City Branch Group Ltd, Re Companies Act 1985

For the purposes of section 459 of the Companies Act 1985, the affairs of a holding company may include the affairs of its wholly owned subsidiary. The court should examine the business reality rather than adopt a narrow legalistic view. The connection is especially strong where the holding company controls the subsidiary and the same directors manage both companies.

Misconduct prejudicing a subsidiary may prejudice members of the holding company through an actual or potential diminution in the value of its investment. A petition alleging such misconduct should therefore survive a strike-out application where it has a realistic prospect of establishing that the subsidiary’s affairs were also the holding company’s affairs.

The Gross and Rackind families each held 50 per cent of Citybranch Group Limited, a quasi-partnership holding company. Its property investment business was conducted through wholly owned subsidiaries. The relationship of trust and confidence underlying the quasi-partnership broke down, after which the Rackind family sought to wind up the holding company and the Gross family presented a petition under section 459 of the Companies Act 1985.

The petition alleged misconduct concerning both the holding company and its subsidiaries. On a strike-out application, His Honour Judge Weeks QC held that the petition had a realistic prospect of success and permitted it to be amended. The Rackind family appealed. The principal issue was whether conduct of a wholly owned subsidiary’s affairs could also constitute conduct of the holding company’s affairs where their directors overlapped.

1. Appeal dismissed. Sir Martin Nourse, with whom Jacob and Keene LJJ agreed, held that the petition had a realistic prospect of establishing unfairly prejudicial conduct of the holding company’s affairs. The judge had therefore adopted the correct approach when refusing to strike it out.

2. The expression “the affairs of the company” in section 459 of the Companies Act 1985 is of very wide import. The court may consider the business reality rather than confining itself to a narrow legalistic analysis. Conduct of one company’s affairs can consequently also amount to conduct of another company’s affairs.

3. The affairs of a wholly owned subsidiary may form part of the affairs of its holding company. That conclusion was particularly appropriate where the holding company necessarily controlled the subsidiary and the holding company’s directors constituted a majority of, or were identical to, the subsidiary’s directors. Nicholas v Soundcraft Electronics Ltd [1993] BCLC 360 illustrated the converse situation, while R v Board of Trade, ex p St Martins Preserving Co Ltd [1965] 1 QB 603 supported a broad understanding of a company’s affairs. The persuasive Australian decisions in Re Norvabron Pty Ltd (No 2) (1986) 11 ACLR 279 and Re Dernacourt Investments Pty Ltd (1990) 2 ACSR 553 were followed.

4. The statement in Re A Company [1987] BCLC 141 that the complaint must concern the affairs of the company in respect of which the petition is presented did not determine the issue. It had to be read in context because that case did not concern a group structure or whether the same conduct could be the conduct of two companies’ affairs.

5. Conduct prejudicing a subsidiary was capable of prejudicing the holding company’s members. Harm to the subsidiary could diminish the value of the holding company’s investment and thereby cause actual or potential prejudice to its shareholders.

6. Against the background of a quasi-partnership and an agreement to co-operate in managing the business, causing an irrevocable breakdown of trust and confidence was arguably conduct of the company’s affairs. The challenge to retaining the allegation concerning threats to wind up the company disclosed no ground for interfering with the judge’s case-management judgment. Questions whether other alleged conduct occurred outside a subsidiary’s affairs or could be remedied by its board required determination at trial.

7. The judge’s permission to amend the petition was also a discretionary decision which the Court of Appeal affirmed. The appeal was dismissed with costs, permission to appeal to the House of Lords was refused, and the petition was returned to the registrar for further directions.

1. Court of Appeal (Civil Division): In [2004] EWCA Civ 815, dismissed the Rackind family’s appeal, affirmed the refusal to strike out the section 459 petition and upheld permission to amend it.

2. High Court, Chancery Division: His Honour Judge Weeks QC, sitting as a deputy High Court judge, declined to strike out the petition and permitted its amendment. No citation is stated in the judgment.