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OUTER HOUSE, COURT OF SESSION
[2008] CSOH 106
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P663/08
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OPINION OF LORD GLENNIE
in Petition of
GOWANBRAE
PROPERTIES LIMITED
Petitioner;
for
An Order under
section 994 of the Companies Act 2006 in respect of Splendid Homes Limited
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Petitioner: Simpson, Simpson & Marwick
Respondents: Munro, Burness LLP
22 July 2008
Introduction
[1] The
petitioner holds 135,925 £1.00 redeemable preference shares in Splendid Homes
Limited ("the Company"). The shares
carry no voting rights. In terms of
Article 18.5 of the Articles of Association, which was inserted by
amendment to the Articles when the redeemable preference shares were created,
the shares were to be redeemable at par on the "Redemption Date", that is to
say the date upon which a Certificate of Practical Completion was issued in
respect of development works intended to be carried out by the Company on a
property which it owned, Howden House, in West Lothian. The Company, through its Board of Directors,
has now decided not to proceed with the development. The petitioner complains that this decision
has the effect of preventing the accrual of its right to have the shares
redeemed. It complains that the decision
not to proceed with the development, with the consequence that practical
completion will not be achieved, amounts to conduct of the affairs of the
Company in a manner which is "unfairly prejudicial" to its interests as a member
of the Company. It petitions the court
in terms of section 994 of the Companies Act 2006 and seeks orders, to the
precise terms of which I shall refer in due course, under section 996 of
that Act.
[2] The
Company is the first respondent to the Petition. The second respondent, Centrex Developments
Limited, is the holder of the two issued ordinary shares in the Company; and is
therefore in control of it. The third to
fifth respondents are the directors of Centrex Developments Limited and the
sixth respondent is its Company Secretary.
The seventh respondent, Centrex Estates Limited, is the holding company
of Centrex Developments Limited. I shall
refer to the two Centrex companies respectively as "Developments" and
"Estates".
[3] I
heard a debate at the instance of both parties.
For the respondents, Ms Munro argued that, on the averments in the
petition, the petitioner had shown neither prejudice nor unfairness and invited
me to dismiss the petition. She also
submitted that in all the circumstances the relief sought should not be granted
in any event. For the petitioners, Mr Simpson
submitted that both prejudice and unfairness had been shown and he asked me to
grant the prayer of the petition, in part at least. The prayer seeks relief in alternative forms;
and it was agreed that if I were in favour of the petitioner, I should put the
case out By Order for further discussion as to the precise form of the relief
to be granted.
Sections
994 and 996 of the Companies Act 2006
[4] Section 994
of the Companies Act 2006 provides, so far as material, as follows:
"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."
It is not necessary to set out
subsections (2) and (3). The
court's power on the hearing of such a petition is contained in section 996,
which is in the following terms:
"996 Powers
of the court under this Part
(1) If the court is satisfied
that a petition under this Part is well founded, it may make such order as it
thinks fit for giving relief in respect of the matters complained of.
(2) Without prejudice to the
generality of subsection (1), the court's order may -
(a) regulate the conduct of the company's
affairs in the future;
(b) require the company -
(i) to refrain from doing or
continuing an act complained of, or
(ii) to do an act that the
petitioner has complained it has omitted to do;
(c) authorise civil
proceedings to be brought in the name of and on behalf of the company by such
person or persons and on such terms as the court may direct;
(d) require the company not
to make any, or any specified, alterations in its articles without the leave of
the court;
(e) provide for the purchase
of the shares of any members of the company by other members or by the company
itself and, in the case of a purchase by the company itself, the reduction of
the company's capital accordingly."
Sections 994 and 996 re-enact in a
slightly modified form the provisions of sections 459 and 461 of the Companies
Act 1985. Cases decided under those
sections, and their predecessors, provide useful and authoritative guidance to
their application.
Principal
relevant authorities
[5] I
was referred in argument to the well known cases of Re Saul D Harrison & Sons Plc [1995] 1 BCLC 14 and O'Neill v Phillips [1999] 1 WLR 1092.
In Re Saul D Harrison at pp.30-32, Neill LJ set out ten
"guidelines" to be applied in identifying unfairly prejudicial conduct. I quote five of them:
"(4) The conduct must be both
prejudicial (in the sense of causing prejudice or harm to the relevant
interest) and also unfairly so: conduct may be unfair without being prejudicial
or prejudicial without being unfair, and it is not sufficient if the conduct
satisfies only one of these tests...
