Wilson v. Jaymarke Estates Limited and another (Scotland)

The House dismissed an appeal against an order under section 461(2)(d) of the Companies Act 1985 requiring the majority shareholder to buy out the minority shareholder following a successful unfair prejudice petition under section 459. The sheriff had found that management charges totalling £235,000 were transferred out of the company without commercial justification and in breach of fiduciary duty, and had added those sums back for valuation purposes. The appellant argued that past practice amounted to consent to such charges or entitled him to a discount; the House held that past agreement in a different commercial context did not constitute consent to later, unsupported extractions and that there was no evidential basis for a discount. The court also noted the limits on the House's appellate jurisdiction in appeals from the Court of Session under section 32 of the Court of Session Act 1988.

Background and facts:

• Jaymarke Estates Ltd was used for a property development by two director-shareholders, Mr Shaw (70%) and Mr Wilson (30%). They fell out in 1996 and Mr Wilson resigned. In November 1997 Mr Wilson presented a petition under section 459 of the Companies Act 1985 alleging conduct unfairly prejudicial to his interests.
• The sheriff, after a nine day proof, found unfair prejudice based on (a) an irrecoverable loan of £88,125, (b) management charge payments of £150,000 to Jaymarke (Northern) Ltd and £85,000 to Jaymarke Developments Ltd, and (c) failure to hold annual meetings or lodge returns. The sheriff treated the management charges as having no commercial reality and as breaches of fiduciary duty, added them back for valuation and ordered Mr Shaw to buy Mr Wilson's shares under section 461(2)(d), fixing the value at £49,345.

Procedural history:

The Inner House of the Court of Session upheld the sheriff's interlocutor ([2005] ScotCS CSIH_84). The majority shareholder appealed to the House of Lords.

Nature of the claim and relief sought:

Petition under section 459 seeking a remedy for unfairly prejudicial conduct; the remedy ordered by the sheriff was a buy-out under section 461(2)(d).

Issues before the House:

1. Whether the management charge payments were unfairly prejudicial and correctly added back for valuation.
2. Whether the respondent should be taken to have consented to those charges by prior practice or whether a discount should be allowed because the respondent held shares in the recipient company.
3. Appellate scope under section 32 of the Court of Session Act 1988.

Court's reasoning and disposition:

The House accepted the factual findings of the sheriff and Inner House that the management charges in 1995 and 1996 had no commercial reality and were made to minimise group tax liabilities rather than reflect services to Estates. Past practice up to about 1993, when different companies provided services and costs were legitimately allocated, did not amount to consent to later extractions after the relationship between the directors had broken down. There was no evidence to justify a discount relating to the recipient company. Although appeals from the Court of Session to the House of Lords are limited to questions of law by section 32 of the Court of Session Act 1988, the appeal failed on its merits. The House therefore dismissed the appeal. The judgment also included an observation about the special right of appeal to the House from the Court of Session and the need to respect the limits of that jurisdiction.

Appeal dismissed. The House upheld the sheriff's and Inner House's findings that the payments labelled as management charges lacked commercial reality and constituted breaches of fiduciary duty; they were properly added back for valuation. Past agreement to a lawful taxation-driven allocation of costs before 1993 did not amount to consent to later, unsupported payments after the relationship between the directors broke down. No discount was warranted and there was no basis to disturb the buy-out order under section 461(2)(d). The court also noted the restricted scope of appeals from the Court of Session under section 32 of the Court of Session Act 1988.

Sheriff at Aberdeen (proof and interlocutor finding unfair prejudice; order under Companies Act 1985 s461(2)(d)); appeal to the Inner House of the Court of Session which adhered to the sheriff's interlocutor ([2005] ScotCS CSIH_84); appeal to the House of Lords ([2007] UKHL 29) dismissed.