Waldron v Waldron

The petition under section 994 of the Companies Act 2006 alleged that the respondent, as managing director of a family company, had acted in a manner unfairly prejudicial to the petitioners by (inter alia) using a company he controlled (Tunnelling) to acquire the assets of an insolvent third party (DCT) and thereafter procuring payments from the company to that vehicle, and by dismissing two siblings from employment.

The court applied established principles on unfair prejudice and "quasi-partnership" type equitable constraints (drawing on Ebrahimi, O'Neill v Phillips and related authority) and assessed whether equitable considerations constrained the exercise of strict legal powers. It found that equitable constraints did exist between the family members before and after the Subscription Deed and the company voluntary arrangement.

• On the central factual disputes the judge accepted contemporaneous documents and other independent evidence over parts of the parties' oral evidence.
• The judge held that the respondent’s use of Tunnelling to acquire DCT assets and to benefit from subsequent hire arrangements constituted a breach of fiduciary duty and amounted to unfairly prejudicial conduct.
• However, the petitioners (Austin and Gerard) had acquiesced in the arrangements for a lengthy period after learning of them and, crucially, their subsequent dismissal was justified by serious misconduct (an attempt to induce an IT contractor to provide covert access to the respondent’s e-mails involving an offer of money). The acquiescence and the justification for dismissal meant the court refused relief to Austin and Gerard; Marian was likewise disentitled.

Background and procedural posture: The petitioners are three siblings and shareholders in Westshield Limited; the first respondent (Patrick) is their brother and managing director. The petition claimed unfair prejudice under section 994 Companies Act 2006 and sought an order that the petitioners’ shares be bought out without any minority discount. District Judge Bever ordered a split trial on liability and quantum; this judgment determines liability and entitlement to relief.

Facts: The company was a family business. Over time shareholdings and governance arrangements changed (including a 2009 Subscription Deed involving an external investor linked to the bank and a later company voluntary arrangement). In January 2014 assets and contracts of the DCT group became available; the respondent incorporated Tunnelling which acquired those assets and there were subsequent transactions between Tunnelling and the company. In August 2016 the respondent dismissed two brothers (Austin and Gerard). The petitioners complained of a number of acts they said were unfairly prejudicial; the central complaints were the DCT/Tunnelling transactions and the dismissals/exclusion.

Issues framed by the court:

• Whether the company was subject to equitable constraints between family members such that the respondent could not simply rely on strict legal powers (the "quasi-partnership" question).
• Whether the Subscription Deed or the company voluntary arrangement extinguished any such equitable constraints.
• Whether the respondent’s conduct amounted to conduct of the company’s affairs that was unfairly prejudicial under s.994 (in particular the Tunnelling transactions and the dismissal/exclusion of Austin and Gerard).
• If unfair prejudice was established, whether relief should be granted and in what terms.

Court’s reasoning and findings: The judge applied the established test for unfair prejudice (management of company affairs; prejudice to the applicant’s interests; and unfairness) and examined whether equitable considerations constrained the majority’s legal rights. He found that the family arrangements and the parties’ dealings gave rise to equitable constraints which did not cease on the Subscription Deed or the company voluntary arrangement. On the facts, the judge accepted contemporaneous records showing that the respondent did not obtain prior consent from Austin and Gerard to the Tunnelling purchase and that he proceeded without their informed approval. Accordingly the respondent’s conduct in using Tunnelling to acquire DCT assets and in procuring hire payments was a breach of fiduciary duty and therefore unfairly prejudicial. However, the petitioners had early knowledge of the arrangements and were acquiescent for a long period thereafter; moreover, when proceedings were prompted by the brothers’ dismissal, the court found the dismissals were justified because Austin and Gerard had engaged in serious misconduct (an attempt to procure covert access to the respondent’s e-mails and an offer of money to the IT contractor). In the exercise of its discretion the court declined relief to the petitioners and accordingly did not order a buy-out.

Wider observations: The judgment emphasises that equitable constraints in family companies are a matter of fact and degree, that third‑party rights are a relevant consideration (but not necessarily conclusive), and that the court must balance established equitable principles, acquiescence and the petitioners’ own conduct when deciding whether to grant relief under s.994.

This was a first instance decision. The court found that equitable constraints (akin to a quasi-partnership) existed between the family shareholders both before and after the Subscription Deed and the company voluntary arrangement. The respondent breached his fiduciary duties in acquiring DCT’s assets through Tunnelling and in related hire arrangements and that breach constituted unfairly prejudicial conduct. Nonetheless the petitioners (Austin and Gerard) had acquiesced in those arrangements and their later dismissal was justified by serious misconduct (an attempt to induce an IT contractor to provide covert access to e-mails), so the court exercised its discretion to refuse relief. The petition is therefore dismissed as to all relief sought.