Hough & Ors v Hardcastle & Ors

SIR DONALD RATTEE: This is an application under CPR 3.4 and 24.2 for orders striking out or dismissing a petition under section 459 of the Companies Act 1985 because it discloses no grounds on which the petition has any real prospect of success. The petition alleges, as it has to in order to come within section 459, that the affairs of Grandactual Limited (“the Company”) are being and have been conducted by the first to third respondents to the petition in a manner which has been unfairly prejudicial to the interests of the petitioners as shareholders. By the petition the petitioners seek an order that the first to third respondents be ordered to purchase the shares in the Company held by the petitioners at a price to be determined by the court.

The Company operates a restaurant in Cockspur Street, just off Trafalgar Square in London. The theme adopted by the restaurant is what is called “Tex Mex” and it is called the Texas Embassy. It was the idea of the first to third respondents, who are United States’ citizens. Finance was to be raised by a private placement of shares and a prospectus was issued inviting investment. The original prospectus contemplated a need for US$1.6 million in order to launch the project. The prospectus set out the proposed share structure of the company intended to operate the restaurant. There would be three classes of shares: A shares, which would be voting shares; B shares, which would be non-voting ordinary shares; and C shares, which would be redeemable, non-voting cumulative preference shares. The nominal capital of the Company was originally £41,000, divided into 100,000 A shares of one penny each and 2 million each of B and C shares in the same denomination. The scheme was that control of the Company by means of holding A shares was to be in the developers, i.e. the first to third respondents, although the fourth petitioner was also involved in the management of the Company and he came to hold 10,000 A shares. So between them the first to third respondents and the fourth petitioner held all the A shares in the Company. Other investors would subscribe for C shares. The investor would have an option to acquire all the B shares at a nominal value which could only be exercised when all the C shares had been redeemed. Until the C shares had been redeemed, they would carry cumulative preference dividends payable, if funds were available, or otherwise rolled up and carried forward. Until the C shares had been redeemed, profits would be split 90/10 in favour of the investors until the payments reached by them were sufficient to redeem their C shares, at which point they would subscribe for B shares and future profits would be divided 50/50 between the A shareholders and the B shareholders.

This intended structure of the Company was confirmed by a stockholders agreement dated 1^st February 1994, of which clause 2.1 provided as follows:

“Until Class C Stock has been redeemed, whenever, in the discretion of the Board of Directors, it is determined that the Company has sufficient reserves available, 90% of such cash shall be committed to the redemption of shares of Class C Stock at the redemption price, pro rata among Class C Stockholders as a dividend. When all shares of Class C Stock have been redeemed, all cash dividends and other distributions shall be distributed in the proportion of 50% of the Class A Stockholders and 50% to the Class B Stockholders. For the purposes of this agreement the redemption price per share of Class C Stock shall be the Pounds Sterling amount of the original subscription price paid per share of Class C Stock. All distribution from the Company by way of dividend or otherwise shall be included in determining when the redemption price per share of Class C Stock has been paid in full.”

The prospectus also explained that the operating company would enter into a licensing agreement with a company which would own the intellectual property and the trademarks, service marks and logos that would be used by the operating company in running the restaurant. I quote from the prospectus:

“The licensing company will be owned proportionately as the operating company is owned, i.e. each investor will own the same percentage interest in the licensing company as the investor owns in the operating company. The investors will share dividends exactly as they share in the operating company. It is contemplated that the licensing company will receive a royalty equal to two percent of the gross sales of the operating company, but the final royalty will be determined by regulatory and tax considerations.”

The Company became the operating company contemplated by the prospectus, and an Isle of Man company, Injebreck Limited (“IL”), became the licensing company. The proposed capital structure of the company was embodied in amended articles of association adopted by the Company on 22^nd October 1993. In accordance with those articles the Company’s share capital is divided into three classes: A shares, B shares and C shares. The relevant articles of association provide as follows, and I quote from paragraph 6 of the petition:

“(1)

By Article 15, the Class A Shares are ‘ordinary voting shares’;

(2)

By Articles 16 and 17, the Class B Shares are non-voting shares (subject to the provisions of Articles 11 and 28) and are to ‘rank pari passu with the Class A Shares regarding repayment of capital on a liquidation’; by Article 7, the Company cannot issue any Class B Shares while there are any Class C Shares in issue.

