King & Ors v Kings Solutions Group Ltd

By Application Notice dated 20 December 2019 the Second to Fifth Respondents apply to strike out parts of the Points of Claim served in proceedings under section 994 of the Companies Act 2006 (“section 994”). By a petition presented on 19 March 2018 (the “Petition”) Mr Anthony King and his parents, Mr James King and Mrs Susan King, claim relief in relation to the affairs of the First Respondent, Kings Solutions Group Ltd (the “Company”), which is not an active party and played no part in this application. The Sixth

In this judgment, I will refer to the three petitioners together as the “Petitioners” and to them individually as “Anthony”, “James” and “Susan”. I do so for ease of reference and without intending any disrespect to them. I will also refer to the Second to Fifth Respondents as the “Applicants”. In their Skeleton Argument and throughout the hearing Ms Catherine Addy QC, who appeared with Mr Joseph Sullivan on behalf of the Applicants, referred to them as the “Active Respondents” in contrast to KSSL, which she submitted should not be treated as an active party. Mr Christopher Newman, who appeared on behalf of the Petitioners, did not accept this characterisation. In the event, it was unnecessary for me to decide whether KSSL is – or should be treated as – an active party. But I prefer to employ the neutral expression the “Applicants” to refer to the Second to Fifth Respondents.

The Petition is one of a number of sets of proceedings involving the parties (or a number of them) and it is necessary for me to explain those proceedings briefly as part of the background to the present application. The other proceedings have been issued either under CPR Part 7 or CPR Part 8 and for ease of reference I will use the umbrella term the “Claims” to refer to them collectively. In the following sections of this judgment I deal with the following topics in the following order:

In the Appendix I set out the extracts from the Points of Claim served by the Petitioners which the Respondents have challenged on this application (rather than set them out in the body of this judgment below). I briefly summarise those extracts in section IV (below). Those summaries are no more than that and in deciding this application I have had full regard to the detailed wording of the relevant extracts themselves.

The Company is a holding company for a group of operating companies which provide security and fire services to domestic and commercial customers. Before 20 December 2013 the Petitioners and a family trust called the JPK No

The Second Respondent, Primekings Holding Ltd (“Primekings”), holds all the other issued ordinary shares in the Company. The Third Respondent, Mr Robin Fisher, and the Fourth Respondent, Mr Barry Stiefel, are directors of the Company, KSSL and Primekings. The Fifth Respondent, Mr Geoffrey Zeidler, is the Chairman of the board of directors of both the Company and KSSL. The Petition and the Claims all arise out of the investment by Primekings in the Company which was completed on 20 December 2013.

By a share purchase agreement dated 20 December 2013 (the “SPA”) and made between James and Susan (1) and Primekings (2), Primekings agreed to purchase the 402 ordinary shares in the Company for £2,000,000. £750,000 of the purchase price was payable immediately. The balance of £1,250,000 was to be paid whenever and as soon as Primekings acting reasonably and in good faith determined that the Company could lend or distribute sufficient funds to pay this sum but with the intention of paying it entirely by the third anniversary of completion.

By a second agreement also dated 20 December 2013 (the “Subscription

Schedule 5 to the Subscription Agreement set out the terms on which Anthony could require Primekings to acquire his shares (defined as the “AK Option Shares”). Paragraph 2.2 provided that the consideration was to be their fair value calculated in accordance with paragraph 4. Paragraph 3.3 provided that on completion Anthony was required to deliver stock transfer forms, share certificates and a waiver of any applicable pre-emption rights duly signed by (or on behalf of) all members of the Company. Paragraph 4.1 provided as follows:

“The ‘fair value’ of the AK Option Shares shall be (as agreed between AK and the Investor [Primekings] or, in the absence of such agreement, as calculated by an independent accountant appointed by the board under paragraph 5) of the AK Option

For present purposes, it is unnecessary for me to set out the assumptions on which the independent accountant was to value the AK Option Shares and it is enough to note that he or she was to be appointed by the Company’s board of directors. Paragraph 5 provided for the appointment of the independent accountant who was to act as an expert and not an arbitrator. Paragraph 5.3 provided that the fees of the appointed accountant should be borne equally by the parties.

On completion James and Susan were allotted six B shares which carried no voting rights. Article 31 of the Company’s Articles of Association provided that those shares were to be redeemable over a period of three years at £500,000 per share if the EBITDA of the Company was equal to or greater than £3,000,000 or in accordance with a detailed formula if the EBITDA of the Company was less than that figure. The Company’s obligation to redeem the shares was, however, dependent upon the Company having sufficient distributable profits to do so (or other monies which could lawfully applied for their redemption): see Article 31.10.

The effect of the Subscription Agreement was that Primekings became the owner of c. 76% of the share capital of the Company and Anthony and the Trust retained approximately c. 24%. In November 2014 Primekings voluntarily agreed to reduce its shareholding from c. 76% to c. 60% and also agreed to reduce the number of the Trust’s shares subject to the call option from 402 to 242 ordinary shares. The Company did not have sufficient funds to pay the additional £1,250,000 to James and Susan. But Primekings voluntarily paid this sum to them making the final instalment on 31 March 2015. I was taken to an email dated 24 October 2014 in which Anthony expressed real gratitude to Mr Fisher and Mr Stiefel.

The Applicants described the investment in the Company as a rescue package and the agreements signed and completed on 20 December 2013 as the “Rescue

After the Transaction had been completed and the voluntary reduction by Primekings of its shareholding in the Company the parties held the following shares in the Company:

Ki Finance SARL (“KI Finance”) which had provided additional finance to strengthen the Company’s capital base also held 200m preferred shares of 1p each. It was the Applicants’ evidence that further finance was necessary and that the Company is currently indebted to Primekings for £2,700,000 and to KI Finance for £3,895,000.

After the Transaction James and Susan resigned as directors of the Company and were replaced by Mr Fisher and Mr Stiefel. Mr Peter Swain was also appointed to be a director at the same time. Anthony remained a director of the Company until 20 September 2017. He also acted as the managing director of KSSL.

On 23 April 2014 Mr Swain resigned as a director and on 28 July 2015 the Fifth Respondent, Mr Geoffrey Zeidler, also became a director of the Company. He was later appointed to be a director of KSSL and the Chairman of the boards of directors of both companies.

