Rahman v Malik & Ors

In a quasi-partnership company, unfair prejudice may arise where the parties’ agreed arrangements require equal participation, but one member is excluded from management, deprived of profits, or subjected to an unauthorised dilution of his shareholding. The assessment of fairness is contextual and grounded in equitable principles of good faith and conscience. A reasonable offer to purchase an excluded member’s shares at fair value, generally without a minority discount, may affect the availability of relief. The offer must nevertheless address material matters such as unpaid dividends and under-declared profits. Delay does not by itself defeat relief where the circumstances explain it and no material prejudice is shown.

The petitioner held shares in Gate of India (Tynemouth) Ltd, a family company operating a restaurant business. He alleged that he had succeeded his father as an equal participant in a quasi-partnership, but had not been appointed a director, had been excluded from management, had not received his share of profits, and had suffered an unauthorised dilution of his shareholding.

The petition was presented under Companies Act 1985, s 459, and was treated by agreement as continuing under Companies Act 2006, s 994. The central issues were whether the alleged arrangements existed, whether the conduct was unfairly prejudicial, whether delay or rejected buy-out offers affected relief, and how the petitioner’s interest should be valued.

1. The petition succeeded. The court ordered, subject to consequential submissions, that the first respondent purchase the petitioner’s shares at 50 per cent of the company’s value, valued at the date of the order.

2. Fairness under Companies Act 2006, s 994, is contextual. It is not determined by the judge’s personal view of fairness, but by equitable principles concerning agreed arrangements, good faith and unconscionable reliance on strict legal rights. The company was a quasi-partnership in which the petitioner had agreed rights and expectations of participation.

3. The petitioner had succeeded his father’s interest in the business, including an equal shareholding, participation in management and appointment as a director. His exclusion, the failure to appoint him to the board, non-payment of his share of profits and the attempted dilution of his shareholding were contrary to that arrangement and unfairly prejudicial.

4. Temporary exclusion during an altercation could be justified, but permanent exclusion was not. The petitioner’s subsequent delay did not defeat relief. His son’s illness and death, his depression, continuing contact with the company and the absence of demonstrated prejudice explained the delay.

5. The buy-out offers were unreasonable because they failed adequately to account for unpaid dividends and the under-declaration of profits. The petitioner’s equal interest was therefore to be valued without a minority discount. He was also entitled to his proper share of dividends, increased by 15 per cent for the first two accounting periods to reflect the established under-declaration, subject to credits for sums already received and reconciliation of diverted funds.

6. The parties were directed to seek agreement on the accounting issues. If agreement was impossible, those matters were to be determined by inquiry or further hearing.