KHADIM HUSSAIN v ALLAH HUSSAIN & Ors

The petitioner applied under section 994 of the Companies Act 2006 for relief for conduct of the company's affairs alleged to be unfairly prejudicial to his interests as a member. The court found that although certain payments (the "Excess Takings") by directors and family members amounted to prejudice, they arose against a long-standing, informal family understanding about how the company and its separate trading sites would be run and exploited. That common understanding, manifested by decades of conduct, meant that strict enforcement of directors' duties inter se would be inequitable. The petition failed because the element of unfairness required by s.994 was not established: the conduct complained of, including undeclared takings and related HMRC issues, had been known to and acquiesced in by members of the family and was dealt with (or is being dealt with) by voluntary HMRC disclosure. Nor was the petitioner excluded from management in a manner deserving of relief; the contested changes to bank mandates and the appointment of a non-executive director (Shahzad) were proportionate responses to the breakdown in family relations and not designed to oust the petitioner. The petition was dismissed.

Background and parties. The dispute concerned KTA Group Limited, a family business incorporated in 1998 carrying on garage and car sales operations through separate sites (notably Worleys and Pewsham). The petitioner, Khadim Hussain, and first respondent, Allah Hussain, are surviving original family members and shareholders; the next generation occupy most operational roles. The petitioner sought relief under section 994 Companies Act 2006 alleging that family members had taken company funds without his knowledge and excluded him from management.

Nature of the claim / relief sought. The petitioner sought relief for unfairly prejudicial conduct under s.994 CA 2006 (including an order compelling the first respondent to sell his shares to the petitioner or other remedies to redress alleged exclusion and misapplication of company assets). The pleaded allegations included (i) excessive and undisclosed drawings by directors and family members (the "Excess Takings"), (ii) obstruction of investigations into those takings and (iii) the appointment of a non-executive director for an improper purpose.

Issues framed by the court. The four principal issues identified for trial were: (1) whether the Excess Takings amounted to prejudice which was also unfair, (2) whether the petitioner had been excluded from management, (3) whether breaches of statutory directors' duties gave rise to unfair prejudice, and (4) the appropriate relief, if any.

Findings and reasoning.

• The court accepted that the Excess Takings and other conduct were prejudicial to the petitioner in his capacity as a member, and accepted that there had been historical and continuing failures to record and disclose certain extractions from the company (HMRC investigations and voluntary disclosures having followed).
• However, the court concluded that the relevant element of unfairness (the equitable requirement for s.994 relief) was not made out. The tribunal found a long-standing, informal family understanding about how the businesses and bank accounts operated, with money being taken and used across linked family businesses, salaries and drawings often set by reference to practical family needs and tax thresholds rather than strict documentary rules. That mutual understanding had been manifested by conduct for decades and had included acquiescence by the petitioner in similar conduct by others. Equity therefore did not require the strict enforcement of directors' duties between the family members in the circumstances.
• Allegations of exclusion from management failed. The changes complained of (for example, bankline signature requirements and the appointment of a part-time non-executive director) were legitimate, proportionate responses to a breakdown of trust and were not used to exclude the petitioner from participation in the running of the Worleys business, which he continued to control under the family arrangement.
• The appointment of the non-executive director (Shahzad) was held to have been made for proper purposes: to provide objectivity and assist with HMRC and governance issues in a crisis of family relations, rather than to manufacture a majority to oust the petitioner.
• The court emphasised that relief under s.996(1) must be referable to proven unfair conduct, proportionate and not punitive; the requisite link between unfairness, prejudice and an appropriate remedy was not established.

Disposal. The petition was dismissed; the court invited the parties to agree the consequential order.

First instance: The petition under section 994 CA 2006 is dismissed. The court held that although there were prejudicial extractions and breaches of company bookkeeping and tax obligations, those features arose within and were largely acquiesced in under a long-standing informal family understanding about how the group and its site accounts operated. For that reason the conduct was not "unfair" in the equitable sense required by s.994 and no relief was appropriate. Allegations of exclusion from management and improper appointment of a non-executive director were rejected; the contested governance measures were proportionate responses to the breakdown of family trust and the HMRC issues.