Croly v Good and Others

The petitioner succeeded in part under section 994 Companies Act 2006, the court finding that the company's affairs had been conducted in a manner unfairly prejudicial to his interests as a member. The court concluded that FP Mailing (Windsor) Ltd had become a quasi-partnership by early 2006 such that equitable considerations applied to informal arrangements between the two principal participants. The judge found that the petitioner had been effectively expelled on 9 November 2007 and that, since that date, the first respondent had drawn substantial sums in a manner inconsistent with the parties' agreed Remuneration Strategy and with the petitioner’s expectation of broad equality of receipts.

The court rejected a number of the petitioner’s specific complaints (notably some alleged overdrawings in earlier years and the contention that earlier arrangements were backdated to 1 April 2005) after detailed factual findings on witness credibility and accounting entries. As relief the court directed that the first respondent should be ordered to purchase the petitioner’s shares without a minority discount and that valuation should be carried out as at the date of the petitioner’s expulsion, 9 November 2007, with the valuer directed to assume the directors' loan accounts are recoverable in full.

Background and procedural posture:

• The petition under section 994 Companies Act 2006 was presented by Mr Croly on 30 June 2008 seeking a buyout of his shares in FP Mailing (Windsor) Ltd, alleging unfair prejudice by the respondents (principally Mr Good) in respect of exclusion from management, excessive drawings and failure to declare dividends. The matter was heard in the Chancery Division (Companies Court) before HHJ David Cooke.

Key factual findings:

• The company had 100 shares (75 A; 25 B). The petitioner held 30 A shares (40% of A class, 30% of issued capital). Mr and Mrs Good held the balance; Mrs Good played little active part and her holding was effectively under Mr Good's control.
• The court found that by early 2006 the relationship between Mr Good and Mr Croly had the characteristics of a quasi-partnership: the petitioner participated in management (notably sales), was held out to the franchisor as a principal, and had entered into a remuneration arrangement (the "Remuneration Strategy") with a structure of broadly equal net monthly receipts.
• The judge made detailed credibility findings: both principal witnesses were unreliable in places; contemporaneous records, accounting entries and third-party documents (for example the franchisor’s Deed of Adherence request) were used to resolve factual disputes.
• The court found that the petitioner was excluded from management on 9 November 2007 (expelled) and that since that date the first respondent had drawn substantial further sums (of the order of £200,000) and placed the company into administration by a pre-pack sale to a vehicle controlled in practice by Mr Good.
• The court rejected several specific alleged breaches: it did not find that the Remuneration Strategy was backdated to 1 April 2005, did not accept the petitioner’s claim that certain earlier payments should be charged to Mr Good personally, and found that in the 2006–07 year the petitioner had in fact drawn more than the respondent.

Issues framed and legal reasoning:

• Whether the conduct was prejudicial to the petitioner in his capacity as member and unfair within the meaning of section 994. The court applied the established approach to unfairness and to quasi-partnerships, considering the parties' informal arrangements, the nature of participation in management, and whether equitable considerations should be applied.
• Whether the company was a quasi-partnership. The court concluded it was, on the basis of participation in management, the parties’ arrangements for profit distribution and the franchisor's treatment of the petitioner as a principal.
• Which complaints were unfairly prejudicial. The court held that the expulsion, the failure to declare dividends for 2007 and 2008 and the post-expulsion extra drawings were unfair and prejudicial; other complaints were dismissed on the facts.
• Relief and valuation date. The court considered authorities on valuation dates and fairness and concluded that a valuation as at the date of expulsion (9 November 2007) was required to avoid unfairness to the petitioner given subsequent events, including the company’s decline and pre-pack disposal. The court directed that the buyout be on a non-discounted basis and that the valuer assume directors' loan accounts recoverable in full.

Remedy and next steps:

• The court concluded that the appropriate remedy was an order for the first respondent to purchase the petitioner’s shares at a fair valuation determined as at 9 November 2007, without minority discount. Directions for valuation were to follow and a hearing was to be listed to hand down the formal order if the parties did not agree the terms themselves.

The petition under section 994 succeeds in part. The court held that the company had become a quasi-partnership and that the petitioner’s expulsion (9 November 2007), the failure to declare dividends for 2007–08 and post-expulsion extra drawings by the first respondent were unfairly prejudicial to the petitioner as a member. The appropriate relief is an order that the first respondent purchase the petitioner’s shares on a non-discounted basis. The valuation is to be fixed as at 9 November 2007 and the valuer is to assume the directors' loan accounts are recoverable in full. Other complaints were rejected on the facts.