(5) In construing the word
"unfairly" in this context it will be necessary to take account not only of the
legal rights of the petitioner but also consider whether there are any
equitable considerations such as the petitioner's legitimate expectations to be
weighed in the balance....
(6) For the purpose of
determining the legal rights of the petitioner one turns to the memorandum and
articles of the company because the articles constitute the contract between
the company and the member in respect of his rights and liabilities as a
shareholder. Furthermore, it is to be
remembered that the management of a company is entrusted to the directors, who
have to exercise their powers in the interests of the company as a whole.
(7) In order to establish unfairness
it is clearly not enough to show that some managerial decision may have
prejudiced the petitioner's interests. A
shareholder on joining a company will be deemed to have accepted the risk that
in the wider interests of the company decisions may be taken which will prejudice
his own interests. Thus it may be
necessary for the directors to take steps which are prejudicial to some of the
members in order to secure the future prosperity of the company or even its
survival...
(10) Though in general members
of a company have no legitimate expectations going beyond the legal rights
conferred on them by the constitution of the company, additional legitimate
expectations may be superimposed in certain circumstances. These may arise from agreements or
understandings between the members or between the members and the directors...."
As Neill LJ accepted, the concept
of fairness in this context was capable of introducing considerations similar
to those explained by Lord Wilberforce in Ebrahimi v Westbourne
Galleries Limited [1973] AC360 at 379.
In that passage, Lord Wilberforce had said that it could be relevant to
refer to considerations of a personal character arising between one individual
and another which might make it unjust or inequitable for one to insist on his legal
rights or to exercise them in a particular way.
While there were many associations of a purely commercial nature of
which it could be said that the basis of association was adequately and
exhaustively laid down in the articles, the super imposition of equitable considerations,
he explained, required "something more".
Hoffman LJ (as he then was) developed the same point in a passage
beginning at page 19. He said this:
"Not only may
conduct be technically unlawful without being unfair: it can also be unfair
without being unlawful. In a commercial
context, this may at first seem surprising.
How can it be unfair to act in accordance with what the parties have
agreed? As a general rule it is
not. There are cases in which the letter
of the articles does not fully reflect the understandings upon which the
shareholders are associated."
He then quoted the passage in the
speech by Lord Wilberforce to which I have referred and continued:
"Thus the
personal relationship between a shareholder and those who control the company may
entitle him to say that it would in certain circumstances be unfair for them to
exercise a power conferred by the articles upon the board or the company in
general meeting. I have in the past
ventured to borrow from public law the term "legitimate expectation" to
describe the co-relative "right" in the shareholder to which such a
relationship may give rise. It often
arises out of a fundamental understanding between the shareholders which formed
the basis of their association but was not put into contractual form, such as
an assumption that each of the parties who has ventured his capital will also
participate in the management of the company and receive the return on his
investment in the form of salary rather than dividend. These relationships need not always take the
form of implied agreement with the shareholder concerned..."
Adopting Lord Wilberforce's expression
of the need for "something more" before equitable considerations would be superimposed
upon the letter of the articles, he added:
"Thus in the
absence of 'something more', there is no basis for a legitimate expectation
that the board and the company in general meeting will not exercise whatever
powers they are given by the articles of association."
Lord Hoffman (as by then he had
become) returned to this theme in O'Neill
v Phillips at p.1101. Having agreed with Jonathan Parker J in In Re Aztec (BSR) Plc [1998] 2 BCLC 556 at 588, that to give rise to an
equitable constraint based on "legitimate expectation" there had to be some
personal relationship or personal dealings between the respective parties such
as would "affect the conscience" of the party seeking to exercise the legal
right, Lord Hoffman went on to say this:
"This is putting
the matter in very traditional language, reflecting in the word 'conscience'
the ecclesiastical origins of the long-departed Court of Chancery. As I have said, I have no difficulty with
this formulation. But I think that one
useful cross-check in a case like this is to ask whether the exercise of the
power in question would be contrary to what the parties, by words or conduct,
have actually agreed. Would it conflict
with the promises which they appear to have exchanged? In Blisset
v Daniel the limits were found in
the "general meaning" of the partnership articles themselves. In a quasi-partnership company, they will
usually be found in the understandings between the members at the time they
entered into association. But there may
be later promises, by words or conduct, which it would be unfair to allow a
member to ignore. Nor is it necessary
that such promises should be independently enforceable as a matter of
contract. A promise may be binding as a matter
of justice or equity although for one reason or another... it would not be
enforceable in law."
He emphasised that it was not only
conduct in breach of some promise or undertaking which could be regarded as
unfair for the purpose of the jurisdiction in question.
