Langer v McKeown & Anor

The petitioner succeeded under section 994 of the Companies Act 2006, the court finding that the company's affairs had been conducted in a manner unfairly prejudicial to the petitioner. The principal wrongful acts were: the transfer of the Soho Club business to the respondent's companies on terms that did not reflect the arm's‑length value; the respondent's appropriation of the opportunity to acquire the Euston Club rather than presenting it to the company; the transfer of the Marylebone Club's assets and goodwill without adequate consideration; and a pattern of financial mismanagement including excessive or unjustified payments to the respondent's family and associates and poor accounting which allowed a shareholder loan position to arise without proper disclosure.

The court applied the statutory duties of directors (sections 171, 172, 174, 175 and 177 Companies Act 2006) and equitable principles of good faith in closely held companies (Re A Company/O'Neill v Phillips and related authority). The court found breaches of duties to avoid conflicts of interest, to declare interested transactions and to exercise reasonable care and skill. The appropriate remedy was a buy‑out: the respondent was ordered to purchase the petitioner's 25% holding, to be valued on specified assumptions and with a valuation date of 1 October 2019; limited adjustments were ordered in respect of excessive salary and improper payments and the treatment of the petitioner's shareholder loan account.

Background and parties. The petitioner, Mrs Diana Langer, was a 25% shareholder in Stratos Clubs Limited. The first respondent, Mr John McKeown, was the dominant director and majority shareholder. The businesses operated lap‑dancing clubs (Marylebone, Soho and later Euston) under the Sophisticats name.

Nature of the claim. Mrs Langer petitioned under section 994 Companies Act 2006 for relief on grounds of unfair prejudice, alleging that the respondent had diverted corporate opportunities, caused disposals at undervalue, mismanaged company finances including excessive payments to family and friends, and treated her as indebted on a shareholder loan account without proper disclosure.

Procedural posture and issues for trial. A split trial was ordered to determine (a) whether the respondent engaged in unfairly prejudicial conduct, (b) appropriate relief, and (c) valuation methodology if a buy‑out were ordered. The judge heard extensive factual and expert evidence including company and valuation accounts.

Issues framed by the court. The court considered: (i) whether the Soho and Marylebone transfers and the respondent's purchase of the Euston opportunity involved breaches of statutory director duties and the companies' articles; (ii) whether the petitioner had suffered prejudice (financial and in loss of share value); (iii) the extent and effect of financial mismanagement; (iv) valuation methodology and valuation date; and (v) appropriate relief and adjustments for excessive payments and the shareholder loan.

Reasoning and findings. The judge applied the standards in Re A Company (O'Neill v Phillips) and other authority to conclude that equitable considerations of good faith applied in this close, trust‑based relationship. The Soho transfer was carried out without adequate market testing, independent valuation or proper approvals, and there was a transactional conflict of interest and failures of procedural approvals under the articles: this amounted to a breach and caused prejudice. The respondent's acquisition of the Euston business was an exploitation of an opportunity which ought to have been offered to the company; the court rejected the defendant's argument that insolvency or lack of funds excused his conduct. The Marylebone transfers were procedurally defective and undervalued, although on their own some aspects were less blameworthy than the Soho sale. The court found patterns of excessive salary and payments to family and friends and poor accounting practices that prejudiced the petitioner. The respondent's later shareholder and board ratifications did not cure unfair prejudice.

Relief. The petition was allowed. The primary remedy was a compulsory purchase by the respondent of the petitioner's 25% shareholding in a deemed group that included Stratos and the Euston entity, valued on specified assumptions and with valuation date 1 October 2019. The order included directions for apportionment and assumptions (including treatment of VAT issues and the Soho sale being treated on arm's‑length terms) and a mechanism for adjustments in respect of excessive salary and improper payments linked to the petitioner’s loan account.

The petition is allowed. The court found that the respondent engaged in unfairly prejudicial conduct by diverting corporate opportunities (the Euston acquisition), causing transfers of business and assets (Soho and Marylebone) on terms that did not reflect arm's‑length value, and by a pattern of financial mismanagement (excessive payments and poor accounting) which prejudiced the petitioner. The court ordered the respondent to purchase the petitioner's 25% shareholding, with the valuation to be carried out on specified assumptions and with the valuation date set at 1 October 2019; limited adjustments were ordered in respect of excessive salary and other improper payments and in relation to the petitioner's shareholder loan account.