Khadim Hussain v Allah Hussain & Ors

Key principles and decision: The court applied the statutory unfair prejudice framework under section 994 Companies Act 2006 and related authorities to determine whether conduct complained of by a 50% shareholder amounted to unfairly prejudicial conduct. The judge below had found that (i) a long-standing informal family understanding governed how the family businesses were run within the company, (ii) certain unauthorised extractions by one branch of the family occurred but were known and acquiesced in as part of that shared understanding and were prejudicial but not unfair, and (iii) the appointment of a new director (the third respondent) was for legitimate commercial reasons and did not amount to exclusion from management meriting relief.

The appellate court (Leech J) dismissed the appeal. The appeal challenged the lower court's fact findings (including credibility assessments and the weight given to contemporaneous emails and a scripted board meeting note). The appellate court declined to overturn those findings: the trial judge had properly weighed documentary and oral evidence, found a binding factual "common understanding" between family members about management and withdrawals, and was entitled to conclude there had been no exclusion from management deserving of a remedy. The court therefore refused the remedies sought by the petitioner (winding up or buyout).

Background and parties: The Company (KTA Group Ltd) was a family-run vehicle sales/repairs business formed in 1998. The petitioner, Khadim (50% shareholder), and the first respondent, Allah (50% shareholder), were family members who distributed management across family branches. Disputes arose after alleged undisclosed extractions from company funds and post-mediation tensions. The petitioner issued a section 994 petition (issued 16 October 2020) alleging unfair prejudice, seeking either winding up the company or an order for the first respondent to sell his shares.

Procedural history to this court:

• Trial and dismissal of petition by Chief ICCJ Briggs, judgment handed down 19 July 2022 (reported at [2022] EWHC 1880 (Ch)).
• Permission to appeal limited to exclusion-from-management grounds (Ground (1)) was granted by Adam Johnson J on 2 March 2023.
• Appeal heard before Leech J on 10-11 October 2023 and judgment delivered 1 December 2023.

Nature of the claim and relief sought: The petitioner alleged unfair prejudice under s.994 on two principal bases: (1) exclusion from management (including appointment of a director for improper purpose, restriction of access to bank instructions/Bankline and to company information, and procedural unfairness at board meetings), and (2) unlawful or undisclosed "Excess Takings" by other family directors. Remedies sought included winding up the company or an order requiring the first respondent to sell shares (buyout), and compensation/derivative relief in respect of takings.

Issues framed:

• Whether the petitioner had been excluded from management in a manner amounting to unfair prejudice.
• Whether the sums taken by other directors (the "Excess Takings") were prejudicial and, if so, whether they were unfair.
• Whether the appointment of the third respondent was for an improper purpose and whether board conduct (including communications external to board meetings) undermined transparency and justified relief.

Court’s reasoning and conclusions: The judge below had made detailed factual findings: there was a pervasive family arrangement under which separate businesses within KTA were run by different branches, withdrawals and informal payments had been commonplace and sometimes undeclared to HMRC, and corporate formalities had been routinely ignored over many years. On the Excess Takings point the trial judge found that substantial undisclosed personal drawings by the second respondent had occurred but that the petitioner had knowledge of and had acquiesced in the broad pattern of informal treatment of remuneration and drawings; accordingly those takings were prejudicial but not unfair in context.

On exclusion from management, the trial judge (and Leech J on appeal) focussed on concrete acts and whether those acts amounted to unfair prejudice. The court held that:

• Shahzad’s appointment as director was properly made in accordance with the company’s constitution and, on the evidence, motivated by commercial and governance reasons after a breakdown in family relations rather than to secure a manufactured majority.
• Although there were regrettable private emails, a scripted board-meeting note and some ill-judged side communications involving a non-director, there was insufficient evidence that such communications were converted into board action that excluded the petitioner or caused unfair prejudice.
• The petitioner had on occasions voluntarily not engaged with board processes and declined to attend meetings; there was no established agreement entitling him to equal board numbers; and changes such as bank-mandate instructions did not demonstrably prejudice him in practice.

Leech J applied standard appellate caution on overturning trial findings of fact and credibility and held that the trial judge had properly tested documents against witness evidence; the appeal therefore failed and was dismissed.

The appeal is dismissed. The court upheld the trial judge's factual findings that (i) the family-run company had operated for years under an informal common understanding that permitted certain withdrawals, (ii) the Excess Takings were prejudicial but not unfair in context, and (iii) the appointment of the third respondent was lawful and motivated by governance needs rather than an improper plot to exclude the appellant. Leech J concluded the trial judge had properly tested the documentary and oral evidence and there was no basis to disturb his credibility and fact-findings.

Petition (s.994 Companies Act 2006) originally issued 16 October 2020. After a full trial Chief ICCJ Briggs dismissed the petition in judgment of 19 July 2022 (reported at [2022] EWHC 1880 (Ch)). Permission to appeal on the exclusion-from-management ground was granted by Adam Johnson J on 2 March 2023. Appeal heard before Leech J on 10–11 October 2023; judgment dismissing the appeal delivered 1 December 2023 ([2023] EWHC 3080 (Ch)).