Queensgate Place Limited v Solid Start Limited & Ors

A member petition under Companies Act 2006, section 994, succeeds where company affairs cause prejudice to the petitioner’s interests as a member and that prejudice is unfair. Prejudice is construed broadly and may include financial loss connected with the shareholding, including loss relating to an associated shareholder loan.

Fairness is assessed judicially in the context of the parties’ agreed arrangements, the company’s constitution and equitable considerations. Breaches of directors’ duties strongly indicate unfair prejudice, but causation remains essential. A director cannot abdicate responsibility for governance, accounts and financial oversight where there are grounds to distrust a co-director.

Queensgate Place Ltd, the beneficial owner of 50% of Solid Star Ltd, petitioned under section 994 of the Companies Act 2006. Solid Star was a joint venture vehicle in which Viking World Investments SA held the remaining beneficial interest. The petition concerned the conduct of the company’s affairs by its directors, Prakash Bhundia and Minesh Bhundia.

The alleged unfair prejudice included unequal repayment of shareholder loans, undervalue sales of company properties to connected companies, diversion of funds, and Solid Star’s involvement in an unrelated development which resulted in substantial liability. The hearing concerned liability only. The central issues were whether the conduct was unfairly prejudicial, whether the directors’ breaches caused the prejudice, and whether Prakash’s conduct was dishonest.

1. Liability established. The court found that Solid Star’s affairs had been conducted in a manner unfairly prejudicial to Queensgate. The established heads were: unequal repayment of shareholder loans; sales of six properties to PX1 without full consideration; payment of £368,685 to Crane Court; and involvement in the separate Crane Court/Lazuli development.
2. Section 994 requires conduct of the company’s affairs or an act or omission of the company, prejudice to the petitioner’s interests as a member, and unfairness. Prejudice is not confined to diminution in share value. It may include financial damage connected with the shareholding, including damage relating to a shareholder loan.
3. Fairness depends on the context, the parties’ agreed arrangements and equitable considerations. The parties had agreed that shareholder loans would be repaid pari passu. Repaying Viking while leaving Queensgate’s loan substantially unpaid preferred one member over another and constituted unfair prejudice.
4. The property transfers to PX1 were unfairly prejudicial because several properties were sold at undervalue, most of the agreed consideration was not paid, and no security was obtained for the balance. Funds raised against the properties were also used to discharge liabilities unrelated to Solid Star, including the Lazuli loan.
5. Prakash breached duties under sections 171, 172, 174, 175 and 177 of the Companies Act 2006, including duties concerning proper purposes, promotion of the company’s success, reasonable care, conflicts and disclosure of interests. His conduct in relation to the PX1 sales, the Crane Court payment and the Lazuli involvement was dishonest according to the objective standard in Royal Brunei Airlines v Tan.
6. Minesh negligently breached duties under sections 172, 173, 174 and 394 of the Act by failing to inform himself about the company’s finances, participate in approval of accounts, maintain proper governance or intervene despite known grounds for distrust. Reliance on a co-director is not a complete answer where the director has reason to suspect that the co-director is not performing his duties.
7. The breaches were causative of much of the prejudice, although Minesh was not responsible for the first two PX1 sales. Remedy, quantum and allocation of responsibility were adjourned for a further hearing. The liquidator of Solid Star was to be given an opportunity to participate in the remedies stage.