Richards & Anor v IP Solutions Group Ltd

Factual and Procedural Background

On 29 July 2015, the Claimants, who held senior executive roles and 30% shareholdings each in Company A, were summarily dismissed from their employment. Subsequently, on 18 January 2016, Company A required the Claimants to transfer their remaining shareholdings for a nominal sum under the "Bad Leaver" provisions of the Company’s Articles of Association. The Claimants challenge both their dismissals and the forced transfer of shares, seeking declarations of wrongful dismissal, damages, and confirmation of continued shareholding.

The Claimants had founded a business in 2001 which prospered and, in 2014, entered into a private equity investment deal ("Project Spur") with Company B, resulting in the creation of a holding company (Company A). The Claimants sold their original business shares to Company A and acquired 30% shareholdings each. The deal included a financial forecasting model ("Spur 57"), used to assess company performance and determine eligibility for management bonuses.

Following the investment, the Claimants became directors and employees of Company A under service agreements. Disputes arose over bonus payments calculated under the Spur 57 model, culminating in the Claimants’ dismissal at a Board meeting on 29 July 2015. The Company subsequently enforced the "Bad Leaver" provisions to compel transfer of their shares.

Proceedings were issued in October 2015, and the trial focused primarily on whether the dismissals were lawful and whether the "Bad Leaver" provisions constituted an unenforceable penalty.

Legal Issues Presented

1. Whether the Claimants were wrongfully dismissed, specifically if Company A was entitled to summarily dismiss the Claimants on 29 July 2015.
2. If the dismissal was lawful, whether the "Bad Leaver" provisions in the Articles of Association constituted a penalty and were therefore unenforceable.

Arguments of the Parties

Defendant's Arguments

• The Company was entitled to summarily dismiss the Claimants for gross misconduct and breaches of their duties as directors and employees.
• The breaches included: unauthorized receipt and retention of a quarterly bonus payment; prioritizing their own short-term interests over the Company’s; and claiming personal expenses improperly.
• The statutory duties of directors under the Companies Act 2006, incorporated into the service agreements, imposed strict liability for breaches justifying immediate dismissal without regard to intention or surrounding circumstances.
• The "Bad Leaver" provisions were a legitimate contractual mechanism triggered by summary dismissal for breach.

Claimants' Arguments

• The duties of directors and terms of employment are distinct; breaches of directorship duties should not automatically justify summary dismissal under the employment contract.
• Clause 14.2.2 of the service agreement requires a "material" (significant) breach before summary dismissal can be justified, engaging an objective assessment of context and seriousness.
• The receipt of the Q1 bonus was based on a reasonable belief that eligibility conditions were met, and the retention of the bonus was not a significant breach.
• The Claimants did not threaten or act to damage the Company’s long-term interests.
• The expenses claims were inadvertent and minor, not amounting to gross misconduct or material breach.
• If the "Bad Leaver" provision is a secondary obligation, it may constitute an unenforceable penalty due to the nominal sum payable for shares.

Table of Precedents Cited

Court's Reasoning and Analysis

The court undertook a detailed examination of the contractual provisions, statutory duties of directors under the Companies Act 2006, and the factual matrix surrounding the Claimants' conduct. The key focus was whether the breaches alleged were "material" or significant enough to justify summary dismissal under clause 14.2.2 of the service agreements.

Regarding the Q1 bonus payment, the court found that although the final application of the Spur 57 model showed the Claimants were not entitled to the bonus, the payment was made in circumstances where there was a reasonable belief and Board transparency supporting eligibility. The Claimants’ retention of the bonus was not a material breach, especially given ongoing negotiations and offers to offset the bonus against future payments, which the court found more likely than not to have been made.

The court also considered the alleged threats to act contrary to the Company’s interests, concluding that the Claimants did not engage in gross misconduct or breaches justifying summary dismissal. The discussions at the Remuneration Committee meeting were robust but did not amount to misconduct.

Expenses claims that included personal items were found to be inadvertent and minor, without evidence of bad faith or dishonesty, thus not constituting material breaches.

Overall, the court found no sufficient grounds, individually or cumulatively, to justify summary dismissal under the contractual or common law standards. The strained relations within the Board were acknowledged, but the court declined to attribute sole responsibility to the Claimants.

On the penalty issue, the court tentatively considered the Supreme Court’s decision in Cavendish Square Holding BV v. Makdessi. It noted the distinction between primary obligations (commercial arrangements) and secondary obligations (penalty clauses). The court observed that the "Bad Leaver" provisions formed part of the Articles of Association and appeared to be primary obligations agreed for commercial reasons. Even if construed as secondary obligations, the court found no unconscionable element rendering them unenforceable.

Holding and Implications

The court held that the Claimants were wrongfully dismissed.

The direct consequence is that the Claimants are entitled to a declaration of wrongful dismissal and may seek damages and further declarations regarding their shareholdings. The court did not set new precedent on the enforceability of "Bad Leaver" provisions, as it did not need to decide the penalty point definitively. Further directions on relief and costs were reserved for subsequent proceedings or agreement between parties.