Sethi v Patel & Scitec Group Ltd

The petitioner presented a petition under section 994 of the Companies Act 2006 seeking a buy-out of his shares for unfair prejudice. The first respondent conceded, for the purposes of the petition, that unfair prejudice had occurred and agreed that he should buy out the petitioner; the court therefore ordered a compulsory purchase of the petitioner’s shares. The court fixed the valuation date as 13 March 2007 and refused to include an "escape clause" making the purchase conditional on the purchaser’s ability to raise funds, following Re Cumana Ltd. The court declined to award interest or "quasi-interest", applying the guidance in Profinance Trust SA v Gladstone and emphasising that such relief should be exercised with caution. The court made specific factual findings relevant to valuation: Scitec had overpaid rent by £47,000; refurbishment works should be treated as loans from Scitec to Mr Patel amounting to £100,000; Scitec had a claim in respect of Cardnet chargebacks in the sum of £67,707; certain bad-debt and debtor issues should be taken into account by valuers; the two cars purchased in early 2007 were not company assets as at the valuation date; and payments toward a Cyprus property should be treated as a dividend or, if not credited to Mr Patel, as a sum owed by Scitec. The court directed that the exact valuation be determined at a further hearing, giving directions consistent with its findings.

This was a first-instance petition under section 994 of the Companies Act 2006 brought by Mr Sudhir Sethi for an order that his shares in Scitec Group Limited be purchased. The dispute arose after operational and financial concerns culminating in the freezing by Lloyds TSB Cardnet of substantial receipts and Mr Sethi’s resignation on 13 March 2007. The petition proceeded to a limited trial to determine (i) whether unfair prejudice had occurred, (ii) the form of relief, and (iii) directions for valuation.

Parties and posture:

• Petitioner: Mr Sudhir Sethi (co‑founder and 40,000 ordinary shares).
• First respondent: Mr Alpesh Patel (co‑founder, director and 40,000 ordinary shares).
• Second respondent: Scitec Group Limited (company; did not participate).

Issues for decision:

• Whether to order a compulsory purchase of the petitioner’s shares.
• Whether any purchase order should contain an "escape clause" dependent on the purchaser’s solvency.
• Whether interest or "quasi‑interest" should be awarded on the purchase price from the valuation date.
• Specific valuation adjustments: treatment of rent payments, refurbishment costs, Cardnet chargebacks, bad debts, two cars purchased in 2007, and payments relating to a Cyprus property.

Court reasoning and findings:

• The first respondent conceded unfair prejudice and that he should buy the petitioner out; the court held that, ordinarily and in the circumstances, a compulsory purchase order should be made and granted the order.
• An "escape clause" was refused following the principle in Re Cumana Ltd that the court should fix the compensation due and not make the order contingent on the defendant’s ability to raise funds.
• The court declined to award interest or quasi‑interest, applying Profinance Trust SA v Gladstone and noting that awarding such relief is discretionary and should be used sparingly; the petitioner had elected a valuation date of 13 March 2007 and the delay to trial was not a sufficient reason to augment the price by interest.
• Factual findings relevant to valuation included: an oral and lease‑based rent of £36,000 per year with overpayments to £48,000 in specified periods resulting in £47,000 recoverable by Scitec as at the valuation date; refurbishment works which the court treated, on balance, as loans by Scitec to Mr Patel totalling £100,000; failure by Mr Patel to exercise due care in relation to Cardnet transactions leading to a compensatory claim of £67,707 (representing the chargeback sums adjusted for likely gross margin); bad debt entries in the 2007 accounts to be considered by valuers; cars purchased in early 2007 were not company assets at the valuation date; and payments toward a Cyprus property of £21,500 should be treated as a dividend or treated as owed to Scitec if not credited to Mr Patel.

The court directed that the valuation be carried out at a further hearing on the basis of these findings and invited the parties to agree an order to give effect to the conclusions.

This was a first instance petition under section 994. The court ordered that Mr Patel purchase Mr Sethi’s shares (the petition succeeds) because Mr Patel conceded unfair prejudice and a buy‑out was appropriate; the court declined to include an "escape clause" making the order conditional on Mr Patel’s ability to raise funds (following Re Cumana Ltd); refused any award of interest or quasi‑interest (applying Profinance Trust SA v Gladstone and exercising discretion against augmentation); and gave detailed factual findings to govern the valuation of the shares as at 13 March 2007, including specified sums recoverable by Scitec and matters to be taken into account by valuers. The valuation was to be determined at a further hearing.