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    Unfair prejudice

    [2012] EWHC 1613 (Ch)

    Ch D (Manchester) (Briggs J) 19/06/2012


    A minority shareholder was entitled to a remedy under the  Companies Act 2006 Pt 30 where a company had engaged in unfairly prejudicial conduct, as it had departed from an agreement by decreasing the amount of funds available, and rendering itself unable to pay the minority shareholder dividends due under the agreement.

    The applicant minority shareholder (J) applied for relief under the  Companies Act 2006 Pt 30, alleging that the first defendant majority shareholder (S) and the second defendant company (B) had engaged in unfairly prejudicial conduct.

    J and S were brothers who ran a hotel business through B. A rift developed between them, and it was agreed that J should leave the business to be solely run by S. It was foreseen that the hotel business and premises would be rented to a new company (L), which would be set up, owned and managed by S and that J would receive compensation for loss of office and an index-linked dividend. Those dividends were to be funded by rents payable by L to B, and J was to retain 48 of the 98 shares in B, the remaining shares to be vested in S. Evidence of that agreement consisted of minutes taken at a director’s meeting and additional points of agreement that had been later agreed. S had signed the latter indicating his agreement to them. Additionally there had been discussions between J and S as to whether J’s dividends would be guaranteed for 15 years. In the event, no agreement was reached. J received indexed dividends for 17 years. They ceased following the reduction of rent that was paid by L to B, which S said reflected market rent. The shortfall in income meant that B, who had been using shareholder funds to pay J’s dividends, was legally obliged not to continue to pay those dividends. The factual issues for resolution were the duration and nature of dividend payments, S submitting that the fixed 15-year dividend stream constituted full payment for J’s interest in B, and whether S had personally guaranteed the payment of dividends. J submitted that he had been unfairly prejudiced by (i) B?s failure to require L to pay rent at the agreed rate; (ii) S’s decision to stop dividend payments, coupled with a reduction in rent demanded from L. S submitted that the shift to a market rent was justified by tough market conditions that justified a departure from the agreement.

    J submitted that he had been treated unfairly prejudicially in that (i) B had failed to require L to pay rent at the agreed rate; (ii) S’s decision to stop dividend payments, coupled with a reduction in rent demanded from L, amounted to unfairly prejudicial conduct. S submitted that the shift to a market rent was justified by tough market conditions that justified a departure from the agreement.

    HELD: The clear implication from the parties? bargain as to its duration was that the agreed dividends were to be paid by B, and the rents necessary to fund them out of annual profits paid by L, for as long as the letting of the hotel and the hotel business to L should endure, that letting being a periodic tenancy terminable upon notice. There was no reference to any fixed term in either the minutes or the additional points, and it was unlikely that S would have agreed to the latter had a fixed term been agreed; there was evidence that it had been proposed that the dividend be guaranteed for 15 years, but not that it should stop after 15 years; S’s contention that the dividends were to last 15 years was at variance with other evidence; S’s explanation of the payment of dividends for 17 years as a mistake was lame and unpersuasive (see paras 26, 42-44, 48 of judgment). (2) The evidence showed that although J wished to obtain a 15-year guarantee and S was prepared in principle to consider granting one, agreement had never been reached in part as the parties could not agree if it should be secured on S’s property. Accordingly, it could not be said that S had undertaken a personal liability to pay J if B failed to do so (paras 27, 49). (3) The conduct of B’s affairs under the stewardship of S had been unfairly prejudicial to J’s interests as a minority shareholder. There was no basis for concluding that the market circumstances affecting the hotel and its business ought to be regarded as an unforeseen change of such magnitude as to justify a departure from the arrangements without consequential unfair prejudice to J’s interests; the bargain had not been based in any sense on market rents and did not contain a provision to switch to market rents in the future. J had not obtained everything that he had bargained for; it was a clear part of the bargain that the dividend be paid not out of shareholder’s funds, but out of annual profits, so as to leave the former intact. As there was no evidence that L could not afford to pay the agreed rents in full, it was clearly prejudicial to J’s interests for B to undercharge L, while paying J out of ever-decreasing shareholder funds. The true beneficiary of that depletion had been S through his wholly-owned company, L (paras 68-69, 86). (5) S was ordered to restore to J the diminution of funds attributable to his undercharging of L; an enquiry was ordered as to the effect of that undercharging together with payments of dividends in excess of annual profits. B was to demand rent at the full rate necessary to fund dividends under the agreement so long as L remained in occupation and to pay J dividends as provided for in the agreement, depletion of shareholders’ funds was to carry simple interest at judgment rate. S was also to be at liberty to reduce the amount payable to L by waiving dividends otherwise payable to him (para.86).

    Application granted