Mark Lee Hilliard v Carl Anthony Jordan & Anor

This is a first instance unfair prejudice petition under section 994 of the Companies Act 2006 concerning a quasi-partnership between two equal shareholders and co-directors. The court found that the first respondent acted in a manner unfairly prejudicial to the petitioner by unilaterally agreeing and implementing a new lease, charging an inflated rent and requiring a rent deposit which was paid and thereafter used for the respondent's personal purposes rather than being held on the terms required by the rent deposit deed.

On valuation the court held that fairness required the shares to be valued at the date when the unfair prejudice began, 23 March 2022. The single joint expert's net asset valuation as at that date was adjusted by adding back unpaid increased rent for the four months prior to the new lease (£24,000) but not by adding other suggested adjustments. The court directed that the respondent purchase the petitioner’s shares for £115,000.

Background and parties: The petitioner (P) and first respondent (R) were equal shareholders and co-directors of Xact Skips Limited, formed to take over a waste business on land owned by a company controlled by R. The parties had informal arrangements for running two related businesses and agreed division of day-to-day responsibilities. Disputes arose after R caused the company to enter into a new five-year lease at an increased rent, to provide for a rent deposit and after a Funding Circle loan was advanced to the company.

Nature of the claim/application: (i) The petitioner brought an unfair prejudice petition under section 994 of the Companies Act 2006 asking the court to order a buy-out and to value the shares at a date that would reflect the impact of the respondent’s conduct.

Issues framed by the court: (ii) The principal issues were whether R’s conduct in entering into the new lease, rent deposit deed and using the rent deposit was unfairly prejudicial to P, whether the terms were market terms, and what was the appropriate date and basis for valuing P’s shares (in particular whether the valuation should be as at 23 March 2022 or a later date).

Court’s reasoning and findings: (iii) The court found both parties honest but unreliable on some recollections; contemporaneous documents and the single joint expert evidence were preferred. The expert evidence showed the five-year term was materially shorter and the rent materially higher than a market lease for the site; the rent deposit sum paid (£200,000) exceeded the deed sum (£180,000) and was not held in the separate interest-bearing account as required but was used by R to discharge personal obligations. The court held that those features demonstrated R fixed terms by reference to his own interests, producing unfair prejudice to P. The court accepted that security of tenure could benefit the company but found the actual terms and the misuse of the deposit were inconsistent with market terms and the parties’ agreed understanding. The court adopted the valuation date of 23 March 2022, applied the single joint expert’s net asset valuation but refused to add back the arrangement fee and loan interest, and did add back unpaid increased rent of £24,000, resulting in a buy-out price of £115,000. The court directed that R purchase P’s 50 ordinary shares for that sum. The judge also commented on costs budgets and recommended alternative dispute resolution for remaining disputes between the parties.

The petition under section 994 was allowed. The court held that the first respondent’s conduct in agreeing and implementing the new lease, charging an inflated rent and causing payment and misuse of the rent deposit was unfairly prejudicial to the petitioner. The shares were to be valued as at 23 March 2022; the expert net asset valuation was adjusted by adding back unpaid increased rent for the four months prior to the new lease (£24,000) and, giving effect to that adjustment, the court directed the respondent to purchase the petitioner’s shares for £115,000.