He encouraged employees to leave without proper notice and to begin work for a competitor without honouring their post-termination contractual restrictions. He took files which belonged to the company and caused a degree of confusion and concern among at least some of the company's clients. He later took funds belonging to the company without proper justification and when the company was in a precarious financial position. He did all this while remaining a director and shareholder of the company, and he retained that directorship in order to protect his own interests and not those of the company.
The breaches of the statutory obligations to act in the best interests of the company and to avoid conflicts of interests are palpable. I find that his conduct in these respects does amount to unfair prejudice to the other shareholder. In my view, there is nothing in the evidence about the petitioner's conduct which prevents or negates what would otherwise amount to unfairness being found established.
Relief
I have a wide discretion as to relief pursuant to section 996 of the Act. I do not consider that I should order a winding up of the company. Although Mr Murray suggested it, he did not press it very hard. In my view, it would not be appropriate. This case is very different in essence from Patel v Ferdinand, where each partner had a separate company to trade. Here the understanding has been that the petitioner should retain the company, subject to buying the first respondent's 50 per cent shareholding at a fair valuation. I can see no justification for departing from that longstanding understanding and agreement in principle, and I propose therefore to make an order of that nature, as proposed by the petitioner, namely that the petitioner buys the first respondent's shares at a fair valuation.
A late issue
The issue, therefore, should now be straightforward. I have already described that the court ordered the instruction of a single joint expert to value the shares. The parties duly jointly instructed that independent expert. He produced a valuation on the two relevant bases. The parties asked some supplementary points to which he responded in writing. So the matter stood until last Friday, the fourth or fifth day of the trial, when Mr Murray raised a new issue on the valuation report which had hitherto been presented to me as, in effect, unchallenged by either party.
Mr Murray produced three draft questions which he suggested I should send to the expert. The questions did not simply ask for clarification of what was in the valuation report but raised issues with which the report had not dealt. In particular, proposed question 2 asked, "What would be the impact on each of your share valuations of a balance on the directors' loan account of £445,000 comprising Mr Taylor £229,000 and Mr Goodchild £215,000 and retained profits of £597,000?" (I have rounded those figures for convenience). Question 3 was extremely convoluted and, as well as raising new issues, was very difficult to understand. Mr Murray accepted that there would need to be some redrafting of the questions.
I refused to permit these questions to be sent to the expert. The issues they raised would have affected the timetable of the trial. There would almost certainly have needed to be a further report by the expert, and cross-examination of him would have been virtually inevitable. An adjournment would have been the likely result. Such a result would have been disproportionate in terms of additional expense and delay and would have been unfair to the petitioner. Mr Murray therefore indicated that he would deal with the matter in submissions.
What the issue amounts to is this. In paragraph 9.9.6 of the expert report, the expert states that:
"... each valuation of the shares of the respondent [ie whether as at March 2018 or June 2017 and whether on a continuing or exiting basis] has been treated separately to any balance owed by/to the company by/to the respondent, an issue which will require separate consideration."
The expert valued the shares on the "maintainable profit" basis rather than on a net asset valuation basis because he said that the recoverable value of the net assets of the company (taking account of the directors' loan accounts) was lower than the value produced by the maintainable profits approach, and that in those circumstances valuations of professional practices should adopt the latter approach.
The first respondent now complains that this leaves him prima facie liable to repay his directors' loan account (or the balance of it after the value of the shares to be paid to him by the petitioner are taken into account).
Mr Murray submitted that in these circumstances I should not adopt the share valuations in the single joint expert's report, but should increase those valuations by some or all of the amount owed by the first respondent to the company. This would wholly, or partly, extinguish his directors' loan account and compensate for the lack of a declaration of dividend in 2016 and 2017. The problem with this submission, as Mr Goldberg points out, is that I would have to descend into the expert’s arena, and in effect decide how much of the first respondent's loan account should be written off as dividend or how much of it should otherwise be added to the value of his shares, but without any material with which to make such an assessment. It is quite impossible for me to do so.
The expert said that the loan accounts would require "separate consideration". I do not consider that it is my role to give them such consideration in the context of this case, nor do I have the wherewithal to do so. If the first respondent had wished the expert to opine on this issue, he should have raised it when the report was received, at the very latest some weeks ago, and when other matters were being raised by the parties with the expert.
I therefore propose to use the valuations in the single joint expert report. I acknowledge that this leaves some matters unresolved between the parties, but that is unavoidable. It would obviously be highly undesirable for there to be further litigation between them, and one hopes that they will find a way of resolving remaining issues without recourse to the courts.
Basis of Valuation
As to the contest between the continuing basis and the exiting basis, Mr Goldberg submits I should use the latter, which produces the lower figure as it reflects what actually happened. Why, he asks, should one use a counterfactual basis which assumes that the company retained the first respondent and his work? Mr Murray, on the other hand, submits that I should split the difference between the two valuations, as the expert did not plump for one or other method as more appropriate. In this respect I agree with Mr Murray, and the purchase order that I make should include a price of £170,500 for the first respondent's 50 per cent shareholding in the company.
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