Re Audas Group Ltd

The petitioner, a minority shareholder and director, brought a petition under sections 994 and 996 of the Companies Act 2006 alleging that the affairs of Audas Group Limited were being conducted in a manner unfairly prejudicial to his interests. The court found that the majority shareholders/directors (Bray and Sharp) had acted in breach of the contractual duty of good faith in the Shareholders Agreement and had used procedures (including a pretextual disciplinary process) to exclude the petitioner from management and from information to which he was entitled as a director. Those acts constituted unfairly prejudicial conduct.

The court also found that the petitioner had breached the Shareholders Agreement by disclosing confidential management accounts to the bank, but that that misconduct arose from and was substantially outweighed by the respondents’ prior unfairly prejudicial conduct. The respondents had validly established that the petitioner’s disclosure amounted to a material breach within the meaning of the Articles, but the exercise of the board’s power to require a transfer notice was itself infected by lack of good faith.

Liability was determined only; the petitioner was held prima facie entitled to relief under sections 994 and 996 but final orders were reserved pending submissions on remedy.

Background and parties:

• Audas Group Limited (AGL) was incorporated as a holding company for APML and Sigma. The three principal participants (Brown, Bray and Sharp) each held equal A ordinary shareholdings and each had been involved in management and as employees.
• The petitioner, Mr Brown, claimed that he had been dismissed as an employee and removed as a director and that the affairs of AGL had been conducted in a manner unfairly prejudicial to him. He relied on sections 994 and 996 Companies Act 2006 and alleged breaches of the written Shareholders Agreement and of the Articles.

Nature of the application and relief sought:

• Mr Brown sought relief under section 994(1) that the company’s affairs had been conducted in a manner unfairly prejudicial to his interests and asked, in effect, for orders requiring the respondents to purchase his shares at a fair value (and that he should not be obliged to comply with a compulsory Transfer Notice under the Articles).

Issues framed by the court:

1. Whether the respondents’ conduct (including the disciplinary process leading to dismissal and their subsequent restrictions on his role and information) amounted to unfairly prejudicial conduct under section 994.
2. Whether Mr Brown’s disclosure of management accounts to the bank on 24 November 2017 breached the confidentiality provisions of the Shareholders Agreement and engaged the Articles’ compulsory transfer mechanism (Article 17.1(c)).
3. Whether the board’s resolution requiring Mr Brown to serve a Transfer Notice was validly exercised or infected by lack of good faith.

Court’s reasoning and conclusions:

• The court analysed the Articles, the Shareholders Agreement (including Clause 3.1 on Shareholder Reserved Matters, Clause 11 on confidentiality and Clause 18 on good faith) and the factual matrix.
• The respondents had instigated a disciplinary process which the court found to be a sham: the dismissal decision was pre-determined, taken covertly and focussed on advancing sectional interests rather than promoting the companies’ interests. The respondents thereafter cut off the petitioner’s access to staff, clients, suppliers and banking instructions, and caused Group matters (bonuses, senior appointments, a compromise agreement) to be carried out without the petitioner’s prior consent although those matters fell within the Shareholder Reserved Matters. Those actions breached contractual good faith obligations and were unfairly prejudicial.
• The petitioner did breach the confidentiality clause by copying the bank to his 24 November 2017 email attaching management accounts. That disclosure was a material breach of the Shareholders Agreement and, in ordinary circumstances, could trigger Article 17.1(c). However, the respondents’ prior breaches and the context in which the petitioner acted substantially outweighed his wrongdoing.
• The board’s decision to require a Transfer Notice (and to cap price at £1 if Article 17.1(c) were engaged) was taken in the context of the respondents’ own breaches and opportunism; the respondents had not treated the contractual regime and their own prior breaches even-handedly. Accordingly, the court held the petitioner succeeded on unfair prejudice grounds in respect of liability and was prima facie entitled to relief under sections 994 and 996, but reserved the detailed remedy to further hearing and submissions.

First instance: The petition under section 994 succeeds on liability. The court held that the respondents (Bray and Sharp) had acted in breach of contractual good faith and had conducted the affairs of AGL in a manner unfairly prejudicial to the petitioner by orchestrating a pre-determined dismissal, excluding him from management and withholding information and consent to Shareholder Reserved Matters. The petitioner himself had committed a material breach of confidentiality by copying the bank the 24 November 2017 email, but that misconduct was prompted by and substantially outweighed by the respondents’ conduct. The petitioner is prima facie entitled to relief under sections 994 and 996, but the court reserved determination of the precise remedial orders (including any dispensation from serving a Transfer Notice or the terms of a buy-out) until further submissions.