Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2009] CSOH 156
P1881/07	OPINION OF LORD MENZIES in the Petition of IAN ANDREW FOWLER Petitioner; against MARK GRUBER Respondent: ­­­­­­­­­­­­­­­­­________________

Petitioner: Gillies, Solicitor Advocate; McGrigors, LLP

Respondent: Sandison, QC; Maclay Murray & Spens

20 November 2009

[1] Following upon the interlocutor dated 10 March 2009, and Opinion of even date ([2009] CSOH 36), this matter was continued to enable the parties to agree and implement the mechanics of putting into effect my decision. The matter came before me on 26 October 2009, when I was told that the petitioner's shareholding in the company had been purchased for the sum of £469,800, and parties were agreed that the prayer of the petition should be dismissed. There were several counter motions relating to expenses. The petitioner sought the expenses of the petition against the respondent, and also an additional fee in terms of Rule of Court 42.14(3). Each of these motions was opposed by the respondent, who in turn sought expenses of the action from 23 April 2008 to date against the petitioner.

[2] The solicitor advocate for the petitioner submitted that the normal rule should apply that expenses should follow success. The petitioner's averments about the respondent's unfair and prejudicial conduct of the company's affairs were very serious, and were upheld by the court. That conduct by the respondent, and the defence which was maintained to the petition, caused this litigation, and the cost of litigation should therefore fall on the respondent - Shepherd v Elliot (1896) 23 R 696. It would not do for the respondent to argue that he had been successful on one or other aspect of unfair prejudice relied on by the petitioner - under reference to paragraph [128] of the Opinion of 10 March 2009, it was clear that the petitioner had been wholly successful on the question of unfair prejudice. With regard to valuation, the value placed on the petitioner's shareholding by the court was more than twice the value given by the respondent's expert witness, who valued the shareholding in October 2008 at about £228,000. The valuation which the court had reached was about five times as much as the value which the respondent put on the shares in April 2008. There had only been one offer from the respondent in advance of the litigation, which was to purchase the petitioner's shareholding for a sum of £175,000. There were no grounds for departure from the normal rule. I was referred to Craig v Craig 1906 14 SLT 469, and Elliot v J & C Finney (No. 2) 1989 SLT 241.

[3] With regard to any reliance which the respondent might place on the minute lodged on 23 April 2008 (No. 24 of process) Mrs Gillies observed that this was without any admission of liability. If the petitioner had accepted the offer contained in this minute, the court would have fixed a valuation of his shareholding on the basis that there had been no unfairly prejudicial conduct of the company's affairs. The way in which the respondent had conducted the company's affairs was a relevant factor in valuing the petitioner's shareholding and in particular in assessing what discount was appropriate to reflect the fact that the petitioner owned only a minority shareholding - see paragraph [187] of the court's Opinion. It would have been different if the respondent had agreed to a buyout of the petitioner's shareholding at a price to be fixed as if unfair prejudice had been suffered. However, the respondent persisted in denying throughout that there had been unfairly prejudicial conduct, and accordingly this minute did not assist him. The difference between a 60% discount and a 40% discount was approximately £150,000, so the point was far from de minimis. The minute had no impact on the scope of the proof and did not restrict it at all. It was always part of the petitioner's case that the respondent paid himself excessive remuneration, and this factor was relevant not only to the issue of unfairly prejudicial conduct but also to valuation. It would have been open to the respondent to agree to a proof on the basis that unfairly prejudicial conduct was admitted, but he chose not to adopt this course of action. Under reference to statement 11 of the petition, it was submitted that the petitioner had always (even before the petition was raised) been agreeable to a valuation by an independent expert. The court had taken into account the respondent's conduct when deciding that the discount of 60% argued for by the respondent's expert Mr Anderson was excessive. The respondent had never been prepared to agree that unfairly prejudicial conduct had taken place. It was submitted that the considerations enunciated in O'Neill v Phillips [1999] WLR 1092 at 1106/7 applied to this minute. The petitioner was entitled to his full expenses.

[4] Senior counsel for the respondent submitted that the argument for the petitioner proceeded on a misunderstanding of the passage relied on in O'Neill, which decided only what features an offer would require to possess if it was to elide the question of unfair prejudice. O'Neill was not in point, as the respondent did not suggest that unfair prejudice was elided completely in the present case. Under reference to Shepherd v Elliot, senior counsel accepted that the onus rested on him to displace the general rule that prima facie the petitioner is entitled to expenses if successful. On the question of severability of the various issues, he referred me to Lord Kinnear's opinion in Craig v Craig at page 471. Although he accepted that the petitioner had succeeded in obtaining a finding of unfairly prejudicial conduct, it was clear from the minute (No. 24 of process) that the respondent was prepared to accept a court order compelling a buyout. The petitioner never accepted that the appropriate remedy was a buyout - throughout the whole protracted petition procedure the primary remedy which he sought was his restoration to the position of Managing Director of the company. If he had accepted in April 2008 that the appropriate remedy was an order for the purchase of the petitioner's shareholding, the proof could have been restricted to expert valuations and any other evidence which might affect valuations; senior counsel suggested that such other evidence would have been minor, and would have affected only the calculation of a discount as discussed in paragraph [187] of the Opinion of 10 March 2009. The petitioner ought to have accepted the minute after it was lodged, and there would have been a proof of about 3 days duration, consisting almost entirely of expert valuation evidence. Instead, the proof actually lasted for 12 days. The petitioner succeeded in relation to 3 of the 7 complaints of unfairly prejudicial conduct that he made; none of these elements had any effect on valuation. He failed on three elements, and the final element, which was excessive remuneration, was dealt with wholly by the expert valuation evidence. None of the issues of fact which were the subject of evidence from non-expert witnesses had any impact on the outcome of the case. Moreover, the petitioner failed on two other important aspects - (1) the remedy which he sought, namely an order reinstating him as Managing Director of the company, and (2) the status of the company as a quasi partnership at the material time. Because the petitioner did not accept the minute (No. 24 of process) all nine issues had to be explored at length. Of these, the three in which the petitioner was successful had no impact on valuation.

