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	England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Clark v Utilty Consultancy Services Ltd & Ors [2009] EWHC 315 (Comm) (11 February 2009) URL: http://www.bailii.org/ew/cases/EWHC/Comm/2009/315.html Cite as: [2009] EWHC 315 (Comm)

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

		11 February 2009

Introduction

1. This case arises out of a small development project involving the construction of a number of flats at Grosvenor Mews, Billingborough. The land in question was originally owned by Mr John Griffiths and his wife Doreen. In about 1992 they began to explore the possibility of building on it as an investment for their approaching retirement, but lacked the funding and expertise to carry out the development themselves. Their neighbours, Mr Stewart Grew and his wife Lorna, the Second and Third Respondents, expressed interest in assisting. Mr and Mrs Grew owned and controlled the First Respondent company ((UCS(), which could find funding and organise the development. The corporate vehicle which was used for the development was Crane Elegance Limited ((CEL(), a company already established by the Grews.
2. In essence the agreed project involved the following.

a. The property was transferred by the Griffiths to CEL on 1 August 2003. The consideration was (10,000 but the parties also entered into a declaration of trust for the distribution of the proceeds of the sale of the flats, providing for (1) the repayment of secured borrowings charged against the property (2) payment of the next (115,000 to the Griffiths (3) repayment of capital introduced into CEL by UCS or monies loaned to CEL by UCS (4) any remaining monies to be the profits of CEL.

b. The Griffiths had approximately 24% and UCS about 76% of the shares in CEL. Both couples were directors.

c. CEL was to construct 20 flats in blocks of two.

3. The construction work was to be carried out by Clark Construction Initiatives Ltd ((CCI(). CCI had originally been a trading name of the Petitioner, Mr James Clark, a builder who, acting like many at the time to obtain certain tax advantages, incorporated the business in 2002 with an issued share capital of (100. In 2003 Mr Clark transferred 24 of the 100 shares in CCI to Mr Grew, retaining the other 76 himself, and Mr Grew became a second director along with Mr Clark. A written contract on the JCT form was signed between CCI and CEL providing initially for the works to be done for (850,000 maximum but later changed orally to a cost plus basis. There is a dispute as to whether the uplift on cost was to be 20% or a sliding scale reducing to 15%, but the difference is immaterial for the purposes of these proceedings.
4. In practical terms CCI continued to function much as previously. Mr Clark handled, as agreed with the Grews, all matters to do with the performance of the works. He continued to make little distinction between his own affairs and his company(s affairs, in the same way as when the business had been unincorporated. In consequence, he drew substantial sums for personal purposes and expenditure from the company, these being debited to loan account. At the same time he drew no salary, nor was any PAYE or N.I. deducted.
5. The management of the financial side of the company was the role of Mr Grew/UCS. The book-keeping for both CEL and CCI was provided by UCS, and specifically by its employee Mrs Bradshaw.
6. Natwest provided a percentage of the funds for the development under a loan agreement with CEL. Payments were made in the usual way against stage valuations into CEL(s account with Natwest. While some of the balance would have come from deposits on pre-sales of some of the flats, the remaining shortfall was met by UCS, either by payments to CEL or on occasion directly to CCI. The practice was that as the CCI bank account became depleted or overdrawn, it would be replenished by transfers from CEL or UCS. Though sometimes described in the books of CEL or UCS as stage payments, they were generally (if not invariably) lump sums which did not correspond in either amount or timing to the payments made by Natwest or the underlying valuations. In the books of CCI they were recorded as loans. The formal bookkeeping made however no difference to the actual flow of funds, and the position was reconciled and corrected by appropriate journal entries made by the outside accountants employed by the three companies, Messrs Street, before drawing up the accounts for the year ended 31 October 2004 and the subsequent - more lengthy period - from 1 November 2004 to 31 March 2006.
7. The Billingborough development was completed in July 2005. It had been subject to substantial cost overruns. This was due in part to changes in specification. There had also been a delay of about 6 months in the completion of the works (fixed by the contract as 20 January 2005) - not all of which appears to be explicable by those changes - which had delayed the ability to sell many of the flats. All this had thrown an additional funding burden on CEL and, behind it, on UCS.
8. With the project now at an end, the purpose for which the Grews had joined with Mr Clark in CCI had now ceased. They told Mr Clark that they were not prepared to continue on the same basis. They had two small pieces of work on their own properties at Birththorpe and Heckington, which provided occupation and monies for CCI and its employees, including Mr Clark, but insisted on becoming 100% shareholders. Mr Clark transferred his 76% shareholding to them in August 2005 for (1 a share. This had the apparent advantage, and certainly the consequence, that in his divorce proceedings he was able to, and did, state on oath in a document served in November 2005 that he had no interest in CCI. Around the same time he moved to being paid weekly - net of PAYE and NI contributions - a salary equivalent to (40,000; the funds for this - as for CCI(s other requirements came from UCS.
9. On 17 January 2006 UCS transferred 24 shares back to Mr Clark. The reason for this transfer, to which I will return, is in dispute.
10. On 6 February 2006 CCI resolved to cease trading. It had no contracts, and was dependent on funding from UCS, which the Grews were not prepared to continue, making cessation of trading unavoidable. Shortly afterwards, Mr Clark was made redundant and removed as a director of the company.
11. On 16 May 2006 Mr Grew presented a petition to wind up CCI on the basis that it was insolvent, and a compulsory winding-up order was made on 4 July 2006.