On 15 July 2015 (and shortly after the final instalment had been paid to James and Susan) the Petitioners issued proceedings against Primekings, Ki Finance,

On 10 February 2016 the Petitioners discontinued the Misrepresentation Claim against Ki Finance and it ceased to be a defendant. I will refer to the remaining defendants as “Primekings” or the “Primekings Parties” (depending on the context). In the Amended Particulars of Claim dated 17 March 2016 the Petitioners made the following allegations against them:

The Petitioners also allege that the pursuit of those goals (which they define as the “Campaign”) amounted to unfairly prejudicial conduct of the affairs of the Company for a number of reasons. Detailed particulars of the Campaign are set out in paragraphs 108 to 203. The Respondents do not challenge the general allegation that there was such a Campaign or all of the particulars of it although Ms Addy was at pains to point out that the Respondents strongly deny these allegations and do not accept that they have a real prospect of success.

The first passage of these particulars and the sixth extract from the Points of Claim which the Applicants challenge is contained in paragraphs 127 to 136 where the Petitioners allege that the Respondents obstructed Anthony from exercising his put option to require Primekings to acquire the AK Option Shares.

Seventhly, the Applicants challenge paragraphs 137 to 139 in which the Petitioners allege that the Primekings Parties applied for and obtained charging orders over their shares with a view to obtaining an order that the charged shares be sold to them at the lowest possible valuation.

Eighthly, the Applicants challenge paragraphs 168 to 171 in which the Petitioners allege that James was served personally with the order requiring him to attend for personal examination under CPR Part 71 to increase pressure on the King family ahead of a possible meeting with Primekings.

Ninthly, the Applicants challenge paragraphs 175 and 176 in which the Petitioners allege that their oral examination and a statement made by leading counsel after the hearing formed part of the Campaign.

Pressure exerted by threat of further costs in respect of the Misrepresentation Action

Tenthly, the Applicants challenge paragraphs 182 and 183 in which the Petitioners allege that the Primekings Parties did not commence detailed assessment of the costs of the Misrepresentation Claim because they believed that the recoverable costs were likely to be no greater than the Interim Costs Order of £1.7m. The Petitioners assert that the threat of detailed assessment was used as part of the Campaign.

The eleventh passage which the Applicants challenge is paragraphs 184 to 191 in which the Petitioners allege that the Part 8 Claim was structured and pursued to result in an expropriation of their shares on unfair terms.

The twelfth passage which the Applicants challenge is paragraph 196 in which the Petitioners plead the payment by DWF’s insurers to satisfy the Interim Costs Order.

The thirteenth extract which the Applicants challenge relates to a letter dated 30 October 2018 from Teacher Stern to Anthony which the Petitioners allege amounted to harassment.

The fourteenth and final extract which the Applicants challenge is paragraphs 198 to 203 in which the Petitioners allege that the claims for costs which the Primekings Parties made in the Part 8 Claim represented an improper attempt to exert pressure on them.

In Section X the Petitioners allege that they have been wrongfully excluded from the Company’s business in breach of their rights as shareholders and in Sections XI and XII they also plead that threats were made to apply for an injunction and to claim a debt of £50,493 from James.

In Section XIII the Petitioners allege that a number of steps have been taken to minimise the possibility that they would be able to vindicate their legal rights. This section includes the allegation that the Respondents prevented Mr King from exercising his put option in June 2017. This sentence was not included in the application but Ms Addy asked me to strike it out on the basis that it was parasitic on extract (6) (above). For this reason, I have included it in the Appendix.

In Section XIV, paragraph 233 the Petitioners allege that the Campaign had serious consequences for the Company’s business. Because of the significance which I attribute to this paragraph I set out the relevant parts:

“233.

The Campaign has had serious consequences for the business and has very significantly contributed to any decline in its fortunes:

a.

Money and management time that could have been spent on investment, servicing customers, and business development, has been squandered on the Campaign. Expenditure on legal expenses has fed through (it is to be inferred) into increased borrowing from from Mr Kirsh’s vehicles, at interest rates of circa 9%.....

c.

The concerted and unjustified efforts of the Respondents (via the Campaign) to damage the reputation of Mr King will, it is to be inferred, have seriously damaged the reputation of the Company itself because of the close association between the Company and the Kings, as its founders. Likewise, the exclusion of the Kings from the Company and the attempt to distance the business from the King family by rebranding it has deprived the Company of the positive benefits to be derived from the Company’s association with the King family, from its longevity as a business, and from the benefit of Anthony King’s skills and reputation.

d.

It is to be inferred from the matters set out herein, including the Respondents’ wilful disregard of the best interests of the Company in failing to file accounts on time, their pursuit of the “Campaign at the expense of the Company, and in their own reliance on the recent asserted poor financial performance of the Company as supporting a low valuation for the Petitioners’ shares, that the Respondents have in other respects damaged at least the short term financial position of the business in ways that are unfairly prejudicial to the Petitioners. The Petitioners reserve the right to amend following disclosure and the taking of an equitable account.”

In Section XV, paragraph 234 the Petitioners contend that the matters set out in Sections V, VII, IX, X, XI, XII, XIII and XIV constitute unfairly prejudicial conduct of the affairs of the Company. In paragraph 235 they also allege that where the matters pleaded relate to events which did not ultimately occur, the Petitioners rely on those events as:

In the prayer for relief the Petitioners seek an order that the Respondents (including KSSL) be jointly and severally liable to purchase their ordinary shares at a fair value to be determined by the Court (and, in the alternative, an order that they purchase the 60% shares held by Primekings). They also seek an order that the Petitioners be jointly and severally liable to purchase their B shares for £2,133,000 and an order that all money expended on the Campaign be reimbursed to the Company.

Finally, I add that it is a key part of the Petitioners’ case that the Campaign has been intended to keep them short of funds and to deny them access to justice. In his witness statement dated 20 March 2020 Anthony stated in paragraph 51.1:

“I should mention that I am only able to have representation due to the kindness of a number of legal professionals who have been willing to act for me on a conditional basis which does not require payment at the outset. Primekings calculates that if I have no money, then I will not be able to pay the sort of adverse costs orders which occur during most pieces of litigation given the ‘pay as you go’ principle, which will eventually (they calculate) stop this claim in its tracks, even though it is overwhelmingly strong on the facts.”

