Faulkner & Ors v Vollin Holdings Ltd & Ors

The petitioners, minority shareholders in Compound Photonics Group Limited, sought a summary order requiring the majority shareholders to purchase their shares at fair value under the unfair prejudice jurisdiction (Companies Act 2006, sections 994–996). The petitioners relied on an alleged contractual "2013 Constitution" (shareholders' agreement and articles) including an express duty of good faith and alleged entrenched director rights, and also alleged abuse of process arising from a large counterclaim against one petitioner which had been discontinued.

The court held that summary determination was not appropriate. Key legal reasons were that material factual disputes required a full trial (including issues of whether an entrenched right existed; whether removal/resignation in March 2016 was for proper commercial reasons or unfairly prejudicial; and the interpretation and effect of the contractual duty of good faith), and that discontinuance of the counterclaim did not automatically debar the respondents from advancing an arguable defence. The court also found that the counterclaim and its discontinuance did not amount to abuse of process warranting debarment, applying the principle that mixed motives do not of themselves show an abuse of process. The application for an immediate buyout order was refused and the trial was to proceed, with case management directions to focus on events around March 2016.

The petitioners are minority shareholders in Compound Photonics Group Limited. The first petitioner was formerly Chairman and the second formerly Chief Executive Officer. They alleged that majority investors (the active respondents) repudiated the protections in a 2013 shareholders' agreement and articles (the "2013 Constitution"), breached an express contractual duty of good faith and caused their exclusion from management, and that corporate acts including the sale of the Newton Aycliffe facility were carried out to the prejudice of minorities. The petitioners sought relief for unfair prejudice under sections 994–996 of the Companies Act 2006, and, by means of an application at the start of the trial, sought summary determination requiring the respondents to purchase their shares at fair value; valuation was reserved to a separate hearing.

The petitioners' application relied heavily on the fact that a substantial counterclaim by the respondents against the second petitioner (alleging mismanagement and losses) had been discontinued shortly before trial. The petitioners argued that the counterclaim had been an intimidation tactic and an abuse of process, and that its discontinuance left the respondents without any properly arguable defence to the allegation that the second petitioner's forced resignation in March 2016 was unfairly prejudicial. They submitted that a buyout order was an appropriate, financially neutral remedy which the respondents had no legitimate reason to resist.

The court identified the issues as (i) whether the second petitioner had an entrenched right to remain as a director or whether the respondents had an unfettered statutory right of removal (Companies Act section 168(1)), (ii) whether the respondents breached contractual duties (including an express duty of good faith) or directors' duties, (iii) whether factual findings could properly be made summarily or required full trial and cross-examination, and (iv) whether the counterclaim and its discontinuance amounted to an abuse of process justifying debarment from defending.

The court concluded that there were substantial and intertwined factual disputes — including conflicting accounts of representations at the time of investment, the commercial nature of the business and investors' expectations, the circumstances of the departures in 2016, and valuation-related issues such as the Newton Aycliffe sale — which required evidence assessment and findings following cross-examination. On the abuse point the court applied the principle that proceedings pursued for mixed motives will not necessarily be an abuse where a legitimate purpose exists, and held that a debarment order would be a disproportionate and extreme remedy in the present circumstances. The court therefore refused the application for summary buyout and directed that the trial proceed with tighter case management and a focus on events leading up to March 2016.

The court also noted the very large costs incurred in the litigation and emphasised proportionality in cross-examination and the conduct of the trial.

The court refused the petitioners' application for an immediate share purchase order and declined to debar the respondents from defending the petition. The judge held that the respondents had an arguable defence, that material factual disputes (including whether an entrenched director right existed and whether conduct was unfairly prejudicial) required a full trial and findings after cross-examination, and that the discontinued counterclaim did not amount to an abuse of process justifying the extreme remedy of debarment. The trial was to proceed with case management directions focusing on events around March 2016.