[5] With regard to valuation, senior counsel submitted that there were six issues between the parties, and the respondent was successful on 41/2 of these. The only issue on which the petitioner was entirely successful was excessive remuneration. The respondent was successful on all appropriate adjustments to EBITDA. On the question of the appropriate weighting to EBITDA, the court applied a simple average, which was the approach argued for by the respondent. The multiplier chosen by the court was within the range argued for by the respondent, and outwith the petitioner's range. With regard to discount, the respondent's position that there should be a discount was preferred to the petitioner's position that there should be no discount (albeit that the discount awarded by the court was less than that argued for by the respondent). The respondent's position on stock/inventory write down was accepted.

[6] In light of all these factors, senior counsel submitted that the petitioner was not entitled to any of the expenses occasioned by the factual aspects of the proof (leaving aside the two expert witnesses as to valuation) after 23 April 2008. With regard to valuation, he submitted that there was approximately divided success - the final award of the court was approximately double the respondent's offer and less than half the petitioner's evaluation. Senior counsel therefore moved for the expenses of the non-expert evidence after 23 April 2008, which failing he argued that there should be no expenses due to or by either side in relation to non-expert evidence. Regarding expert evidence, he argued that no expenses should be found due to or by either side. In relation to expenses before 23 April 2008, of the nine factual elements relied on by the petitioner, five were never going to be successful (or in any event the petitioner was ultimately unsuccessful on these). This should be recognised by limiting any award of expenses in favour of the petitioner before 23 April 2008 to 50%.

[7] In reply, the solicitor advocate for the petitioner renewed her submission that the bad faith of the respondent was a necessary ingredient of the court's valuation; it was not just valuation evidence which persuaded the court that the discount should be limited to 40%. With regard to the respondent's submissions as to what should have happened after the minute (No. 24 of process) was lodged on 23 April 2008, she referred to the letters from the respondent's agents dated 21 April 2008 and the response dated 4 June 2008. Unfair and prejudicial conduct remained a live issue which the respondent was not prepared to concede.

[8] In reaching a decision as to liability for expenses, I had regard to the general rule that expenses should follow success, and that the party which has caused the litigation should bear the costs thereof. Indeed, senior counsel for the respondent accepted that the onus rested with him to displace the general rule. I was not persuaded that it was appropriate to approach the question of liability for expenses by carrying out an arithmetical exercise as to how many of the individual examples of unfairly prejudicial conduct relied on by the petitioner were eventually made out. As I observed at paragraph [128] of the Opinion dated 10 March 2009,

"I am not convinced that it is appropriate to look at each of these complaints as wholly separate and distinct from the others. They are, in my view, properly to be seen as examples of the way in which the respondent conducted the affairs of the company, and should be taken together when considering whether the petitioner has made out a case under Sections 459 and 461 of the 1985 Act."

[9] The petitioner raised these proceedings alleging unfairly prejudicial conduct of the company's affairs on the part of the respondent. The respondent denied this throughout the proceedings. The minute lodged on 23 April 2008 (No. 24 of process) did not alter the respondent's position in this regard. Throughout the proof the respondent continued to maintain the position that he had not conducted the affairs of the company unfairly to the prejudice of the petitioner. I preferred the position of the petitioner to that of the respondent, and found that the respondent had indeed conducted the affairs of the company unfairly to the prejudice of the petitioner. This was not merely of academic interest; not only was it a necessary precursor to any award in favour of the petitioner, but it was relevant to the issue of the proper valuation of the petitioner's shareholding. I considered that the submission for the petitioner that the questions of whether the respondent had conducted the affairs of the company unfairly to the prejudice of the petitioner, and the proper valuation of the petitioner's shareholding, were inseparably intertwined to be correct. If the respondent had admitted in his answers to this petition that he had conducted the affairs of the company unfairly to the prejudice of the petitioner, or if this had been accepted in the minute (No. 24 of process), then no doubt the length and scope of the proof could have been reduced significantly. However, neither of these events occurred. The respondent continued to deny throughout the proceedings that he had conducted the affairs of the company unfairly to the prejudice of the petitioner, and continued to deny any obligation to provide any remedy to the petitioner as a result. I found against the respondent on both these issues. Moreover, I found the proper valuation of the petitioner's shareholding to be more than double the valuation argued for on behalf of the respondent. On both main branches of the case, namely whether the respondent's conduct of the company's affairs justified any remedy being granted to the petitioner, and the extent of that remedy, the petitioner was substantially successful. Subject to what is said in the following paragraph, I reached the view that the respondent had failed to discharge the onus of persuading me that the general rule did not apply. The effect of the minute lodged on 23 April 2008 was, because of its reservation of admission of liability, very limited. It was still necessary for the petitioner to lead evidence as to the unfairly prejudicial conduct of the company's affairs by the respondent, not least because this evidence was of relevance to the valuation exercise. I concluded that the petitioner should be entitled to the majority of the expenses of process, and that there was no justification for any award of expenses to the respondent. (I should note in passing that I reached this view without relying on the passage in O'Neill v Phillips to which I was referred; I agreed with senior counsel for the respondent that this was not in point).

