Sally Ann Gibbins v John Peter Francis Tierney & Ors

Under section 994 of the Companies Act 2006, unfair prejudice requires both prejudice and unfairness assessed in the context of the parties’ corporate agreement and company law duties. In a quasi-partnership, exclusion of a member from agreed participation in management may constitute unfair prejudice, particularly where no legitimate reason is shown. Misuse of company funds, diversion of business and breaches of directors’ duties may likewise establish unfair prejudice.

On a buy-out, the usual valuation date is the date of purchase. Fairness may require an earlier date where the company’s business or assets have been depleted by the unfairly prejudicial conduct. Shares in a quasi-partnership are ordinarily valued without a minority discount.

The petitioner held one of three equal shares in PHB Ethical Beauty Limited, a company operated as a quasi-partnership with the two individual respondents. The parties had agreed that all three would participate in management, while the petitioner managed the company’s finances.

The respondents excluded the petitioner from management, used company funds for their own benefit, and diverted company business to another company they controlled. The respondents took no part in the proceedings and were debarred from defending the petition. The court therefore determined liability and relief on an uncontested basis.

The issues were whether the petitioner had suffered unfair prejudice under section 994 of the Companies Act 2006 and, if so, the appropriate buy-out terms, valuation date and treatment of any minority discount.

1. Liability. The petition was well founded. The company was a quasi-partnership, and the parties’ agreement and understanding entitled each of them to participate in management. The respondents’ exclusion of the petitioner from August 2020 was contrary to that understanding and prejudicial to her interests. In the absence of a legitimate reason, the prejudice was unfair.
2. The respondents also used company funds for their own benefit and diverted company business to a company they controlled. That conduct caused prejudice to the petitioner and, without a persuasive legitimate explanation, was unfair. It breached their duties under sections 172, 173, 174 and 175 of the Companies Act 2006, including the duties to promote the company’s success, exercise independent judgment, exercise reasonable care, skill and diligence, and avoid conflicts of interest.
3. Relief. Section 996 of the Companies Act 2006 gives the court broad power to grant relief, including ordering members to purchase another member’s shares. The appropriate remedy was an order requiring the first and second respondents to purchase the petitioner’s shares at fair value.
4. Valuation. The usual starting point is valuation at the date of purchase, but fairness may require an earlier date where the company has been deprived of business or assets by the unfairly prejudicial conduct. The shares should be valued as if that conduct had not occurred. The appropriate date was 1 August 2020, shortly before the proven conduct began. Consistently with the quasi-partnership character of the company and the petitioner’s exclusion from management, no minority discount was to be applied.
5. The respondents were ordered to purchase the shares on a willing seller and willing buyer basis, valuing the company as a going concern and taking account of its assets, goodwill, profitability and future prospects as at 1 August 2020. The petitioner was given permission to rely on an expert valuation report. The respondents were ordered to pay the petitioner’s costs, including £37,500 on account.