AMT Coffee Limited

This is a petition under s 994 of the Companies Act 2006 alleging conduct unfairly prejudicial to the interests of the petitioners, who are trustees/personal representatives of the estate of a deceased shareholder. The judge found that the surviving directors (and major shareholders) engaged in unfairly prejudicial conduct by (i) paying themselves excessive remuneration which was not authorised by the company constitution, (ii) failing in good faith to consider declaring dividends despite distributable reserves, and (iii) permitting large unsecured, interest-free directors’ loan accounts that harmed the company. The court excluded the expert remuneration evidence on grounds of unreliability and decided the appropriateness of remuneration from the factual matrix.

Key statutory provisions considered include s 994 and s 996 of the Companies Act 2006 (remedial powers) and provisions concerning ratification and directors’ duties (eg ss 171, 172, 174, 197 and s 239). The judge rejected defences of acquiescence, Duomatic ratification and want of standing. The principal remedy ordered was a buy-out: the two surviving active brothers were to purchase the petitioners’ shares at a fair value without a minority discount, with further directions to fix the price.

Background and procedural posture:

• This was a first instance trial of a petition under s 994 Companies Act 2006 by the executors/trustees of the late Angus McCallum-Toppin seeking relief for conduct unfairly prejudicial to the interests of the estate as a shareholder of AMT Coffee Limited. The petition sought, among other remedies, an order for purchase of the petitioners’ shares.
• The petition proceeded after interlocutory orders resolving the identity of the personal representatives. The trial was heard in June–July 2018 and judgment given on 29 January 2019.

Facts and issues:

• The company was a closely held family company with a small number of shareholders. After the death of one brother (Angus) his estate retained shares but, through the company constitution, lost voting rights unless registered. The surviving brothers (Alistair and Allan) and their mother Anna were the active shareholders and directors.
• The petitioners alleged three principal complaints: excessive director remuneration, failure to consider or declare dividends despite distributable reserves, and extensive interest-free unsecured directors’ loan accounts. The respondents advanced defences including consent/acquiescence, Duomatic ratification, and delay/knowledge by the petitioners.
• The court also had to determine appropriate remedy and valuation basis for any buy-out (whether a minority discount should apply and whether the company was effectively a quasi-partnership).

Court’s reasoning and findings:

• Standing: the petitioners (as personal representatives/trustees) had standing under s 994(2).
• Witness credibility and evidence: the judge evaluated witness reliability and found documentary records and consistent factual material reliable; however all three experts on remuneration were found unreliable for different reasons and their evidence was excluded under CPR r 35.1 as not reasonably required or insufficiently robust.
• Remuneration: the judge found that director remuneration was not authorised by the constitution or fixed by the board as required, and assessed appropriateness by reference to commercial factors and the company’s financial performance. He found Alistair received excessive remuneration in seven of the ten years examined and Allan in six of ten; Anna’s non-executive remuneration was also excessive relative to her contribution.
• Dividends: although declaration of dividends is a business judgment, the judge held there was no bona fide decision not to pay dividends; the failure to consider dividends in good faith, coupled with payments out as remuneration and the loan accounts, amounted to unfair prejudice.
• Directors’ loan accounts: large, unsecured, interest-free loan accounts created credit risk, reduced distributable resources, and produced adverse tax consequences; they were unauthorised and amounted to unfair prejudice.
• Defences rejected: the court rejected the respondents’ arguments that prior consent by the deceased shareholder, acquiescence by the petitioners, non-registration of estate shares or Duomatic ratification precluded relief. The probate rule and executor capacity arguments did not defeat the petition where acts were done in a different capacity (director/shareholder) and prejudicial conduct continued after the executor was removed.
• Remedy and valuation: the judge concluded that a purchase order was the appropriate remedy. Given the history, the diversion of value to the respondents and the absence of realistic reconciliation, he ordered that the two surviving brothers should buy the petitioners’ shares at a fair value and held that, in all the circumstances, no minority discount should be applied.

Subsidiary matters: the judge observed the court’s broad remedial discretion under s 996 and reserved detailed directions on valuation and adjustments, fixing a further hearing to determine implementation.

The petition under s 994 was successful. The court held that the respondents’ conduct was unfairly prejudicial because they had taken unauthorised and in many years excessive remuneration, failed in good faith to consider declaring dividends while distributable reserves existed, and permitted substantial unsecured, interest-free directors’ loan accounts. The judge ordered that the two principal respondent brothers (Alistair and Allan) purchase the petitioners’ shares at a fair value, and directed further procedural steps to determine the precise price and adjustments; the court rejected defences of acquiescence, Duomatic ratification and lack of standing.