(3)

There are the following provisions relating to the Class C Shares:

(a)

By Article 19, subject to the provisions of Articles 11 and 28, the Class C Shares are ‘non-voting redeemable cumulative preference shares’;

(b)

by Article 20, the Class C Shares carry the right to a cumulative fixed dividend of 3% per annum, to be paid in preference to all other dividends on any other shares;

(c)

by Article 21, the Class C Shares are to be redeemed out of ‘Surplus Funds at the Redemption Price, at such time or times as the directors may resolve and in any event, but subject to the availability of Surplus Funds, all issued Class C Shares shall be redeemed on or before 31^st December 2003’; (‘Surplus Funds’ means the Company’s net profits after deducting taxation, certain other adjustments and any preferential dividend) (Article 1);

(d)

by Article 22, Surplus Funds in excess of 10% of the nominal value of the issued Class C Shares have to be used by the directors to procure the redemption of 10% of the outstanding Class C Shares;

(e)

by Article 27, the holders of the Class C Shares are entitled to be repaid the capital paid up on such Class C Shares together with any arrears of dividends and to be paid in priority to the Class A and Class B Shares.”

I should refer to certain other articles. Articles 4 and 5 are as follows:

“4.

Subject to any direction to the contrary which may be given by the Company in general meeting, but subject as hereinafter provided, the directors are unconditionally authorised to allot, make offers or agreements to allot, create, deal with, grant options over or otherwise dispose of relevant securities within the meaning of section 80(2) of the Act to such persons, including any director, on such terms and at such times as they think fit, but no shares will be issued at a discount.

5.

The maximum nominal amount of share capital which the directors may allot or otherwise dispose of in accordance with Article 4 is the nominal amount of unissued shares at the date of adoption of these articles of association, as the articles of association of the Company or such other amount as is authorised by the Company in general meeting.”

Article 11 provides, so far as material:

“Whenever the capital of the Company is divided into different classes of shares, the special rights attached to any class may be varied or abrogated only with the consent in writing of the holders of 75% in nominal value of the issued shares of that class, or by a special resolution passed at a separate general meeting of the holders of that class. Without prejudice to the generality of the foregoing, the following shall be deemed to be variation or abrogation of class rights:

11.2

In relation to Class B shares and Class C shares, the creation or issue of any new shares not being Class A shares having rights ranking pari passu or above Class C shares or Class B shares.”

A license agreement dated 13^th December 1993, as contemplated by the prospectus, was entered into between IL and the Company which provided, amongst other things, that beginning on 1^st January 1998 the Company should pay IL an annual licence fee of 2% of the Company’s gross sales revenue in consideration of a licence to use the intellectual property vested in IL in connection with the proposed restaurant business of the Company.

As a result of the original prospectus which sought to raise US$1.6 million, the first to third respondents (the Hough family) subscribed for and were allotted an aggregate of 300,000 C shares in the company, and the fourth and fifth respondents (the Traill family) took 100,000 C shares.

By February 1994 it had become clear to the respondents that more money would have to be raised. On 19^th February 1994 the second respondent wrote a letter to the Class C shareholders, which included the following:

“Finally, several of you have indicated your desires regarding taking or not taking your pro-rata part of any additional monies we may raise. However, some of you have not indicated any inclination, one way or the other, and it would be helpful to us to have some general idea from you. Obviously we don’t expect a commitment at this time. We won’t know for a little while whether this will be necessary or exactly how much, but as we do we’ll keep everyone posted.”

This drew a response by the first respondent by a letter of 24^th February 1994, which included the following:

“I told you in December that our four family involvements would accept the dilution if the investment capital was increased to $1,700,000, but I would ask you to ignore that advice. If you now decide to pull in more cash, we would almost certainly like to participate to ensure that we at least hold our percentage stake. Not to do so, once everything is moving, would be absurd. I would suggest, however, that, while I appreciate your expressed view with regard to not wishing to borrow, the cash flow pattern in respect of set-up costs as at opening and income time could enable you to avoid raising further cash. It seems pointless to pull in more than necessary.”

When an offer of the opportunity to subscribe for further shares was in fact subsequently made, the Hough family did increase its holding to 450,000 such shares. The Traill family did not subscribe for further C shares.

