Allnutt v The Nags Head Reading Ltd & Ors

This is a petition under section 994 of the Companies Act 2006 alleging unfair prejudice arising from the removal of a director in a quasi-partnership. The court held that the petitioner had an ongoing and material conflict of interest arising from his acquisition and involvement in a nearby pub (the Butler) which he did not fully and frankly disclose to his quasi-partners. The court applied the legal framework of unfair prejudice (section 994), the statutory duties of directors (section 175) and related principles concerning authorisation, informed disclosure (including regulation 85 of Table A and the Duomatic principle) and acquiescence.

Because the petitioner failed to make full disclosure of the nature and extent of his interest in the Butler, there was no valid authorisation or informed consent and no basis to infer assent by silence. The conflict was serious, ongoing and unexplained and, for that reason, the majority shareholders’ decision to remove him as a director was justified and not unfairly prejudicial. The claim is dismissed.

Background and parties. The Nags Head was bought and run from 2007 by five quasi-partners who were also shareholders and directors: the claimant Edward Allnutt and four others (the Lodges and the Oates). In 2014–2015 the claimant acquired an interest in a nearby pub, the Butler. Relations deteriorated and on 9 February 2016 the claimant was removed as a director by a majority vote. The claimant then brought a petition under section 994 of the Companies Act 2006 seeking relief including an order that his shares be bought out.

Procedural posture. The Employment Tribunal proceedings about employment were found binding and removed from the present petition; this trial was directed to liability only. The Employment Tribunal’s factual findings were accepted by the parties and by the court.

Relief sought. The petitioner sought relief under section 994, principally a court-fixed buyout of his shares, compensation for loss of office and such other orders as thought fit.

Issues framed by the court.

• Whether the conduct complained of amounted to unfairly prejudicial conduct under section 994;
• whether the claimant’s involvement in the Butler created a conflict of interest with his duties as director under section 175 of the Act;
• whether any conflict was authorised, ratified or consented to by disclosure, regulation 85, the Duomatic principle or acquiescence;
• whether any prejudice caused by his removal was nevertheless unfair; and
• whether section 1157 or other equitable considerations should excuse the claimant’s conduct.

Evidence and findings of fact. The court heard oral evidence and found the claimant’s evidence less persuasive and in parts self-serving; other witnesses (the Lodges, the Oates, the Butler’s manager and a partner) were found credible. The court summarised the commercial risk to the Nag’s Head from a refurbished nearby pub and found the Butler was being developed to compete with the Nag’s Head. Meetings in August 2014 and February 2016 were critical: the August meeting did not produce adequate disclosure or any clear authorisation, and the February 2016 meeting produced a majority vote removing the claimant as director.

Court’s reasoning. The court applied the principles in O’Neill v Phillips concerning the contextual assessment of fairness under the predecessor of section 994 and emphasised that where a fiduciary seeks the court’s indulgence for conduct that might conflict with duty, full and candid disclosure is required (Movitex and analogous authorities). Regulation 85 and section 175 and 180 were considered as statutory means of authorising potential conflicts, but such authorisation requires adequate disclosure and compliance with procedural safeguards. The Duomatic principle and acquiescence were considered but held inapplicable because the other shareholders did not have full knowledge of relevant facts and the August 2014 meeting fell well short of the informed consent required. The court concluded the conflict was material and continuing and remained unexplained; accordingly the majority’s removal of the claimant was justified and not unfairly prejudicial. Section 1157 did not afford a basis to excuse the claimant’s failure to make disclosure.

Outcome and further steps. Liability was dismissed. The court therefore did not resolve valuation questions except to note the parties’ agreement that, had liability been found, findings would be made on discounted or non-discounted share valuation.

The Claim is dismissed. The court found that Mr Allnutt had a serious, ongoing and unexplained conflict of interest arising from his involvement in the Butler which he did not fully disclose; that there was no effective authorisation, Duomatic assent or acquiescence; and that for those reasons his removal as director was justified and not unfairly prejudicial under section 994 of the Companies Act 2006.