Harris v Jones & Ors

A trustee of shares must not use voting or shareholder powers to procure an unjustified diminution in the value of the beneficiary’s interest. An allotment of shares made on apparently uncommercial terms, disproportionately benefiting the trustee and motivated in part by a desire to dilute the beneficiary’s holding, may constitute breach of trust and unfair prejudice under Part 30 of the Companies Act 2006.

A person whose share has been transferred to him but who has not been registered may nevertheless petition under section 994(2). Equitable compensation must reflect what would probably have occurred absent the breach, with the court doing the best it can where the counterfactual involves uncertain commercial events.

Mr Harris beneficially owned one of two shares in Zetnet Ltd, while the registered title was held by Mr Jones on trust for him. In September 2007, Zetnet obtained funding by issuing 998 further shares and granting secured loans. Mr Jones actively participated in those arrangements and received 398 shares, reducing Mr Harris’s economic interest from 50 per cent to 0.1 per cent.

Mr Harris claimed breach of trust and petitioned under Part 30 of the Companies Act 2006 for unfair prejudice. The shares were later sold and Zetnet was dissolved. The principal issues were whether Mr Jones’s participation breached his trusteeship, whether Mr Harris could petition despite not being a registered member, and what compensation and relief should be granted.

1. Breach of trust. Mr Jones actively participated in the September 2007 arrangements. They were apparently uncommercial, disproportionately favourable to him, and motivated in part by a desire to dilute Mr Harris’s 50 per cent interest. The arrangements were incompatible with Mr Jones’s obligations as trustee. He had at least to avoid unjustified steps diminishing the value of the trust share.
2. Alleged failure to sell to Unicom. Mr Harris failed to prove that Mr Jones was obliged to procure revised accounts or that Unicom would have made an offer at any particular price. The claim based on failure to realise the value of the shares was therefore not established. The burden remained on Mr Harris to prove the counterfactual loss on the balance of probabilities, applying The Law Debenture Trust Corporation plc v Eletrim SA [2010] EWCA Civ 1142.
3. Compensation. The net sale proceeds of £252,466.60 were the best available evidence of value. The court assessed what would probably have happened without the dilution and allowed a deduction for the cost of hypothetical commercial funding. Equitable compensation was fixed at £110,000, representing 50 per cent of an adjusted value of £220,000, with interest. The settlement payment by Aaron & Partners did not require credit because it related to a different head of complaint.
4. Unfair prejudice. Although Mr Harris was not a registered member, the transfer executed in his favour brought him within section 994(2). Following In re McCarthy Surfacing Ltd [2006] EWHC 832 (Ch), he was entitled to petition. The dilution was prejudicial and unfair. Under section 996, no additional order was necessary beyond the equitable compensation and interest.
5. Mr Jones was also ordered to pay Mr Harris one half of the £17,375 balance, with interest, held on trust following the failed Solutrea transaction.