AMT Coffee Ltd; McCallum-Toppin and another v McCallum-Toppin and others [2019] EWHC 46 (Ch)

At a glance

• The High Court ruled that; the directors’ use of their loan accounts to obtain interest-free long-term unsecured loans to finance personal expenditures, the distribution of available profits via the payment of excessive directors’ remuneration, and the directors’ policy not to pay dividends even where there were sufficient reserves to do so, all amounted to conduct which was unfairly prejudicial to the petitioner.

• The Court noted in particular the directors’ failure to make decisions in good faith and without regard to the best interests of the company or to obtain shareholder approval. Such misconduct not only led to persistent breaches of the statutory directors’ duties under English law but in effect also amounted to a total exclusion of the petitioner who was a major shareholder without representation on the board. The Court ordered a share purchase order (whereby the respondents purchased the petitioner’s shares) as the most appropriate remedy to the unfairly prejudicial conduct found.

Background

The respondents were a family company, AMT Coffee Ltd (the “Company”) and its three directors. In 2006, Angus McCallum-Toppin, a fourth director, died leaving his two shares in the Company to his widow (the “first petitioner”) and their two children. The residue of his estate was also given on certain trusts and the trustees of his estate were the first petitioner and Allan McCallum-Toppin (one of the current directors) until his removal and replacement as a trustee in 2015.

The first petitioner and her co-executor presented a petition under section 994 of the Companies Act 2006, claiming that the affairs of the Company had been conducted in a manner which was unfairly prejudicial to their interests, namely that:

(1) the first two respondents enjoyed substantial interest-free and unsecured credit facilities;

(2) the first three respondents (the only surviving directors of the Company) had been paid excessive remuneration; and

(3) the Company had failed to give consideration to payment of any or any adequate dividends.

The High Court’s analysis and findings

Directors’ Loan Accounts

In the early days of the Company, the directors maintained loan accounts. These were entirely informal, did not bear interest and were not subject to any agreed repayment plan or terms. Outstanding loan accounts appeared to have been repaid and/or reduced by the payment of bonuses to the directors at the end of each year.

After Angus’ death however, the first two respondents who now controlled the Company, used the loan accounts to make personal expenditures at a high level including (but not limited to), a deposit on a house purchase, medical and dental care costs and personal air travel. Using the Company’s cash in this way meant that capital, which would have otherwise been available either to keep any Company debt down or to enable further projects to be undertaken was withdrawn.

It was noted further that the directors’ loan accounts led to charges on the Company for additional corporation tax which was not in its best interest, yet no action was taken at any time by the directors to obtain shareholder approval.

Held – the High Court held that allowing these loan accounts to exist on such a scale and for such a long period amounted to conduct unfairly prejudicial to the petitioners. It was noted in particular that in permitting these loan accounts to exist, the directors breached other provisions of the Companies Act 2006, namely:

• there had never been any formal authorisation for these loan accounts (a breach of section 197 Companies Act 2006)

• the directors failed to act for the proper purpose of the Company (section 171 Companies Act 2006)

• the directors failed to act as they considered in good faith would be most likely to promote the success of the Company for the benefit of the members as a whole (section 172 Companies Act 2006)

• the directors failed to exercise reasonable skill, care and diligence (Section 174 Companies Act 2006)

The Court was also satisfied that there had been no informal ratification by way of the Duomatic principle as even if the facts had been in the respondents’ favour, “conduct unfairly prejudicial to the petitioners which not only benefited the respondents but also damaged the Company could not be made whole by an application of the Duomatic principle.”

Directors’ Remuneration

The question of remuneration of company directors is ordinarily subject to the constitution of the Company concerned and a commercial decision with which the court will not generally interfere. In the present case however “the approach taken to remuneration in the company had been based on anything but commercial factors, instead, it had largely been based on ties of blood and on happenstance.”

The respondents argued that the defence of knowledge, consent and acquiescence arose. It was noted in particular that, while Angus was alive, he had consented to the payment of remuneration in accordance with a 2005 management agreement entered into between the directors. The agreement stated the policy of not paying dividends to shareholders and permitted directors to operate loan accounts.

Held – The High Court considered that what mattered in this case was whether the actions taken after the death of Angus were unfairly prejudicial to a member or members. The fact that Angus had previously consented to similar actions being taken before his death did not automatically make those same actions not unfairly prejudicial since his consent had not carried over to his estate after his death and did not need to be formally withdrawn.