The restaurant opened for business on 24^th February 1994. By November 1994 it became apparent that further finance was required for the Company and an offer of £233,333 of convertible debentures convertible into B and C shares in the Company was made and communicated to, amongst others, the first and fourth petitioners. Neither took up the offer, but others did. A resolution of the directors of the Company, i.e. the first to third respondents and the fourth petitioner, to authorise the issue of convertible debentures dated 28^th July 1995 was signed by the fourth petitioner as director and secretary of the Company. He was a director of the Company from 1992 to 1997 and was its secretary from 1993 to 1997. When, as secretary, the fourth petitioner came to issue share certificates for the additional C shares, he realised that the issue of such additional shares took the C shares purportedly issued to 2,485,938, whereas the Company’s authorised capital included only two million such shares. There is in evidence a resolution in writing of the directors of the Company purporting to create an additional two million C shares. It is signed by all the directors, including the fourth petitioner. Apparently no one at the time appreciated the need for a meeting of Class C shareholders to approve the creation of such new shares under article 11 of the Company’s articles of association.

The restaurant prospered. However, there has been no redemption of the Class C shares in the Company pursuant to the articles. According to evidence of the second respondent, which is not disputed, in early 1999 the Company was in a position to start to redeem its C shares. However, it was then realised that there was what appears to be a clear mistake in the drafting of the articles of the Company in that they provide for redemption at the one penny nominal value of the C shares instead of what it is common ground was the intention of the parties and was included in the stockholders agreement as the price paid by the C shareholders, namely 66.6 pence per share. The directors of the Company took the view that in these circumstances the Company could not properly pay more than the one penny authorised by the articles without problems arising under the United Kingdom company law.

The problem was explained to all the shareholders by a letter from the second respondent dated 28^th April 1999, from which I quote:

“All of this brings me to the myriad of topics I now need to discuss with you. To begin with, we are trying to make a distribution out of both Grandactual and Injebreck to you, the Class C shareholders. In fact, I have been working on this with my partners for many months. We have the money to distribute for 1998. The problem has been a wide variety of legal nits here and there, of which I have sorted out several, but have a few remaining. One of the problems is that the Articles of Association for Grandactual are incorrect and do not conform to the Shareholders Agreement. I have to get this corrected before I can go to the next step in making a distribution. The problem with the Articles is that they only address the Nominal Value of the Class C shares as being the basis for redemption, but in fact you are entitled to the Nominal Value and the Paid in Share Premium. The nominal value per share is one pence, but the Paid in Share Premium is approximately 65 pence. So I have to amend the Articles. To do that I have to call an Extraordinary General Meeting (‘EGM’) of the shareholders to vote this in. You can help me to speed up this process in two ways.

First, you can agree to consent to a short notice period for the EGM and secondly, you can give me your proxy. WE HAVE TO GET 95% TO AGREE TO SHORT NOTICE AND 75% TO AGREE TO CHANGE THE ARTICLES. Since I can’t imagine any of you seriously wishing to redeem for 1 pence what you are entitled to get 65 pence for, my only concern is that you please FAX to me [number given] the Consent Form and the Proxy which are enclosed herein just as soon as possible, so that we may get on to the next step. For your convenience, I am including the Special Resolution to reflect this change in the Articles so you can see what we are talking about. If there are any questions, please feel free to telephone or e-mail me.”

The petitioners refused to support this proposed amendment of the articles of association of the Company because at least the first petitioner had since 1995 been dissatisfied with the fact that, when additional Class C shares were issued to raise for the Company money over and above the $1.6 million originally raised, there was no adjustment of the profit sharing rights as between A and C shareholders in the Company to take account of the fact that the proportion of overall finance being put into the Company by the C shareholders had increased over that originally intended when the structure of the Company was originally agreed, on the basis of which the petitioners had subscribed for C shares. It is apparent from documents in evidence that such complaint was made by the first petitioner to the second respondent as early as 1995. So relations between the petitioners and the respondents apparently became soured and, therefore, according to the first petitioner, by 1999 the petitioners were not prepared to be cooperative in any proposals made by the second respondent to deal with the proposed amendment of the Company’s articles. No similar problem stopped redemption of the C shares in IL, although its articles were in similar form, apparently because, so the second respondent was advised, unlike the Company, IL had a positive retained surplus and no one could complain if directors gave effect to what was clearly the intent of the articles, having regard to the stockholders agreement, and redeemed the C shares at the price paid for them. This IL has done, but the petitioners have refused to accept their redemption monies, which are being held as a result by IL on their behalf. This seems to be all part of the stand off that has unfortunately developed between the parties.