On 19 March 2018 the Petition was presented (as I have stated). On 31 May

On 20 January 2019 the Petitioners served their Points of Claim. On 27 March 2019 the Court extended time for service of the Points of Defence and on 18 April the Applicants served their Points of Defence. By letter dated 18 June 2019 RPC informed Macfarlanes LLP (“Macfarlanes”), who were acting for the Applicants, that they had not filed a Reply because there were likely to be significant amendments to the Points of Claim.

By letter dated 26 June 2019 Macfarlanes put RPC on notice that the Applicants intended to apply to strike out parts of the Points of Claim but stated that they would hold back the application pending receipt of the draft Amended Points of Claim. In letters dated 12 July 2019 and 16 August 2019 Macfarlanes chased for the amendments. In their second letter Macfarlanes asked for confirmation that RPC would provide the draft Amended Points of Claim by 20 September 2019 or they would proceed with preparing a strike out application.

By letter dated 16 September 2019 RPC confirmed that any amendments which the Petitioners intended to make would add to the Points of Claim rather than withdraw any aspect of them. They also stated that it seemed unlikely that the threatened strike out application would be affected by the amendments and that any such application would be doomed to failure.

On 20 December 2019 the Applicants issued the Application Notice. The Costs and Case Management Conference for the Petition which had originally been listed for hearing on 5 and 6 March 2020 was then adjourned pending the determination of the present application.

By letter dated 29 April 2020 Macfarlanes wrote to Claremont Litigation Ltd (“Claremont”), who were by now acting for the Petitioners, stating that the Applicants vehemently denied that there had been any Campaign. However, they also stated that in circumstances where the relationship between the parties had irretrievably broken down, the Applicants wished to find a way in which

In their letter Macfarlanes proposed that Primekings should purchase the

Part 30 of the Companies Act 2006 (the “Act”) is headed “Protection of Members against Unfair Prejudice”. Section 994 provides that a member may petition the Court for an order under that Part (and section 996 sets out the powers of the Court to grant relief). Although the section is very familiar, it is important in the present case that I should it set out:

“994 Petition by company member

(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 Loveridge v Loveridge [2020] EWCA Civ 1104 Floyd LJ recently set out the following propositions which apply to a petition issued under section 994 at [41]:

“A number of uncontroversial propositions can be derived from the authorities cited to this court:

i)

For a petition to be well founded the acts or omissions of which the petitioner complains must consist of the conduct of the affairs of the company: Hawkes & Cuddy (No 2) [2007] EWHC 2999 at [202] per Lewison J; ii) The conduct of those affairs must have caused prejudice to the interests of the petitioner as a shareholder: ibid; iii) The prejudice so caused must be unfair: ibid; iv) A minority shareholder cannot normally complain of conduct which is in accordance with the company's constitution unless he can establish a breach of the rules on which it is agreed that the affairs of the company should be conducted, or the use of those rules in a way which equity would regard as contrary to good faith: O'Neill v Phillips [1999] 1 WLR 1092 at 1099 A-B per

Lord Hoffmann;

v)

Although the term "legitimate expectation" has been used in connection with establishing equitable restraint on the exercise of constitutional power, that expression does not have "a life of its own", supplanting traditional equitable principles: ibid at 1102 B-F.”-

Section 994(1) consists of two limbs. To invoke limb (a) the petitioner must establish that “the company’s affairs” are being or have been conducted in a manner which is unfairly prejudicial. To invoke limb (b) the petitioner must establish that an act or omission of the Company is or would be prejudicial. In Graham v Every [2015] 1 BCLC 41 Arden LJ (as she then was) explained the difference at [37]:

“The requirement in section 994 for an “act or omission of the company” means that the petitioner must identify something which the company does or fails to do. The alternative requirement — that “the company's affairs are being or have been conducted in a manner that is unfairly prejudicial” to members or the petitioner — does not contain the same stipulation. Mr Graham can rely on the actions of some other persons, including his fellow shareholders. But the actions must still amount to the conduct of the company's affairs.”

Limb (a) is, therefore, wider than limb (b) but the petitioner must still show that the actions of the individuals upon which he or she relies can be attributed to the company itself. In the Points of Claim the Petitioners rely for the most part on limb (a) rather than limb (b): see paragraph 234.

The present application also gives rise to two particular issues: First, when it is appropriate for the Court to consider whether the conduct complained of amounts to conduct of Company’s affairs; and, secondly, whether a petitioner may rely on conduct which cannot be attributed to the company in support of an unfair prejudice petition.

As for the first question, there are a number of authorities in which it has been emphasised that the Court should exercise control over the matters which a party can raise in an unfair prejudice petition before the trial. In Re Unisoft Ltd (No 3) [1994] 1 BCLC 609 Harman J struck out large parts of a petition on the grounds that the conduct alleged was not conduct of the affairs of the company or did not affect the petitioner as a member. He stated this at 611e-g:

“Petitions under s. 459 have become notorious to the judges of this court – and I think also to the Bar–for their length, their unpredictability of management, and the enormous and appalling costs which are incurred upon them particularly by reason of the volume of documents liable to be produced. By way of example on this petition there are before me upwards of thirty lever-arch files of documents. In those circumstances it befits the court, in my view, to be extremely careful to ensure that oppression is not caused to parties, respondents to such petitions or, indeed, petitioners upon such petitions, by allowing the parties to trawl through facts which have given rise to grievances but which are not relevant conduct within even the very wide words of the section.

The section requires there to have been conduct of the company's affairs, or an act or omission of the company, so one has to look and see that the activity complained of is an activity in the course of conduct of the company's affairs or is by the company, so that the petitioner can show that the affairs have been conducted in a manner prejudicial to the interests of the members. The requirement of prejudice means that the conduct must be shown to have done the members harm and I believe harm in a commercial sense, not in a merely emotional sense. The further requirement that the prejudice is ‘unfair’ is a more uncertain but necessary thing to show, but before the fairness or unfairness of the conduct or act is considered ‘prejudice’ – that is harm or damage – must be shown. Those requirements set out the basic rules that the court must in my view be careful to insist upon to restrain this procedure from breaking all reasonable bounds.”