The High Court held further that as the remuneration paid to the directors was not authorised by the constitution of the Company, nor by the shareholders under the Duomatic principle, this amounted to unfairly prejudicial conduct.

Dividends

The decision of whether to declare dividends is one directors must make in good faith and in consideration of the best interests of the company. The Court noted that it would give weight to the directors’ commercial judgment. In the present case, the Company enjoyed substantial accumulated balances on its profits and loss account, but no dividends had been paid to the shareholders since 2007.

On the facts, there was no decided policy of not distributing profits in order to concentrate on growth and that instead, the directors made ad hoc decisions about how best to rewards themselves out of the profits of the company. Furthermore, the directors did not regard the interests of Angus’ estate, a major shareholder without representation on the board.

Held – There was a failure to make a decision in good faith when the Company:

(1) had sufficient reserves to declare dividends;

(2) paid out large sums by way of bonuses to two of the directors, thereby paying significant parts of the profits to them; and

(3) had lent large sums of money to those directors on loan accounts to pay for personal expenditures, leaving the Company with less cash to pay dividends. This amounted to conduct unfairly prejudicial to the petitioners

Paramount Powders (UK) Ltd, Badyal v Badyal [2019] EWCA Civ 1644

At a glance

• The Court of Appeal upheld a High Court Judgment which dismissed a winding-up petition on the basis that a breakdown in mutual trust and confidence between shareholders/quasi-partners was not a sufficient ground alone for a winding-up order to be made on just and equitable grounds. Mutual confidence was only one of a trio of material factors, the others being probity and good faith. It was held that, a winding-up order could also be refused if the petitioner’s own misconduct was responsible for the breakdown of such trust and confidence.

Background

The case involved members of a family business, Mr Tarlochan Badyal (the ‘appellant’), and his two brothers, Malkiat Singh Badyal and Santokh Singh Badyal (the ‘first and second respondents’) who began a business together manufacturing powder coating. The business traded initially as a partnership called Slough Plastics Company under which the brothers were equal partners. Paramount Powders UK Ltd (the ‘Company’) was subsequently incorporated and although the first and second respondents were the only directors of the Company, the three brothers were equal partners, and each held 25% of the shares in the Company, the remaining 25% being held by their father. It was common ground that the Company was treated as a quasi-partnership by all the brothers.

Relations between the three brothers became strained and the appellant presented a petition claiming, in the first instance, relief under section 994 to 996 of the Companies Act 2006 on the grounds that the incorporation of a further company called Paramount Powder Ltd (‘PPL’), with the second respondent as sole director, competed with the business of the Company in breach of fiduciary duties owed to the Company by first and second respondents. The appellant also contended that the conduct of Company’s affairs had unfairly prejudiced his interests. The appellant subsequently presented a petition for the winding up of the Company on a just and equitable basis, alternatively for relief under section 994 to 996 of the Companies Act 2006.

In their defence and counterclaim, the respondents denied any wrongdoing but agreed that trust and confidence had broken down between the partners. They asserted in particular, that the appellant himself had breached his own fiduciary duties to the Company through his involvement with a rival business.

The judge found in favour of the respondents and dismissed the petitions and relief was therefore refused for both unfair prejudice under section 994 to 996 of the Companies Act 2006 and on the just and equitable ground under section 122(1)(g) of the Insolvency Act 1986.

The Appeal

The appellant contended that the judge was wrong not to order that the Company be wound up. In particular that “he wrongly discerned a principle of law that a breakdown of mutual trust and confidence between the shareholders in a quasi-partnership company cannot found a winding-up order without something more.”

The Court of Appeal’s findings

Held – The Court of Appeal considered the question arising as to whether the judge was wrong to refuse to wind up the Company on the just and equitable ground. The appellant’s primary argument was that to secure an order for the winding up of a ‘quasi-partnership’ company, it was only necessary to show that mutual trust and confidence between the shareholders/quasi-partners had broken down.

The appeal was dismissed on the basis that “the seminal authorities on the just and equitable jurisdiction demonstrate that, in general, equity intervenes to enable the court to subject the exercise of legal rights under a company’s constitution to equitable considerations. One factor, among a number, which is relevant in that context is a breakdown of mutual trust and confidence, but it is only one.”