Kelly v Hussain

The claim was a petition under section 994 of the Companies Act 2006 alleging that the petitioners had been unfairly prejudiced by their dismissal and exclusion from management following the transfer of a partnership business into Principal Housing Care Ltd. The court determined two preliminary issues: whether Mr Kelly and/or Mrs Kelly were entitled to relief under section 994 by reason of their dismissal and/or exclusion.

The judge found that the company had been run as a quasi-partnership with a mutual expectation that each participant would continue to participate in management, but that exclusion does not automatically amount to unfair prejudice. The court held that Mrs Kelly’s intemperate and damaging letter to Sandwell justified her dismissal and that Mr Kelly’s admission of dishonesty (receipt and retention of refunds and use of company funds for personal tax) justified his dismissal and exclusion. Accordingly the preliminary issues were answered in the negative.

The court also dealt with costs: the respondents were awarded their costs to date and interim payments on account were ordered (£60,000 to Mrs Dell/Capricorn Investments Ltd and £20,000 to Mr Hussain). Certain wider allegations (including alleged misapplication of funds and the company’s administration) were left to be particularised and, if properly pleaded, tried later.

Background and parties: The business began as a partnership in about 2003 involving Mr Kelly, Mr Hussain and Mrs Dell, with Mrs Kelly heavily involved operationally. The business was transferred in 2005 into Principal Housing Care Ltd. Shareholdings and management roles reflected the prior arrangement: 25 shares to Mr Kelly, 25 to Mrs Kelly, and 50 between Mr Hussain and Mrs Dell; there were three directors (Mr Kelly, Mr Hussain and Mrs Dell). The petitioners alleged a quasi-partnership and a legitimate expectation of continuing management participation.

Nature of the application: A petition under section 994 of the Companies Act 2006 for relief on grounds of unfairly prejudicial conduct, focused in preliminary issues on whether the dismissals/exclusions of Mr and Mrs Kelly were unfairly prejudicial.

Key facts:

• Mrs Kelly attended a meeting with Sandwell Borough Council on 5 February 2007; on 6 February she wrote an assertive letter to Sandwell purporting to withdraw the company from Sandwell and criticising Sandwell’s conduct. That letter was damaging to the company’s reputation and led to Sandwell withdrawing placements. Mrs Kelly was dismissed on 19 February.
• Mr Kelly failed to disclose that refunds from Scottish Power, payable to an account in his name, had been banked to his personal account; he admitted this amounted to theft. Other irregular use of company funds for personal purposes was also found.

Issues framed: (i) Whether the petitioners were entitled to relief under section 994 by reason of Mr Kelly’s dismissal/exclusion; (ii) whether the petitioners were entitled to relief under section 994 by reason of Mrs Kelly’s dismissal/exclusion. The court also considered whether the dismissals were justified and whether the petition disclosed unfair prejudice.

Reasoning and decision: The judge accepted that the company operated as a quasi-partnership and that the petitioners were excluded from management, but emphasised that exclusion is not automatically unfair. The conduct of the petitioners was examined: Mrs Kelly’s letter was found to be intemperate, damaging and likely known to Mr Kelly; her dismissal was therefore justified. Mr Kelly’s dishonesty in retaining refunds and using company funds for personal tax was found to be dishonest conduct justifying dismissal and exclusion. Consequently both preliminary issues were answered in the negative and no relief under section 994 was available on those grounds. The judge also observed procedural and pleading deficiencies in later allegations (unexplained cash withdrawals and alleged misuse leading to administration) and required re-pleading with particularity before those matters could be tried.

Costs: The respondents were awarded their costs to date and interim payments on account were ordered: £60,000 to Mrs Dell/Capricorn Investments Ltd and £20,000 to Mr Hussain. The judge explained the basis for reserving or ordering costs in the context of the preliminary issues and the February amendments to the petition.

The court answered the two preliminary issues in the negative: the petitioners were not entitled to relief under section 994 of the Companies Act 2006 in respect of the dismissal and exclusion of Mrs Kelly and Mr Kelly. Rationale: the company was a quasi-partnership but the dismissals were justified by the petitioners’ own conduct (Mrs Kelly’s damaging letter to Sandwell and Mr Kelly’s dishonest retention of refunds and misuse of company funds), so the prejudice was not unfair. Costs were awarded to the respondents with interim payments ordered. Certain other allegations were left for further pleaded and trial if particularised.