In Graham v Every (above) Arden LJ referred to Unisoft with approval. She also referred to the earlier decision of the Court of Appeal (of which she had been a member) in Re Coroin Ltd (No 2) [2013] EWCA Civ 781. In that case, she had encouraged pro-active case management by concentrating on the statutory requirements:

“13.

The requirements relevant to this appeal are that (1) there is an act or omission on the part of the company and (2) that act or omission is unfairly prejudicial to Mr McKillen. 14. These requirements are cumulative. If the court concludes that the first requirement is not satisfied, the second requirement does not arise. Moreover there is nothing to stop the court considering the requirements on the basis most favourable to Mr McKillen and, if it concludes that the case could not succeed on that basis, restricting its consideration of other issues raised. Cases under section 994(1) can be very resource-intensive. This case is an example of a heavy section 994(1) petition since the trial below occupied 30 days of court time. Courts must, where possible, find ways and means of reducing the hearing times for these cases. In this case it may have been possible for significant amounts of court time to have been saved by focusing on the statutory requirements for an act or omission of Coroin which is unfairly prejudicial.”

As for the second question, in Re a company (No 001761 of 1986) [1987] BCLC 141 at 146b-g Harman J gave the following examples of conduct which he did not consider to be conduct of the company:

“Paragraph 7, it is conceded by counsel for the petitioners, is mere narrative and no act by the respondent is averred in it. Paragraph 8 alleges the service on the company of a notice under s 518 requiring repayment of a loan of £75,000 and that the notice was of no effect. As it seems to me, the observation of counsel for the respondent that the allegation is self-cancelling in itself is well-founded. The service of a notice which is of no effect seems to me to be incapable of being unfairly prejudicial or prejudicial to anybody. Secondly, the act of serving or procuring the service of a notice in respect of a loan seems to me to be an act entirely adverse to the company and plainly not taken by the respondent in the course of or as in any way part of the company's business. It is the opposite of being part of the company's business; it is a demand for a personal benefit; personal repayment, in this case, of a loan to the respondent's father. As it seems to me, such an allegation is incapable of being within the section at all. It is not conduct of or in the company's affairs.

Paragraph 9 alleges a board meeting at which the respondent's personal solicitor, plainly acting in her personal interest and plainly not acting in any sense in the company's affairs, asked the petitioners in this petition in their personal and individual capacity to transfer their shares to the respondent and to resign as directors. That seems to me plainly a matter which is not in the course of the conduct of the company's business. It would be an extraordinary thing if one cannot ask for a transfer of shares without being held to be conducting the company's business and, it seems to me, it is, on the face of it, quite incapable of being prejudicial, let alone unfairly prejudicial, to anybody to make such a request.

The final two sentences of that paragraph allege further things said by the solicitor which quite plainly are nothing to do with the company's affairs; they are to do with the conduct, good or bad as it may be, of the petitioners personally and not in any other sense.

Paragraph 10 is conceded by counsel for the petitioners (Mr Hollington) to be narrative, properly there but in no sense conduct of the company's affairs which could be unfairly prejudicial to anybody.”

In Re Unisoft Ltd (No 3) (above) Harman J also held that the acts of the members themselves (such as voting at a general meeting) are not acts of the company nor are they part of the conduct of its affairs: see 611e-g. In Re Coroin Ltd (No 2) (above) Moore-Bick and Rimer LJJ took a similar view in relation to the failure by a shareholder to comply with rights of pre-emption and to comply with an obligation of good faith in a shareholders’ agreement: see, in particular, [145], [150] and [168] to [170].

In both Re Unisoft Ltd (No 3) and Re Coroin Ltd (No 2) the Court was prepared to strike out the allegations which did not relate to the affairs of the Company.

Arden LJ accepted that in the normal case the failure to comply with preemption provisions fell outside section 994(1) but she distinguished both Re Unisoft (No 3) and Re Coroin Ltd (No 2) on the following basis:

“40.

In the normal way, pre-emption agreements fall outside s 994(1) but in the present case the directors were, as I have explained, not to be remunerated by salary but by way of dividend. Thus the size of a director's shareholding would dictate his reward for his work on the Company's business. How directors were to be remunerated and the Company's distributions policy are within the conduct of the Company's affairs. So, by denying Mr Graham's pre-emption right at a time when Mr Graham was still a director, Mr Every was arguably interfering with the way in which the parties had agreed that the Company would remunerate its directors.

41.

On this basis, there is sufficient for this court to allow the allegation to stand on the basis that Mr Graham provides proper particulars to justify Mr Stewart's submission to us that the noncompliant share purchase allegation is an allegation that the affairs of the Company have been or are being conducted in a manner which is unfairly prejudicial to the interest of Mr Graham as a member. There is a possibility that he will be able to do so. The point is important because Mr Graham seeks an order that his present shareholding ought to be valued on the basis that he could have acquired the impugned shares. However, Mr Stewart's submission to us can only be made good if there is an appropriate link between the impugned share sale allegation, the conduct of the Company's affairs, unfair prejudice to Mr Graham and the relief.”

Mr Newman relied on the judgment of McCombe LJ who prefaced his conclusions by stating that one of the problems which has long beset litigation

Vos LJ (as he then was) was the third member of the Court and he held that the pleaded allegations were capable of establishing that the company’s affairs were being or had been conducted in an unfairly prejudicial manner. But he stated this (at [81] and [82]):

“As it seems to me, the petition as presently drafted pleads both that (a) the consequence of the Respondents conduct was that Mr Graham sought to and was unable to increase his influence within the Company: ie that he was diluted, and that as a result (b) the affairs of the Company have been conducted in a manner that is allegedly unfairly prejudicial to his interests. It is true that these allegations are not particularised in the way they should be, and that they do not explain how it is alleged that Mr Every used his control of the impugned shares to take decisions of which Mr Graham did not approve, or why the non-compliant share purchase caused Mr Graham any loss in the way that the Company's affairs were thereafter directed, but those lacunae can be dealt with in the way that Arden LJ has suggested.

As Mr Stewart explained in argument, the allegation is, in effect, that the Respondents denied Mr Graham the additional shares he ought to have had, and have thereafter used their greater control of the Company's affairs to his disadvantage by, for example, excluding him from the management of the Company and reducing the (greater) profit share he would otherwise have had. These matters have been unfairly prejudicial to his interests.”

