Sudicka v Morgan & Ors

The court found that the petitioner, Ms Romana Sudicka, had been unfairly prejudiced in the management of AGL Accountants Ltd (AGLK) and that the conduct complained of fell within s994 of the Companies Act 2006. The judge held that directors owe duties to promote the success of the company, to exercise independent judgment and reasonable skill, care and diligence, and to avoid conflicts of interest, and that Mr Morgan breached those duties by diverting the company’s business and assets to his sole trader practice and by withdrawing funds.

The court concluded there were two relevant agreements in 2012: (i) a tripartite agreement implementing the buy-back of Mr Cotton’s shares to enable refinancing, and (ii) a separate, unwritten agreement between Ms Sudicka and Mr Morgan that an equivalent holding would be allotted to Ms Sudicka. Although the formal buy-back was defective in law, the court held that Mr Cotton and Mr Morgan were estopped from denying that the arrangements had been implemented as between them and Ms Sudicka.

The company was held to have been run in a manner unfairly prejudicial to Ms Sudicka, within a quasi-partnership context. The fair value of AGLK as at 31 March 2015 was assessed at £405,000, and the appropriate remedy ordered was that Mr Morgan buy out Ms Sudicka’s 50% beneficial interest for £202,500. Messrs Garton and Crocker were held jointly and severally liable with Mr Morgan for that sum; Mr Cotton was jointly and severally liable for one third of the sum (£67,500).

Background and parties

The dispute concerned ownership and control of AGL Accountants Ltd (referred to in judgment as AGLK). The petitioner/claimant, Ms Romana Sudicka, asserted she was beneficially entitled to 50% of AGLK’s shares; the first respondent, Mr Steven Morgan, denied that and asserted a smaller entitlement for her. Mr David Cotton, a long-standing senior professional at the Kingsbridge practice, was also a respondent. The litigation included a Part 7 claim and a petition under section 994 of the Companies Act 2006 alleging unfair prejudice.

Procedural posture and relief sought

• The Part 7 claim was issued 9 December 2016; an interim injunction was granted on 30 January 2017 by HHJ McCahill QC (Mr Morgan’s appeal against that order was dismissed by the Court of Appeal, as recorded in the judgment).
• The petition under s994 was presented 22 November 2017. The petitioner sought a monetary award equivalent to the value of her asserted 50% interest as at March 2015, together with declarations and other relief.

Issues framed

• Whether the 2011 shareholders’ agreement and associated articles had been adopted and whether that failure mattered.
• Whether the transfers in 2012 (including the attempted buy-back of Mr Cotton’s shares and subsequent allotment) were valid in law or were enforceable by estoppel or trust.
• Whether the relationship between the members amounted to a quasi-partnership and, if so, whether company affairs had been conducted in a manner unfairly prejudicial to the petitioner under s994.
• Whether certain defendants (Mr Morgan, Messrs Garton and Crocker, and Mr Cotton) bore responsibility and to what extent; and the appropriate remedy if unfair prejudice was made out.
• Valuation of the company as at 31 March 2015.

Court’s reasoning and findings

• The judge accepted that the 2% transfers to satisfy ICAEW requirements were not gifts but were held by Mr Morgan on trust for Ms Sudicka as beneficial owner.
• The court found there were two interrelated agreements in 2012: a tripartite variation to procure refinancing and a separate agreement between Ms Sudicka and Mr Morgan that effectively resulted in Ms Sudicka receiving an equivalent holding to Mr Cotton’s 16.5% stake. The formal buy-back was defective under company law, but the respondents were estopped from denying its practical effect between them and the petitioner.
• The relationship between the remaining shareholders after 2012 was a quasi-partnership characterised by trust and confidence.
• From spring 2015 Mr Morgan excluded Ms Sudicka, withdrew funds (£70,000) from AGLK, orchestrated her ineffective removal as director and then, in mid‑2017, facilitated appointments of Messrs Garton and Crocker and the transfer of AGLK’s business and staff to his sole trader practice. The judge found these actions breached directors’ duties and amounted to unfairly prejudicial conduct under s994.
• Valuation experts gave differing figures; the court adopted a composite approach based on gross recurring fees and adjusted EBITDA. The judge preferred the gross recurring fee approach and fixed the company value at £405,000 as at 31 March 2015.
• Remedy: because Mr Morgan was personally responsible for the unfair prejudice and the company was left effectively valueless, the appropriate relief was an order that Mr Morgan purchase Ms Sudicka’s 50% beneficial interest for £202,500. Messrs Garton and Crocker were held jointly and severally liable for that sum; Mr Cotton was joint and several for one third (£67,500).

Wider observations

The judge commented on the quasi‑partnership nature of small professional firms, the scope of equitable remedies where formal statutory steps are defective but parties have acted on an understanding, and the court’s wide remedial power under s996. The judgment records detailed credibility findings as to witnesses and the factual narrative underpinning the legal conclusions.

First instance: The petition under s994 Companies Act 2006 was well founded. The court held that Mr Morgan had conducted AGLK’s affairs in a manner unfairly prejudicial to Ms Sudicka and had breached his duties as a director by diverting business, assets, staff and funds to his sole trader practice. The company was valued at £405,000 as at 31 March 2015 and the court ordered Mr Morgan to purchase the petitioner’s 50% beneficial interest for £202,500. Messrs Garton and Crocker were held jointly and severally liable with Mr Morgan for the whole sum; Mr Cotton was held jointly and severally liable for one third of the sum (£67,500). The order was based on findings of estoppel in relation to the defective 2012 buy-back, quasi-partnership features, breaches of directors’ duties and the unfair prejudice principles in s994 and the remedial powers in s996.

Interim injunction granted by HHJ McCahill QC on 30 January 2017; Mr Morgan appealed that interim injunction and the appeal was dismissed by the Court of Appeal (no neutral citation provided in the judgment). Petition presented 22 November 2017. AGLK entered liquidation on 14 February 2018. Final determination by Mr Justice Birss in the High Court (Chancery) delivered 27 February 2019.