Against this factual background the petitioners presented their petition on 21^st July 2004. It alleges four heads of conduct of the Company’s affairs unfairly prejudicial to the petitioners as C shareholders of the Company. The first head is what is called in the petition “Unfair dilution of the Class C shares in the Company”, though this seems to me to be a misleading name for it, for, as I understand it, the real complaint under this head is that I have already mentioned, namely that further monies were raised by the issue of additional C shares in the Company without any reduction in the rights of the Class A shareholders to take account of the consequential reduction of the proportion of overall finance provided by them. In the petition it is alleged that the purported resolution of 30^th June 1995 increasing the number of authorised C shares in the Company without a class meeting in accordance with article 11 was invalid, in breach of the Company’s articles, and – I quote from paragraph 22 of the petition:

“…prejudicial to the interests of the Petitioners, in that, if there had been a separate Class C shareholders’ meeting, the Hough family would have voted against the proposal unless there was a corresponding adjustment and/or dilution to the percentage share of the Company’s profits available to the Class A shareholders.”

Paragraph 24 of the petition alleges that the issue of Class C shares on 1^st October 1997 on conversion of the convertible debentures issued in 1995 was also improper because it was not authorised by a class meeting of C shareholders under article 11. If this allegation means that the issue in 1997 would have needed a class meeting under article 11 even if the purported increase of the authorised share capital in 1995 had been valid, it seems to me misconceived and bound to fail, because in my judgment it is clear that, on the proper construction of the articles and in particular article 11, such a class meeting was required only for the creation and issue of new shares, i.e. shares over and above the Company’s authorised capital. Such issue in 1997 was within the increased total of the C shares purportedly authorised by the 1995 resolution. If, on the other hand, the allegation is dependent on the invalidity of the 1995 resolution to increase the authorised capital, then it adds nothing to the earlier allegation.

It is the respondents’ contention on this application that the complaint relating to the earlier issue of C shares not within the two million authorised at the time and without the authority of a resolution under article 11 has no real prospect of success because it relates to what was done in relation to the Company’s affairs some nine years before the presentation of the petition. Moreover, when the first offer of new C shares was made, albeit without proper authority under article 11, the first to third petitioners themselves voluntarily took part in the offer and subscribed for part of the issue now complained of without demur. It is inconceivable, submitted Mr Tregear QC on behalf of the respondents to the petition, that the court would now grant relief under section 459 in relation to such purported issue of C shares. The first petitioner says he was not aware until 1995, after subscribing for the new shares, that the issue was illegal under article 11. He says that had a class meeting been held in 1994 before the first further issue of Class C shares was made, he would have argued against the authorisation of such shares because of his present dilution argument. I cannot accept this as credible, because it is also his evidence that he did not appreciate the dilution point he now relies on until after he had subscribed to some of the new shares. He then raised the complaint with the second respondent, as is apparent from the documents to which I have referred. He got no satisfaction but took no steps to commence his present petition until 9 years later. It is clear that although the fourth and fifth petitioners did not take up any new shares after their original subscription, the fourth petitioner as director and secretary of the Company was a party to the conduct of which he now complains under this head.

In my judgment Mr Tregear is right in his submission that in these circumstances there is no real prospect of the court granting relief under section 461 of the Companies Act 1985 now in relation to this complaint and it should not be allowed to continue to an expensive trial of section 459 proceedings. I do not consider that the court should entertain a section 459 petition based on conduct of the Company’s affairs in which the petitioners participated without protest nine years before the presentation of the petition. I am equally satisfied that the court would not now grant relief under section 461 on the basis of the similar allegations made in respect of the issue in 1997 of C shares for those who subscribed for convertible debentures in 1995, as to which the petitioners were fully informed at the time of the issue of those debentures in 1995.

Petitions under section 459 are always a very burdensome form of litigation. I understand that section 459 is not subject to any period of limitation, but relief under section 461 is always within the discretion of the court. I do not consider that the court should countenance such proceedings in the circumstances that I have described nearly ten years after the event.

