A recent decision by the Companies Court in Re BC&G Care Homes Ltd; subnom Crowley v Bessell and others [2015]

EWHC 1518 (Ch) is an interesting example of the application of the test for unfair prejudice. In this case the judge upheld the claim by the petitioner (Mr Crowley) for unfair prejudice under section 994 of the Companies Act 2006 (Section 994).

Mr Crowley had originally entered into a partnership with two others to set up and run care homes. Mr Crowley had day-to- day control of the business with the other partners providing building services and business advice. Around eight years later, BC&G Care Homes Ltd (the Company) was incorporated to run the business. Each of the partners was appointed as a director and received one-third of the share capital. No shareholders’ agreement was put in place. Nearly 10 years later Mr Crowley was summarily dismissed as a director and employee of the Company, remaining a co-guarantor of the Company’s debts and a shareholder.

The law regarding Section 994 was not in dispute. The question was whether the removal of Mr Crowley as a director and employee without an offer to buy his shares was a proportionate and justifiable response to allegations of his misconduct. The judge noted that “In many cases, unfairness will lie not in exclusion alone but in exclusion without a reasonable offer being made (see Grace v Biagoli at paragraph [64]; O’Neill v Philips at 1102D…)”.

The judge found that despite incorporation of the Company, the evidence was that the shareholders’ relationship broadly continued under the former partnership agreement. Therefore the exercise of rights in the Company’s articles to remove Mr Crowley as a director was subject to equitable constraint. The removal of Mr Crowley without an offer to buy his shares was considered to be “clearly prejudicial” to his interests as a shareholder as he no longer had employment or a position on the board to monitor the care homes, the companies and his own investment. Such removal in breach of the agreements and understandings underlying his position as a shareholder, whereby he could expect to be a director and employee, was also considered to be unfair, notwithstanding the petitioner’s conduct, as none of the allegations justified “his exclusion while leaving him locked into the Company”.

The judge adopted the “usual” method of valuation of Mr Crowley’s shares applicable to quasi-partnerships, and did not apply a minority discount. The valuation date was accepted as a date prior to his exclusion (not the “normal” date of the order) and an award of quasi-interest was granted.

Impact – the case is an interesting application of Section  994 in the context of a company that was found to be largely operated on the basis of a former partnership agreement. Whilst it is clear that a “useful test is always to ask whether the exercise of the power or rights in question would involve a breach of an agreement or understanding between the parties… Such agreements do not have to be contractually binding in order to found the equity;” it is noteworthy that in this case the partnership had been dissolved nearly 10 years prior to the unfairly prejudicial conduct. The judge did not however rely on the specific terms in the partnership agreement regarding termination or exclusion. The case also highlights the importance of pleadings in unfair prejudice cases, noting a Practice Note issued on 22 April 2015, announcing automatic directions in unfair prejudice petitions with effect from 1 May 2015.