In re Tobian Properties Ltd

The Court of Appeal allowed Mr Maidment’s appeal against the dismissal of his petition under section 994 of the Companies Act 2006 alleging that Tobian’s affairs had been conducted in a manner unfairly prejudicial to him as a member. The court held that the judge at first instance was wrong to treat Mr Maidment as precluded from complaining about excessive director’s remuneration on the basis that the company’s filed accounts could have been inspected at Companies House. The court emphasised that the unfair prejudice enquiry is contextual and that fiduciary breaches by a director (including fixing his own excessive pay) may give rise to unfair prejudice even where the company is insolvent.

The court identified three elements of conduct found by the trial judge to amount to breaches of duty: (1) payment of apparently excessive director’s remuneration to the sole director, (2) permitting a related company (Epyc Ltd) to use Tobian’s trading name without payment between 2005 and 2008, and (3) the sale of Tobian’s goodwill and trading name to Epyc on the eve of creditors’ voluntary liquidation for £5,000 + VAT. The court concluded there was a real prospect that quantification of loss on those heads could produce a surplus for members and therefore remitted these matters for further (quantum) hearing rather than permitting final dismissal of the petition.

Background and parties. The petitioner, Mr Geoffrey Maidment, held 25% of Tobian Properties Limited and brought a petition under section 994 of the Companies Act 2006 claiming that the company’s affairs had been conducted in a manner unfairly prejudicial to his interests. Mr Allan Attwood was the controlling shareholder and sole director; Ms Nicola Heard was a company officer and later director/shareholder of Epyc Ltd, a related company which used Tobian’s trading name.

Procedural history. The petition was heard in the Companies Court before HHJ Hodge QC, who dismissed the Tobian petition. The judge found three breaches of duty by Mr Attwood but concluded that they did not amount to unfair prejudice and in particular relied on the fact that Tobian’s filed accounts disclosed the director’s remuneration. The petitioner appealed to the Court of Appeal (this judgment).

Nature of relief sought. Mr Maidment sought relief under section 994, principally a buyout or other relief that would compensate him for loss caused by conduct unfairly prejudicial to members, and during the appeal sought remittal for further proceedings to quantify loss.

Issues framed by the court.

• Whether the trial judge was correct in law to treat the three established breaches of duty as not amounting to unfair prejudice for the purposes of section 994, particularly given Tobian’s insolvency.
• Whether a shareholder’s failure to inspect accounts filed at Companies House can bar an unfair prejudice complaint about matters disclosed in those accounts.
• Whether the issues of quantification of loss should have been remitted for further hearing given the prospects that the company’s claims might eliminate the insolvency deficiency.

Court’s reasoning and outcome. The Court of Appeal held that the trial judge was wrong in principle to impose a new requirement of diligence (inspection of Companies House filings) as a condition for bringing an unfair prejudice petition. The court emphasised the contextual and equitable nature of the unfair prejudice test (drawing on O’Neill v Phillips) and the strictness of fiduciary duties. Where a company is insolvent, the court must be flexible: if there is a real prospect that quantification of particular breaches (excessive remuneration, unpaid licence for use of trading name, undervalue sale on the eve of liquidation) would produce a surplus for members, the proper course is to remit those matters for a quantum hearing. The appeal was allowed and the petition should have been adjourned for further hearing on quantification rather than dismissed.

Appeal allowed. The Court of Appeal held that the trial judge erred in law by treating a shareholder’s failure to inspect filed accounts as a bar to an unfair prejudice complaint and by refusing to remit quantification issues. Given the contextual nature of unfairness and the existence of breaches of fiduciary duty (excessive remuneration, permitting use of the trading name without payment, and an undervalue sale on the eve of liquidation), there was a real prospect that quantification could eliminate the insolvency deficiency. The appropriate course was to adjourn and remit those issues to a further (quantum) hearing.

Appeal from the High Court of Justice, Chancery Division (Companies Court), HHJ Hodge QC, [2011] EWHC 2186 (Ch), to the Court of Appeal, which delivered judgment allowing the appeal ([2012] EWCA Civ 998). The judgment notes a related petition concerning Annacott Holdings Ltd succeeded at first instance and permission to appeal from that order was refused by this court.