Fotheringay LTD for orders under sections 994 and 996 of the Companies Act 2006 in relation to the affairs of West Ranga Developments LTD (Court of Session)

Factual and Procedural Background

The petitioner, Company A, was incorporated in March 2021 by an experienced property developer who owns 50% of Company A and is its director. Company B was incorporated shortly before as a vehicle for a joint venture property development with Company C, initially wholly owned by Company C. Company A acquired a 25% shareholding in Company B, with the remainder held by Company C. A shareholders' agreement was entered into among the parties.

Company B's business involves commercial property development and investment, including various projects such as design and build, speculative developments, and land acquisition. In 2023, Company B's share capital was restructured and a third party, Company D, became a shareholder, leading to a new shareholders' agreement which Company A contends did not supersede the original agreement.

The petitioner complains that the affairs of Company B have been conducted in a manner unfairly prejudicial to its interests, specifically regarding the exclusion of its director from company affairs and the diversion of development opportunities and profits to other companies within Company C's group. The petitioner seeks orders under sections 994 and 996 of the Companies Act 2006, including an order for the purchase of its shares at fair value. The petition is opposed by Company B and Company C, the majority shareholder.

The remaining respondents, shareholders and directors, have not lodged answers.

Legal Issues Presented

1. Whether the conduct of Company B's affairs has been unfairly prejudicial to the petitioner as a member under section 994 of the Companies Act 2006.
2. Whether the exclusion of the petitioner's director from Company B's business constitutes unfairly prejudicial conduct.
3. Whether the diversion of development opportunities and profits from Company B to other companies within Company C's group breaches directors' fiduciary duties and amounts to unfairly prejudicial conduct.
4. The appropriate relief or remedy under section 996 if unfair prejudice is found.

Arguments of the Parties

Petitioner's Arguments

• The petitioner contends that Company B owns certain development opportunities which have been diverted to other companies within Company C's group without proper accounting of profits, breaching fiduciary duties.
• It asserts that despite the company lacking funds to progress projects, the profits from these projects were agreed to be accounted for to Company B, and the failure to do so is unfairly prejudicial.
• The petitioner argues that the exclusion of its director from company affairs, including denial of access to company email and documents, is unfairly prejudicial.
• The petitioner maintains that the agreements and side letters evidencing profit entitlements are not void for uncertainty and are capable of enforcement.
• The petitioner seeks a declarator that the exclusion is unfairly prejudicial to focus on remedies under section 996.

Respondents' Arguments

• The respondents accept the directors owe fiduciary duties but argue that the projects were carried out by another group company with the petitioner's consent due to funding constraints, negating any breach.
• They contend that any alleged agreement to reconcile profits is void for uncertainty and unenforceable, relying on case law including Crawford v Bruce and East Anglian Electronics Ltd v OIS plc.
• The respondents submit that the petitioner's averments regarding some projects are irrelevant and should not be admitted to probation.
• Regarding the exclusion of the petitioner's director, the respondents argue no finding of unfair prejudice should be made at this stage, as the director allegedly breached fiduciary duties himself.
• They contend that reinstating access may be impractical given the director's resignation from the majority shareholder company which shares IT infrastructure.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Crawford v Bruce 1992 SLT 524	Contractual uncertainty and unenforceability of agreements to agree	Referenced by respondents to argue that the alleged profit reconciliation agreement was void for uncertainty
East Anglian Electronics Ltd v OIS plc 1996 SLT 808	Contractual uncertainty and unenforceability of agreements to agree	Referenced by respondents to support argument on unenforceability of profit reconciliation agreement
Rukhadze and others v Recovery Partners GP Ltd and another [2025] UKSC 10	Fiduciary duty breaches giving rise to accounting remedies	Referenced as an example of a case involving breach of fiduciary duty; respondents argue present case differs
Hawkins, petitioners [2024] CSOH 3	Unfairly prejudicial conduct includes exclusion of a shareholder from company business	Applied to support petitioner's claim that exclusion of its director may be unfairly prejudicial
Gray v Braid Group (Holdings) Ltd [2015] CSOH 146; 2017 SC 409	Examples of unfairly prejudicial conduct include breach of fiduciary duties and exclusion	Affirmed that both types of conduct may constitute unfair prejudice
Davidson v Pinz Bowling [2025] CSIH 6	Approach to unfairly prejudicial conduct under sections 994 and 996; requirement of both unfairness and prejudice	Guided the court's analysis of unfairness and prejudice in this case
O'Neill v Phillips [1999] 1 WLR 1092	Equitable considerations in unfair prejudice; breach of agreed terms or misuse of powers	Used to explain the concept of unfairness requiring breach or inequitable conduct
Jesner v Jarrad Properties Ltd 1993 SC 34	Requirement to prove both unfairness and prejudice	Referenced to affirm need for both elements in unfair prejudice claims
Rock (Nominees) Ltd v RCO Holdings Plc (In Members Voluntary Liquidation) [2004] BCC 466	Requirement to prove both unfairness and prejudice	Referenced to affirm need for both elements in unfair prejudice claims
Re Neath Rugby Ltd [2008] BCC 390	Requirement to prove both unfairness and prejudice	Referenced to affirm need for both elements in unfair prejudice claims
Re Saul D Harrison & Sons plc [1994] BCC 475	Objective standard of fairness; fiduciary powers exercised for benefit of company	Applied to explain that board powers must be exercised bona fide for company benefit

Court's Reasoning and Analysis

The court acknowledged that unfairly prejudicial conduct may include exclusion of a shareholder from company business and breaches of directors' fiduciary duties, as established in prior case law. The court emphasized that both unfairness and prejudice must be proven separately and applied an objective standard of fairness based on the terms of the shareholders' agreements and equitable considerations.

Regarding the petitioner's averments about diversion of development opportunities and profits, the court rejected the respondents' argument that the alleged agreement was void for uncertainty. The court found that the terms "reconciled into the company" and "profits" were capable of meaning that profits were to be accounted for to the company, and that the side letter to the third shareholder supported a common understanding of entitlement to profits.

The court was satisfied that the petitioner had averred a case of unfair prejudice based on the agreement that projects be carried out by other group companies subject to profit accounting, and that failure to account and diversion without consent could amount to unfairly prejudicial conduct if proven.

Concerning the exclusion of the petitioner's director, the court found the question of unfair prejudice to be fact-sensitive and complicated by conflicting provisions in the original and subsequent shareholders' agreements, including changes in shareholding percentages affecting rights to appoint directors. The court concluded that this issue could not be decided at the current stage without evidence.

The court also noted that the nature and extent of any remedy under section 996 depend on the findings regarding the unfairly prejudicial conduct. For example, exclusion might warrant restoration of access, whereas diversion of profits might justify a share purchase order.

Holding and Implications

The court REFUSED IN HOC STATU the petitioner's motion for an order under the prayer of the petition, declining to make a finding of unfair prejudice at this stage.

The court also refused the respondents' motion to exclude certain averments from probation, allowing the petitioner's claims regarding diversion of opportunities and profits to proceed to evidence.

All questions of expenses were reserved, and the court ordered the case to be continued for further procedure in light of this opinion.

The decision leaves open the possibility of future findings on unfair prejudice after evidence is heard, but no new precedent was established. The direct effect is that the petitioner's claims will proceed, but no immediate relief is granted.