"For example,
there may be some event which puts an end to the basis upon which the parties
entered into association with each other, making it unfair that one shareholder
should insist upon the continuance of the association."
I was also referred to my remarks
in West Coast Capital (LIOS) Limited (unreported,
15 May 2008) at paragraphs [19]-[20] in which I emphasised that fairness and
unfairness in the context of assessing whether conduct was "unfairly
prejudicial" for the purpose of the section were not "abstract concepts" but
had to be viewed in the context of a commercial relationship, where the parties'
rights and expectations were governed by contract, namely the articles of association,
and, possibly, by other agreements or understandings, as well as by the
fiduciary duties which directors owe to the company.
[6] The
parties appeared to be in agreement that these cases summarise the applicable
law so far as relevant to the present dispute.
The
basis of the application for relief
[7] The
petitioner does not contend that the decision by the board of directors not to
proceed with the development, and thus not to proceed to the stage at which a
Certificate of Practical Completion could be issued, is in breach of the
articles of association or indeed of any express term governing the
relationship between the shareholders and directors. However, it does say that, in arriving at
that decision, the directors caused the Company to act in breach of an implied
term of an agreement to which both the petitioners and the Company were parties;
or to act in a manner contrary to the clear understanding upon the basis of
which the petitioner had acquired its shareholding. Put another way, it argues that the decision
not to proceed with the development put an end to the basis upon which the
parties entered into association with each other so as to make it unfair that
the petitioner should be bound to continue as a shareholder in the
company. The facts averred in support of
these contentions are as follows.
[8] The
Company was originally wholly owned by the petitioner, which had itself
incurred costs in carrying out the development of Howden House. In early 2007 the petitioner decided to sell
the Company. The Centrex Group, i.e. the
group of companies which includes both Developments and Estates, wished to
acquire the Company and continue to develop Howden House though, I understand,
in a somewhat different direction. Discussions
between Mr Desai, the principal of the petitioner, and Mr Whannel,
the principal of the Centrex Group, led, in February 2007, to the conclusion of
a Share Purchase Agreement (6/7 of Process) between the petitioner and Estates
(hereafter "the SPA") in terms of which the petitioner agreed to sell its
shares in the Company to Estates. Clause
2 of the SPA provided that completion was subject to certain conditions being
purified or waived prior to a certain date.
One of those conditions was that a valuation was to be made and agreed
by the parties of the work carried out by the petitioner in developing Howden
House prior to the completion date under the SPA; and Estates were to pay the
petitioner that agreed amount before the relevant date. On 3 May
2007 Estates assigned its interests under the SPA to Developments
(6/8 of Process). At the same time, the SPA
was amended (6/9 of Process). The effect
of the amendment was that instead of the work carried out by the petitioner
being valued and paid for as a pre-condition to the sale by the petitioner of
its shares in the Company, the parties agreed that the work should be valued at
£235,925 and recorded that they had agreed and executed arrangements for the
satisfaction of that sum. Those
arrangements were contained in the "Guarantee and Undertaking" (6/10 of Process),
hereafter "the Guarantee". They had the effect
that payment of the agreed value of the work (£235,925) was to be deferred
until some considerable time after completion of the share sale transaction. That sum was to be payable in two tranches of
£100,000 and £135,925. The tranche of
£100,000 was to be paid (by Developments) to the petitioner within 120 days of
execution of the SPA, whilst the balance of £135,925 was to be dealt with by
allotting to the petitioner 135,925 redeemable preference shares of £1.00 each
in the capital of the Company, those shares to be redeemable by the Company at par
upon practical completion of the development of Howden House. It is averred in the petition and is, in any
event, a legitimate inference, that the agreement to defer payment was an
indulgence granted to the Centrex Group at the request of Mr Whannel.
[9] The
terms of the Guarantee are of importance to the argument advanced on behalf of
the petitioners. It contains recitals
which narrate that the agreed sum of £235,925 is to be dealt with in the manner
in which I have indicated. Recital (C) records
that
"... It has been
agreed that upon Practical Completion of the development of the Property the
Company shall, in accordance with the terms of it's (sic) articles of association, redeem all of the Shares at the rate
of £1.00 for each redeemable preference share with a total redemption payment
being due on the Completion Date being £135,925 (the "Consideration")."
