Kelly & Anor v Hussain & Ors

Exclusion from a quasi-partnership company is prejudicial, but it is not unfair prejudice under Companies Act 2006, section 994, where the shareholder’s own misconduct justified dismissal and exclusion. Relief depends on establishing both prejudice and unfairness. A shareholder has no automatic right to exit merely because relations have broken down. An irregular corporate act may not justify intervention where it can readily be corrected.

The petitioners were shareholders in Principal Housing Care Ltd, a business operated on a personal relationship of trust and confidence and treated as a quasi-partnership. Both had been involved in management. Mrs Kelly was dismissed after sending an unauthorised and damaging letter to Sandwell Borough Council. Mr Kelly was later dismissed and excluded after admitting that he had retained company refunds and used company funds to pay personal tax liabilities.

The court directed two preliminary issues concerning relief under section 994 of the Companies Act 2006. The respondents called no evidence on those issues. Other allegations concerning later conduct remained for possible determination after proper amendment and particularisation.

1. The preliminary issues were answered no. The petitioners established that the company was operated as a quasi-partnership and that each had a legitimate expectation of continued participation in management. That expectation was consistent with Ebrahimi v Westbourne Galleries [1973] AC 360.
2. Exclusion was prejudicial, but prejudice alone was insufficient. The court had to decide whether the exclusion was unfair. A quasi-partner was not entitled to remain in management irrespective of personal conduct.
3. Mrs Kelly’s dismissal was justified by her unauthorised and intemperate correspondence with Sandwell, sent in the names of all three directors without authority. Mr Kelly knew of, or participated in, the conduct and could also have been dismissed on that ground. Independently, his retention of electricity refunds and use of company funds to pay personal tax liabilities without debiting them to his loan account constituted dishonesty sufficient to justify dismissal and exclusion.
4. The asserted pressure to surrender the shares for no consideration did not make the dismissals unfair. The company was solvent, the respondents were prepared to draw a line under the wrongdoing, and the petitioners had access to legal advice. There was no automatic right to exit from an investment merely because shareholders had fallen out.
5. The court did not decide whether the directors’ acts complied with all statutory or constitutional requirements. It observed that an irregularity which could readily be corrected might not justify intervention, citing Browne v La Trinidad (1887) 37 Ch D 1. It also noted, without ruling, a possible issue concerning the validity of the appointment of an administrator while Mr Kelly remained a de jure director.
6. The respondents were awarded costs to date. Interim payments of £60,000 to Mrs Dell and Capricorn Investments Ltd and £20,000 to Mr Hussain were ordered.