Factual and Procedural Background
The petitioners and respondents were members and directors of a company ("the company") formed as a joint venture to operate an indoor inflatable leisure business. The petitioners sought relief under section 996 of the Companies Act 2006, claiming unfairly prejudicial conduct by the respondents, who were also directors and shareholders in a related company ("Company A"). The Lord Ordinary refused to grant the petitioners' requested order for the respondents to purchase their shares, and the petitioners appealed this decision.
The dispute arose from a series of events including a share reorganisation, disagreements over management fees charged by Company A, threats by the respondents to withdraw services and branding essential to the company’s operations, and issues surrounding the preparation and filing of the company's statutory accounts on a going concern basis. The disagreement culminated in the petitioners initiating proceedings in May 2023, seeking court intervention to resolve the alleged unfairly prejudicial conduct.
Legal Issues Presented
- Whether the conduct of the respondents as directors and shareholders amounted to unfairly prejudicial treatment of the petitioners as members of the company under section 994 of the Companies Act 2006.
- Whether the respondents breached their fiduciary duties to the company by acting in a manner unfair to the petitioners and the company.
- If unfair prejudice is established, what relief under section 996 of the Companies Act 2006 is appropriate, including valuation of the petitioners’ shares and the terms of any purchase order.
Arguments of the Parties
Petitioners' Arguments
- The respondents engaged in a premeditated campaign to force the petitioners out of the company by unfair means, including weaponising a share reorganisation issue and imposing excessive management fees without proper agreement.
- The threats to withdraw essential services and branding were serious and caused uncertainty and prejudice to the company’s operations.
- The respondents breached fiduciary duties owed to the company by prioritising their interests in Company A and failing to negotiate in good faith on behalf of the company.
- The going concern qualification in the company’s draft accounts was improperly applied to manufacture a crisis, thereby prejudicing the company and its members.
- The Lord Ordinary erred in law by failing to apply an objective standard of unfairness and by setting too high a bar for relief under section 994.
- The petitioners proposed that the respondents be ordered to purchase their shares at a fair value adjusted for interest from the date of the Lord Ordinary’s opinion.
Respondents' Arguments
- The Lord Ordinary’s findings on credibility and reliability of witnesses, including on disputed facts, were reasonable and not plainly wrong.
- The relationship breakdown was not due to unfairly prejudicial conduct but a failure of personal relationships and misunderstandings.
- The management fees charged by Company A were reasonable and agreed, with no expert evidence supporting the allegation of excessiveness.
- The respondents acted within their fiduciary duties, representing Company A’s interests separately from the company, and did not breach duties to the company.
- The letters threatening withdrawal of services had no practical effect and were not intended to destabilise the company.
- The going concern issue was a genuine accounting matter based on professional advice, not a deliberate attempt to create a crisis.
- The petitioners failed to demonstrate actual prejudice beyond the temporary insurance lapse, for which all directors bore collective responsibility.