Recital (D) acknowledges that,
prior to the Company being able to purchase the redeemable preference shares,
certain provisions of the Companies Act 1985 require to be complied with; and
narrates that the Company and Developments, as well as Mr Whannel, are
giving certain undertakings in relation to the redemption of the shares. Clause 2 of the Guarantee is headed "Share
Redemption". After reciting that the Company
has agreed to redeem the shares on the Completion Date, i.e. the date upon
which the Practical Completion Certificate is issued, and going on to address
what might be called the mechanics of redemption once the Completion Date has
been reached, this clause requires the Company, Developments, Mr Whannel and Estates all to act in good faith towards the
petitioner, to use reasonable endeavours to ensure the Company is able to
proceed to redeem the shares, and to execute all documents and perform such
other acts as are required to enable the Company to redeem the shares. In particular, Clause 2.3 provides that:
"In the event
that the Company should have insufficient distributable profits to proceed to
redeem the Shares in accordance with the [Companies Act], or for any other
reason, then the Company, the Shareholder [Developments], the Guarantor [Estates]
and/or JW [Mr Whannel] irrevocably undertake to
procure that the redemption of the Shares shall be funded by [Estates] or
[Mr Whannel] applying such funds to the Company as are necessary to enable
the Company to redeem the Shares."
Clause 2.5 contains a provision for
interest in the event that the Company fails to redeem the shares on the
Completion Date. It is to be noted, as I
have already emphasised, that Clause 2 deals exclusively with problems that
might arise once a Certificate of Practical Completion has been issued and the
Company has thereupon become obliged to redeem the shares. Nothing in Clause 2 had any direct bearing
upon any obligation on the Company to proceed with the development and reach
the stage at which a Certificate of Practical Completion might be issued. That matter is dealt with in Clause 3 which
is headed "Property". Clause 3 provides
as follows:
"3.1 The Company, the Shareholder
[Developments], JW [Mr Whannel] and the
Guarantor [Estates] each hereby covenant and undertake at all times:
3.1.1 use all reasonable
endeavours and take all necessary actions to ensure that there is no undue
delay in achieving Practical Completion;
3.1.2 notify Gowanbrae [the petitioner]
as soon as practical of the proposed date for Practical Completion,
3.1.3 notify Gowanbrae [the
petitioner] immediately upon the Practical Completion Certificate being issued;
3.1.4 co-operate fully with the
Gowanbrae (sic) [the petitioner] and
respond promptly to all reasonable enquiries relating to, connected with or ancillary
to the progress of the Development Works and Practical Completion, including
providing all reasonably requested documentation and other information
regarding the progress of the Development Works, achieving Practical Completion
and the redemption of the Shares."
Other provisions of the Guarantee
are not relevant for present purposes.
[10] The Company duly issued the 135,925 redeemable preference
shares to the petitioner on 3 May 2007. At the same time, the Company's articles were
altered by the insertion inter alia
of the new Article 18 to which I have referred in para.[1] above.
[11] Mr Whannel died on 16 June 2007. Some time later, the Company "changed its
intention as regards to the subjects", to use the language of the petition. The petitioner avers, and this is admitted by
the respondents, that the Company now intends not to develop Howden House but
instead to sell it undeveloped to a third party. If that happens, Practical Completion will
not be achieved and the Redemption Date will not materialise. There are no averments in the petition as to
the Company's motivation for so changing its intention. The defenders aver that, after Mr Whannel's death, several months were spent trying to
stabilise the Centrex Group, including seeking the support of its bankers. Those efforts are ongoing. They say that it was considered necessary to
re-focus the activities of the group on its core business and to abandon more
speculative ventures including the development of Howden House. They go on to aver that the Company's
indebtedness, principally to the Bank of Ireland, is of the order of £1.5
million and that the Company has no significant assets other than Howden House,
which is presently valued at somewhere between £750,000 and £850,000. According to the respondents, and I did not
understand this to be disputed by the petitioner, the Company is insolvent on a
balance sheet basis. .
Arguments
for the parties
[12] Although the respondents led at the debate, it is convenient
first to summarise the petitioner's argument.
The argument depends entirely upon an implied term or understanding
which the petitioner contends arises from the terms of the Guarantee understood
in the context of the SPA and from the issue of the preference shares as a
mechanism for deferring payment of just over half of the £235,925 agreed as the
value for development work previously carried out by the petitioner. It is contended in the petition that it was
an implied term of the Guarantee that the Company would achieve practical
completion of the development works within a reasonable time of the date of the
Guarantee. The emphasis, as it was
explained to me, is not on the reasonable time but on the absolute nature of
the obligation to achieve practical completion.
