Any views expressed in this article are those of the author and should not be interpreted as ICAEW views or guidance.
From these early footings he developed a substantial property business. Andreas was always the moving force in the business; he was however from a traditional background and had a strong sense of his obligation to make sure that he provided for his family. As part of this sense of obligation he gifted 12% of his shares to each of his wife, and his two children.
There were two children, Paul and Cheryl, both of whom became involved in the operation of Dinglis Properties Limited (DPL), but with the omnipresent influence of Andreas always looming above them.
Family Disunity
From 2002 onwards Andreas spent most of his time back in Cyprus; it appears that this was driven by his desire to return to his roots, to mitigate the symptoms of arthritis, and with an added impetus of moving his wealth outside the UK tax net. His son Paul took on a larger role in managing DPL and in making central decisions relating to its operations. This responsibility extended to Paul providing personal guarantees relating to certain of DPL’s obligations.
Andreas returned to the UK in 2012 and was troubled by various management decisions made by Paul. He rather capriciously removed him as a director. In 2015 Paul served a petition under Section 994, Companies Act, on the basis that his exclusion from the management of DPL was unfairly prejudicial conduct.
The Judge described the series of events as a catastrophic falling it within the family.
Deciding the Issues
The matters to be decided by the Court included the following:
- Was the removal of Paul unfair? In order for it to be unfair it had to be determined that DPL was a quasi-partnership. Shareholders are otherwise always able to remove directors as part of their normal powers;
- If rental income had been retained by Paul, rather than being paid to DPL, what impact did this have on Paul’s claims?
- Were various actions of Andreas, whereby funds in DPL were advanced to him personally or to companies which he controlled, unfairly prejudicial?
- Depending on the above, should an order be made for the purchase of Paul’s shares?
- Should any such order be based on a minority valuation or a pro rata valuation?
Shareholder Relationships
The Judge stated that the mere fact that a company was a family company was not sufficient to make the relationships those of quasi-partnership. He found that Andreas was a majority shareholder throughout: he had never entered into agreements with Paul or the other shareholders whereby his majority rights were constrained by equitable considerations. The relationships were not those of quasi-partnership. Andreas had decided to gift minority holdings to his wife and children; there were no mutual obligations entered into between the shareholders; this was not a quasi-partnership; therefore the removal of Paul, albeit ill-considered and made without full consideration, was not conduct which was unfairly prejudicial to Paul as shareholder.
The Hole in the Finances
Expert accountants had prepared a joint statement comparing the rental rolls with the amounts shown as rental income in the accounts of DPL. The four years ended December 2013 were reviewed, being mainly within the period when Andreas could only be involved in the activities of DPL from a considerable distance.
The records indicated that during those four years there was a lower bound of missing income of £562,000, with the upper bound at £1,091,000.
The Judge found Paul to be an unreliable witness; the implication was that a company controlled by Paul had received the rents and these had not been passed on in full into DPL.
Unclean Hands?
There have been other cases in which improper conduct has had a fatal impact on section 994 claims: recent examples are Waldron v Waldron and Davies v Lynch-Smith.
In this case the Judge’s conclusions appear to have been coloured by the alleged wrongdoing. He found that the removal of Paul as a director was justified in any event as a result of wrongdoing. Paul singularly failed to convince the Judge that he approached the Court with clean hands.
The Actions of Andreas
Andreas had borrowed some £1.4 million from DPL in connection with a divorce action brought by Iris; this sum had been subsequently repaid. In addition sums were paid to Andreas which were described as consultancy fees of £240,000.
DPL had also advanced sums to companies owned by Andreas in order that the development gains could be for Andreas alone, rather than for the benefit of all shareholders in DPL.
The Judge found that these actions were unfairly prejudicial to the other shareholders. Equally importantly, he concluded that they would recur as Andreas would be motivated to move profits out of DPL for as long as Paul remained as a shareholder.
Paul’s Shareholding
It was the high probability of a repeat by Andreas of the removal of profits from DPL which persuaded the Judge that an order should be made for Paul’s shareholding to be purchased. He stated the following:
“Paul is the minority shareholder in a company controlled by Andreas, who has no real incentive to manage that company in a way which will benefit Paul, and indeed a strong incentive not to. This seems to me to be a paradigm case in which the Court should intervene, and provide for a purchase of shares.”
Pro-Rata Valuation or Minority Holding?
The Judge surveyed some of the recent cases included Kohli v Lit (Sunrise Radio), Blue Index and McCallum-Toppin, in all of which a minority discount had not been applied despite there being no quasi-partnership finding.
He found that Paul’s conduct had an impact on the type of relief which was proportionate. He also considered whether or not this was a case in which it would be just and equitable to consider a winding up. He found that it was not. It also appears that the gap between the exclusion and the making of the section 994 petition played a part in the decision.
The Judge found that Paul had a minority holding and that it should be valued as such, with an appropriate discount for its minority status.
Andrew Strickland, Consultant, Scrutton Bland