The proceedings

12. On 20 April 2007, Mr Clark filed a petition under section 459 of the Companies Act, alleging that CCI(s affairs had been conducted in a manner unfairly prejudicial to Mr Clark and seeking an order that UCS and Mr Grew should purchase the 24 shares of Mr Clark at a price valued as at the date when the prejudicial conduct commenced.
13. Though Mr Clark was initially represented by solicitors and Counsel, who drafted the petition, that has long since ceased to be the case and he acted in person before me. The effective Respondents to the petition, namely UCS and Mr and Mrs Grew, also ceased to have representation some time ago. Before me, however, they were accompanied by Mr Neil Hamilton, a solicitor who had acted for them in other aspects of the dispute between the parties, in particular before the employment tribunal, and in various interlocutory matters. I granted permission for him to speak and cross-examine directly on behalf of Mr and Mrs Grew rather than being restricted to the role of a McKenzie friend. In the event, though the proceedings undoubtedly benefited from his presence, he addressed only some of the issues and far from comprehensively or systematically, and I do not consider that his contribution affected the (equality of arms... between the parties in any significant way.

Analysis and discussion

14. It is not in issue that from 2003 the relationship between Mr Clark and Mr Grew/UCS was based on trust and confidence, which extended in particular to Mr Grew(s management of the financial affairs of the company. This provided an overlay to Mr Grew(s fiduciary and other duties as a director of CCI.
15. Significantly, the petition made clear in Paragraph 28 that Mr Clark relied only on alleged unfairly prejudicial conduct after the transfer of his shares in August 2005, consistently with the fact that prior to that date he held the majority of the shares. The transfer, as I narrated earlier, was triggered by the completion of the Billingborough project and the unwillingness of the Grews to continue their funding of CCI if it remained in joint ownership. CCI was now a company wholly owned by the Grews (through UCS), with work provided by the Grews, and with Mr Clark as a salaried employee (though still a director).
16. Mr Clark claimed that the transfer of the shares was in part a mistake. According to his testimony, Mr Grew had told him that to obtain further funding from the bank it was necessary for UCS to become a majority shareholder with 76% of the shares, thus leaving Mr Clark with 24 %, but that nothing else would change, with the profits being divided 70% to Mr Clark and 30% to Mr Grew. He went on to suggest that he had not noticed in signing the transfer that it covered all 76 shares.
17. I find Mr Clark(s account of his conversation inherently improbable. It is unlikely that a bank would make funding conditional on ownership or control of the construction company employed by a developer, and I can see no reason why Mr Grew or Mr Clark would have so believed. Nor was there a prior agreement for a division of profits 70/30. Even if there had been, there was no reason for it to be maintained, when Mr Clark was being paid a salary and even on his case had been reduced to a 24% interest.
18. Moreover, having heard Mr Clark explain the circumstances in which he executed the transfer, I do not believe that he was unaware that it covered all his 76 shares, even having regard to his mild dyslexia, which on his description of it to me would not have explained the oversight (nor, quite properly, did he so suggest). I note also that he was happy to file a sworn document in his divorce proceedings on 15 November 2005 stating that he had (Zero share holding... in the company, and that the current value of his interest was (Nil(.
19. It is of course the case that on 17 January 2006 UCS transferred 24 shares back to Mr Clark. Mr Grew said that the reason for the transfer, which had been decided in December 2005 but delayed by the holiday season, had been to incentivise Mr Clark to improve his performance. I prefer this evidence to Mr Clark(s rival suggestion that it was to rectify a mistake.