In the alternative, it is contended that there was an understanding
between the petitioners, the Company and both Development and Estates that the
Company would achieve practical completion of the development works within a
reasonable time. Again the emphasis is
on the absolute nature of the obligation to achieve practical completion rather
than upon the time at which practical completion should be achieved. The averments in support of the implied term
and/or the understanding are not based upon any averments to the effect that
oral assurances of any kind were given by Mr Whannel to Mr Desai. They are based entirely upon the terms of the
Guarantee in the context of the SPA, the agreement to defer payment of the
£235,925, the consequent amendment to the SPA, and the alterations to the
articles of association. The implied
term is said to be necessary to give business efficacy to the agreement of the
parties because the express obligations, particularly in the Guarantee, take it
for granted that there is an obligation on the Company to achieve practical
completion. As the matter was developed
in argument before me, reliance was placed by the petitioner on the notion that
the redeemable preference shares were, in effect, simply the means by which
part of the deferred consideration under the SPA as amended would be paid. It would, it was argued, be contrary to the
whole understanding of the parties if a situation were to arise where the
company was not obliged to proceed to practical completion and could, in
effect, simply walk away from the development and thereby deprive the
petitioner of its entitlement to receive this final instalment of the
price. In support of those arguments I
was referred to the summary of the business efficacy rule in McBryde, the Law
of Contract in Scotland,
3rd Ed., at paras.9-65ff. I
was also referred to Reigate v Union Manufacturing Company (Ramsbottom)
Limited [1918] KB592 at 605, to Thomson
v Thomas Muir (Waste Management) Limited 1995
SLT 403, 405-406 and to CEL Group Limited
v Nedlloyd Lines UK Limited [2004] 1 Lloyds Rep 381. Reigate v Union Manufacturing
Company (Ramsbottom) Limited is authority for the "of course" approach to
implication. Here, it was contended, it was
clear that if at the time of entering into the arrangements for the sale and
purchase of the shares in the company, and more particularly the arrangements
by which part of the price was deferred until practical completion was
achieved, the parties had been asked whether the Company would be bound to
proceed with the development so as to reach the stage of practical completion,
they would have answered "of course", since that was the whole basis upon which
the last part of the consideration was payable. Thomson
v Thomas Muir (Waste Management) Limited was
cited, as I understood it, as an example of a case where a term had been
implied notwithstanding very detailed provisions of the contract. CEL
Group Limited v Nedlloyd Lines UK
Limited was cited for Hale LJ's approval of the reverse declaratory clause
test expounded by Donaldson LJ in Bournemouth
& Boscombe AFC v Manchester United (The Times May 22 1980). This approach suggests that a useful
cross-check on the merits of refusing to imply a term restraining a party from
doing something is to draft a declaratory clause in the contract confirming his
right to do that same thing. So here, Mr Simpson
argued that the obviousness of the term for which he contends can be
demonstrated by the absurdity of there being a clause in the contract
confirming the Company's right to walk away from the development and take steps
in its own interests to prevent it having to pay the balance of the purchase
price. In addition I was referred to Re A Company (No 002015 of 1996) [1997]
2 BCLC 1 at 16-18 as an example of how for the purposes of a section 459
petition an understanding, falling short of an implied term, was not excluded
merely because the agreements were detailed and complex.
[13] For the respondents, Ms Munro submitted that the
petitioner had shown neither prejudice nor unfairness. There was no prejudice, she contended,
because on the admitted facts, which I need not relate, the petitioners had
made a substantial profit out of their investment in Howden House and the
failure to pay the last instalment of £135,925 did not result in a loss to the
petitioner from the transaction as a whole.
Nor was there any unfairness. The
decisions taken by the board of directors were not challenged as not having
been made in the best interests of the company.
In those circumstances it was only if the petitioners could establish
the implied term or understanding placing upon the company an absolute
obligation to proceed with the development and reach the stage of practical
completion that it could be said that the affairs of the company were being
conducted in an unfairly prejudicial way.
The petitioners could not establish this: no term was to be implied and
no understanding could be inferred. The
Guarantee contained detailed provisions requiring Developments/ Estates to take
reasonable steps to ensure that the Company is able to redeem the shares once
the Practical Completion Certificate has been issued and the redemption date is
reached. Further, it imposes obligations
on Developments/ Estates to use reasonable endeavours to ensure that there is
no undue delay in achieving practical completion. Those provisions militate strongly against
the imposition of an absolute obligation on the Company to proceed with the
development and reach the stage of practical completion.
