KHADIM HUSSAIN v ALLAH HUSSAIN & Ors

For a petition under section 994 of the Companies Act 2006, the petitioner must prove both prejudice to his interests as a member and unfairness. Unfairness is assessed in context and may arise from breach of an agreement or understanding, but strict legal rights may be qualified by equitable considerations where it would be inequitable to enforce them.

A family company’s informal practices may establish the basis on which its affairs are conducted. That understanding can make conduct prejudicial but not unfair, particularly where comparable breaches were knowingly tolerated by the petitioner. Relief must remedy the proved unfair prejudice, be proportionate, and be linked to the prejudice established. Exclusion from management requires proof of exclusion contrary to an understanding that the member would participate; disagreement, oversight requirements, or voluntary non-participation is insufficient.

The petitioner, an equal shareholder and director of KTA Group Limited, sought relief under section 994 of the Companies Act 2006, principally an order requiring the first respondent to sell his shares. He alleged that family members had taken company funds without authority, failed to comply with directors’ duties, excluded him from management, obstructed an investigation into the company’s finances, and procured the appointment of a non-executive director for an improper purpose.

The respondents admitted that excess takings were prejudicial but contended that they were not unfair in light of the family’s longstanding informal arrangements and the petitioner’s own conduct. The central issues were whether the excess takings were unfairly prejudicial, whether the petitioner had been excluded from management, whether breaches of duty gave rise to relief, and what remedy should follow.

1. Petition dismissed. The admitted excess takings were prejudicial, but they were not unfair. The company had been operated for many years according to an unspoken family understanding, rather than by strict observance of its articles, formal remuneration arrangements, or directors’ duties.
2. The understanding included separate family control of the Worleys and Pewsham businesses, freedom for family members to draw income from the business associated with their side of the family, and a longstanding acceptance that sums exceeding declared remuneration could be taken. The petitioner knew of, participated in, or acquiesced in comparable conduct, including his own undeclared takings and the use of company funds for businesses associated with his family.
3. Section 994 requires both prejudice and unfairness. Fairness must be assessed in the context of the corporate vehicle, the parties’ relationship, their agreements and understandings, and their historical conduct. The strict enforcement of directors’ duties inter se would have been inequitable in these circumstances.
4. The petitioner had not been excluded from management. He continued to manage and control Worleys, retained access to company accounts, payroll information and bank statements, and there was no agreement or understanding requiring equal family representation on the board after the earlier succession arrangements changed. His failure to attend or participate in some board meetings amounted to self-exclusion.
5. The appointment of Shahzad was made for proper purposes, including adding objectivity and improving corporate governance. The refusal to appoint Tazamal was not unfairly prejudicial and involved no breach of duty. Requiring more than one director to authorise company payments introduced oversight but did not itself exclude the petitioner or constitute unfair prejudice.
6. The alleged blocking of the UHY investigation was not a breach of the parties’ understanding. The investigation had been initiated unilaterally, concerned businesses which the petitioner was not entitled to control unilaterally, and was of uncertain utility given the ongoing HMRC disclosure process.
7. Any relief under section 996(1) must remedy the proved prejudice, be proportionate, and avoid a punitive effect. As unfair prejudice was not established, no relief was granted.

First-instance decision. The petition was dismissed and the parties were invited to agree an order.