The second alleged head of unfairly prejudicial conduct of the Company’s affairs is that, whereas the scheme set out in the prospectus on the strength of which the petitioners subscribed to C shares in the Company provided that IL “will be owned proportionately as the Company is owned, i.e. each investor will own the same percentage interest in IL as the investor owns in the Company, the investors will share dividends exactly as they share in the Company”, in fact the capital structure of IL reflects the capital structure of the Company after the allegedly improper issue of additional Class C shares in the Company in 1997 to the debenture holders. It is further complained that no Class A shares in IL have been issued to the fourth petitioner to reflect his A shareholding in the Company.

The third alleged head of unfairly prejudicial conduct of the Company’s affairs is that IL has purported to redeem its Class C shares without the Company’s C shares being redeemed at the same time. The result, it is said in the petition, is to allow the first to third respondents as A shareholders now to receive a 50% share of profits in IL so that this early redemption of IL’s Class C shares has unfairly benefited the A shareholders in IL at the expense of the C shareholders. This is a strange allegation, since, as appears from what I have said earlier, it was the policy of non-cooperation by the petitioners in the alteration of the articles of the Company thought by the respondents to be necessary to enable proper redemption of the C shares in the Company that has prevented any such redemption. However, Mr Tregear submits that this allegation and allegation number 2 relating to the capital structure of IL should be struck out as hopeless for a more fundamental reason, and that is that both allegations relate to conduct of the affairs of IL and not of the Company. Allegation 2 relates to the allotment or issue of shares in IL. Allegation 3 relates to the redemption of its shares by IL. Neither relate to the conduct of the Company’s affairs, and it is only conduct of the Company’s affairs that is relevant to a section 459 petition presented in relation to the Company. The petition could not have been presented in relation to IL, because that is a company incorporated in the Isle of Man.

In response to this, Mr Green, on behalf of the petitioners, submits that allegations 2 and 3 do both relate to conduct of the affairs of the Company as well as of IL. He relies on the fact that both companies are under the same control by the first to third respondents and that both form part of the overall scheme set out in the prospectus, on the strength of which the petitioners took shares in the Company. Mr Green relied on certain authorities which have established that in the case of two companies, one of which is a subsidiary of the other, conduct of the affairs of one can in certain circumstances constitute also conduct of the affairs of the other. Mr Green submits that this principle is not limited to cases of holding and subsidiary companies.

The authorities on which he relies are as follows. First, in Nicholas v Soundcraft Electronics Limited [1993] BCLC 360 the Court of Appeal decided that in withholding monies due to its subsidiary a holding company could be said to be conducting the affairs of the subsidiary. At page 264 of the report, referring to the facts of the case, Fox LJ said this:

“We are not therefore dealing with a case of a company which is simply running its own affairs in a manner which is harmful to the interests of shareholders and its subsidiary. It seems to me that Electronics, when it withheld payments from the company to the subsidiary company, was doing so as part of general control of the financial affairs of the company. It exercised that general control by deciding how much the company should receive (by withholding sums due to the company) and restricting the company’s ability to spend money (by the signature requirements on cheques drawn by the company). In my view, Electronics, when it withheld from the company payments which were due to the company, was conducting the affairs of the company.”

At page 368 of the report at B Ralph Gibson LJ said this:

“On the question whether there was relevant conduct of the business of the company by Electronics, I must refer to some aspects of the facts. Before doing so, it is necessary to complete the passage from Lord President Cooper’s judgment which Viscount Simmons expressly adopted as defining his view. The first sentence of the passage was [1959] AC 324 at 343:

‘In my view the section warrants the court in looking at the business realities of a situation and does not confine them to a narrow legalistic view.’

The court in the Scottish Cooperative Society case was considering section 210 of the Companies Act 1948. With reference to section 75 of the 1980 Act Slade J in Re Bovey Hotel Ventures Limited (31^st July 1981, unreported) said:

‘Without prejudice to the generality of the wording of the section which may cover many other situations, a member of a company will be able to bring himself within the section if he can show that the value of his shareholding in the company has been seriously diminished or at least seriously jeopardised by reason of a course on the part of those persons who have had de facto control of the company which has been unfair to the member concerned.’

