Bailey Ahmad Holdings Limited v Bells Holdings Limited

The claimant sought a Part 8 declaratory judgment that, under the Articles of Association and the Shareholders' Agreement, a shareholder becomes a 'Defaulting Shareholder' where the other shareholder forms an honest belief that a material or persistent breach has occurred, even if that belief is mistaken. The court analysed Articles 14.1–14.3 (defining Compulsory Transfer Event and Defaulting Shareholder) and Article 14.5 (expert determination of fair value) together with the Agreement's jurisdiction clause (Clause 24) and CPR procedure. The judge held that the Articles are plain: a Compulsory Transfer Event occurs only where one of the specified events actually occurs (for example a material breach and failure to remedy), and not merely because the other shareholder honestly but erroneously believes it has occurred. The claimant's construction was held to be not arguable and the Part 8 Claim was summarily dismissed.

Background and parties:

• The dispute concerns Omer & Company Accountants Ltd, owned 40% by the claimant and 60% by the defendant under Articles of Association and a Shareholders' Agreement dated 31 July 2019.
• The claimant alleged that the defendant committed material or persistent breaches of the Shareholders' Agreement and sought to rely on the Articles' 'Defaulting Shareholder' buy-out mechanism.

Nature of the application: The claimant issued a Part 8 claim for a declaration that the claimant is entitled to rely on the Defaulting Shareholder mechanism based on the claimant's honest belief in a material breach rather than requiring prior judicial determination of the presence or absence of material breach.

Issues framed:

• Whether the Articles permit a shareholder to be treated as a Defaulting Shareholder where the other shareholder honestly, but mistakenly, believes that a listed trigger event (notably a material or persistent breach) has occurred.
• Whether the Part 8 procedure was appropriate or whether Part 7 proceedings would be required.
• Whether the claimant's construction had any real prospect of success and thus whether summary dismissal was appropriate.

Court's reasoning and decision:

• The court examined Articles 14.1–14.3 and concluded they specify a list of trigger events which must in fact occur to give rise to the consequences in Article 14; the putative Non-Defaulting Shareholder's belief is not part of that trigger.
• The presence of an expert determination mechanism for valuation (Article 14.5) does not convert an objective event-based trigger into one founded on an honest belief, and the authority relied upon by the claimant did not support that construction.
• The claimant was given an opportunity to supplement submissions and did so, but the judge concluded there was no real prospect of success: the claimant's preferred construction was not arguable.
• The Part 8 Claim was therefore summarily dismissed. The court also observed that the Commercial Court was not the appropriate venue for any future litigation of this straightforward shareholder dispute and encouraged the parties to mediate.

The Part 8 claim is summarily dismissed. The court held that the Articles (notably Articles 14.1–14.3) are plain and require that a listed Compulsory Transfer Event has in fact occurred for a Defaulting Shareholder to arise; an honest but erroneous belief by the other shareholder does not suffice. The claimant's construction was not arguable and there was no real prospect of the court granting the declaration sought.