McMonagle v Harvey & Ors

In an unfair-prejudice petition, the court must assess the parties’ conduct in the context of their relationship and the company’s practical operation. A quasi-partnership may involve equitable expectations of mutual participation and trust. Breach of directors’ duties, exclusion from management, diversion of business opportunities and unjustified extraction of remuneration may amount to unfair prejudice. Relief remains discretionary. A valuation date and minority discount must produce a fair result, taking account of both parties’ conduct. An undiscounted valuation is usual for an innocent minority shareholder in a quasi-partnership, but a discount may be appropriate where the minority shareholder created the circumstances requiring the buy-out.

The petitioner and first respondent were equal business partners, directors and shareholders in Integrated Control Solutions (Eastern) Ltd. Each later transferred half of their shareholding to their wife. Following the first respondent’s establishment of ENJ Control Solutions and diversion of company work, the relationship of trust and confidence broke down. The petitioner presented a petition under section 994 of the Companies Act 2006. The first respondent brought a cross-petition alleging exclusion, improper payments and other unfairly prejudicial conduct.

The central issues were whether the company was a quasi-partnership, whether either party had conducted its affairs unfairly, the appropriate valuation date, and whether the first respondent’s shares should be subject to a minority discount.

1. Petition and cross-petition. Both parties had engaged in conduct unfairly prejudicial to the other. The company was a quasi-partnership from its outset, founded on a close relationship of trust, equal participation in management and equal remuneration.
2. Mr Harvey breached his duties under sections 172 and 175 of the Companies Act 2006 by diverting business opportunities through ENJ. His defensive response to disclosure requests destroyed the relationship of trust and confidence. In a quasi-partnership, that destruction was a paradigm case of unfair prejudice.
3. Mr McMonagle’s response was excessive and opportunistic. Restrictions on Mr Harvey’s work, his exclusion from management, and the stopping of the dividend element of remuneration while alternative payments were made to Mr McMonagle and his wife were unfairly prejudicial.
4. The allegations concerning BISL, most retained chattels and certain expenses were unsuitable for determination under section 994. They were diffuse, late and insufficiently evidenced. The company could pursue them, if appropriate, in properly pleaded Part 7 proceedings.
5. The valuation date was fixed at 3 April 2018, immediately after Mr Harvey’s resignation as an employee. This reflected his effective departure while avoiding an arbitrary valuation based on later, insufficiently established allegations.
6. A minority discount was appropriate. Although the company was a quasi-partnership, Mr Harvey’s conduct had created the circumstances requiring the buy-out. The valuation and purchase price were to account for ENJ receipts, unauthorised withdrawals, bathroom-improvement payments, retained equipment, and unjustified remuneration and expenses.
7. The parties’ prior tax payments and earlier benefits required no adjustment. The claim that Mr Harvey had materially neglected the company’s affairs failed. The court invited counsel to agree the form of order.