Croly v Good & Ors

For relief under Companies Act 2006, section 994, the petitioner must show both prejudice and unfairness suffered in the capacity of member. In a quasi-partnership company, equitable considerations may qualify the strict rights arising from the constitution and may include an expectation of participation in management and agreed profit-sharing arrangements. Expulsion contrary to that basis, unequal withdrawals outside the agreed arrangement, and failure to declare agreed dividends may be unfairly prejudicial. A buy-out valuation ordinarily begins at the date of the order, but an earlier date is appropriate where later events may unfairly depress value. A minority discount is generally inappropriate where the company is a quasi-partnership.

Christopher Croly petitioned under section 994 of the Companies Act 2006 concerning the affairs of FP Mailing (Windsor) Ltd. He alleged that the company had become a quasi-partnership with Robert Good, that he was entitled to participate in management and share profits equally, and that he had been expelled, denied agreed dividends and disadvantaged by unequal withdrawals.

The court determined whether the company had the relevant quasi-partnership character, whether the complained-of conduct was unfairly prejudicial, and what relief and valuation date were appropriate.

1. The petition succeeded. The company’s affairs had been conducted in a manner unfairly prejudicial to Mr Croly’s interests as a member.
2. Under section 994 of the Companies Act 2006, prejudice must affect the petitioner in his capacity as a member, and the conduct must also be unfair. Unfairness may arise from breach of the basis on which the members agreed that the company would operate.
3. The company had become a quasi-partnership by early 2006. The conclusion rested on the overall relationship, including Mr Croly’s significant management role, his being held out to the franchisor as a principal, his remuneration being substantially linked to company profits, and the personal relationship requiring mutual cooperation. No single factor was conclusive.
4. Mr Croly’s expulsion was prejudicial because it deprived him of participation in management and the opportunity to contribute to profits in which he would share. It was unfair because participation formed part of the agreed basis of operation.
5. Unequal withdrawals in the year to March 2008, and the failure to declare dividends for the years ending March 2007 and 2008, were outside the parties’ broad arrangement for equal distributions and were unfairly prejudicial. Earlier excessive withdrawals and personal expenditure did not independently establish unfairness where both parties had operated under the same informal regime.
6. Following Profinance Trust SA v Gladstone [2001] EWCA Civ 1031, the starting point for valuation was the date of the order, subject to fairness. Here, the appropriate date was 9 November 2007, the date of expulsion, because the company’s subsequent decline, administration and pre-pack sale created a substantial risk of unfairly depressing the value of Mr Croly’s shares.
7. Mr Good was ordered to purchase Mr Croly’s shares. The valuation was to be conducted without a minority discount and on the assumption that the directors’ loan accounts were recoverable in full.