Re Lloyds Autobody Ringway Limited

This is a first-instance unfair prejudice petition under section 994 of the Companies Act 2006 and a related partnership claim. The court found that Ringway was not operated as a quasi-partnership and that the petitioner, Mr Davies, had concealed and mismanaged commercial relationships giving rise to an actual and potential conflict of interest (principally his undisclosed involvement with Novo and the interception of profit-based commissions from PCH). The judge held that the suspension and exclusion of Mr Davies from management were justified but that it was nevertheless unfair to leave him locked into the company without a buy-out. The principal remedies were a compulsory purchase of Mr Davies’s 25% shareholding in Ringway at a full minority discount (60%), a Syers v Syers buy-out of his interest in the partnership HPP with the purchase price to be determined by the court, and a requirement that the remaining partners purchase the dormant HPP Vehicles Ltd shares at nominal value.

Background and issues

• The petition under section 994 Companies Act 2006 was brought by Mr Gregory Paul Davies in relation to Lloyds Autobody Ringway Ltd (Ringway), a company with two directors and shareholders: Mr Lynch-Smith (75%) and Mr Davies (25%).
• The petition complained principally of exclusion from management since 16 November 2016 and other allegations of prejudice; related proceedings concerned the partnership HPP Vehicles and a dormant company HPP Vehicles Ltd.

Procedural posture and trial

This was a first-instance trial in the High Court (Manchester) heard over multiple days with extensive factual and expert accountancy evidence. The parties led numerous fact witnesses and competing expert valuation reports.

Key factual findings

• The court preferred parts of the respondent’s evidence on the company’s origin and structure and found that Ringway was established as an extension of Lloyds Autobody rather than as a true equal partnership.
• Mr Davies had an involvement with Novo which he deliberately concealed; the court found both he and Novo’s founder to have been evasive about the nature of that relationship.
• Mr Davies received and failed to account for significant profit-based commissions paid by PCH; he did not discharge the burden of justifying those receipts.
• Certain management charges and payments were historic and could not now found a successful claim, but the sharp rise in a management charge introduced in 2015 was unjustified and prejudicial.

Legal issues framed and reasoning

• Whether Ringway was a quasi-partnership giving rise to equitable constraints and protection under section 994; the court found it was not a quasi-partnership in the full sense, although there was an expectation of day-to-day managerial participation.
• Whether the exclusion of Mr Davies from management was unfairly prejudicial: the court held exclusion was justified by breaches (conflict of interest and failure to account) and therefore not unfair in themselves, but fairness required a buy-out remedy because Mr Davies would otherwise remain locked in while the majority ran the company for its own benefit.
• Whether and how the shares should be valued: the court applied going-concern valuation principles (maintainable EBITDA) but concluded that a full minority discount of 60% should be applied to the purchase price given the particular facts and conduct.

Remedies

• Order that Mr Lynch-Smith purchase Mr Davies’s 25% shareholding in Ringway on usual valuation principles but with a 60% minority discount; valuation date is the date of the court order.
• Syers v Syers order for purchase of Mr Davies’s partnership share in HPP at a court-determined price; as a condition the two remaining partners must buy Mr Davies’s shares in dormant HPP Vehicles Ltd at nominal value.
• Direction that valuation experts and counsel agree forms of order in accordance with the judgment.

First instance: The petition under section 994 was partly successful. The court held that the suspension and exclusion of Mr Davies from Ringway’s management were justified because of his undisclosed involvement with Novo and his failure to account for profit-based commissions from PCH; however, it was unfair to leave him locked into the company without a buy-out. Accordingly the court ordered Mr Lynch-Smith to purchase Mr Davies’s 25% shareholding in Ringway with a 60% minority discount, ordered a Syers v Syers buy-out of Mr Davies’s partnership interest in HPP (price to be determined) and required the remaining partners to purchase the dormant HPP Vehicles Ltd shares at nominal value, for the reasons summarised above.