Clarified Fiduciary Standards in Quasi-Partnerships: Davidson & Others v Pinz Bowling Ltd & Others ([2025] CSIH 6)

1. Introduction

The reclaimer proceedings in Davidson & Others v Pinz Bowling Ltd & Others ([2025] CSIH 6) arose out of a dispute among shareholders and directors in a business venture that was structured as a quasi-partnership. Pinz Bowling Ltd (“Pinz”) and Allan and Sarah Davidson (together, “the Davidsons”) had initially joined forces to operate an indoor inflatable leisure business. Over time, deteriorating personal and commercial relations led to claims of “unfairly prejudicial conduct” under section 994 of the Companies Act 2006.

The Scottish Court of Session (Inner House) explored whether certain acts—particularly threats to withdraw essential services, blaming a share reorganization, and drafting accounts with a “going concern” qualification—amounted to unfairly prejudicial conduct. Ultimately, the Court reversed the first-instance judgment, declaring that both unfairness and prejudice were objectively established. The decision offers fresh insights into the standard for director fiduciary duties, especially in closely held (quasi-partnership) companies, and clarifies how courts gauge “unfairness” in the context of section 994.

The Judgment provides a valuable precedent on how Scottish courts will approach conflicts of interest among directors who serve both a parent (or associated) company and a partially owned subsidiary, reaffirming the principle that shareholders in a quasi-partnership may claim relief where those in control act in breach of fiduciary duty or otherwise exploit their position to the detriment of minority shareholders.

2. Summary of the Judgment

In broad terms, the Inner House held:

Breach of Fiduciary Duties: Two directors (and also owners) of the first respondent, Pinz, negotiated and imposed management and franchise fees on the jointly owned company. This created a direct conflict of interest and amounted to a breach of fiduciary duties, especially when threats were made to withdraw services.
Objective Standard for Unfairness: The Court emphasized that “unfairness” in section 994 matters must be measured by an objective test. The personal lack of business acumen or misunderstanding of legal intricacies by the majority directors does not shield them from a finding of unfair prejudice.
Prejudice Shown Through Delays and Threats: Threats of withdrawing key business services at short notice, coupled with a forced “going concern” qualification on draft accounts, ultimately led to an insurer’s refusal to renew coverage. This caused closure of the premises and, thus, financial damage to the company and the petitioners.
Order for Share Purchase: Given the breakdown of trust and confidence, the Court ordered Pinz to purchase the Davidsons’ shareholdings at a fair value, calculated at £324,720 plus interest, as the appropriate remedy under section 996 of the Companies Act 2006.

3. Introduction (Background, Key Issues, and Parties)

This reclamation (appeal) emerges from a petition over alleged unfairly prejudicial treatment within Angus Park Limited (“the company”). The petitioners—Allan and Sarah Davidson (first and second petitioners) and Argyle Asset Management Ltd (third petitioner)—sought an order compelling Pinz and its directors to buy out their shares following a business divorce.

Key points of contention included:

Whether fees levied by Pinz upon the company were extortionate or unfair.
Use of strong-arm tactics in negotiations, including threats to remove branding and services critical to the company’s ongoing operation.
An alleged “weaponization” of a share transfer from Argyle Asset Management Ltd to the Davidsons, previously disclosed but later resurrected as grounds to force them out.
The insertion (and persistence) of a “going concern” qualification in the company’s draft accounts, which threatened its insurance coverage and jeopardized the entire venture.

At first instance, the Lord Ordinary held that the petitioners did not establish that the respondents’ conduct was unfairly prejudicial. On appeal, however, the Inner House disagreed with that conclusion, finding (1) unfairness (through breach of fiduciary duties under an objective standard) and (2) actual prejudice resulting in damage to the company and its minority members.

4. Analysis

A. Precedents Cited

Several authoritative decisions shaped the Court’s analysis of “unfairly prejudicial conduct” and fiduciary duties:

O’Neill v Phillips [1999] 1 WLR 1092: The leading authority on section 994 (then section 459) unfair prejudice petitions, highlighting that unfairness must be tested against the terms that parties agreed to or the legitimate expectations underlying the corporate relationship.
Re Saul D Harrison & Sons plc [1994] BCC 475: Lord Hoffmann here again stressed that the test for unfairness is objective. A violation occurs when those who control the company exercise their powers in a manner contrary to good faith.
Meyer v Scottish Co-operative Wholesale Society (1954 SC 381; 1958 SC (HL) 40): A seminal Scottish case in which the House of Lords held that a parent company’s attempts to devalue a partly owned subsidiary can be “oppressive,” and that directors of the subsidiary must ensure fair treatment of the minority. The Court of Session in this case heavily referenced Meyer to reaffirm that directors with dual hats must not subordinate the interests of the quasi-partnership company to their majority stake in a parent company.
Ebrahimi v Westbourne Galleries Ltd [1973] AC 360: Introduced the concept of a “quasi-partnership,” emphasizing that where personal relationships and mutual trust underpin an incorporated venture, equitable considerations can require a remedy if that trust breaks down.

