Shah v Shah & Ors

In a family company operated as a quasi-partnership, exclusion of a shareholder from management may constitute unfair prejudice where it breaches the understandings on which the company was formed. A breakdown in trust and confidence does not itself end the company’s quasi-partnership character. Exclusion is ordinarily unfair where the shareholder is removed from substantially all management functions without a reasonable offer to purchase the shares. The court may order a purchase of the petitioner’s shares under Companies Act 2006, section 996, rather than winding up a profitable company where purchase provides an appropriate remedy.

The proceedings comprised an unfair-prejudice petition by Dinesh Shah concerning Mister Dee International PLC and a separate claim challenging the transfer of 4,000 shares to his brother Mahendra. The brothers had previously litigated disputes about share ownership, management and the company’s affairs. The court considered the effect of the earlier judgment and an Employment Tribunal decision, the validity of the share transfer, whether Dinesh had been excluded from management, and whether the company’s affairs had been conducted unfairly.

1. Share transfer. Dinesh’s claim to avoid the transfer of 4,000 shares failed. The letter signed with the stock transfer form showed a sufficiently clear intention to create a trust in Mahendra’s favour. It was unnecessary to identify particular shares within Dinesh’s holding: Paul v Constance [1977] 1 WLR 527; Hunter v Moss [1994] 1 WLR 452.
2. Abuse of process. Dinesh could not relitigate before the High Court issues about his willingness to work for the Company which had been contested and determined by the Employment Tribunal. Applying the broad, merits-based approach in Johnson v Gore Wood & Co [2002] AC 1, the proposed relitigation would be oppressive and a collateral attack on findings fundamental to the Tribunal’s decision. The distinction between the Company and CJ did not prevent the application of that principle.
3. Quasi-partnership. The Company was established on the basis of personal relationships, mutual confidence and an understanding that the shareholder-directors would participate in management. Its later breakdown did not deprive it of that character. The concept remained relevant notwithstanding that CJ was the dominant brother and held the majority shareholding: In re Westbourne Galleries Ltd [1973] AC 360; O’Neill v Phillips [1999] 1 WLR 1092.
4. Unfair prejudice. CJ’s conduct on and after 29 July 2005 removed Dinesh’s effective functions as director and excluded him from overall decision-making. Exclusion from management, without an appropriate offer to purchase the excluded shareholder’s shares, was sufficient to constitute unfair prejudice. Dinesh’s misconduct as an employee did not justify his exclusion from the management rights attached to the quasi-partnership understanding.
5. Relief. The petition for winding up under the Insolvency Act 1986 was dismissed. The appropriate remedy was an order for the purchase of Dinesh’s shareholding under section 996 of the Companies Act 2006. No purchase order was made against Mahendra, whose involvement in the relevant conduct was limited.