Mr Newman also relied on the decision of HHJ Wyn Williams QC (as he then was) in Blackmore v Richardson (1 November 2004, unreported) and the decision of Lam I in the Court of First Instance in Hong Kong in Li Guozhu v New Century Iatrical Management Ltd [2018] HKCFI 868. Both cases illustrate the general proposition which I derive from Graham v Every that the actions of a shareholder or even a third party may give rise to actionable unfair prejudice where they are combined with acts or omissions or other conduct on the part of the company.

However, in my judgment Graham v Every also stands for a second, and narrower, proposition. The real difference between the judgments of Arden LJ and Vos LJ (on the one hand) and McCombe LJ (on the other) was that the majority considered it necessary for the petitioner to plead (and then prove) the causal connection or link between the actions of the shareholder or third party and the conduct of the company’s affairs which led to the unfair prejudice: see, in particular, the last sentence of [41] (Arden LJ) and the second sentence of [81] (Vos LJ).

In Graham v Every the Court accepted that it was arguable that there was such a causal link or connection because of the way in which the directors were remunerated. By failing to comply with the pre-emption provision the respondent obtained greater control over the company and was able to dictate the dividend policy and the remuneration which the petitioner was to receive.

Given the very wide-ranging allegations made in the Points of Claim, it seems to me that this is the real issue to which the present application gives rise. Have the Petitioners pleaded a clear link or causal connection between the actions of the Respondents and the conduct of the Company leading to the prejudice of which they complain? I also bear in mind that in Graham v Every the Court of Appeal was (if necessary) prepared to give the petitioner time to make good the defects in his pleaded case and to give particulars of that connection.

The Companies (Unfair Prejudice Applications) Proceedings Rules 2009 apply to unfair prejudice petitions presented under section 994. Rule 2(2) provides that except insofar as they are inconsistent with the Act and those rules, the Civil Procedure Rules 1998 apply to proceedings under Part 30 of the Act with any necessary modifications.

In support of the application Ms Addy relied on CPR Part 1.4 which is headed

“Court’s duty to manage cases”. In particular she relied upon CPR Part 1.4(1) and Part 1.4 (2)(b), (c) and (h), which provide as follows:

“(1)

The court must further the overriding objective by actively managing cases. (2) Active case management includes—…. (b) identifying the issues at an early stage; (c) deciding promptly which issues need full investigation and trial and accordingly disposing summarily of the others;….(h) considering whether the likely benefits of taking a particular step justify the cost of taking it;….”

Ms Addy also relied upon the Court’s general powers of management in CPR Part 3.1 and the power to strike out a statement of case in CPR Part 3.4. The relevant parts upon which she relied were as follows:

“3.1- The court’s general powers of management

(1)

The list of powers in this rule is in addition to any powers given to the court by any other rule or practice direction or by any other enactment or any powers it may otherwise have.

(2)

Except where these Rules provide otherwise, the court may— ….(k) exclude an issue from consideration….(m) take any other step or make any other order for the purpose of managing the case and furthering the overriding objective, including hearing an Early Neutral Evaluation with the aim of helping the parties settle the case.”

“3.4

– Power to strike out a statement of case

(1)

In this rule and rule 3.5, reference to a statement of case includes reference to part of a statement of case.

(2)

The court may strike out a statement of case if it appears to the court— (a) that the statement of case discloses no reasonable grounds for bringing or defending the claim; (b) that the statement of case is an abuse of the court’s process or is otherwise likely to obstruct the just disposal of the proceedings; or (c) that there has been a failure to comply with a rule, practice direction or court order.

(3)

When the court strikes out a statement of case it may make any consequential order it considers appropriate.”

Mr Newman submitted both in his Skeleton Argument and orally that the

Subject to these qualifications, I accept in general terms that the Petitioners have a legitimate expectation that they are entitled to an adjudication of the allegations made in the Points of Claim at trial unless those allegations are liable to be struck out on one or more of the grounds set out in CPR Part 3.4. But this does not mean that they are entitled to take every allegation to trial. In Grove Park Properties Ltd v The Royal Bank of Scotland Plc [2018] EWHC 3521 (Comm) Males J (as he then was) stated as follows at [24]:

“If it will be open to the claimant's counsel to cross examine the bank's witnesses about the Wyatt Proceedings, it may be asked whether it matters whether the claimant's case about those proceedings is set out in the pleadings in this action. In my judgment it does. Statements of case should be as concise as the nature of the case allows and should plead only material facts, that is to say those which are necessary to formulate a cause of action or defence, not background facts or evidence: Tchenguiz v Grant Thornton LLP [2015] EWHC 405 (Comm), [2015] 1 All ER (Comm) 961 . It is wrong in principle to plead matters which do not support or relate to any of the remedies sought and to plead immaterial matters with a view to obtaining more extensive disclosure than might otherwise be ordered: Charter UK Ltd v Nationwide Building Society [2009] EWHC 1002 (TCC) at (the second) [15]. To do so is likely to complicate or confuse the fair conduct of proceedings.”

I add that in my judgment it is equally wrong in principle to plead matters which do not support or relate to any of the remedies sought or to plead immaterial matters with a view to re-opening issues which have been decided in earlier proceedings (or which would have been decided if the claimant or petitioner had not discontinued those proceedings).

I turn now, therefore, to the effect of discontinuance. CPR Part 38.7 deals with the effect of discontinuance on subsequent proceedings. It provides as follows:

“A claimant who discontinues a claim needs the permission of the court to make another claim against the same defendant if— (a) he discontinued the claim after the defendant filed a defence; and (b) the other claim arises out of facts which are the same or substantially the same as those relating to the discontinued claim.”

