Shehata v Mansfield Hotel Ltd & Ors

A petition under Companies Act 2006, section 994 requires proof that conduct of the company’s affairs caused unfair prejudice to the petitioner’s interests as a member. Equitable considerations may qualify the exercise of strict legal rights where a company is operated as a quasi-partnership, but the court must identify the actual agreement or understanding between the members. A member who voluntarily withdraws from management cannot ordinarily complain of exclusion. Equal treatment does not create an entitlement to annual dividends where the members agreed only to share payments equally and company circumstances permitted. Conduct is not unfair where the petitioner had notice of the relevant decisions, could participate, and was treated in the same way as the other members.

The petitioner held shares and was a director of Mansfield Hotel Limited with the second to fourth respondents. He alleged that the company was a quasi-partnership and that he had been excluded from management, denied information, treated unfairly in relation to drawings and directors’ loans, and prejudiced by company charges and accounting decisions. He sought an order requiring the respondents to buy his shares under section 994 of the Companies Act 2006.

The respondents accepted an informal business relationship but denied unfair prejudice. The central issues were whether the company was operated on a quasi-partnership basis, what agreement governed management and distributions, whether the petitioner had been excluded or had withdrawn voluntarily, and whether the treatment of company drawings and other matters was unfairly prejudicial.

1. Result. The petition was dismissed. The court found no unfairly prejudicial conduct and therefore made no buy-out order.
2. Section 994 of the Companies Act 2006 required proof that the impugned conduct related to the company’s affairs, caused prejudice to the petitioner’s interests as a member, and was unfair. The court applied the formulation in Hawkes v Cuddy (No 2) and Re Saul D Harrison & Sons Plc.
3. The company was a quasi-partnership. The members’ personal relationship, mutual confidence, informal operation and agreement that they would participate in the business justified the application of equitable considerations. The court relied on Ebrahimi v Westbourne Galleries Ltd, O’Neill v Phillips, Re Astec (BSR) plc and Strahan v Wilcock.
4. The agreement did not confer a continuing entitlement to annual dividends or continuing management involvement. The members were to be treated equally, and payments depended on the company’s financial position and, where necessary, a dividend resolution. The petitioner had agreed to step back and had voluntarily ceased participation. Under Larvin v Phoenix Offices Supplies, self-exclusion had to be distinguished from unfair exclusion.
5. The respondents’ decisions concerning the lease, refurbishment, meetings, accounts, drawings and loans were not unfair. The petitioner had notice of relevant meetings and issues, could obtain company information, and had been treated no less favourably than the other members. The agreed equal-treatment policy had not been breached.
6. The charge over company assets was consented to and caused no unfair prejudice. The unpleaded argument concerning section 197 of the Companies Act 2006 was not determined, following Dhillon v Barclays Bank Plc.
7. The parties were invited to agree an order and to cooperate in valuing and arranging any share transfer under the articles.

First-instance decision. No prior appellate decision was stated in the judgment.