McMonagle v Harvey & Ors

This is a first-instance Companies Court judgment under section 994 of the Companies Act 2006 concerning unfairly prejudicial conduct between the two founding directors and shareholders of Integrated Control Solutions (Eastern) Limited ("ICS"). The court found that ICS was a quasi-partnership founded on mutual trust and confidence between the two founders and that that relationship was destroyed by the first respondent's admitted diversion of a modest amount of business via a sole trader trading style (ENJ) and by the hostile reaction that followed.

The judge held that (i) the diversion to ENJ breached the first respondent's duties (sections 171–175 were considered) and contributed to the breakdown of the partnership-like relationship, (ii) the petitioner’s reaction after discovery (including exclusionary measures, removal of access and internal steps to preserve cash and alternative extractions of value) was in part unfairly prejudicial, and (iii) certain later pleaded allegations (notably concerning BISL) were insufficiently pleaded or evidenced to be resolved on the section 994 petition and should be pursued, if at all, by the company in Part 7 proceedings.

Remedial conclusions: the court concluded that the fair remedy is a buy‑out of the first respondent’s shares. The valuation date was fixed at 3 April 2018 (the day after the respondent ceased employment). A minority discount should be applied. The first respondent must account for monies received by ENJ, unauthorised withdrawals from the company accounts in 2018–19, certain personal house‑improvement payments and retained company chattels (or pay their replacement value). The buy‑out price is to be adjusted to reflect these accounts and unauthorised payments.

Background and parties

• ICS was incorporated in 2001 by Timothy McMonagle and Lee Harvey, who ran the business as a joint management team and equal directors and shareholders. The business installs building management systems.
• By 2017 each founder had transferred half their shares to their respective spouses so that each couple held 50% of issued capital; the management relationship and remuneration were informal, relying heavily on an expectation of joint management and equal sharing.

Nature of claims

• The petitioner (Mr McMonagle) presented an unfair‑prejudice petition under section 994 CA 2006 alleging that Mr Harvey diverted company opportunities (initially via ENJ and later, as amended, via BISL), made unauthorised withdrawals, neglected company affairs and retained company chattels; relief sought included an order for purchase of the respondent’s shares.
• The respondent (Mr Harvey) filed points of defence and a cross‑petition under section 994 alleging exclusion from the business, unequal treatment, unauthorised payments to the petitioner, interference with his email access and other mismanagement. The cross‑petition sought a buy‑out without a minority discount on quasi‑partnership grounds.

Procedural posture

• The trial was on liability only. The petitioner amended late in the proceedings to add allegations about BISL and further unauthorised withdrawals; the court gave directions and required disclosure but the BISL allegations lacked the detailed evidential foundation necessary to decide them at section 994 trial.

Issues framed

• Primary issues included whether ICS was a quasi‑partnership, whether there had been a breakdown of trust and confidence, whether the respondent had diverted business and mismanaged the company, whether BISL competed with ICS, what accountabilities for unauthorised withdrawals and retained chattels existed, and the appropriate valuation date and application (if any) of a minority discount.

Court’s reasoning and findings

• The court found ICS to be in the nature of a quasi‑partnership with an expectation of joint participation in management; that background is central to assessing unfair prejudice (citing authorities on quasi‑partnerships and directors’ duties).
• The respondent admitted diversion of business via ENJ (totalling approximately £25,831) and the court held that this constituted a breach of director’s duties (including conflict rules and the duty to promote the success of the company) and materially contributed to the breakdown of trust and confidence between the founding partners.
• The petitioner’s post‑discovery conduct (internal resolutions to limit access, disclosure to staff and clients and steps to stop dividend‑style payments) was partly excessive and produced exclusion of the respondent; removal of remote access to a hospital BMS and statements to clients caused further prejudice and were disproportionate.
• The late‑pleaded BISL allegations were inadequately evidenced and, given the petitioner’s subsequent control of the company, the court held such allegations were more appropriately pursued by the company in Part 7 proceedings (they could increase company assets and thus should be asset claims of the company rather than simply resolved by a section 994 order in the petitioner’s favour).
• On remedy the court concluded buy‑out was appropriate and fixed the valuation date as 3 April 2018 (the day after the respondent ceased employment) as the most just date, subject to adjustment to reflect admitted misconduct and unauthorised payments. The court also rejected reopening historic benefits prior to December 2017 as unjustified on the evidence.

Relief and next steps

• The court directed that the parties agree a form of order giving effect to the conclusions: the first respondent’s shares to be purchased at value as at 3 April 2018 with a minority discount, with set‑offs/adjustments for ENJ receipts, unauthorised withdrawals, house improvement payments and retained chattels (or replacement values). The court left detailed quantification and the precise terms of purchase to be settled and reflected that company claims relating to BISL, chattels and unexplained expenses might be pursued by Part 7 if necessary.

First instance: The petition and cross‑petition were upheld in part. The court found ICS to be a quasi‑partnership and that a breakdown of mutual trust and confidence had occurred: the first respondent’s diversion of business via ENJ breached his duties and materially contributed to the breakdown, and the petitioner’s subsequent exclusionary and opportunistic responses were also unfairly prejudicial in part. Remedy: the court ordered a buy‑out of the first respondent’s shares. The valuation date was fixed at 3 April 2018 (the day after the respondent ceased employment). A minority discount is to be applied. The first respondent must account for ENJ receipts, unauthorised withdrawals in 2018–19 and repay or account for specified personal payments and retained company chattels; the buy‑out price is to be adjusted to reflect those matters. Allegations introduced late concerning BISL and other diffuse claims should, where appropriate, be pursued by ICS in Part 7 proceedings rather than resolved on the section 994 petition.