Re Sunrise Radio Ltd

Key legal principle: A petitioner under section 994 of the Companies Act 2006 must show both prejudice and unfairness; unfairness can arise from breach of statutory or constitutional standards, failure properly to consider relevant factors in the exercise of fiduciary powers, or conduct that undermines trust and confidence. Directors exercising the power of allotment must act in good faith and fairly between shareholders, taking into account foreseeable responses and the likely effect on minorities.

The court found that the petitioner’s unfair prejudice petition succeeded in part. The 2005 allotment of 10,000,000 shares to ABC at par was a breach of fiduciary duty because the board failed to consider price properly, knowing the petitioner was unlikely to subscribe; that allotment diluted both the petitioner’s percentage holding and the value of her shares. The events surrounding the 2007 authorised increase in share capital (including misleading statements about whether the EGM had occurred and the disapplication of pre-emption rights) further destroyed any minimal trust and confidence.

Other material subsidiary findings supporting relief included an unauthorised retrospective invoice of £150,000 by GRS for 2002 (unauthorised by the board), inadequate disclosure in the company accounts of related-party/directors' remuneration (contrary to Schedule 6 / disclosure requirements), and the directors' persistent late filings and poor accounting/secretariat practice. By contrast, the court rejected the petitioner’s allegation that notices of the 2005 rights issue had not been sent; it found on balance that she had received them and chose not to subscribe. The petitioner was not treated as a continuing quasi-partner for all purposes.

Background and relief sought: The petitioner, a minority shareholder of Sunrise Radio Limited holding c.8.33% after a 2005 rights allotment (previously 15%), petitioned under section 994 of the Companies Act 2006 for relief for conduct alleged to be unfairly prejudicial. Primary relief sought was a buy-out on an undiscounted basis treating her as if the 2005 dilution had not occurred; secondary remedies and adjustments were sought in relation to dividends, payments to director-controlled companies, accounting treatment and late filings.

Issues identified by the court:

• Whether the conduct complained of amounted to unfair prejudice (both prejudice and unfairness), including whether the 2005 rights issue and allotment to ABC were properly conducted and priced.
• Whether the petitioner was a quasi-partner or had special expectations.
• Whether directors had authorised and were entitled to consultancy invoices (GRS / ABC) and whether any such charges were properly disclosed in the accounts.
• Whether the 2007 increase in share capital and communication about the EGM were procedurally and substantively proper.
• Whether the sale/occupation of Jersey House and failures to hold/notice AGMs and file returns amounted to unfair prejudice.

Court’s reasoning and findings:

• The court applied the established twofold test of prejudice and unfairness under section 994 and relevant authorities (Saul D Harrison, O’Neill v Phillips, and related case law). It emphasised that directors must act fairly between different shareholder groups when allotting shares and must properly consider price where minorities are unlikely to be able or willing to subscribe.
• On evidence, the court rejected the petitioner’s assertion that notices were systematically withheld; it concluded she had received the 2005 notices but chose not to subscribe. However, the board nonetheless failed to consider the appropriate issue price and issued shares to ABC at par despite the likely effect of substantive dilution in value. That failure to take relevant matters into account was a breach of fiduciary duty and unfairly prejudicial.
• The 2007 increase of authorised capital and the misleading statements about the adjourned EGM compounded the petitioner’s loss of confidence; the disapplication of pre-emption rights increased the risk of further exclusion of the petitioner.
• An invoice of £150,000 purporting to relate to services in 2002 (GRS) was unauthorised because GRS had not been in a position to provide such services at the material time; later consultancy arrangements (from 2003 onward) were authorised by board minutes and the services were found to have been performed. Related-party remuneration should however have been disclosed in the statutory notes and was not, which was inexcusable and prejudicial in undermining shareholder transparency.
• The sale of Jersey House to the controlling shareholder was authorised by the board’s delegation but breached the statutory requirement of shareholder approval under section 320 (Companies Act 1985), even though the sale price was not found to be undervalue. Late filings and administrative failures were not found to be deliberate in all instances, but their cumulative effect, together with the other breaches, rendered the petitioner’s position intolerable.

Remedy and directions: The court ordered that the petitioner be bought out. The judge exercised the broad discretion under section 996 and directed valuation steps: the buy-out was to be on an undiscounted basis (no minority discount), with valuation on a fair basis and practical directions (valuation date fixed as at the date of judgment). Primary liability to purchase was allocated to the controlling shareholder (Dr Avtar Lit or his nominee/ABC), with other directors jointly and severally liable if he did not comply. The court gave detailed directions for valuation and accounting adjustments.

First instance: the petition under section 994 of the Companies Act 2006 is upheld in part. The court found unfair prejudice in respect of (inter alia) the 2005 allotment of shares to ABC at par (failure by directors to consider price and fairness to minority), the misleading conduct and disapplication of pre-emption rights around the 2007 capital increase, the unauthorised £150,000 GRS invoice for 2002, and deficient disclosure of related-party/directors' remuneration. The court dismissed the allegation of a systematic withholding of notices and found the petitioner was not entitled to be treated as a continuing quasi-partner for all purposes. Remedy: order for buy-out of the petitioner’s shares on an undiscounted basis, primary liability on the majority shareholder to procure the purchase, and directions as to valuation (valuation date fixed as judgment date) and adjustments.