Kohli v Lit & Ors

Under section 994 of the Companies Act 2006, prejudice and unfairness are distinct questions assessed objectively. A genuine need for capital does not make a rights issue immune from challenge. Directors exercising the fiduciary power to allot shares must act fairly between shareholder groups and properly consider the likely responses of minority shareholders, the effect on value and an appropriate issue price. An issue at par, made without proper consideration, may be unfairly prejudicial even where the issue is offered pro rata and no improper purpose is proved. Repeated statutory defaults, misleading conduct, unauthorised remuneration and inadequate accounting disclosure may cumulatively destroy reasonable confidence in the board. Relief may include a buy-out under section 996, with an undiscounted valuation where the particular circumstances make that fair.

Geeta Kohli, a minority shareholder in Sunrise Radio Limited, petitioned under section 994 of the Companies Act 2006. She challenged a 2005 rights issue and allotment which diluted her holding, a further increase of capital in 2007, non-payment of dividends, payments to companies associated with the chief executive, accounting disclosures, the sale of company property to a director, and late corporate filings.

The court found that several complaints were established, including the failure properly to consider the 2005 and 2007 issue prices, the misleading conduct surrounding the 2007 meeting, an unauthorised consultancy invoice, inadequate disclosure of directors’ remuneration, the absence of shareholder approval for the property sale, and cumulative filing failures. Other complaints, including the challenge to the need for capital, non-payment of dividends, and the property’s alleged occupation by the director, failed. The central issues were whether the conduct was objectively unfairly prejudicial and what relief and valuation basis were appropriate.

Disposition. The petition was well founded. The court ordered that Ms Kohli’s shares be purchased, principally by Dr Lit or a purchaser procured by him. Mr Jain and Tony Lit were jointly and severally liable to purchase the shares to the extent that Dr Lit failed to do so.

1. The 2005 rights issue was prompted by a genuine need for working capital, and Ms Kohli had received notice of the offer. The choice to raise capital by rights issue was therefore not itself unfair. The directors nevertheless failed to consider whether the shares should be issued above par, despite knowing that Ms Kohli was unlikely to subscribe and that the shares were worth substantially more than par. The allotment to ABC consequently breached the directors’ fiduciary duties and unfairly prejudiced the minority shareholders.
2. The 2007 increase of capital was also unfairly prejudicial. Ms Kohli and her solicitors were wrongly led to believe that the adjourned meeting would not occur. The subsequent disapplication of pre-emption rights increased the risk of further dilution and destroyed any remaining reasonable confidence in the board, even though no further shares had yet been allotted. The principle in Re Kenyon Swansea Ltd [1987] BCLC 514 supported treating a proposed prejudicial act as sufficient.
3. The non-payment of dividends was not unfair in the circumstances. The company’s established growth strategy, known to and acquiesced in by Ms Kohli while a director, required profits to support loss-making subsidiaries, and there were no available cash resources for dividends. The court also held that later consultancy payments were authorised and genuine, except for the £150,000 invoice covering an unauthorised earlier period. The accounting treatment of the authorised payments was nevertheless deficient because the directors’ remuneration and connected-party payments were not properly disclosed.
4. The sale of Jersey House to Dr Lit lacked the shareholder approval required by section 320 of the Companies Act 1985. That breach was real and substantial, although the transaction’s price and financial terms were fair and the complaint alone might not have justified relief. Repeated late accounts and filings, together with the other established matters, cumulatively constituted unfair prejudice.
5. Section 996 of the Companies Act 2006 conferred a broad discretion. Ms Kohli’s shares were not to be treated as 15 per cent of the company as if the 2005 allotment had not occurred. Instead, the 2005 issue was to be valued at the proper price by reference to the value of Sunrise as a whole. The valuation date was 13 November 2009. On the particular facts, including Ms Kohli’s original investment, her unwillingness to sell, the growth strategy and the risk of unjust enrichment, the shares were to be valued without a minority discount.