That statement was cited with approval by Nourse J in Re RA Noble & Sons Clothing Limited [1983] BCLC 273. It is in accordance with the view expressed by Lord President Cooper that the section warrants the court in looking at the business realties of a situation, and does not confine them to a narrow, legalistic view. Those statements apply, in my judgment, to the current provision of the Companies Act 1985, which Fox LJ has set out in his judgment.”

In the second authority relied on by Mr Green, i.e. Re Citybranch Group Limited [2004] 4 All ER 735, the Court of Appeal, in determining an appeal against the refusal to strike out a section 459 petition, had to consider the converse question: could an order be made under section 459 of the Companies Act 1985 in relation to a holding company where (1) it was the affairs of the subsidiary of that company that had been conducted in an unfairly prejudicial manner, and (2) the directors of the holding company were also directors of the subsidiary. The Court of Appeal held that it could. At paragraphs 21 and 22 of his judgment in that case, Sir Martin Nourse said this:

“I now come to the main question. Does the court have power to make an order under section 459 in relation to a holding company where, first, it is the affairs of its wholly owned subsidiary that are being or have been conducted in an unfairly prejudicial manner and, secondly, the directors of the holding company are also directors of the subsidiary? I emphasise that here Mr Gross and Mr Rackind are the only directors of the company and of Blaneland and are also directors of Citybranch, of which Mr Gerald Gross is an additional director.

There is no English authority which directly answers this question. The nearest case appears to be Nicholas v Soundcraft Electronics Limited [1993] BCLC 360, where the company in respect of which the section 459 petition was presented was a 75 per cent subsidiary of Soundcraft Electronics Limited ("Electronics"), the remaining 25 per cent of the shares being held equally by the plaintiff, Mr Nicholas, and another. It was agreed that Electronics would support the company until it was financially viable, though the extent of the support was not discussed or defined. In any event, Electronics withheld support which it ought to have given to the company. It was held that, since Electronics exercised detailed control over the affairs of the company and since, when it withheld payments to the company, it was doing so as part of its general control over the company's affairs, the non-payment of what it owed did relate to the manner in which the affairs of the company were conducted.”

Then, after citing the passage from the judgment of Fox LJ in Nicholas v Soundcraft Electronics Limited, which I have already cited, and from the judgment of Ralph Gibson LJ in the same case, Sir Martin Nourse at paragraphs 24 and following of his judgment said this:

“That case was the converse of the present in that the holding company was held to have been conducting the affairs of the subsidiary. However, I agree with Judge Weeks that it shows that conduct of the affairs of one company can also be conduct of the affairs of another. Mr Oliver submits that the circumstances there were very unusual in that the holding company was actually carrying on the subsidiary's business. He adds that it is only in such exceptional circumstances that the rationale of that decision can apply. It cannot be said, he submits, that Blaneland or Citybranch carried on the company's business here.

25.

The observations of Ralph Gibson LJ in Nicholas v Soundcraft Electronics Limited may have been an echo of those made in the Divisional Court of the Queen's Bench Division presided over by Lord Parker CJ, in R v Board of Trade ex p St Martins Preserving Company Limited [1965] 1 QB 603. In that case a company sought an order of mandamus against the Board of Trade for the appointment of an inspector to investigate the affairs of the company under what is now section 431 of the 1985 Act. The question was whether the affairs of the company ceased to be its affairs on the appointment of a receiver and manager. It was held that they did not. At page 613, Phillimore J, who gave the leading judgment, said:

‘In speaking of 'its affairs' in connection with a company the natural meaning of the words connotes 'its business affairs'.

What are 'its affairs' when the company is in full control? They must surely include its goodwill, its profits or losses, its contracts and assets including its shareholding in and ability to control the affairs of a subsidiary, or perhaps in the latter regard a sub-subsidiary such as Atholl Houses Ltd. In ordinary parlance the affairs of the applicant company must surely have included its shareholding in TG Tickler Ltd, and its power in virtue of that shareholding to control the board of that subsidiary and the disposition of Atholl Houses Ltd, the wholly owned sub-subsidiary - see [1965] 1QB 603 at 613.’

TG Tickler Limited was a 98 per cent subsidiary of the company and Atholl Houses Limited was a wholly owned subsidiary of TG Tickler Limited.

26.