[14] In a brief response, Mr Simpson argued that prejudice
could be suffered even though the petitioner had made a significant profit on
the transaction. It was enough that it
was deprived of its full entitlement.
This, of course, comes back to the issue of whether there was an
entitlement based upon the alleged implied term or understanding. So also, he argued that unfairness was
established if the court accepted his arguments about the implied term and/or
understanding. If either or both of
those were established, it followed that the Company's failure to pursue the
development was conduct which was unfairly prejudicial to the petitioners.
Discussion
[15] I agree with Mr Simpson that prejudice can be identified
in a case where a party is deprived of his full entitlement just as it can be
identified where a party is in fact exposed to loss. I did not find Ms Munro's argument to
the contrary persuasive. It is nothing
to the point, so it seems to me, to say that the petitioner made a substantial
profit out of the whole transaction. If
it were the case that the Company was contractually obliged to proceed with the
development, or that there was a clear understanding to that effect on the
basis of which the petitioner had agreed to defer receiving the full
consideration to which it was otherwise entitled, the Company's decision not to
proceed, thereby depriving the petitioner of that last tranche of the payment
due under the SPA, could well give rise to prejudice sufficient to found a
complaint under section 994 of the 2006 Act.
Accordingly, it seems to me that the question of prejudice, just as much
as the question of unfairness, must turn on the question whether the petitioner
can establish the implied term or understanding for which it contends.
[16] On this latter question, however, I prefer Ms Munro's
submissions. There was no material
dispute between the parties as to the principles applicable to the implication
of terms. In my opinion, none of the
tests laid down in the authorities are satisfied. It is not necessary for reasons of business
efficacy to imply the term for which the petitioners contend; nor is such a
term to be implied on the basis that it represents what the parties must
obviously be taken to have intended (the "of course" approach). On the contrary, it seems to me that the
other agreements into which the parties entered in February and May 2007 point
very clearly in the opposite direction.
One starts with the SPA in its original form. In terms of that agreement, a sum
representing the value of the work carried out by the petitioners in developing
Howden House was to be paid in advance of, and as a condition precedent to,
completion of the purchase of shares in the company. There was, at that time, no question of
deferring any part of that payment, still less any question of entering into an
arrangement in terms of which the petitioners were given redeemable preference
shares in the company as part of the consideration. In May 2007, the position altered. It was agreed that the work carried out by
the petitioners in developing Howden House was to be valued at £235,925. At the same time, it was agreed that payment
of this sum would be deferred until after completion of the SPA as
amended. Part of the deferred payment
(£100,000) was agreed to be payable 120 days later. The balance (£135,925) was to be dealt with
by way of allotting the petitioners 135,925 redeemable preference shares of
£1.00 each. Terms were agreed as to the
circumstances in which those shares were to be redeemed. That was to be upon completion of the
development of Howden House or, more accurately, upon issue of the Certificate
of Practical Completion. That was, in
itself, an uncertain event. There is no
averment that parties had any doubt about the development proceeding, but in
its very nature it was an event which might not in fact occur. Planning permission for the particular
development envisaged might not have been obtained. Or the Company might have run into financial
difficulties, or even been wound up. If,
in May 2007, at the time of entering into these arrangements to defer payment
of £135,925 until the development was completed, the parties had been asked
what was to happen if planning permission was refused, or if the Company did
not have the money to proceed with the development, I cannot think of any
proposed solution that would necessarily have been regarded by all relevant
parties as obvious. For example, it is
not obvious that the parties would unhesitatingly have assented to a suggestion
that the Company would be bound proceed with the development even if planning
permission were refused or if it were insolvent. The most likely response would be to the
effect that obviously best endeavours would have to be used. But that is what the parties have addressed
in the Guarantee; and a best endeavours requirement does not go far enough for
the petitioners, who contend for an absolute obligation.
[17] It is of importance to note that, just as the payment of £100,000
was deferred for a specified period (120 days), so also it would have been easy
for the parties to have agreed that the payment of the £135,925 would be made
by a certain date regardless of whether practical completion was ever
achieved. There are many formulations
that could have been agreed. Parties
could have agreed that this sum would have been payable after a period of, say,
two years. Or they could have agreed that
it should be payable upon practical completion, with a "long-stop" date of,
say, three years time, when it would be payable regardless of whether practical
completion had been achieved or not. But
the parties did not do this. They
specifically chose to tie the payment of the £135,925 to the allocation and
subsequent redemption of the preference shares and to stipulate that those
shares were to be redeemed at par only upon practical completion being
achieved. Why would they do this if
their "obvious" intention was - and although it is not put in precisely this
way, this is what the petitioner's case amounts to - that the shares would be
redeemable, or the money paid, in any event?
