Summary

A company director had failed to comply with an agreement made with the other director and his actions were both contrary to that agreement and contrary to good faith and were thereby unfairly prejudicial to the interests of a shareholder.

Facts

The petitioner (R) issued a petition concerning the actions of his uncle, the first respondent (M), in relation to a restaurant business operated through the third respondent company (G) on the ground that G's affairs were being or had been conducted in a manner that was unfairly prejudicial to his interests. R's father (S) and M had jointly owned companies which operated a restaurant business where R and other family members worked. Due to concerns about tax liability, the business had been transferred to the companies in succession but operated as a quasi-partnership between S and M. S moved and daily control of the business fell to M. S and M later agreed that the business should again be transferred to a new company, G, and that R would take over S's shares. R and S alleged that it was also agreed that R would succeed S as director. Nevertheless, the transfer took place, M's daughter-in-law was appointed director, she and R were allotted shares and R was appointed company secretary. However, following an argument with M, R was evicted from the restaurant. His employment was subsequently terminated, he ceased to be involved in the business and he alleged that M stopped paying him a share of the profits. Nevertheless, M signed a tax return in R's name. M later became the sole director and effectively took total control of G. Substantial dividends were declared but R and S denied receiving payments. M arranged for his son to sign cheques on G's account in his absence and R also believed that money was being diverted from that account. M made offers to buy R's share of G but they were refused. It was accepted that R and M were each entitled to a 50 per cent share and that one of them should be bought out by the other. Experts agreed that there had been an under-declaration of profits by approximately 15 per cent. M contended that R held his shares as nominee for S. He further argued that he had completed the tax return in R's name at R's request. M also submitted that he had made payments to S in kind and had made payments at the request of or approved by S and that once paid he recouped it out of G's money. M further submitted that the offers made to buy R's shares were reasonable and so on the basis of O'Neill v Phillips (1999) 1 WLR 1092 HL, R was not entitled to a remedy.

Held

The key issue about the agreement between M and S was whether R was to succeed S's interests in all respects. On the evidence, R's version was preferred. There was therefore an agreement or understanding between S and M to the effect that S's share in the business in the fullest sense, that was as partner with a right and expectation of participation in the running of the business and of being consulted about all major decisions, was to pass to R. It was further expressly or implicitly agreed that R would be appointed to the board of directors and that he was not to be a mere nominee for S. (2) M appointed R company secretary but not director. According to M, that went to his daughter-in-law. Her appointment was not agreed to by either R or S. It was also accepted that no formal general meetings were held in G. Thus, even aside from the eviction incident, there was evidence of exclusion of R in breach of the agreement and understanding reached between M, S and other members of the family and R had been unfairly treated and prejudiced in his interest as a member, M having acted in breach of the agreement, unconscionably and contrary to good faith in those respects. G was, from inception, run and meant to be run by M. M said that he was "the only one" but that was contrary to his agreement and understanding with S and R. It was his attempt to take over the whole operation. M could be forgiven for excluding R on the day of the dispute leading to the eviction. However, that did not mean that he was entitled to exclude R thereafter permanently. (3) On the evidence, M did not consult R but deliberately appended his name and a false signature. (4) Whether paid for by M or not, assuming that they were so paid, as the payments were made without R's authority, they were not deductible from the sums due and owing to R. No dividends as declared or otherwise due were paid or applied for R's benefit. To the extent that M reimbursed himself out of G's assets for the payments he allegedly made on S's behalf, he did so without authority. The authority he needed was that of R, not S. (5) There was an under-declaration of profits by 15 per cent in the first two accounting periods of G. (6) The petition was justified and the findings justified the intervention of equity. R was entitled to relief, O'Neill applied. R was entitled to reject the offers as unreasonable. M should purchase the shares of R at 50 per cent of their value.

Petition granted