The High Court on 9 July 2018 handed down judgment in the case of Curtis Michael Harry –v- Maynard Daniel Harry & Ors [2018] EWHC 1737 (Ch) whereby the Petitioner succeeded on a liability trial of an unfair prejudice petition under s994 Companies Act 2006. The unfair prejudice arose from, amongst other things, the transfer of the operating business of Salisbury Autistic Care Limited (“the Company”) for no consideration to a successor company, Salisbury Support 4 Autism Limited (“SS4A”). Maynard Harry (“Maynard”), who was described by Chief Insolvency & Company Judge Briggs (“the Judge”) as having given “unimpressive evidence about the diversion”, had installed nominee directors in both companies in an attempt to distance himself from the transaction which the Court found that he had orchestrated.
Debenhams Ottaway LLP acted for the successful petitioner, Curtis Michael Harry (“Curtis”). Further directions were set down for valuation of SAC and quantum. The petition has subsequently settled by way of acceptance of Curtis’s Part 36 offer made in December 2017 which values SAC at in the region of £1.5m.
The judgment provides a useful synopsis of the law surrounding unfair prejudice petitions under section 994 of the Companies Act 2006 and the thresholds that need to be met to justify an order requiring the respondent to purchase the petitioner’s shares.
The Facts
Curtis and his brother Maynard were members of the Company. Maynard was the sole appointed director from incorporation, Curtis was the Company Secretary. The shareholding was held in unequal amounts with Maynard holding 90% and Curtis 10%. The Company provided support services to adults under the age of 65 who are on the autistic spectrum.
The main business of the Company was carried on at two premises in Middlesex, Castleton Avenue and Holt Road. Both premises were used as care homes and the properties were owned by Maynard. Curtis and Maynard worked together until about September 2009 when their relationship soured.
Maynard resigned as director of the Company during 2015 and purportedly appointed Julalak Kaewdonree (“Julalak”) as the managing director. The Company was dissolved by way of compulsory strike off from the register on 8 November 2016. It was subsequently restored to the register on 25 May 2017 for the purpose of this petition.
In November 2014 Maynard incorporated SS4A. He was the sole director and shareholder of SS4A until he resigned from his post as director on 1 March 2015, and Pradthana Khankaew (“Pradthana”) was appointed as the sole director. Maynard further signed a consultancy agreement with SS4A on 1 March 2015 for 18k per annum, and tenancy agreements were entered into with SS4A for both Castleton Avenue and Holt Road on 15 June 2015. Maynard also purportedly transferred his shareholding in SS4A to Shanna Attidore (“Shanna”) on 2 March 2015.
The petition alleged that Curtis had been prejudiced unfairly in his capacity as a minority member as a result of Maynard’s action of (a) transferring the business of the Company to SS4A in 2015 (the “Diversion”) and (b) failing to provide any financial information on the Company when requested including failing to disclose the amount of rent and remuneration he received. The Diversion is said to have taken place when Maynard was in control of both the Company and SS4A. It was further alleged that Maynard received excessive remuneration and failed in his duties to the Company by allowing a judgment to be entered against it in June 2015 for the sum of £54,985 due to a failure to comply with an unless order.
Maynard denied the Diversion but admitted that he loosely remained involved in the Company and SS4A after his resignation. He stated that it was a requirement of the Care Quality Commission to have a registered responsible individual in respect of businesses such as that of the Company and SS4A. He signed a consultancy agreement with SS4A, and remained the registered responsible individual at Holt Road and Carleton Avenue. He denied that he was a defacto or shadow director of the Company or SS4A as claimed. Maynard denied that he received excessive remuneration, denied that the rent paid for the premises he owned was excessive, stating that it was below the market rent, and denied that there was a failure to produce accounts to Curtis.