Grounds of complaint

20. As I noted above, paragraph 28 of the petition seeks to rely on unfairly prejudicial conduct after August 2005. The reasoning underlying this date would appear to be that until then the Petitioner had a majority holding. The selection of this date does of course skate over the fact that in August 2005 he ceased to be a shareholder at all, and is only on the basis of the minority shareholding of 24% re-acquired in mid-January that Mr Clark can advance a case for section 459 relief. In the light of my observations below, the difference may however be academic.
21. The particulars of allegedly unfair prejudicial conduct are set out in paragraphs 29 to 38 of the petition, and I address them in turn below.

(A) The Billingborough development

22. The first allegation is that sums which should have been payable to CCI in respect of the Billingborough development had been diverted to UCS and/or the Grews. The petition seeks to infer this from the fact that the actual construction costs to completion in May 2005 were about (1.2 million, on the basis of which the company should have received a profit of at least (170,000, but had not done so.
23. I observe firstly that the position is complicated by the form of the book-keeping which I described above and which depended on reconciliation by the accountants when preparing the accounts for the board at the end of the two accounting periods. This was the practice throughout the Billingborough development, that is to say during the time when the Claimant was the majority shareholder. The statutory accounts from November 2004 were drawn up by Streets to 31 March 2006, the company having ceased trading in February 2006. They include a substantial debit to CCI to reflect compensation for failure to complete on time. I am unaware that the directors have ever adopted these accounts, and of course the company has been in winding up since 4 July 2006. There is scope for argument as to whether this figure is justified, either fully or at all, but it will not be binding on the liquidator.
24. More fundamentally, the petition alleges that the monies which should have been paid to CCI had been diverted to UCS and/or the Grews. I have seen no evidence of this. Even if it had occurred, the probabilities are that it would have occurred before August 2005, a period in respect of which Mr Clark cannot, and does not, make any claim in this petition, and almost certainly before he reacquired a minority interest in January 2006.
25. In the result, Mr Clark has failed to establish conduct by Mr Grew in this regard unfairly prejudicial to Mr Clark as a 24% minority shareholder.

(B) Hire invoices

26. It is next alleged that UCS and the Grews caused invoices for the hire purchase of certain equipment used on the Billingborough development, and the two later projects at Birthorpe and Heckington to be paid by the Company. I was shown no evidence of this, let alone that this occurred after Mr Clark became a minority shareholder in mid-January 2006. Even if there had been some incorrect debiting, I would expect it to have been picked up and corrected in Street(s draft accounts, and is in any event not binding upon the liquidator.

(C) The Birthorpe and Heckington Developments

27. It is alleged that UCS and the Grews diverted to themselves payments due from themselves and/or companies controlled by them in respect of these two developments. For this allegation, not a shred of particularisation was produced, let alone evidence in support.

(D) Treatment of UCS as a creditor of CCI

28. Complaint is made that the accounts for the year ended 31 October 2006 record UCS as a trade creditor in the sum of (55,218. Mr Clark disputes that UCS was a trade creditor, but advances no basis for doing so other than an unparticularised and unsubstantiated suggestion that the sum represents monies wrongfully diverted to UCS. These accounts were prepared by Streets well after CCI had gone into liquidation, and cannot in themselves constitute unfairly prejudicial treatment of Mr Clark as a minority shareholder. If and to the extent that they may be incorrect, the liquidator can refuse the proof.

(E) Removal of the petitioner as director of CCI

29. Complaint is made that the removal of Mr Clark as director in February 2005 was a breach of the basis of trust and co-operation between him and the Grews. This might well have been true if he had been removed while the Billingborough project was on foot, though the scenario is unreal since during that period Mr Clark held the majority of the shares and could have prevented his own removal. The joint venture nature of the company ceased however in August 2005, when Billingborough was completed, the Grews acquired full ownership, and Mr Clark ceased to be a shareholder. Even in January 2006 the position was very different from the Billingborough period. Mr Clark was now a salaried employee, and the company was entirely dependent on UCS for funding, which it was not obliged to continue. Its refusal to do so shortly thereafter meant that CCI had to cease trading, which it did on 6 February 2006. It was only then that Mr Clark was made redundant and dismissed as managing director.
30. I cannot see that in the changed circumstances UCS and the Grews had any legal or moral obligation to maintain Mr Clark in his employment or directorship, let alone that their action unfairly prejudiced Mr Clark as a minority shareholder.

