Joanne Couch v Kevin Fox & Anor

The petitioner brought an unfair prejudice petition under section 994 of the Companies Act 2006 in respect of conduct in a 50/50 quasi-partnership company, Kent Conversions Ltd. The court found that various acts and omissions by the first respondent, notably persistent refusal or delay in authorising day-to-day business payments, removal of the business telephone and changing passwords, and obstructive conduct in relation to a remortgage, impeded the company’s affairs, caused prejudice to the petitioner as a member and were unfair within the meaning of section 994.

The court rejected the petitioner’s claim to a salary because there was no agreement or corporate authority for remuneration, and found that repayment of the petitioner’s director’s loan is a debt due to her but is affected by the company’s insolvency and arises in her capacity as a creditor rather than as a shareholder. The court dismissed the respondent’s counterclaims, including alleged wrongful exclusion from management, significant misappropriation of funds and the respondent’s large backdated invoice for renovation works, for lack of supporting agreement or evidence.

The judge proposed relief in the form of a buy-out of the respondent’s 50 shares, valuation by a single joint expert as at 31 March 2021 on specified assumptions, removal of the respondent as a director, and further directions for determination of valuation.

This is a first instance unfair prejudice petition under section 994 Companies Act 2006 brought by Ms Joanne Couch against her former partner and co-director Mr Kevin Fox and the respondent company, Kent Conversions Ltd, a 50/50 quasi-partnership incorporated to hold and let a property (Hydrangea House). The petition followed the breakdown of a long personal and business relationship. The trial was expedited because the petitioner’s cancer had metastasised and her prognosis was limited.

Nature of the claim and relief sought

• The petitioner sought relief for conduct said to be unfairly prejudicial to her as a member and director: obstructing company operations by delaying or refusing to authorise expenses, refusing to agree a salary or repayment of loans, taking the single business telephone and changing passwords, refusal to cooperate on measures to improve profitability, unauthorised occupation of Hydrangea House, submission of a large invoice for renovation works, and use of company money for personal expenditure.
• The first respondent counterclaimed alleging wrongful exclusion from management, denial of access to company records, unauthorised personal expenditure by the petitioner, inflation of the petitioner’s director’s loan account and diversion of company income; the parties agreed those counterclaims could be dealt with without a cross-petition.

Issues framed by the court

• Whether the impugned acts or omissions amounted to conduct of the company’s affairs or acts of the company;
• Whether that conduct caused prejudice to the petitioner in her capacity as a member;
• Whether the prejudice was unfair in all the circumstances (applying s 994 together with authorities on quasi-partnerships and directors’ duties and the court’s equitable jurisdiction to require conduct to conform with the parties’ agreed basis);
• Whether specific allegations by each party (including occupations, withdrawals, alleged invoice, and access to accounts) were proved; and
• Appropriate remedies, including a possible buy-out under section 996(1) and valuation methodology.

Court’s reasoning and findings

• The judge assessed credibility, generally preferring the petitioner’s evidence where there was direct conflict though accepting parts of the respondent’s account. Evidence from witnesses who did not give oral evidence was afforded limited weight.
• On the central complaints the court found that the respondent’s persistent delays or refusals to authorise routine payments and obstructive conduct, and his taking of the business telephone and changing of passwords, did impede the company’s administration and were prejudicial and unfair under section 994. The respondent’s delay in agreeing remortgage paperwork caused the company to pay a higher interest rate and was found to have caused financial prejudice.
• The petitioner’s claim to a salary was dismissed because there was no agreement, no shareholders’ agreement, no board resolution and no contract of employment authorising payment.
• The petitioner’s director’s loan account showed she was owed a substantial sum and repayment is due on demand, but that claim is a creditor claim complicated by the company’s insolvency and is not a proprietary shareholder remedy under section 994.
• The respondent’s occupation of Hydrangea House caused annoyance but was not proved to have caused material damage to the business; the respondent’s large backdated invoice for renovation works was unsupported by agreement or adequate documentation and was therefore rejected; small unauthorised withdrawals were found not to have caused material prejudice.
• The respondent’s complaints about exclusion from management and lack of access to the company’s books were dismissed: he had read-only access to the company’s accounting system (Xero) and had been sent access invitations.

Relief and procedural outcome

The judge proposed orders that the petitioner purchase the respondent’s 50 shares at a price to be fixed; that valuation be by reference to the open market value of the company as at 31 March 2021 on the assumption that the company was indebted to the petitioner on her director’s loan account in a specified sum; that valuation be carried out by a single joint expert; that the respondent be removed as a director; and that the petition be listed for further directions to trial the valuation issue. The respondent’s counterclaims were dismissed.

The petition under section 994 Companies Act 2006 succeeds save in respect of a small number of specific allegations that were not proved. The court found that the respondent’s obstructive conduct in authorising routine payments, interference with the business telephone and passwords, and delay over remortgaging prejudiced the petitioner as a member and was unfair. The respondent’s counterclaims were dismissed. The judge proposed relief in the form of a compulsory buy-out of the respondent’s shares with valuation as at 31 March 2021 on specified assumptions, appointment of a single joint expert to value the shares, removal of the respondent as a director and further directions for a valuation hearing. The rationale was that the conduct amounted to unfairly prejudicial conduct of the company’s affairs within s 994 and that a buy-out was the appropriate remedy in the quasi-partnership context.