In his points of defence, Maynard sought to explain his resignation as director of the Company during 2015. His reasons for resigning are said to be that he had started a different business in Asia and was spending a great deal of time there. He accepted that he appointed Julalak as managing director for the Company, that she had connections and experience in running a business and ‘had full authority to run the company and make decisions’. It was Maynard’s evidence that Julalak ‘informed me that she had decided to cease trading as there were a number of liabilities which we had no way of settling’.
In relation to the Diversion, it was Maynard’s evidence that the Company could not be sold due to its debts (he stated that the Company has lost several high value contracts) and a registered county court judgment.
A common theme throughout this petition was a lack of disclosure by Maynard or the Company.
The Court’s Decision
The judgment goes into detail on the law relating to unfair prejudice petitions under section 994 of the Companies Act 2006.
In relation to Maynard, the Judge stated that ‘he gave unimpressive evidence about the Diversion’ and ‘When confronted with the dates for new tenancy agreements with SS4, and the date of the consultancy agreement with SS4 he was unable to offer an adequate explanation’. The Judge further found that ‘A common theme to Maynard’s oral evidence was that if there was an inconvenient document providing contrary evidence, the document contained a mistake or there had been an unexplainable oversight giving rise to a mistake’.
The Judge also found that the evidence given by Maynard was unsatisfactory concerning the appointment of Julalak as director of the Company on 1 March 2015, Pradthana’s appointment as director of SS4A on the same day and the transfer of Maynard’s shareholding in SS4A to Shanna. Of particular relevance was a fax purportedly sent by Julalak to the solicitors acting for Maynard in October 2017, supporting Maynard’s version of events, yet her name was misspelt or was at odds with her name used on her Linkedin profile, and spelt differently in the directors appointment form submitted to Companies House. In relation to Pradthana, this was not well explained if at all, as she was only 28 years of age when she was registered as the person of significant control of SS4A and lived in Thailand.
The Judge accordingly made a finding of fact that, as a de facto director, Maynard conceived, engineered and executed the Diversion. SS4A was a successor company of the Company. The Judge further found that the Diversion had a detrimental and terminal effect on Curtis’s shareholding giving rise to economic prejudice potentially rendering his shares valueless. The effect of the Diversion was to take away the Company’s life blood and with it any expectation of a return on equity.
The judgment goes further for the requirement for full disclosure of the financial picture in order to determine quantum.
Commentary
This is a classic case of unfair prejudice arising from director misfeasance. In many ways the petition looks and feels like an office holder misfeasance application but the remedy is for the benefit of the shareholders of the Company. The remedy typically awarded in petitioners of this nature is an order requiring the defaulting majority shareholder or shareholders to purchase the shares of the minority shareholder at a market rate to take into account notional add backs to the Company by way of redress of the wrong doing of the majority. There is often a dispute as to whether minority shareholdings should be valued at a discount but the Courts are increasingly awarding full market rate, particularly where a company has substantial tangible assets.
Luke Harrison, Lead Commercial and Insolvency Dispute Resolution Partner at Debenhams Ottaway LLP, who acted for Curtis commented:
“I am pleased for Curtis that he has finally obtained relief for the years of unfair prejudice that he suffered at the hands of his brother. The litigation was challenging because of the lack of disclosure, particularly of financial information and far from candid approach taken by Maynard to the factual issues in dispute. Forensic investigations carried out by Curtis and the firm revealed, however, a trail of publically available documents that were used to discredit Maynard’s evidence.”
Commenting on the judgment Curtis said:
“The team at Debenhams Ottaway have been exemplary in seeing this through. I felt confident that I was in safe hands and that no stone was being left unturned in the quest for the truth. Luke Harrison and Alexander Neale are formidably litigators with a good nose for strategy and getting to the truth.”
Curtis was represented by the Debenhams Ottaway LLP Commercial & Insolvency Disputes team lead by Luke Harrison. Luke Harrison was assisted by Associate Alexander Neale and instructed Sri Carmichael of Hardwicke Chambers.
A copy of the judgment may be downloaded here
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