Loveridge v Loveridge  EWCA Civ 1697
November 23, 2021
In a case involving petitions brought under section 994 of the Companies Act 2006 against a number of connected and family-run companies alleged to form one overall business, the Court of Appeal has taken the opportunity to review the correct approach to determining whether an arguable case has been disclosed for the purposes of successfully opposing a strike out application.
The Judgment of Falk J, with which Bean LJ and Nugee LJ agreed, covers much ground: including the treatment of informal loan finance within family companies and the scope of the Court’s jurisdiction in relation to petitions alleging unfairly prejudicial conduct.
Husband and wife, Alldey and Ivy, founded a caravan park business as a partnership. Over the years, their son Michael became involved, and expanded the business to the extent that five family companies were incorporated (‘the Companies’) and a further two partnerships were formed.
The Companies were: Kingsford Caravan Park Limited (‘Kingsford’), Breton Park Residential Homes Limited (‘Breton Park’), Quatford Park Homes Limited (‘Quatford’), Riverside Caravan Park (Stourport) Limited (‘Riverside Stourport’) and Bewdley Caravan Sales Limited (‘Sales’).
The relationship between Michael and his parents eventually broke down: Michael had abstracted £1.25 million from the Sales business, despite objections from its shareholders and board members, and he was eventually removed as a director. At the same time, there existed a number of intercompany loans totalling millions of pounds (‘the Intercompany Loans’).
Matters came to a head when Michael brought a petition under section 994 of the Companies Act 2006 (‘the Petition’) asserting unfairly prejudicial conduct on the basis that Alldey and Ivy were excluding him from the management of the Companies; alternatively, he sought to have the Companies wound up pursuant to section 122(1)(g) of the Insolvency Act 1986 on the basis that it was just and equitable to do so.
Proceedings in the High Court
Subsequently, on 13.11.20, Alldey and Ivy sought to strike out the Petition, or parts of it. This was met by an application dated 17.11.20 seeking permission to amend the Petition and seeking an interim injunction preventing Alldey and Ivy from taking any action to demand repayment of, or taking steps to enforce, amounts owed under the Intercompany Loans, pending trial.
Despite the earlier decision of the Court of Appeal, HHJ Cooke (sitting as a Judge of the High Court) refused to strike out the Petition. Instead, he gave permission for certain amendments to the Petition (finding that Michael had an arguable case in respect of those amendments) and granted the interim injunction.
Andrews LJ granted Alldey and Ivy permission to appeal.
Proceedings in the Court of Appeal
Unfairly Prejudicial Conduct
In its original form, the Petition could not succeed in light of the earlier Court of Appeal decision.
The question for HHJ Cooke had been whether in its amended form the Petition would have a real prospect of success.
Ultimately, in disagreeing with HHJ Cooke, the Court of Appeal concluded that the proposed amended Petition had no such prospect.
The need to consider the Companies separately
Despite Michael’s argument that the Companies were regarded as part of the same overall business, the Court of Appeal ruled that a finding that the affairs of one company might have been conducted in an unfairly prejudicial manner did not of itself justify a similar finding in respect of the other Companies. That question had to be determined by reference to each individual company and Michael’s interests as a member of each of those.
Entitlement to participate in management
In terms of Michael’s entitlement to participate in the management of the Companies; the Court of Appeal found that the amended form of the Petition did include sufficient new material to amount to an arguable claim that Michael has or had an entitlement to participate in the management of Kingsford, Riverside Stourport and Sales such that his exclusion could potentially justify a claim for relief. That entitlement was based on the pleaded history of his association with the original partnership, the parties’ close family links, and the conduct of the partnership’s affairs.
However, as regards Quatford, which was held 50:50 by Michael and Ivy, the Court of Appeal found that:
‘The existence of the separate legal entities and the different ownership and management structures cannot be ignored. Michael cannot, as things stand, be excluded from the management of Quatford…The fact that the parties may regard the various activities as being in some senses a single business is not arguably sufficient to outweigh this.’
