Cusack v Holdsworth and Quantum Survey Management Limited

The court determined an unfair prejudice petition under s.994 Companies Act 2006 arising out of the breakdown of a two-director, two-shareholder small surveying company. Key findings were: the parties had a concluded shareholder agreement; the company authorised payment of university fees; there was a common understanding to "demerge" the business into North (Sheffield) and South/South-West operations; however a £120,000 pension payment made to Mr Holdsworth was not authorised and constituted an unauthorised disposition of company property and a breach of directors' duties; and contracts diverted to Mr Holdsworth's new company during the Relevant Period before the end of the extended accounting period also breached duties and amounted to unfair conduct.

The court held that the pension payment had prejudicial financial consequences and should be reflected in the remedy. The appropriate practical remedy would be an order for Mr Holdsworth to sell his shares to Mr Cusack, with the valuation dated at the end of the Relevant Period and adjustments/deductions to reflect the unauthorised pension payment (plus interest), set off for the loan back to the company and prima facie adjustments for Project's work in the Relevant Period. Further submissions were directed on precise terms and valuation mechanics (section 996 Companies Act 2006).

Background and parties: Quantum Survey Management Limited was a small company with two equal shareholders and co-directors, Mr John Cusack and Mr James Holdsworth. The petitioner (Mr Cusack) sought relief for unfair prejudice under s.994 Companies Act 2006, asking for an order to buy out Mr Holdsworth's 50% shareholding and compensation for alleged wrongdoing.

Nature of the claim / relief sought: Petition under s.994 seeking buy-out and compensation for alleged unauthorised payments, diversion of business and employees to a newly incorporated company (Project), and breaches of directors' duties.

Issues for determination:

• Whether a shareholder agreement (SHA) had been agreed by members;
• Whether university fees paid for employees were authorised;
• Whether the £120,000 pension payment to Mr Holdsworth was authorised;
• Whether the directors agreed to demerge the company into North and South operations;
• Whether Mr Holdsworth diverted work, opportunities and employees to Project and over what period;
• Whether the petitioner had suffered unfair prejudice as a member.

Evidence and findings: The judge relied principally on documentary evidence and inferences rather than contested oral recollection. On the balance of probabilities the court found there was a concluded SHA (even if unsigned), and that company payments of university fees were authorised. The parties had a common understanding to demerge the business and extended the accounting period for that purpose. However, the pension payment to Mr Holdsworth was made without authorisation and thus breached directors' duties; it was an unauthorised disposition of company property and prejudicial to the petitioner. Contracts diverted to Project before the end of the Relevant Period also breached duties and were unfair, though the seriousness of prejudice from those diversions required further submissions. The departures of two employees to Project were not shown to have caused prejudice to the petitioner as a member.

Remedy and reasoning: The court concluded the appropriate route was typically a buy-out under s.996, but tailored directions were required to achieve an objectively fair solution reflecting the demerger, the pension payment and diversion of work. The valuation date was directed to be the last day of the Relevant Period. The court directed that the pension payment (plus simple interest) be reflected by deduction from the valuation, that there be set off for a £40,000 loan back to the company, and prima facie adjustment for Project's work in the Relevant Period. The judge reserved the precise terms and will hear further submissions or appoint a joint expert if the parties cannot agree.

The petition was allowed in part. The court found a concluded shareholder agreement and a common understanding to demerge the business, authorised university fee payments, but held that the £120,000 pension payment to Mr Holdsworth was unauthorised and a breach of directors' duties constituting unfairly prejudicial conduct. Contracts diverted to Project during the Relevant Period also breached duties and were unfair. The court directed that Mr Holdsworth should be required to sell his shares to Mr Cusack with the valuation date fixed at the end of the Relevant Period, and that the unauthorised pension payment (plus interest) be deducted from the valuation with set-off for the £40,000 loan and adjustments for Project's Relevant Period work; further submissions were ordered on precise terms and valuation.