Sudicka v Morgan & Ors

A petition for unfair prejudice is well founded where the complained-of conduct concerns the company’s affairs, causes prejudice to the petitioner’s membership interests, and makes that prejudice unfair. In a small company operated as a quasi-partnership, equitable obligations may supplement the members’ legal rights. Directors must exercise independent judgment and act for the company’s interests; diverting its business, assets, staff or clients for personal benefit may constitute unfair prejudice. The court’s remedial power is sufficiently wide to impose proportionate liability on non-shareholder directors and members who participated in the conduct.

The claimant and petitioner sought declarations concerning her beneficial 50 per cent interest in AGL Accountants Ltd and relief under Part 30 of the Companies Act 2006. The dispute arose after the breakdown of her personal and business relationship with Steven Morgan. She alleged that Morgan excluded her, diverted the company’s business to his sole-trader practice, and caused the company’s value to be destroyed.

The court also considered the position of David Cotton, Ian Garton and Charles Crocker, including the validity of arrangements concerning shares, the removal of the claimant as a director, and the respondents’ participation in the transfer of the business. The central issues were whether the petition was well founded and what remedy should follow.

1. Shareholding and agreements. The transfer of 2 per cent of the shares to Morgan was held on trust for Sudicka, subject to the ICAEW presentation requirement. There were two agreements in September 2012: one involving Cotton, Morgan and Sudicka concerning the proposed purchase of Cotton’s shares, and another between Morgan and Sudicka providing for equivalent shares to be allotted to Sudicka. Although the statutory buy-back was ineffective for non-compliance with section 658(2)(b) of the Companies Act 2006, Morgan and Cotton were estopped from denying its effect as between themselves and Sudicka.
2. Unfair prejudice. The court applied the three requirements identified in Neath Rugby Ltd (No 2): the conduct must concern management of the company’s affairs, prejudice the petitioner’s interests as a member, and be unfair. Those requirements were satisfied. The company was treated as a quasi-partnership despite the contractual no-partnership clause, given its small scale, mutual trust and confidence, and the members’ involvement.
3. Morgan breached his directors’ duties by removing company funds for his own benefit, attempting to exclude Sudicka, diverting clients and staff to his sole-trader practice, and orchestrating the stripping of AGLK’s business and value. After his purported resignation he remained a de facto director. Garton and Crocker knowingly assisted the scheme and acted in breach of their duties. Cotton’s conduct, particularly his participation in the proxy arrangement and subsequent transfer of the business, was sufficiently connected with the unfair prejudice to justify relief.
4. The company was valued at £405,000 as at 31 March 2015. Sudicka was beneficially entitled to 50 per cent, valued at £202,500. Morgan was liable for the whole sum. Garton and Crocker were jointly and severally liable for the whole sum. Cotton was jointly and severally liable for one third, namely £67,500.

The judgment records that an interim injunction granted by HHJ McCahill QC on 30 January 2017 was upheld after Morgan’s appeal was dismissed. The present proceedings were determined at first instance.