(F) Failure to provide information

31. This allegation was neither particularised nor supported by any evidence.

(G) Loans by Petitioner not recorded in accounts

32. This allegation was unparticularised, and I saw no evidence to justify it.

(H) Causing salary of about (60,000 to be recorded as a director(s loan

33. As I recounted above, from the outset Mr Clark simply drew for personal purposes from the company(s bank account. Such drawings were debited to his director(s loan account. That continued up to August 2005, when he switched to a salary. This allegation therefore relates to a period when he was himself the majority shareholder and in respect of which the petition understandably does not therefore make any claim. In any event the arrangement appears to have subsisted at the wish of Mr Clark, who avoided the deduction of PAYE and NI in this manner.
34. It is contended in the petition that UCS and the Grews failed to cause CCI to rectify the position before winding-up. This overlooks that rectification would have increased the liabilities of the company because of the need to pay PAYE and NI. I cannot see any conduct unfairly prejudicial to Mr Clark as a minority shareholder.

(I) Winding-up the company

35. It is said that the company was not insolvent, and that the presentation of the petition was therefore unfairly prejudicial to Mr Clark.
36. It is however plain that the company could not pay its debts as they fell due, and was insolvent for this reason. It had no work and its only source of funding, namely UCS, was not prepared to continue.
37. It is therefore unnecessary to consider balance sheet insolvency, a topic on which accounting evidence was given on both sides, and I will limit myself to very brief comments. Mr Day of Streets was prepared to make adjustments to the draft accounts to the end of March 2006, but even on this basis took the view that there was a deficit of over (550,000. His opposite number, Mr Argyle of Duncan and Toplis, thought it likely that but for various matters which he criticised, the company would have been marginally solvent. However, the margin suggested by Mr Argyle was not only dependent on some necessarily speculative assumptions but was very thin and more than cancelled by the unpaid back liability of CCI for PAYE and NI in respect of the drawings by Mr Clark.

Conclusion

38. In summary, Mr Clark failed to establish that he was the victim of any unfairly prejudicial conduct for the purpose of section 459, and the petition therefore fails.

Relief

39. In the light of my conclusion on liability, the question of relief does not arise, and I will restrict myself to only a few short observations on this subject.
40. Mr Clark sought an order that his 24 shares should be repurchased at a price which valued them at a date before the commencement of the alleged unfairly prejudicial conduct.
41. While the petition appeared to regard the relevant date as August 2005, Mr Clark could not have been prejudiced as a shareholder before he acquired these shares, which he did on 17 January 2006, less than 3 weeks before the company ceased trading.
42. Mr Argyle took the view that the company was worth (50,000 as at 31 March 2006, giving a pro rata value to Mr Clark(s shareholding of less than (12,500. I did not understand him to suggest that this figure would have been any higher on 17 January 2006. He did however say that its value would have been less in August 2005, as a result of the subsequent earnings on the Birthorpe and Heckington works. In consequence, Mr Clark(s case was dependent on the sole act of suggested unfair prejudice after 31 March 2006, namely the presentation of the winding-up petition. Given that the company had long since ceased trading in the circumstances which I have described, the impact of this step is far from obvious.
43. Moreover, Mr Argyle(s estimate was based on his view of the net assets of the company, which had led him to opine that there was a narrow balance sheet solvency. For the same reason as I set out above, it appears to me that this was wrong, and that the company was therefore worthless.
44. Finally, perhaps the most unusual feature of this generally unusual case is that the petition for section 459 relief was issued after - by some nine months - the company had gone into compulsory liquidation. This raises important questions as to whether and in what circumstances it is proper to grant such relief sought only after the making of a winding-up order. Given the nature of the representation before me, I did not benefit from any submissions on these points, and in the light of my findings and conclusions set out above it is fortunately unnecessary for me to address these questions in this judgment and perhaps even undesirable that I should. They might well, however, have provided further reasons to dismiss this petition.