In Westbrook Dolphin Square Ltd v Friends Provident Life and Pensions Ltd [2011] EWHC 2302 (Ch) Arnold J considered how the Court should approach the application of this provision. He stated (at [45]):

“Counsel for Friends Provident submitted, and I accept, that the principles identified by the maxims nemo debet bis vexari pro una et eadem causa (no-one should be vexed twice in respect of one and the same cause) and interest reipublicae ut sit finis litium (it is in the public interest that there be an end to litigation) should inform the court’s approach to CPR 38.7. In my judgment it follows that there is an analogy between the principles to be applied to an application under r. 38.7 and those applied by the courts under CPR r. 3.4(2)(b) with respect to Henderson v Henderson abuse of process. The main difference I perceive is that under r. 38.7 the onus lies upon the applicant to show that it should be given permission to bring the new claim, whereas under r.3.4(2)(b) the onus lies upon the defendant to show that the new claim is an abuse of process. ”

Although the decision was overturned on appeal (see [2012] EWCA Civ 666) this analysis was not the subject of any criticism by the Court of Appeal. But in any event Briggs LJ (as he then was) adopted a similar approach in Hague Plant Ltd v Hague [2014] EWCA Civ 1609 at [60] and [61]:

“… it seems to me that the rule leaves it to the court to decide whether to grant or refuse permission having regard, as I have said, to the public interest in finality. It is true that the Notes to the current edition of the White Book use the phrase ‘exceptional circumstances’ as characteristic of the sort of explanation likely to be required in an application for permission under Pt 38.7, but it is dangerous in my view to erect that as a test imposed by the rules, not least because of its inherent uncertainty. To that limited extent the judge may have mis-described the ambit of the court’s discretion to give such permission. The real question for the judge was whether, having abandoned the de facto directorship claim in the light of Jean Angela’s Defence (in which the other defendants precisely concurred) a sufficient explanation was offered for its re-introduction to overcome the court’s natural disinclination to permit a party to re-introduce a claim which it had after careful consideration decided to abandon.”

In the present case, Ms Addy did not seek to persuade me that the allegations made in the Misrepresentation Claim and in the Petition were identical. It is necessary, therefore, for me to consider the effect of CPR Part 38.7(b). There is an obvious analogy between that provision and CPR Part 17.4(2) (which deals with the circumstances in which a party may be permitted to amend to add a new claim after a limitation period has expired). Mr Newman drew my attention to the White Book Vol 1 at 17.4.4.3 (p.644) where it is stated that the expression

“the same or substantially the same as” is not synonymous with “similar”. That passage continues:

“A new claim does not arise out of the same or substantially the same facts as the original claim if it puts the defendant in the position of being obliged to investigate facts and obtain evidence well beyond the ambit of the facts that the defendant could reasonably be assumed to have investigated for the purpose of defending the original claim.”

In Ward v Hutt [2018] 1 WLR 1789 HHJ Matthews considered the scope of CPR Part 38.7(b). In that case a liquidator discontinued a misfeasance claim against two directors for payments made in breach of fiduciary duty but then commenced a second claim against them in their capacity as partners of the recipient firm on the basis that the payments were a preference. The judge held that the second claim arose out of substantially the same facts and that CPR Part

In addition to CPR Part 38.7 Ms Addy relied upon Henderson v Henderson abuse of process. The decision of the House of Lords in Johnson v Gore Wood & Co [2002] 2 AC 1 remains the leading authority even though that part of the decision dealing with the so-called principle of reflective loss has recently been subjected to scrutiny by the Supreme Court in Marex Financial Ltd v Sevilleja [2020] 3 WLR 255. Lord Bingham (with whom three other members of the House of Lords agreed) explained the general principle at 31A-F:

“But Henderson v Henderson abuse of process, as now understood, although separate and distinct from cause of action estoppel and issue estoppel, has much in common with them. The underlying public interest is the same: that there should be finality in litigation and that a party should not be twice vexed in the same matter. This public interest is reinforced by the current emphasis on efficiency and economy in the conduct of litigation, in the interests of the parties and the public as a whole. The bringing of a claim or the raising of a defence in later proceedings may, without more, amount to abuse if the court is satisfied (the onus being on the party alleging abuse) that the claim or defence should have been raised in the earlier proceedings if it was to be raised at all. I would not accept that it is necessary, before abuse may be found, to identify any additional element such as a collateral attack on a previous decision or some dishonesty, but where those elements are present the later proceedings will be much more obviously abusive, and there will rarely be a finding of abuse unless the later proceeding involves what the court regards as unjust harassment of a party. It is, however, wrong to hold that because a matter could have been raised in earlier proceedings it should have been, so as to render the raising of it in later proceedings necessarily abusive. That is to adopt too dogmatic an approach to what should in my opinion be a broad, merits-based judgment which takes account of the public and private interests involved and also takes account of all the facts of the case, focusing attention on the crucial question whether, in all the circumstances, a party is misusing or abusing the process of the court by seeking to raise before it the issue which could have been raised before. As one cannot comprehensively list all possible forms of abuse, so one cannot formulate any hard and fast rule to determine whether, on given facts, abuse is to be found or not. Thus while I would accept that lack of funds would not ordinarily excuse a failure to raise in earlier proceedings an issue which could and should have been raised then, I would not regard it as necessarily irrelevant, particularly if it appears that the lack of funds has been caused by the party against whom it is sought to claim. While the result may often be the same, it is in my view preferable to ask whether in all the circumstances a party's conduct is an abuse than to ask whether the conduct is an abuse and then, if it is, to ask whether the abuse is excused or justified by special circumstances. Properly applied, and whatever the legitimacy of its descent, the rule has in my view a valuable part to play in protecting the interests of justice.”

Lord Bingham also confirmed that the principle may apply where the claim is brought by a different party and the action results in a settlement or compromise rather than a judgment: see 32C-33A. In Aldi Stores Ltd v WSP Group plc [2008] 1 WLR 748 the Court of Appeal also confirmed that there is no rule of law that there cannot be an abuse of process unless the defendants in the new action have a sufficient identity with the defendants in the original action: see [10]. However Thomas LJ stated that the fact that the defendants were different is a powerful factor in the application of the merits-based judgment identified by Lord Bingham.

In Ward v Hutt (above) HHJ Matthews struck out the liquidator’s new claim on the ground that he had not complied with CPR Part 38.7. However, he declined to strike it out on the basis that it involved Henderson v Henderson abuse of process (although he held it was an abuse for other reasons). After citing the judgment of Lord Sumption in Virgin Atlantic Airways Ltd v Zodiac Seats UK Ltd [2014] AC 160 at [17] to [24] he held that Henderson v Henderson abuse of process could have no application where a claimant discontinued one claim but then commenced another. He said this at [51] and [52]:

“50.