The observations of Phillimore J demonstrate that the expression ‘the affairs of the company’ is one of the widest import which can include the affairs of a subsidiary. Equally, I would hold that the affairs of a subsidiary can also be the affairs of its holding company, especially where, as here, the directors of the holding company, which necessarily controls the affairs of the subsidiary, also represent a majority of the directors of the subsidiary. (In the case of Blaneland they are identical).

27.

In support of the contrary view, Mr Oliver and Miss Nicholson have referred us to a number of other authorities which do not take the matter significantly further. I need only refer to Re A Company No 001761 of 1986 [1987] BCLC 141, a decision of Harman J, where he said at page 144:

‘All these cases together, in my judgment, lead one clearly to the understanding that the conduct to be complained of must be in the affairs of the very company in respect of which the petition is presented.’

Mr Oliver relies on the words ‘in the affairs of the very company in respect of which the petition is presented.’ However, I agree with the observations of Judge Weeks, who said:

‘Those words must be read in context. Harman J was not considering a group structure in that case and did not have to deal with the proposition that the conduct of one company's affairs may also be the conduct of another company's affairs.’”

Finally, after citing some Australian authorities, Sir Martin Nourse said at paragraph 33 of his judgment:

“For these reasons, I would decide the main question, like the subsidiary questions, in favour of the Gross family. In conclusion I refer to the decisive passage in Judge Weeks's judgment:

‘In my judgment, there is no authority which forces me to hold that conduct of a subsidiary's affairs can never also be conduct of the parent company's affairs, and in the circumstances of the present case I think it not beyond the bounds of possibility that the court may reach the conclusion that the acts complained of were also acts in the conduct of the parent company's affairs. This is a strike out application, and I should not strike out the petition if it has any realistic prospect of success. In my judgment, those paragraphs do have a realistic prospect of success.’

That was an entirely correct approach to the main question.”

Mr Green submits that, on the basis of such Court of Appeal authority, it is at least arguable that the affairs of IL are the affairs of the Company. I disagree. The essence of the decisions of the Court of Appeal in the two cases I have cited was in my view that it may in certain cases be possible to say that conduct of the affairs of one company also constitute conduct of the affairs of another when the first company either is controlled by or has control of the other. That, if I may say so, is perfectly understandable. However, that principle is of no avail to the petitioners in the present case, in which IL had no power to control the Company and was subject to no power of control by the Company. Mr Green sought to argue that the first to third respondents as directors of the Company had control over IL. This they clearly did not. They had control over IL but as shareholders of that company. In my judgment, the fact that they also had control over the Company cannot be said to make the affairs of one company the affairs of the other, and I so decide. In my judgment, it is a point that can and should be decided now on this application at this stage and not allowed to go to a trial. In my judgment, there is no real prospect that Mr Green’s argument on the point could be improved by anything that might emerge at a trial.

The fourth allegation of unfair conduct of the affairs of the Company is that – I quote paragraphs 37 to 39 of the petition:

“As a result of the purported redemption of the Class C shares in Injebreck and alteration of its profit-sharing ratio to 50/50, the respondents have been and are moving available cash in the company to Injebreck to be distributed principally to themselves as the holders of the Class A shares rather than using such cash to redeem the Company’s Class C shares.

38.

Between 1998 and 2002 a total of US$369,477 was transferred by the Company to Injebreck in respect of ‘licensing fees’. Most of this has been distributed to Injebreck shareholders whether by way of redemptions or dividend.

39.

The Company has paid no dividends and has made no redemptions of its Class C shares. The first to third respondents have used Injebreck to channel available cash in the Company to themselves.”

This does amount to an allegation relating to conduct of the affairs of the Company, but despite voluminous evidence filed on both sides on this application there is no evidence that the monies that have been admittedly paid by the Company to IL amount to anything other than the licence fees to which IL was entitled under the license agreement entered into as contemplated by the original prospectus on the strength of which the petitioners invested in the Company. Indeed, the petition does not in fact contain any allegation that the amount paid by the Company to IL has exceeded the license fees. Payment of such fees cannot possibly be unfairly prejudicial conduct of the Company’s affairs. They had to be paid to keep the Company in business. Thus, in my judgment this allegation has no real prospect of success at a trial.

Accordingly, in my judgment the petition does not contain any allegation that has any real prospect of resulting in the court making any order under section 461 at the trial and the petition should be either struck out or dismissed now.