Shehata v Mansfield Hotel Ltd & Ors

The petitioner sought a buy-out order under section 994 Companies Act 2006 alleging that the affairs of Mansfield Hotel Limited had been conducted in a manner unfairly prejudicial to his interests. The court found that the parties had formed a quasi-partnership based on personal relationships, mutual trust and an informal agreement for "equal treatment" of drawings and participation in management. The petitioner, however, had effectively chosen to step back from management from about mid-2016 and failed to engage with meetings and accountants thereafter.

The key contested issue was the treatment of director withdrawals (circa £536k) as loans rather than dividends. The court concluded that the account treatment arose from delegation to one director and the company accountant, innocent errors and the practical operation of their informal arrangements rather than deliberate unfairness by the majority. The petitioner had benefited from drawings, had taken undisclosed cash withdrawals and entered vehicle leases which were not for company benefit, further undermining his exclusion complaint.

For these reasons the court held that the petitioner had not proved unfairly prejudicial conduct and declined to order a buy-out; instead the court invited the parties to arrange an independent accounting reconciliation and to use the Articles' mechanisms to agree valuation and sale of shares.

Background and parties: Milad Makram Morgan Shehata (petitioner) was one of four equal shareholders in Mansfield Hotel Limited, a company operating the St Mark Hotel. The second to fourth respondents were fellow shareholders and directors (referred to as the Respondent directors). The petitioner alleged unfair prejudice and sought an order that the respondents buy his shares.

Nature of the claim: A petition under section 994 Companies Act 2006 for relief on the ground that the company's affairs had been conducted in a manner unfairly prejudicial to the petitioner; primary relief sought was a buy-out of the petitioner's shares.

Issues identified by the court:

• Whether the parties had a quasi-partnership or an understanding that all members would participate in management and be treated equally.
• Whether the petitioner had been excluded from management and whether any exclusion was unfairly prejudicial.
• The proper accounting treatment of director withdrawals (whether dividends or loans) and the consequences of that treatment for the petitioner’s liabilities and prejudice.
• Whether security/charges granted over the hotel or other conduct of the majority was unfairly prejudicial.

Procedural posture: First instance trial in the Companies Court (Business and Property Courts). The petitioner amended his petition; the court heard oral evidence from eight witnesses and considered documentary and account material.

Court’s reasoning and findings:

• The court found a quasi-partnership existed: the relationship was personal, founded on trust and informal dealings, and the Articles contained share transfer pre-emption provisions.
• There was an agreed informal "equal treatment" policy and an understanding that members might take payments in turn rather than fixed annual dividends; no binding agreement entitled the petitioner to fixed annual sums indefinitely.
• The petitioner largely "self-excluded" from management from mid-2016: he chose not to attend meetings or engage with accountants despite receiving notice; the court distinguished self-exclusion from forced exclusion and relied on authority on that distinction.
• The account treatment of withdrawals as directors' loans in the 2017 accounts and related years resulted from delegation of accounting responsibility to one director and the company accountant and included innocent errors; there was no evidence of deliberate misfeasance by the majority.
• The petitioner had taken undisclosed cash withdrawals (found to be approximately £12,500 diverted) and had entered vehicle leases charged to the company for his personal use; these facts diminished his unfairness claim.
• The court declined to consider a late unpleaded argument about illegality under section 197 Companies Act 2006 and refused a post hoc challenge to the accounting timetable raised without pleading.

Disposition and relief: The court concluded the conduct complained of was not unfairly prejudicial and that a buy-out order was not justified. It invited the parties to agree an independent accounting reconciliation and to use the Articles' mechanisms to effect any sale or valuation of shares.

Petition dismissed. The court found a quasi-partnership and an informal equal-treatment understanding but concluded the petitioner had largely self-excluded from management; the treatment of withdrawals as loans arose from delegation, accountant advice and innocent error rather than unfair conduct by the majority, and the petitioner therefore did not establish unfair prejudice warranting a buy-out.