[18] Further, the terms of the Guarantee itself militate strongly
against such an implication. Clause 2
deals with the position once the Company has come under an obligation to redeem
the shares, i.e. once the Practical Completion Certificate has been
issued. Once that point is reached,
there are obligations on the Company and others to use all reasonable endeavours
to take the appropriate steps. If the
Company has insufficient distributable profits to enable it to do so, other
parties are required to take steps to procure that the redemption of the shares
is funded by Estates or by Mr Whannel.
Clause 3 deals with the position up to the time when practical
completion is achieved. In particular,
it requires the Company and others to "use all reasonable endeavours and take
all necessary actions to ensure that there is no undue delay in achieving
Practical Completion" (3.1.1). It is not
easy to see how this qualified obligation can sit alongside an absolute
obligation on the Company to achieve practical completion. Presumably it would be a defence to any claim
against the Company for delay that, for example, planning permission had not
been granted despite its best endeavours.
Or that some other factor, including financial difficulties on its part,
had prevented it taking certain steps.
If that is a defence to a claim based upon an alleged breach of the
obligation to use reasonable endeavours to reach the stage of practical
completion without delay, how can it not be a defence to a complaint that the
Company has failed to reach that stage at all?
It seems to me that the qualified obligation in Clause 3 of the
Guarantee runs counter to there being any such absolute obligation imposed upon
the Company.
[19] I therefore conclude that the petitioner has not made good its
contention that there was an implied term that the Company would achieve
practical completion. It is not
necessary for me to consider whether there is a qualified obligation in that
respect because the petitioner's complaint is not directed to the particular
reasons why the Company has failed to achieve practical completion. Its case is simply that the failure to
achieve it is a breach of an obligation owed to it by virtue of the implied
term. That case, put on that simple
basis, must in my view inevitably fail.
I should add that I have not been concerned with the question whether
the Company or any other party is in breach of any obligations under the
express terms of the Guarantee. If any
complaint is made along these lines, that will have to be the subject of a
separate action.
[20] In this particular case, that conclusion on the question of the
implied term is determinative also of the argument that there was some
understanding between the parties that the Company would definitely achieve
practical completion. That understanding
is said to derive from the same contractual arrangements as were deployed in
support of the argument about the implied term.
If those contractual arrangements do not support the implied term, then
it seems to me that they cannot support the alleged understanding either. If there is no obligation on the Company in
terms of the implied term contended for by the petitioner, it must follow that
the Company is free to make commercial decisions in its own interests. The directors owe a fiduciary duty to the Company
and complaints can be made against them if, in breach of that duty, they have
regard to extraneous matters, such as a desire to benefit some other company. The court will not lightly infer from
surrounding circumstances the existence of an understanding to which the Company
should be held in equity and which would prevent it from making decisions in
its best interests; the "something more" to which the authorities refer will
usually be found in specific words or conduct from which a promise can be
inferred. All that is relied on in the
present case is the web of contracts, and in particular the Guarantee, and the
agreement to defer a part of the consideration.
The reason for rejecting the implied term put forward by the petitioner
is that those circumstances are insufficient to support the inference of a
promise. That is fatal in this case to
the inference of an understanding.
[21] For those reasons, it seems to me that there is neither an
implied term nor and understanding as contended for by the petitioner. Nor can it be said that there was some basis
upon which the petitioner and the respondents entered into an association which
has now fallen away, so that it would be unfair to hold the petitioner to the
association. In truth, it took the
shares as part of the arrangement to defer part of the consideration under the SPA
as amended. It must have done so knowing
the commercial risks
involved. There being no implied term or
understanding as contended for, it must follow that the disadvantage suffered
by the petitioner as a result of the company not proceeding with the
development is not the result of unfairly prejudicial conduct of the affairs of
the Company. The petition must therefore
fail.
[22] I
cannot, however, leave this aspect without raising a question as to whether on
the averments in the petition this is a case where the jurisdiction under
section 994 of the Companies Act 2006 is properly invoked. The essence of that jurisdiction is that the
affairs of the company have been conducted in a manner which is unfairly
prejudicial to the interests of the petitioner as a member of the company. The petitioner's claim, as was stressed
repeatedly in argument, is based on the fact that it had an accrued right to
payment under the SPA and had agreed to defer part of it until practical
completion was achieved. The only link
to the conduct of the Company's affairs is that the pursuit of the development
by the company so as to reach the stage of practical completion was the trigger
for the petitioner's entitlement to be paid the last element of the deferred
price. It seems to me to be arguable
that the prejudice which the petitioner has suffered, if it be prejudice, is as
a seller of shares rather than as a member of the company. In response to this argument, I was referred
on behalf of the petitioner to the case of Gamlestaden
Fastigheter AB v Baltic Partners Limited [2007] 4 All ER 164.