- The appeal should be refused as the Lord Ordinary’s decision was factually and legally sound.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| O'Neill v Phillips [1999] 1 WLR 1092 |
Defines unfair prejudice as requiring both unfairness and prejudice; unfairness may arise from breach of agreed terms or equitable considerations. |
The court applied Lord Hoffmann's guidance on unfairness, emphasizing the need for both elements and an objective standard of fairness. |
| Jesner v Jarrad Properties Ltd 1993 SC 34 |
Requirement that both unfairness and prejudice must be proven for a successful claim. |
Supported the court's approach that prejudice alone or unfairness alone is insufficient. |
| Rock (Nominees) Ltd v RCO Holdings Plc (In Members Voluntary Liquidation) [2004] BCC 466 |
Confirms the dual requirement of unfairness and prejudice in unfair prejudice claims. |
Reinforced the legal framework applied by the court. |
| Re Neath Rugby Ltd [2008] BCC 390 |
Clarifies the need for objective assessment of unfairness in member disputes. |
Used to support the court’s objective approach to the conduct of the directors. |
| Re Saul D Harrison & Sons plc [1994] BCC 475 |
Directors’ fiduciary powers must be exercised for the benefit of the company as a whole; improper purposes constitute unfairness. |
The court applied this principle to assess whether the respondents acted for the benefit of the company or for improper purposes. |
| Meyer v Scottish Co-operative Wholesale Society Ltd 1954 SC 381; 1958 SC (HL) 40 |
Parent companies must deal fairly with subsidiaries and minority shareholders; misconduct includes neglect or concealment harming the minority. |
The court found the respondents breached fiduciary duties by failing to deal fairly with the company and its minority shareholders. |
| Henderson v Foxworth Investments Ltd 2014 SC (UKSC) 203 |
Sets high threshold for appellate courts to overturn factual findings based on credibility. |
The court declined to overturn the Lord Ordinary’s credibility findings as not plainly wrong. |
| McGraddie v McGraddie [2014] SC (UKSC) 12 |
Reinforces appellate restraint in overturning factual findings. |
Supported the court’s approach to defer to the Lord Ordinary on credibility and primary facts. |
| Royal Bank of Scotland Plc v Carlyle [2015] SC (UKSC) 93 |
Affirms principles on appellate review of credibility and factual findings. |
Reinforced the standard of review applied by the court. |
| Woodhouse v Lochs and Glens (Transport) Ltd 2020 SLT 1203 |
Clarifies appellate court’s approach to reviewing primary and secondary facts and application of law to facts. |
The court applied this to distinguish between deference to factual findings and independent review of inferences and legal application. |
| AW v Greater Glasgow Health Board [2017] CSIH 58 |
Appellate courts may be less influenced by witness sympathy when applying law to facts or drawing inferences. |
Supported the court’s independent assessment of unfairness and prejudice based on the facts. |
Court's Reasoning and Analysis
The court accepted the Lord Ordinary's findings on primary facts and credibility, including the assessment of witnesses and disputed events. However, it identified errors in the application of law to these facts, particularly regarding unfairness and prejudice under section 994 of the Companies Act 2006.
In October 2022, the respondents, as directors of both Company A and the company, negotiated management fees and threatened to remove branding without adequately considering their fiduciary duties to the company. This created a conflict of interest and breached their duties by prioritising Company A’s interests unfairly. Objectively, this conduct was unfair, though the court found insufficient evidence of prejudice in monetary terms concerning the fees.
In March and April 2023, the respondents persisted with threats to withdraw essential services on short notice and insisted on preparing statutory accounts with a going concern qualification without proper analysis. These actions were objectively unfair and prejudicial, causing the petitioners to incur litigation costs and resulting in actual prejudice when insurance lapsed and the business temporarily closed.
The court rejected the Lord Ordinary’s reasoning that the respondents’ lack of understanding or ineptitude negated unfairness, emphasizing that unfair prejudice depends on objective assessment, not subjective intent or sophistication. The respondents’ conduct breached fiduciary duties and was unfairly prejudicial to the petitioners and the company.
On valuation, the court accepted the petitioners’ calculation with a correction to an arithmetical error, establishing the fair value of the petitioners’ shares at £324,720, plus interest from the date of the Lord Ordinary’s opinion.
Holding and Implications
The court ALLOWED the reclaiming motion, recalling the interlocutors of 14 May 2024 except for the expenses findings and associated remit. It ordered the first respondent to purchase the petitioners’ entire shareholdings in the company at a price of £324,720 with interest at 4% per annum from 12 April 2024 until payment, to be made within 28 days or as otherwise agreed. Interest will accrue thereafter at the judicial rate. Questions of expenses were reserved.
The decision directly affects the parties by mandating the purchase of shares at fair value, providing a remedy for unfairly prejudicial conduct. The court’s analysis clarifies the application of fiduciary duties and the objective test of unfairness and prejudice under sections 994 and 996 of the Companies Act 2006, but does not establish new precedent beyond the proper application of established principles to the facts.