Wilson (Respondent) v. Jaymarke Estates Limited and another (Appellants) (Scotland)

Past consent to management charges within a group of associated companies does not authorise a controlling director to make future payments lacking commercial justification. Consent inferred from a course of dealing extends only to dealings undertaken in materially comparable circumstances.

A director’s transfer of company assets to associated companies, where no services were supplied and no contractual liability existed, may constitute a breach of fiduciary duty and unfair prejudice to a minority shareholder. On valuing the minority interest for a compulsory purchase order, the improperly transferred sums may be restored to the company’s assets.

Two shareholders used Jaymarke Estates Ltd for a property development. After their quasi-partnership broke down, the majority shareholder became sole director. The minority shareholder petitioned under section 459 of the Companies Act 1985, alleging unfairly prejudicial conduct.

The sheriff found unfair prejudice arising from an irrecoverable loan, corporate governance failures and £235,000 in management charges paid to associated companies which had supplied no services. She ordered the majority shareholder under section 461(2)(d) to purchase the minority holding for £49,345, valuing the company as if the management charges remained its assets.

The Inner House adhered to that decision: [2005] ScotCS CSIH_84. The appeal concerned whether the minority shareholder’s participation in an earlier practice of allocating commercially justified management charges amounted to advance consent to the later payments, and whether the valuation required a discount because he held shares in one recipient company.

1. Appeal dismissed unanimously. Lord Hoffmann delivered the leading speech. Lord Hope, Lord Rodger, Lord Walker and Lord Carswell agreed that the appeal should be dismissed for his reasons.

2. Per Lord Hoffmann, the minority shareholder’s earlier agreement to management charges did not amount to prospective consent to all charges later recommended by the accountants. The former practice operated while both shareholders participated in management and while a hub company incurred costs for the benefit of associated companies. It therefore possessed a commercial basis, even though the allocation was predominantly arranged to minimise overall corporation tax.

3. The challenged payments occurred after that practice and the quasi-partnership had ended. Neither recipient supplied services to the company, no express or implied management contract existed, and one recipient was not trading. Past consent in materially different circumstances could not authorise the majority shareholder to deal with the company’s assets as his own. The sheriff was entitled to treat the payments as unfairly prejudicial and to add £235,000 back when valuing the company under sections 459 and 461(2)(d) of the Companies Act 1985.

4. Per Lord Hoffmann, no valuation discount was justified merely because the minority shareholder held 27% of one recipient company. There was no evidence about that company’s financial position, and any money received might have been absorbed by creditors. In any event, the paying company was entitled to reclaim the money.

5. Lord Hoffmann observed that section 32 of the Court of Session Act 1988 confined the House’s jurisdiction in this appeal to questions of law. Whether the appellants’ contentions met that description was doubtful, but the issue required no determination because the appeal failed even on the widest view of the jurisdiction.

6. Lord Hope, with the express agreement of Lord Rodger and Lord Walker, emphasised that sections 32(4) and 32(5) prevent the House from reanalysing the evidence and permit an appeal only on a genuine question of law. Counsel certifying a Scottish appeal as reasonable must respect that restriction. The unrestricted route of appeal under section 40(1)(a) must be used carefully if it is to remain consistent with the public interest.

1. House of Lords: Dismissed the appeal unanimously and affirmed the Inner House’s decision: [2007] UKHL 29.

2. Inner House of the Court of Session: Adhered to the sheriff’s interlocutor, holding that the management charges lacked services or commercial justification and were properly restored for valuation purposes: [2005] ScotCS CSIH_84.

3. Sheriff Court at Aberdeen: Found the minority shareholder’s section 459 petition well founded and ordered the majority shareholder under section 461(2)(d) of the Companies Act 1985 to purchase his 30% holding for £49,345.