It is therefore clear that the principle exemplified by the decision in Henderson v Henderson is properly to be treated as part of the rules of res judicata; hence the formulation of the summary of the relevant rules in para 22 of the judgment of Lord Sumption JSC, set out above. It was accepted at the hearing by the first and second respondents that there could be no question here of any issue estoppel because the first claim had been discontinued. Yet they argued that the principle in Henderson v Henderson could nevertheless apply. But, since there was no decision on the first occasion and the Henderson v Henderson principle is part of the rules of res judicata, I struggle to see how the principle is relevant.

51.

On the other hand, where the claim does not progress so far as to be decided, but is instead discontinued, there are the rules in CPR Pt 38. The relevant rule, which I have already set out and discussed, is rule 38.7. This deals with the situation where, if there had been a decision on the first claim, there could have been an argument, if a second claim were brought, that some aspect of res judicata should apply, whether it was because of cause of action estoppel, issue estoppel, or the Henderson v Henderson principle. Rule 38.7 provides that in circumstances where the claim is to be brought against the same defendant as before and based on the same or substantially the same facts, there is a requirement to obtain the permission of the court before bringing the fresh claim. As it seems to me, that is sufficient protection for defendants facing a second bite at the cherry. It enables the court to intervene and prevent injustice, in exactly the same way as the court may do in the case of res judicata.”

Ms Addy and Mr Sullivan argued that Ward v Hutt was wrong because the judge wrongly interpreted Virgin Airways as re-drawing the boundary between res judicata and abuse of process and treating the principle in Henderson v

Henderson as part of the law of res judicata. I accept that submission. It is important to understand the argument in Virgin Airways and Lord Sumption set it out at [23]:

“It was submitted to us on behalf of Virgin that recent case law has re-categorised the principle in Henderson v Henderson 3 Hare 100 so as to treat it as being concerned with abuse of process and to take it out of the domain of res judicata altogether. In these circumstances, it is said, the basis on which Lord Keith qualified the absolute character of res judicata in Arnold v National Westminster Bank by reference to that principle is no longer available, and his conclusions can no longer be said to represent the law.”

Lord Sumption rejected this submission and with it the argument that a claim could not be the subject matter of a cause of action estoppel even though circumstances had changed and material was available which had not been available before. He concluded that the principle in Henderson v Henderson could be the subject matter of a cause of action estoppel. But he was not suggesting that the Court had no power to stay or strike out proceedings for Henderson v Henderson abuse where there was no cause of action or issue estoppel. This is clear from his analysis of Johnson v Gore Wood (above) at [25]:

“It was clearly not the view of Lord Millett in Johnson v GoreWood that because the principle in Henderson v Henderson was concerned with abuse of process it could not also be part of the law of res judicata. Nor is there anything to support that idea in the speech of Lord Bingham. The focus in Johnson v Gore-Wood was inevitably on abuse of process because the parties to the two actions were different, and neither issue estoppel nor cause of action estoppel could therefore run…..Res judicata and abuse of process are juridically very different. Res judicata is a rule of substantive law, while abuse of process is a concept which informs the exercise of the court's procedural powers. In my view, they are distinct although overlapping legal principles with the common underlying purpose of limiting abusive and duplicative litigation. That purpose makes it necessary to qualify the absolute character of both cause of action estoppel and issue estoppel where the conduct is not abusive. As Lord Keith put it in Arnold v National Westminster Bank plc [1991] 2 AC 93, 110G, “estoppel per rem judicatam, whether cause of action estoppel or issue estoppel, is essentially concerned with preventing abuse of process”.”

In my judgment, it remains open to a party to rely upon Henderson v Henderson abuse of process where the first claim has been discontinued as well as resulting in a judgment or compromise. With the greatest of respect to HHJ Matthews, his decision on this point was not necessary for his decision because he had already decided to strike out the claim for failure to comply with CPR Part 38.7. However, the point is of much more than academic significance in the present case because the respondents to the Petition include a number of parties (and, in particular, Mr Stiefel) who were not defendants to the Misrepresentation Claim.

In the Points of Claim the Petitioners continue to assert that they believe that they were induced to enter into the Transaction by representations which were untrue and also that the assurances which Mr Stiefel gave to them after completion confirmed that belief: see extract (1). In my judgment those paragraphs should be struck out for a number of reasons.

First, the Petitioners do not allege that any of the facts and matters pleaded in these paragraphs constitute conduct of the affairs of the Company or that the relevant conduct was unfair or that it caused prejudice: see paragraph 234.

Secondly, I am satisfied that CPR Part 38.7 is engaged and since there was no application for permission to make that claim I strike out extract (1) under CPR Part 3.4(2)(c) for failure to comply with that provision. I say this for the following reasons:

Ms Addy applied to strike out extract (2) on the basis that it related to two acquisitions which were contemplated by the Subscription Agreement but never went ahead. She also submitted that there was no allegation that this conduct was unfairly prejudicial. I am not prepared to strike out these paragraphs for the following reasons:

In his Skeleton Argument Mr Newman also submitted that this conduct amounted to a breach of fiduciary duty and relied on these allegations as similar fact evidence. The Petitioners do not, in fact, plead that Mr Fisher, Mr Stiefel and Mr Swain committed any breaches of their duties as directors in relation to these matters. But when I put this point to counsel it was common ground between Ms Addy and Mr Newman that it was not necessary for them to do so (despite the general allegation in paragraph 107). Finally, I add that I was not persuaded that it was permissible to plead these allegations on the basis that they provided similar fact evidence. But in the event, it was unnecessary for me to consider this point further.

In extract (3) the Petitioners repeat the allegation that they believed that they had been the subject of an actionable misrepresentation. They also state that

In paragraph 96 e. the Petitioners allege that Primekings’ efforts in the Part 8 Proceedings to take the B Shares from the King family was evidence of the lengths which Primekings is prepared to go to deny them their lawful entitlements. For the reasons which I set out below in relation to extract (7) I am not prepared to strike out this paragraph.

In my judgment, paragraphs 97 to 101 of extract (5) should also be struck out for very similar reasons to extracts (1) and (3). In particular:

The Petitioners also allege that the lawyers who acted for them in the Misrepresentation Claim were negligent: see paragraph 102. However, they plead in terms that this negligence is not relevant to these proceedings. The only possible reason for the Petitioners to introduce this allegation is because they wish to challenge or explain DWF’s conduct of the earlier claim and the evidence which they gave. In my judgment, this is not a permissible reason for pleading this allegation and it is likely to complicate or confuse the fair conduct of the Petition: see Grove Park (above). The Applicants should not have to deal with a challenge to DWF’s evidence or an attempt to explain it away. Nor should they have to defend an allegation that DWF or other lawyers were negligent.

