Harris v Jones & Ors

The court held that Mr Jones, who had declared himself trustee of one share for Mr Harris, breached his fiduciary duties by actively participating in the September 2007 transactions which diluted Mr Harris’ 50% beneficial interest to 0.1%. The judge found the allotments and associated secured funding arrangements to be commercially unsubstantiated and motivated, at least in part, by a desire to dilute Mr Harris. The petition under Part 30 (section 994) of the Companies Act 2006 was found to be well founded as the arrangements were unfairly prejudicial to Mr Harris. The court awarded equitable compensation of £110,000 (being an assessment of the claimant’s fair position had the dilution not occurred) plus interest to be fixed, rather than ordering a proprietary remedy or an order requiring purchase of the shares.

The court also made subsidiary findings on credibility: the evidence of Mr Hyslop was preferred over Mr Harris on the events of mid-2007; Mr Harris had withheld some monies collected by Harris Technology Ltd, and had acted in ways that contributed to the company’s cash-flow crisis; and the claimant had not proved that Unicom would have paid a specific sum for the shares. The court refused to give credit against the award for the £25,000 settlement received from Aaron & Partners.

Background and parties. Zetnet Ltd was formed in 2005 with two issued shares owned beneficially by Mr Harris and Mr Jones. In August 2006 Mr Harris transferred legal title of his share to Mr Jones who executed a declaration that he held that share on trust for Mr Harris. Relations later broke down and in September 2007, Mr Jones participated in a package of debentures and allotments which increased issued shares to 1,000, reducing Mr Harris’ beneficial interest from 50% to 0.1%. Mr Harris brought a petition under Part 30 of the Companies Act 2006 (unfair prejudice, s.994) and related proceedings including claims for breach of trust.

Nature of the claims and relief sought. Mr Harris sought relief under section 994 (unfair prejudice) including an order requiring Mr Jones to buy his shares, and personal and proprietary remedies for breach of trust including equitable compensation and, alternatively, proprietary relief over shares or proceeds.

Issues for decision. (i) Credibility of competing witnesses and factual findings as to the events of August–September 2007; (ii) whether Mr Jones as trustee breached duties in participating in the September 2007 transactions; (iii) whether Mr Jones failed to obtain a sale to Unicom (i.e. breach in failing to procure a sale at an asserted price); (iv) whether the conduct amounted to unfair prejudice under s.994; and (v) the appropriate remedy and measure of equitable compensation or other relief.

Court’s reasoning and findings. The judge preferred the evidence of Mr Hyslop to that of Mr Harris on key factual points, and found that Mr Harris had withheld sums collected by Harris Technology Ltd and had sought a debenture and threatened administration. The court accepted that Mr Jones actively participated in the composite transaction of 17–19 September 2007 (sole member resolution, allotments of 998 shares, debentures and priority deed) and that those arrangements were not commercially justified, disproportionately advantaged Mr Jones and were motivated in part to dilute Mr Harris’ interest. The judge rejected the claimant’s case that Mr Jones had an enforceable duty to procure a sale to Unicom at a specific price because (a) there was insufficient evidence what restated accounts would have shown, or what Unicom would have then offered, and (b) the burden lay on the claimant to prove the lost sale (not pursued as loss of a chance).

Remedy. The court found the petition under s.994 to be well founded. Given the sale to Breathe Networks Ltd and subsequent dissolution of Zetnet, the judge awarded equitable compensation rather than ordering purchase: a fair assessment was that the net proceeds would have been reduced to about £220,000 after funding costs, giving Mr Harris a 50% share of £110,000. The judge declined to give credit for the £25,000 received from Aaron & Partners. Interest was to be fixed subsequently. The judge also held that one half of the balance of the forfeited Solutrea deposit (after fees) was payable to Mr Harris as beneficiary.

Petition under Part 30 (s.994) upheld in part and breach of trust established. The judge found that Mr Jones breached his fiduciary duties by participating in the September 2007 allotments and debenture package which had the effect of diluting Mr Harris’ beneficial interest and were unfairly prejudicial. The court awarded equitable compensation of £110,000 plus interest rather than proprietary relief or an order for purchase of the shares, and ordered distribution of the relevant share of the forfeited deposit. The judge declined to find that Mr Jones had a specific breach in failing to secure a sale to Unicom at a stated price due to lack of evidence on what restated accounts would have shown and what Unicom would have offered.