Cusack v Holdsworth & Anor

Unfair prejudice is assessed objectively by reference to the effect of conduct on the petitioner as a member. The petitioner must establish both unfairness and prejudice. Equitable considerations may qualify strict legal rights where shareholders have reached a common understanding about how the company will be conducted or divided. Conduct consistent with that understanding will not ordinarily be unfair, but a director who diverts company contracts before the agreed separation period breaches the company’s constitution, fiduciary duties and any shareholders’ agreement. An unauthorised disposition of company property to a director is capable of amounting to unfairly prejudicial conduct. The court has a wide discretion under the Companies Act 2006 to fashion an objectively fair remedy, including directions other than a share purchase order.

Quantum Survey Management Limited was owned equally by John Cusack and James Holdsworth, who were also its directors. Mr Cusack petitioned under sections 994 and 995 of the Companies Act 2006, alleging unauthorised payments, diversion of company contracts and opportunities, and the transfer of employees to a new company established by Mr Holdsworth.

The court determined whether a shareholders’ agreement had been concluded, whether university fees and a substantial pension payment were authorised, whether the parties had agreed or understood that Quantum would be divided geographically, and whether the complained-of conduct was unfairly prejudicial. It also considered the appropriate valuation and remedy.

1. Shareholders’ agreement. The documentary evidence established that the members had agreed the substantive terms of the shareholders’ agreement. The agreement was not ineffective because it was unsigned or because some later questions remained unanswered. Applying Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd’s Rep 601, the correspondence and circumstances showed an intention to be bound, and the document remained workable.
2. Authorisation and factual findings. The university fees were authorised by the directors. The £120,000 pension payment was not authorised. It was an unauthorised disposition of company property and a breach of duty.
3. Demерger understanding. The parties had a common understanding that the business would be divided during the extended accounting period, with the Sheffield business going to Mr Cusack and the South-West business to Mr Holdsworth. That understanding generated equitable constraints on the parties’ strict legal rights. The transfer of employees after the understanding was not unfairly prejudicial on the evidence.
4. Unfair prejudice. The objective test under sections 994 and 995 was applied. The petitioner had to prove both unfairness and prejudice. Diversion of Quantum contracts to Project before the end of the relevant period was unfair because no agreement permitted it at that time. It breached the shareholders’ agreement and Mr Holdsworth’s duties to Quantum. The court reserved the question whether that conduct caused sufficient prejudice. The unauthorised pension payment was unfair and prejudicial because it seriously diminished the value of Mr Cusack’s shareholding.
5. Remedy. Under section 996 the court had a wide discretion. It directed a valuation without a minority discount, as there was no minority in the equal ownership structure. The valuation date was the last day of the relevant period rather than the date of the eventual purchase order. The pension payment and interest were to be reflected in the valuation, subject to set-off for the irrecoverable £40,000 loan. A prima facie adjustment was also required for sums due for work undertaken by Project during the relevant period. Further submissions and directions were required.