Further, the Court was:
‘…not persuaded that the general assertions in the amended petition that Michael is entitled to participate in the management of all the companies has a sufficient pleaded factual foundation in respect of Breton Park’; which was a company in which Michael had never held a directorship.
Exclusion of Michael
HHJ Cooke was entitled, in the view of the Court of Appeal, to find that it was arguable that the breach of fiduciary duty which justified Michael’s removal from Sales did not justify his exclusion from the management of the other Companies.
That said, the Court of Appeal noted that (emphasis added): ‘…while the amended petition relies on an intended removal of Michael as a director of Kingsford, it makes no similar complaint in respect of Riverside Stourport, and simply includes a general complaint that exclusion from other companies would be unfairly prejudicial…At present, therefore, no actual or intended exclusion from management is pleaded as a basis for an allegation of unfairly prejudicial conduct in respect of Riverside Stourport. Whilst s 994 can extend to intended acts, they must at least be “proposed” (s 994(1)(b)). There is no such pleading in support of the unfair prejudice petition in relation to Riverside Stourport. Given the history of the petition there is no excuse for a lack of clarity on this point, and I do not consider that Michael should be given the benefit of any doubt’.
The Intercompany Loans
Michael’s position as set out in the proposed amended Petition was that the Intercompany Loans were intended to remain outstanding ‘indefinitely’ and would only be repaid as and when the parties agreed.
Such an agreement was considered by the Court of Appeal to be ‘unworkable’, and not ‘realistically arguable’. In finding that HHJ Cooke erred in concluding that there was an equitable constraint on Alldey and Ivy’s calling in of the Intercompany Loans; the Court of Appel considered that such was inconsistent with the legal effect of the loan arrangements; the Intercompany Loans being legally enforceable debts.
The ‘basis of association’
Finally, the proposed amended Petition pleaded that unfairness had arisen because the parties’ association had been frustrated by the breakdown of their relationship. The Court of Appeal considered such to be insufficient to found an unfair prejudice petition absent an unjustified exclusion from management.
Accordingly, other than in respect of Kingsford, it was found that the amended Petition disclosed no arguable case of unfairly prejudicial conduct.
Alldey and Ivy’s offer to purchase Michael’s shares
On or around 30.10.20, Alldey and Ivy had offered to purchase Michael’s shares in Kingsford on the basis that:
- Michael’s shares in Kingsford would be purchased at fair market value;
- the value of the shares would not be subject to a minority discount; and
- should the parties not be able to agree the value, an independent expert would be appointed to determine the fair market value of the shares.
HHJ Cooke found, and the Court of Appeal agreed, that such offer was compliant with the guidelines established in O’Neill v Phillips  1 WLR 1092. Michael’s argument that it was the fair market value of the company which was relevant, as opposed to the fair market value of the shares, was held to be misconceived.
In the circumstances of the case, the Court of Appeal held that there was ‘no sound basis’ upon which it could be alleged that the offer to purchase Michael’s shares in Kingston did not cure the prejudice which Michael now complained of. As against Kingsford, the Petition was struck out as an abuse of process on the basis that Alldey and Ivy’s offer provided all the relief that Michael would have been entitled to seek under the Petition in its amended form.
Just and Equitable Winding Up
In considering whether Michael had a realistically arguable case to seek a just and equitable winding up, the Court of Appeal dealt with each of the Companies in turn, and in summary, concluded that:
- Michael had not established that he had been excluded from the management of Riverside Stourport;
- Michael’s exclusion from the management of Sales had been justifiable;
- Alldey and Ivy had offered to purchase Michael’s shares in Kingsford, which answered his claim in respect of that particular company; and
- the amended Petition did not disclose such deadlock in respect of Quatford and Breton Park as would be required to justify their being wound up.
The Court of Appeal did not consider Michael’s general allegation that Alldey and Ivy intended to run the Companies as if Michael were not a shareholder, and to exclude him from the management of the Companies, to be sufficient to overcome the shortcomings in the pleadings in relation to each of the individual companies.
In summary, the Court of Appeal’s decision acts as a warning against overly generic pleading in a case involving multiple family-run companies operating informally; in which the businesses of separately-incorporated entities are intrinsically intertwined.