Paragraph 104 falls into a slightly different category. In that paragraph the

In extract (6) the Petitioners allege that the Applicants prevented or obstructed Anthony from exercising the call option to require Primekings to buy the AK Option Shares. They allege that this was a breach of contract by Primekings but also part of the Campaign. Ms Addy submitted that these paragraphs contained allegations relating to the conduct of Primekings and did not involve any conduct of the affairs of the Company.

Viewed in isolation, I would have accepted that submission. Even though Schedule 5, paragraph 4.1 (above) involved the Company in the valuation process, it seems to me that there is no real difference between the allegations made here and the allegations made in Re a company (No 001761 of 1986) and Re Coroin Ltd (No 2). Moreover, it is impossible to see how the failure by Primekings to acquire the AK Option Shares from Anthony could have prejudiced his ability to influence or control the conduct of the affairs of the Company.

However, in the present case the Petitioners also allege that this conduct formed part of the Campaign to deprive them of their shares, to exclude them from the business of the Company and to deprive them of their ability to vindicate their legal rights: see paragraph 106. No application has been made to strike out that paragraph nor indeed to strike out other allegations relating to the Campaign which clearly do involve the conduct of the Company’s affairs. See, for example, paragraphs 108 to 126, paragraphs 172 to 174 and paragraphs 177 to 181 which are all concerned with the removal of Anthony as a director.

I turn therefore to the question which I posed in [96] (above). Have the Petitioners pleaded a clear link or causal connection between the actions pleaded in paragraphs 127 to 136 and the conduct of the Company leading to the prejudice of which they complain? Not without some hesitation, I have to come to the conclusion that the Petitioners have pleaded a sufficient link or connection. I say this for the following reasons:

Ms Addy submitted that I should strike out paragraph 104 and extracts (4) and (7) to (14) for two reasons: first, because all of the pleaded allegations are against the Primekings Parties in their personal capacity and did not form part of the conduct of the Company; and, secondly, because the Petitioners had already made materially similar complaints in the Part 8 Claim and it was an abuse of process to re-litigate them.

Conduct of the affairs of the Company: I do not accept the first submission. Again, viewed in isolation I would have accepted that most (if not all) of the allegations made in extracts (4) and (7) to (14) involved personal conduct and did not form part of the conduct of the Company’s affairs. However, for the reasons which I have set out in relation to extract (6), I am satisfied that the Petitioners have pleaded a sufficient causal link or connection between the personal conduct, the conduct of the affairs of the Company and the prejudice which they have suffered.

Abuse of Process: In relation to the second submission, however, it is necessary in my judgment to distinguish the allegations made by the Petitioners in relation

Extracts (7), (11), (12) and (14) (together with paragraphs 96 e. and 104) are all concerned with the Part 8 Claim and, in particular, with the enforcement of the charging orders by obtaining an order for the sale of the Petitioners’ shares. Again, not without some hesitation, I have come to the conclusion that it is not an abuse of process for the Petitioners to advance those allegations in the Points of Claim. I reached that conclusion for the following reasons:

I have considered whether I should exercise my wider case management powers to exclude these allegations and I have decided that I should not do so for the reasons which I have set out in relation to extract (8). I will not, therefore, strike out paragraph 96 e. or paragraph 104 or extracts (7), (11), (12) and (14).

Extracts (8) and (9) are concerned with the oral examination. In extract (10) the Petitioners also allege that the Primekings Parties put improper pressure on them by the threat of detailed assessment proceedings when they knew that they would recover no more than the amount in the Interim Costs Order. In extract

Ms Addy drew my attention to the fact that CPR Part 71.3 requires an order under CPR Part 71.2 to be served personally on the creditor not less than seven days before the hearing. She also pointed out that the Petitioners were in breach of the Interim Costs Order and that the Primekings Parties were well within their rights to issue an application under CPR Part 71 (and it was not suggested otherwise). She also pointed out that extract (8) is now factually incorrect because Primekings has issued detailed assessment proceedings which are shortly due to be heard.

Ms Addy submitted that I should strike out extracts (10) and (13) on the basis that the Court will determine whether Primekings is entitled to an order for payment of further sums by way of costs in the detailed assessment proceedings and that if they are entitled to a further payment, the allegations in extracts (10) and (12) will fall away. She also pointed out that the Petitioners’ lack of funds and reliance upon solicitors and counsel who were prepared to act on a conditional fee basis cut both ways. If the Petition is dismissed, then the Respondents will have very little prospect of recovering their costs. I should, so she submitted, limit the issues before the Court as much as possible.

Mr Newman submitted that there was no principle of a “proper forum” and that the Petitioners were perfectly entitled to raise the same issues in different sets of proceedings at the same time. He relied on Grove Park Properties Ltd v The Royal Bank of Scotland plc (above) as authority for the proposition that a party may rely on earlier litigation in subsequent proceedings or at the same time for different purposes.

Mr Newman also submitted that the detailed assessments of the costs of the Misrepresentation Claim and the Part 8 Claim would not determine the issues

In my judgment, the Court undoubtedly has jurisdiction to strike out or stay extracts (7) to (14) under CPR Part 3.1(1)(k) and (m) in the exercise of its case management powers and the authorities encourage the Court to exercise those powers proactively. However, I am not prepared to strike out extracts (7) to (14) for the following reasons:

Mr Newman also submitted that I should not strike out any of the extracts which the Applicants challenged because KSSL had made no application to strike them out. In the event, I need only consider this submission in the context of extracts (1), (3) and (5). Whether or not KSSL is an active party in the present proceedings, I reject that submission. KSSL was not a party to the Misrepresentation Claim and the allegations which I have struck out have no relevance to any claim against it. In fairness to him, Mr Newman did not press this point hard.

For these reasons I strike out the paragraphs set out in extracts (1), (3) and (5) shown in the Appendix (below) (apart from those parts shown in square brackets and in bold). I dismiss the application to strike out the paragraphs in extracts (2), (4) and (6) to (14). I leave it to the parties to agree a Minute of Order and, if possible, the appropriate costs order. If they are unable to do so, I will determine the incidence of costs on paper.