Davies v Lynch-Smith & Ors

For section 994, exclusion of a minority director from management may be justified by his own misconduct, including an actual or potential conflict of interest and failure to account for company-related commissions. That does not necessarily end the inquiry. The court must assess whether leaving him locked into the company without a fair buy-out was itself unfair.

Relief is fashioned to cure established prejudice. Although no minority discount is the usual starting point, a discount may be appropriate where the petitioner deserved exclusion and would not have obtained just-and-equitable winding-up relief. Here a 60% discount was ordered. Separate prejudicial transactions were addressed through accounting adjustments or repayment, and partnership buy-out and account orders were made.

Two connected first-instance matters concerned a vehicle bodyshop company and a credit-hire partnership. Mr Davies held 25% of Ringway and was its managing director. Mr Lynch-Smith, the 75% shareholder, suspended and dismissed him after concerns about his involvement in Novo and undisclosed commissions paid by PCH.

The petition under section 994 alleged a quasi-partnership, unfair exclusion from management, excessive charges and other prejudicial transactions. The partnership claim concerned HPP, which had been dissolved by notice; a dissolution account had been ordered by District Judge Bever on 2 January 2018. The central issues were whether Ringway was a quasi-partnership, whether the exclusion was unfair, the effect of other conduct, and the appropriate valuation and relief.

Outcome. The unfair prejudice petition succeeded in part. Mr Davies’s exclusion from management was justified, but leaving him locked into Ringway without a fair buy-out was unfairly prejudicial. A buy-out was ordered at a 60% minority discount. A Syers v Syers order was made in relation to HPP, with related orders concerning HPP Vehicles Ltd.

1. Equitable obligations. The court applied the principles in O'Neill v Phillips [1999] 1 WLR 1092 and Strahan v Wilcock [2006] EWCA Civ 13. Unfairness may arise from breach of agreed terms or from exercising strict legal powers contrary to good faith. The evidence did not establish a quasi-partnership. The parties had agreed to share day-to-day management, but Mr Lynch-Smith retained strategic control.
2. Exclusion. Mr Davies’s undisclosed involvement in Novo created actual and potential conflicts of interest. Under section 175(1) of the Companies Act 2006, a director must avoid such conflicts and disclose the relevant interest. His failure to account for profit-based PCH commissions was dishonest and independently justified exclusion. The credit-card allegations, taken alone, would have warranted only accounting adjustments.
3. Unfair prejudice and relief. The court considered the reasons for exclusion and the subsequent conduct of the majority shareholder. Excessive management charges, a £100,000 payment to Lloyds Liverpool and the Tesla purchase constituted unfair prejudice, although some matters required repayment or accounting adjustments rather than a buy-out. The cumulative picture showed that Mr Davies would remain locked into Ringway without financial benefit or influence.
4. Valuation. The court identified the prejudice and fashioned relief to cure it. No discount is generally appropriate, but a discount may be ordered where the petitioner deserved exclusion and would not have secured just-and-equitable winding-up relief. In these unusual circumstances, a full 60% discount was fair. The valuation date was the date of the order.
5. Partnership. The court ordered the purchase of Mr Davies’s HPP interest at a price to be determined and required the remaining partners to purchase his shares in dormant HPP Vehicles Ltd at nominal value. Accounts and inquiries were ordered to quantify HPP’s claims arising from diverted business and breach of fiduciary duty.

First-instance judgment. The partnership claim had been issued on 21 August 2017, and a dissolution account had been ordered by District Judge Bever on 2 January 2018. The parties subsequently agreed that a Syers v Syers buy-out order should be made.