Starling v Climbing Gym Ltd

The petitioner, a 32% shareholder and operations director, brought an unfair prejudice petition under the Companies Act 2006 after being suspended and dismissed following undisclosed involvement with a separate climbing‑wall venture (Avid). The court examined whether equitable "quasi‑partnership" principles applied, whether the petitioner had signed a directors' service agreement (DSA), and whether his conduct gave rise to a breach of directors' duties under the Act, in particular the no‑conflict rule in section 175.

The judge found on the balance of probabilities that the DSA had been signed, that no quasi‑partnership existed (so equitable exceptions did not displace the written shareholder agreement (SA) and articles), and that the petitioner had taken an interest in Avid and failed to disclose information and opportunities relevant to the Company. That conduct could reasonably be regarded as giving rise to a conflict of interest under section 175 and breached obligations in the DSA. The disciplinary process, although open to criticism on some procedures, was held not to have been conducted in bad faith. The petition for unfair prejudice was dismissed.

Key legal principles applied:

• Directors' duties under the Companies Act 2006, including sections 171–175 (powers, promotion of success, care and skill, and the no‑conflict rule).
• The statutory unfair‑prejudice framework (section 994) and the court's remedial discretion under section 996.
• The established test for quasi‑partnerships from Ebrahimi and subsequent authorities: equitable considerations only displace written governance where special personal‑relationship features exist.

This is a first‑instance shareholder dispute arising from the dismissal and exclusion of the petitioner, Simon Starling, from the management and employment of The Climbing Gym Limited. The petitioner (32% shareholder) sought relief under the Companies Act 2006, alleging unfair prejudice and seeking reinstatement as employee and director and protection against forced share transfer provisions in the shareholders' agreement (SA). The respondents (including the majority shareholders Paul and Susan Barden) maintained that the petitioner had concealed and personally invested in a competing opportunity (Avid) and breached his service agreement and statutory duties.

The court framed the key issues as: (i) whether the company operated as a quasi‑partnership so equitable considerations should apply; (ii) whether the petitioner had signed the directors' service agreement and was bound by it; (iii) if equitable considerations applied, whether the petitioner’s exclusion was justified; (iv) if no quasi‑partnership, whether the directors were entitled to remove him as director; and (v) whether other matters raised (dividend non‑payment, use of corporate funds as legal costs, earlier exclusion) affected the unfair‑prejudice claim.

The judge found the following:

• Nature of claim/application: an unfair‑prejudice petition under section 994 of the Companies Act 2006 seeking relief under section 996, and ancillary injunctive relief earlier in the proceedings; reinstatement was sought but not obtained in interim proceedings.
• Quasi‑partnership: no sufficient special circumstances to treat the company as a quasi‑partnership. The incorporation, negotiated and signed SA and DSA, equal initial share allocation, and commercial planning pointed to a commercial enterprise governed by written agreements rather than a personal association of the Ebrahimi type.
• DSA signature: on the balance of probabilities the petitioner had signed the DSA; contemporaneous evidence and credible witness testimony (notably Ms Hughes) supported this finding.
• Conflict of interest and duties: the petitioner took a substantial personal interest in Avid (including a £100,000 investment and 49 of 100 shares) and did not disclose relevant information/opportunities to the board. The court held that the circumstances could reasonably be regarded as giving rise to a conflict under section 175 of the Act (the duty to avoid conflicts and to disclose), and that he failed to obtain board authorisation.
• Disciplinary process and dismissal: although the investigation and hearing had procedural shortcomings (no independent investigator, role of the chair’s note‑taker, scope creep), they were not conducted in bad faith. The board’s loss of confidence and the contractual and statutory duties breached justified exclusion and dismissal under the DSA and company constitution; removal could alternatively have been effected by ordinary resolution but the actions were not inequitable in the circumstances.
• Other pleaded matters (dividends, bank access, corporate legal costs): either not substantiated, not pursued at trial, or insufficient to establish unfair prejudice; some matters may be pursued by valuation or other routes but were not decided here.

Concise reasoning: the court emphasised the primacy of the written SA and DSA where parties are sophisticated and have documented their relationship. Equitable considerations only arise where the parties' words or conduct create a legitimate expectation that strict legal rights will not be exercised; that was not shown. The petitioner’s undisclosed outside interest and withholding of relevant information were inconsistent with the DSA and the codified no‑conflict duty, making exclusion and dismissal lawful and not unfairly prejudicial.

This is a first instance judgment. The petition under section 994 of the Companies Act 2006 is dismissed. The judge held that (i) there was no quasi‑partnership so equitable exceptions did not displace the written shareholder and service agreements; (ii) the petitioner had signed and was bound by the directors' service agreement; (iii) the petitioner's undisclosed substantial investment in Avid and his failure to disclose relevant information amounted to conduct that could reasonably be regarded as giving rise to a conflict under section 175 of the Companies Act 2006 and breached contractual obligations; and (iv) the disciplinary process, though imperfect, was not in bad faith and exclusion/dismissal were not unfairly prejudicial.