Gerrard v Koby & Anor

A breakdown in the relationship between participants in a quasi-partnership company does not, by itself, establish unfair prejudice. Relief may nevertheless be available where one participant’s conduct breaches the basis of mutual confidence on which the company was formed and makes it unfair for the innocent participant to remain associated with the company.

Conduct may qualify even where the company has suffered no measurable financial loss. A director who diverts a corporate opportunity, discloses confidential company information, or secretly pursues a conflicting personal interest may thereby cause unfair prejudice to a member. The petitioner’s own misconduct is relevant to whether the prejudice is unfair and to the appropriate relief, but there is no general clean-hands requirement.

Baumler (UK) Ltd was operated by Michael Gerrard and Michael Koby, its two directors and shareholders, on the basis that financial contributions, management and important decisions would be shared and generally agreed unanimously.

Gerrard petitioned under section 459(1) of the Companies Act 1985. He alleged that Koby had diverted to Howard Ronson the opportunity to acquire the property occupied by the company, had secretly expected to share in the resulting profits, and had helped pressure the company to surrender its leases. Koby denied unfairly prejudicial conduct and argued that the dispute was merely a breakdown in relations between quasi-partners.

The central issues were whether the conduct concerned the company’s affairs, whether it prejudiced Gerrard in his capacity as a member, whether the prejudice was unfair, and whether relief should be granted under section 461.

1. Jurisdiction and outcome. The petition succeeded in principle. The court found unfairly prejudicial conduct and held that relief should be granted under section 461 of the Companies Act 1985. The precise form of relief was adjourned for further argument, but it should, if possible, include a buy-out order.
2. Section 459 requires conduct of the company’s affairs, or an act or omission of the company or on its behalf, prejudice to the petitioner’s interests in his capacity as a member, and unfairness in that prejudice. A mere breakdown in relations between participants in a quasi-partnership company is insufficient by itself.
3. That limitation did not assist Koby. He had used confidential information concerning the property, procured its acquisition by Ronson’s interests, kept that involvement secret, and later participated in a plan to secure the company’s departure from its premises while expecting a share of the development profit. These acts were breaches of fiduciary duty. They were not authorised by Gerrard or by any agreement that the property opportunity was available for personal exploitation.
4. The company’s lack of proved financial loss after the acquisition did not prevent relief. Koby’s conduct destroyed the mutual confidence on which the company had been formed and made continued association impractical. The resulting prejudice to Gerrard’s membership interests was unfair. The reasoning in O’Neill v Phillips [1999] 1 WLR 1092 supported relief where circumstances had brought the basis of the association to an end.
5. The petitioner’s conduct could be relevant to whether conduct was unfair or to the relief granted. However, Re London School of Electronics Ltd [1986] Ch 211 did not impose an independent clean-hands or just-and-equitable requirement. No such requirement defeated this petition.