B. Legal Reasoning

Objective vs. Subjective Unfairness: The Court reiterated that “unfairness” is not judged by the subjective motives or understanding of the allegedly oppressive party. Even if the majority shareholders or directors claim confusion or ignorance, the question is whether objectively their conduct was unfair—and if that conduct caused prejudice to the minority.
Breach of Fiduciary Duties to the Company: Where directors also represent a parent (or associated) company, they cannot exploit their position to advance the parent’s interests at the expense of the subsidiary, or attempt to strong-arm a minority shareholder into surrendering shares. The Court looked closely at Meyer v Scottish Co-operative to highlight that “dealing fairly” with the subsidiary is mandatory when the venture can be considered a quasi-partnership.
Persistent Threats to Withdraw Services: According to the Court, repeated threats to remove the shared brand and management support were not “risible,” as the first-instance judge had characterized them. Instead, these threats posed genuine risk to the company’s continuity. The fact that the minority had to seek interim orders—and that coverage lapsed—demonstrated real economic harm.
“Going Concern” Qualification and Shareholders’ Interests: Drafting the accounts to reflect doubts over the company’s going concern status, without proper basis or analysis, undermined the company’s position with its insurer and thus rose to the level of prejudice. The directors who participated in that action had a duty to the company to ensure its affairs were not misrepresented.
Resulting Prejudice: Prejudice manifested in the forced closure of the property when insurance cover lapsed and the need for costly litigation to protect the petitioners’ holdings. Hence, the Court found both the “unfairness” and “prejudice” limbs under section 994 satisfied.

C. Impact of the Judgment

This decision clarifies and reinforces the principle that directors must carry out fiduciary duties to a quasi-partnership or closely held company—even amid personal disputes. It further establishes that:

Heightened Vigilance in Dual Roles: Individuals with roles in both a parent (or controlling) company and a partly owned subsidiary must ensure that their actions do not undermine the subsidiary’s commercial viability or minority shareholders’ interests.
Strong-Arm Tactics Will Invite Judicial Scrutiny: Attempts to coerce a minority by threatening removal of branding/facilities, or by artificially devaluing a business (e.g., mislabeling it as no longer a going concern), can trigger a section 994 petition.
Objective Criterion for Unfair Prejudice: Parties cannot sidestep liability on grounds that their statements or letters were “risible” or inexpert. The test looks to whether, objectively, the behaviour unfairly harmed the minority.
Practical Guidance on Remedies: Courts remain willing to order comprehensively that one side buy out the other’s shares at a fair value (plus interest), particularly when trust has irretrievably broken down.

5. Complex Concepts Simplified

Several aspects of the Judgment involve technical corporate law concepts or procedures. Below are straightforward explanations:

“Quasi-Partnership” Companies: A company can be deemed a “quasi-partnership” when its structure relies on personal relationships, mutual trust, and confidence among a small number of individuals. Although the entity is legally a company (with shareholders and directors), the expectations and obligations resemble partnership principles, meaning courts can apply equitable remedies if trust and confidence break down.
Breach of Fiduciary Duty: Directors owe a duty of utmost good faith to act in the best interests of the company as a whole. If they allow personal motives or the interests of another entity to override the company’s welfare—particularly in a scenario where they “wear two hats”—they breach that duty.
Unfairly Prejudicial Conduct: Under section 994 of the Companies Act 2006, a shareholder can petition the court if the company’s affairs are conducted in a manner that is unfair to certain shareholders and prejudicial (causing them harm). Both elements—unfairness and prejudice—must be proven.
Going Concern Qualification: In company accounts, a “going concern” note signifies that the enterprise can continue operating for at least 12 months from the date the accounts are approved. If a going concern qualification appears inconsistently or without proper basis, it can jeopardize financing, insurance, or investment and has heavy repercussions.
Valuation of Shares: When a buyout order is made, the Court will typically rely on expert testimony to assess the “fair value” of the shares at the relevant date. Here, the Court used a multiplier based on maintainable profits minus certain costs like franchise and management fees.

6. Conclusion

The Inner House’s decision in Davidson & Others v Pinz Bowling Ltd & Others ([2025] CSIH 6) provides a crystallized approach to assessing unfairly prejudicial conduct in a quasi-partnership context. The Court confirmed that unfairness is judged objectively, and actual prejudice can be shown by the need for court intervention to avoid ruinous threats and the loss suffered due to misguided accounting approaches.

Key takeaways include:

Dual directors owe fiduciary duties to each entity they serve; they cannot simply switch hats to favor one over the other to the minority’s detriment.
Threats to withdraw critical brand or management support, even if ultimately not carried out, can still be “unfairly prejudicial” if they force the minority to resort to defensive legal proceedings.
The rationale behind lettered demands and the insertion of “going concern” qualifications must be carefully grounded in fact. Using such measures as pressure tactics will invite sanctions from the Court.
The appropriate remedy under section 996 can be an outright buyout of the aggrieved shareholder’s interests, calculated at fair market value plus interest.

As a consequence, directors and shareholders of quasi-partnership companies should proceed with caution when disputes arise. This Judgment underscores the Scottish Courts’ commitment to balancing strict legal powers with equitable principles, ensuring that all corporators are treated fairly and that no party wields procedural or commercial advantages to the unfair disenfranchisement of the other.

In sum, the case enriches the body of Scottish jurisprudence regarding fiduciary duties and unfair prejudice, aligning closely with existing authorities but offering much-needed clarity and fortification of the principle that an objective test applies, regardless of the personal acumen or subjective intentions of the majority.