In that case a shareholder claimed under the Jersey equivalent of section 459
on the basis that he was a creditor, and would not have advanced sums to the
company but for having been a shareholder.
This, it was argued, illustrated the width of the jurisdiction. Those facts are, of course, the reverse of
the present circumstances where the shareholding is in a real sense incidental
to the indebtedness of the respondent to the petitioners under the SPA. Had I otherwise been in favour of the
petitioner's arguments, I would have hesitated before granting relief under
section 994 of the Act. It seems to me,
provisionally at least, that the petitioner's complaint is really a simple
complaint under the SPA and/or the Guarantee rather than a complaint about
unfairly prejudicial conduct of the Company's affairs. I do not, however, need to decide this point.
The relief sought
[23] It
follows from the above that I do not need to consider the question of whether
it would be appropriate in the circumstances to grant the relief sought in the
petition. However, since the point has
been argued and in case the matter should go further I should briefly set out
my views.
[24] In the
prayer to the petition the petitioner seeks an order (i)
ordaining the Company to redeem the redeemable preference shares; (ii) so far
as the Company has insufficient distributable profits to redeem the preference
shares, ordaining Estates to apply such funds to the Company as shall be
necessary to enable it to do so; and (iii) failing the redemption of the shares
by the Company, ordaining Developments to purchase the shares at the price of
£1.00 per share or at such other price as the court might think proper. Ms Munro drew my attention to the
averments in the answers to the petition about the apparent insolvency of the Company
which were in substance admitted in the petition. In those circumstances she submitted it would
be inappropriate to order the Company to redeem the shares. That would be to give a preference to the
petitioner over existing creditors. It
would also be contrary to section 160(1)(a) of the Companies Act 1985 - I was
told that the equivalent part of the 2006 Act is not yet in force - which
provides that redeemable shares "may only be redeemed out of the distributable
profits of the company". Section 178(3)
of the 1985 Act provides that the court should not grant an order for specific
performance of the terms of redemption or purchase if the company shows that it
is unable to meet the costs of redeeming or purchasing the shares out of
distributable profits. This was not an
action of specific performance (or implement), but the relief claimed was
substantially the same. The policy of
the Act was that a company should not be ordered to redeem redeemable shares if
it could not do so out of distributable profits. In so far as an order was sought to the
effect that Estates should put the Company in funds to enable it to redeem the
redeemable preference shares, this too ran counter to the Act. Once the Company was put in funds, those
funds should be available for the body of creditors; and the order sought would
give the petitioner a preference over the creditors. Further, she argued, Estates was not a member
of the company. It was simply the
holding company of Developments. There
was no basis for any order being made against Estates in a petition under 994
of the 2006 Act, whatever might be the position if the petitioner brought an
action under the Guarantee.
[25] Mr Simpson
argued that whatever might be the merits of the points raised by Ms Munro,
they did not strike at the order sought at (iii) in the prayer to the petition,
to the effect that Developments should purchase the redeemable preference
shares. In any event, he submitted that
section 160 (1)(a) of the 1985 Act allowed redeemable shares to be redeemed out
of the proceeds of a fresh share issue made for the purposes of the
redemption. There would be nothing to
prevent a new share issue to raise sufficient funds to enable the shares to be
redeemed. The creditors would not be
prejudiced by this.
[26] Had I
had to decide this point, I would not have dismissed the petition on the ground
that none of the relief sought was competent or appropriate in the
circumstances. Whilst I accept
that the court hearing a petition under section 994 is unlikely to make an
order which would have the effect of prejudicing the rights of third party
creditors - indeed I can think of no circumstances in which it would knowingly
do so - as at present advised I do not see why it should not make an order
which would result in the Company being put in funds specifically for the
purpose of redeeming the shares, without those funds having to be made
available to the general body of creditors.
Further, it seems to me that Mr Simpson is right in saying that
none of the points raised by Ms Munro would prevent an order being made
that Developments, in their capacity as controlling shareholder, should
purchase the shares.
Disposal
[27] In all the circumstances, however, for the reasons I have given
I shall sustain the first plea in law for the respondents and dismiss the
petition.
