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Granting an option to purchase a shareholding to a party as relief for unfair prejudice was within the court’s discretion

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14th July 2015

Thomas v Dawson [2015] EWCA Civ 706 – Court of Appeal (Civil Division)

As reported on Westlaw.

Summary

Granting an option to purchase a shareholding to a party for a significant sum as relief for unfair prejudice was within the court’s discretion under the Companies Act 2006 s.996 despite valuation evidence showing the company was balance sheet insolvent.

Abstract

The appellant (T) appealed against an order granting relief for unfair prejudice by giving him an option to purchase the share of the respondent (D) in the residential care home business which they co-owned. The business was a quasi-partnership company. T and D each owned a single share and were the only directors. T was more actively involved in the business. They had been in a personal relationship, but had separated with T moving to live rent-free in a flat at the care home. Their joint management of the company broke down after each embarked on a series of unauthorised withdrawals from the company’s bank account. The ensuing litigation led to judgments against T and D for recovery of those sums, and to an interim order finding unfair prejudice under the Companies Act 2006 s.996 on the basis of D’s failure to allow the proper financial management of the company and to consent to T receiving proper remuneration for his continuing managerial role. The order provided for D’s share to be purchased by T for a price to be valued. Valuation evidence subsequently produced failed to value the company or D’s share. The judge concluded that T should be given the option of purchasing D’s share for £55,000 comprising the judgment sum owed by D and a figure representing the capitalisation of a specified term of the income latterly taken by D from the company. Provision was made for T’s payment for D’s share to be made initially to the company and applied in discharge of D’s judgment debt to it with the balance going to D. T argued that (1) the order was outwith the discretion under s.996 as D’s share was worthless and should have been transferred for a nominal consideration; (2) the judge radically departed from the basis upon which he had earlier ordered that the price was to be ascertained without any evidential basis and without giving the parties a proper opportunity to respond.

Appeal dismissed. (1) The judge was correct to attribute a significant positive value to D’s share in the company and was entitled to take into account the value which its acquisition represented to T in obtaining control so as to be able to enforce the derivative judgment against D, whilst securing the non-enforcement of the much larger derivative judgment against himself. It also enabled T to secure the continuation of his free accommodation and to amalgamate the parties’ previous drawings, albeit as recognition for significant managerial work on his part. The court was entitled to infer from T’s vigorous pursuit of the appeal that he wished to obtain ownership and control of the company as something of real value to him. The judge’s solution to the difficult problem of remedy was well within the scope of the statutory discretion afforded to him under s.996. There was no problem with the attribution of a capitalised sum for D’s former income stream as part of the price. That income was derived from her shareholding, and would pass to T upon the transfer of her share. The reasoning for regarding D’s judgment debt as an item of value appeared to be that access to that debt was directly attributable to T’s acquisition of D’s share. The judge’s solution could secure a clean break should T choose to avail himself of it. Therefore, he could not complain that the conferral of a mere option to purchase was unfair to him, Bird Precision Bellows Ltd, Re [1986] Ch. 658 applied (see paras 31-33, 35-37 of judgment). (2) The interim order did not commit the court to fixing the value of the share option in accordance with any valuation evidence presented. The evidence was prepared and submitted for the court’s assistance, but did not fetter its broad discretion to remedy the unfair prejudice by appropriately just means. The evidence did not actually provide a value for the company or D’s share leaving the court to decide how to identify a fair price. The court was free to depart from the interim order in relation to the unfair prejudice petition if it considered it appropriate to do so in the light of the valuation evidence and its assessment of it. For those reasons, Burke v Bayne Services (Edinburgh) Ltd [2011] CSIH 14, 2011 G.W.D. 8-199 was not a useful analogy, Burke considered. It was for the parties to respond to the valuation evidence. They could have applied to adduce further evidence or make further submissions. It was entirely dependent upon the particular case and was within the judge’s discretion whether he should provide an indication of his thoughts to enable the parties to make submissions before he announced his judgment. The instant was not such a case not least because the judge had provided the parties with a period in which to consider and deploy any matters relevant to the formulation of a just remedy for the unfair prejudice (paras 25-29).

Judge

Arden LJ; Ryder LJ; Briggs LJ

Counsel

For the appellant: Gareth Jones. For the respondent: Turlough Stone.

Significant Cases Cited

Burke v Bayne Services (Edinburgh) Ltd [2011] CSIH 14; 2011 G.W.D. 8-199; Official Transcript; IH (2 Div); 04 February 2011

Bird Precision Bellows Ltd, Re [1986] Ch. 658; [1986] 2 W.L.R. 158; [1985] 3 All E.R. 523; (1985) 1 B.C.C. 99467; [1986] P.C.C. 25; (1986) 83 L.S.G. 36;

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