Kerrie Heywood v Kevin Freakley & Ors.

The petitioner, a registered shareholder, brought a claim under section 994 of the Companies Act 2006 alleging that the companys affairs were conducted in a manner unfairly prejudicial to her interests. The court found unfairly prejudicial conduct in two respects: (1) the allotment and issue of shares on 30 March 2018 which diluted the petitioners effective ownership from 50% to 25%, and (2) the execution of a Deed of Release on 6 August 2019 by the first respondent which extinguished the companys valuable rights under a building agreement. The court held that the petitioner had standing to present the petition even if the registered share might be held as nominee or on trust for a third party; the registered status sufficed for standing. The allotment breached the pre-emption provisions of section 561 and was concealed from the petitioner; the Deed of Release was made in circumstances of clear conflict of interest and lacked evidential justification. The court reserved consideration of remedy and quantum for a later hearing.

This was a first instance unfair prejudice petition under section 994 Companies Act 2006 brought by the petitioner, a registered shareholder of K & B Homes Limited, against members of the Freakley family and the company. The petitioner alleged that the companys affairs had been conducted in a manner unfairly prejudicial to her interests.

Background and parties:

• The site subject to the dispute was land in Lostock, Bolton, owned by members of the Freakley family. The company was engaged to develop the site. The petitioner and her partner, a developer, negotiated with the Freakleys to undertake the development on a profit-sharing basis.
• Disputes arose over the corporate ownership and share allotments in 20172018. Documents filed at Companies House recorded changes in directors and persons with significant control and a return of allotment on 17 May 2018 showing an increase in issued shares.
• The Building Agreement dated 7 June 2019 recorded the company as developer with contractual entitlements to proceeds from sales; on 6 August 2019 a deed purported to release the companys rights under that agreement.

Procedural posture and issues:

• The trial was limited to liability issues by order of HHJ Cadwallader; remedy and quantum were directed for a later hearing.
• The court identified the live liability issues as (i) whether the share allotments of 28-30 March 2018 unlawfully diluted the petitioners shareholding and (ii) whether the companys rights under the Building Agreement were improperly released by the Deed of Release dated 6 August 2019. The respondents also raised, and the court addressed, the argument that the petitioner lacked standing because she was a nominee shareholder.

Courts reasoning and findings:

• The court found on the balance of probabilities that the petitioner had effectively been entitled to 50% of the equity as at midnight on 29 March 2018 and that, without her consent or knowledge, the company re-registered and allotted further shares on 30 March 2018, reducing her effective holding to 25%.
• The allotment of two new A shares to a family member amounted to a breach of the pre-emption provisions in section 561 of the Companies Act 2006 (as recorded) and the concealment of the allotment was an additional factor making the conduct unfairly prejudicial.
• The Deed of Release was executed by the first respondent in circumstances of a clear conflict of interest and without evidential justification for surrendering the companys valuable asset; it therefore amounted to conduct of the companys affairs that was unfairly prejudicial to the petitioner.
• On standing, the court held that the registered shareholder is entitled to present a section 994 petition even where the beneficial interest may be held by another, and that in the present case any potential nominee relationship did not defeat the petitioners standing; issues relating to beneficial interest might, however, be relevant to remedy.

The court concluded that serious unfairly prejudicial conduct had been proved in the two respects identified and reserved determination of appropriate relief and quantum for a subsequent hearing.

This first instance petition succeeded in respect of liability. The court found that the allotment and issue of shares on 30 March 2018 unfairly prejudiced the petitioner by diluting her effective ownership from 50% to 25%, and that the Deed of Release dated 6 August 2019, executed by the first respondent, unfairly prejudiced the petitioner by releasing the companys valuable rights under the Building Agreement. The petitioner has standing to bring the section 994 petition as the registered shareholder. Remedy and quantum were reserved for a later hearing.