In re Neath Rugby Ltd, Hawkes v Cuddy (No. 2)

The court considered petitions under the predecessor of Part 10 of the Companies Act (formerly Part XVII of the Companies Act 1985 and now sections 994 and 996 of the Companies Act 2006) alleging that the affairs of Neath Rugby Limited had been or were being conducted in a manner unfairly prejudicial to members. Key legal issues included the scope of a nominee director’s duties where that director sits on the board of a separate regional joint venture (the Ospreys), the consequences of contravention of section 216 of the Insolvency Act 1986, the extent to which the affairs of a separate company (the Ospreys) could be treated as the affairs of Neath, and whether deadlock or breakdown in trust justified winding up or ordered buy-outs.

The judge found some of the allegations in both the petition and the cross-petition well founded but not such as to justify winding up or a compulsory buy-out. He held that: (i) many operational decisions taken by the Ospreys were the Ospreys’ own affairs rather than Neath’s affairs; (ii) Mr Cuddy owed fiduciary duties to the Ospreys when acting as its director but also owed a duty to consult Mr Hawkes as Neath’s co-owner under the Hawkes/Cuddy arrangement and the later shareholders’ agreement; (iii) unlawful participation in Neath’s management in breach of section 216 occurred historically but the illegal situation had been cured by resignation of Mrs Cuddy; and (iv) limited unfair prejudicial conduct was established, notably misuse of Neath’s confidential information in relation to trademark litigation and failures to consult over StadCo and WRU negotiations. Relief was fashioned to preserve the 50:50 regional structure while giving the petitioner a voice and safeguards in future governance rather than effecting a demerger, buy-out or winding up.

This is a three-week first instance hearing concerning a bitter dispute between joint participants in a company (Neath Rugby Limited) that acquired and ran Neath Rugby Football Club following reorganisation of Welsh rugby. The petitioner, Mr Frederick Geraint Hawkes (through companies he controls), and the cross-petitioner/respondent, Mr Michael Cuddy (nominally through his wife), each alleged unfair prejudice under the statutory regime applicable to quasi-partnership companies. The dispute arose from tensions between Neath as a local club and Neath’s involvement in the regional venture, Neath-Swansea Ospreys ("the Ospreys").

Key background facts: (i) Hawkes and Cuddy reached an oral Hawkes/Cuddy agreement in early 2003 to co-acquire the club as joint co-owners and co-managers; (ii) because of perceived section 216 restraints after the insolvency of Gowerpark Ltd, Mrs Cuddy was placed on Neath’s board as a nominee director and in practice acted as a front for Mr Cuddy; (iii) Neath became a 50% participant in the Ospreys, with Swansea holding the other 50%; (iv) disputes arose over matches to be played at the Gnoll, merchandising and trade mark licensing, the withdrawal of development players, the StadCo stadium arrangements and negotiations with the WRU; and (v) relations deteriorated into litigation (including trademark proceedings) and criminal prosecution relating to late filings; the matter had earlier been the subject of a hearing before HH Judge Havelock-Allen QC and an appeal to the Court of Appeal in relation to findings about section 216.

Nature of the claim / relief sought: the petitioner sought relief for unfair prejudice under the Companies Act (former s.459 CA 1985 / now s.994 CA 2006), including orders to redress the alleged unfair conduct, and potentially a buy-out, winding-up or other remedies. The cross-petitioner sought relief of a similar nature.

Issues framed by the court included:

• Whether Mr Cuddy’s conduct as a director of the Ospreys amounted to conduct of the affairs of Neath and, if so, whether it caused unfair prejudice;
• The legal duties of a nominee director and the extent to which he must advance the appointor’s interests as distinct from the company he serves;
• The legal effect and consequences of contravention of s.216 Insolvency Act 1986 on management participation;
• Whether deadlock, frustration or illegality justified winding up or compulsory buy-out;
• The appropriate remedy if unfair prejudice were established.

Court reasoning, briefly:

• The judge analysed nominee director duties, concluding that when acting within the Ospreys board Mr Cuddy owed fiduciary duties to the Ospreys and must exercise independent judgment for that company’s benefit, but he also had an established duty to consult Mr Hawkes arising from the Hawkes/Cuddy arrangements and the later shareholders’ agreement.
• The judge held that many decisions taken by the Ospreys (venue, merchandising, StadCo involvement) were decisions of that separate company and not per se conduct of Neath’s affairs; however, specific acts by Mr Cuddy—notably the disclosure and use of Neath’s internal confidential information in the trademark dispute and failures to consult over StadCo/WRU matters—did amount to conduct of Neath’s affairs and were unfairly prejudicial.
• Findings of past illegality under s.216 were accepted on the evidence set out by the earlier judge and upheld by the Court of Appeal, but the unlawful situation had been remedied by resignation of Mrs Cuddy; the court treated that past illegality as relevant context but refused to grant draconian remedies based on it because the illegality had been cured and the petitioner agreed not to rely on future s.216 breaches for relief.
• Deadlock and breakdown in trust were considered: although relations had irretrievably broken down, the company continued to function and the court declined to treat the situation as justifying winding up or compulsory sale; instead it fashioned relief to avoid further unfair conduct and to preserve Neath’s Ospreys share.

The judge concluded that limited unfair prejudice was proved and ordered relief in substance reflecting the joint Cuddy/Swansea proposal of 5 November 2007: preserve the 50:50 Ospreys structure, remedy consultation failings and give Mr Hawkes a voice and safeguards ("eyes and ears") in Ospreys governance and effective control mechanisms within Neath’s board, rather than ordering a buy-out, demerger or winding up.

The petition and cross-petition were allowed in part. The court found limited unfairly prejudicial conduct (notably misuse of Neath’s confidential information and failures to consult over StadCo/WRU matters) but rejected orders for winding up or compulsory buy-out. The judge held that, as a director of the Ospreys, Mr Cuddy owed fiduciary duties to the Ospreys and an independent judgment obligation, while also owing a duty to consult Mr Hawkes under their joint arrangements and the shareholders’ agreement. Past illegality under section 216 Insolvency Act 1986 was accepted but had been cured by resignation; accordingly relief was fashioned to preserve the 50:50 regional structure and to give the petitioner governance safeguards rather than ordering demerger, sale or winding up.

The dispute had previously been the subject of a five day hearing before HH Judge Havelock-Allen QC; aspects of that hearing (findings about contravention of section 216) were the subject of an appeal to the Court of Appeal. Neutral citations for those prior decisions are not given in the text of this judgment.