[10] However, there were some aspects of the position which the petitioner maintained throughout this procedure which I considered to be unreasonable and which added somewhat to the length of the proof. These may be divided into three categories. First, the petitioner maintained throughout the proceedings that the primary remedy which he sought was to be reinstated as managing director of the company. I regarded this as falling into the category of pious hope - it was never a practicable solution to the problem - see my remarks at paragraph [138] of the Opinion of 10 March 2009. Although not a great deal of time was spent in evidence on this issue, the petitioner, the respondent and Mr Murray each spent some time on it in examination in chief and cross-examination, and it was the subject of submissions for both parties. Second, some time was spent in evidence and in submissions on the petitioner's proposition that the company should be regarded as a quasi partnership. If successful, this proposition would have had a significant effect on the valuation of the petitioner's shareholding. On this point the petitioner was unsuccessful. Third, there were aspects of the petitioner's case which were maintained throughout the proceedings for which it appeared to me there was never any evidential basis. I refer in this regard in particular to the claims made in statement 8.3, 8.5 and 8.7, which were dealt with in paragraph [131], [133] and [135] of the Opinion of 10 March 2009. It would be wrong to suggest that these matters resulted in a lengthy prolongation of the proof, but nonetheless time was spent on each of them, causing additional expense. On the basis of the evidence which I heard, I do not consider that there was a realistic prospect that any of these matters would have resulted in a successful outcome for the petitioner. Taking account of all of these factors, I considered that it was fair to restrict the respondent's liability in expenses to the petitioner to 85% of what would otherwise have been awarded.

[11] I now turn to the petitioner's motion for an additional fee in terms of Rule of Court 14.14(3). The solicitor advocate for the petitioner moved for an additional fee in terms of paragraphs (a), (b), (c), (e) and (f) of that rule. With regard to (a), she accepted that the legal issues were not novel per se, but it was apparent from the terms of the Opinion dated 10 March 2009 that the cause was complex and involved a significant number of questions, some of which involved difficulty. With regard to (b), this case involved a level of skill, time, labour and specialised knowledge of the solicitor beyond the normal scale of practice. Written statements of witnesses required to be completed, a large number of documents required to be examined, and a high level of skill was required of the solicitor in preparing the case and discussing with the expert valuation witness. With regard to (c) there was a large number of documents prepared and perused. With regard to (e) the cause was of critical importance to the petitioner. He had formed the company and expected to run it. He took a very proactive involvement in the litigation; he regarded it as affecting his reputation in the business community, and in addition it had considerable financial implications for him. With regard to (f), the valuation which the court ultimately placed on the petitioner's shareholding was considerable; if the petitioner had not been successful, this would have had a significant impact on his financial circumstances, and the proceedings were funded from his own personal savings.

[12] In response, senior counsel for the respondent opposed the motion for an additional fee on all heads. With regard to (a), he accepted that there were a number of factual issues, although not all were relevant. However, the number of issues was not so disproportionate or unusual to justify an additional fee. There were no questions of law or fact that were so difficult or complex as to justify an additional fee. This case raised the sort of issues that one would expect in a petition of this kind. The same observations applied to head (b). With regard to (c), the number of documents prepared or perused was not outwith the range normally associated with such a petition. With regard to (e), he submitted that a case would have to be specially and unusually important to a client to justify an award of additional fee under this category. This case was not equivalent to a claim for catastrophic injuries in a personal injuries action nor did it relate to the whole assets of a company. The importance of the cause was not such as to justify an award under this heading. With regard to head (f), an award of £469,800 was not so large as to be out of the ordinary, and was less than many awards made in the Court of Session.

[13] I was satisfied that an additional fee should be granted in terms of heads (a) and (b) of Rule of Court 42.12(3). It is, I think, apparent from the terms of the court's Opinion dated 10 March 2009 that the cause was more complex than the normal proceedings in this court, and raised a significant number of questions. Although these were not in themselves novel, the case was not free from difficulty. I was also persuaded that it required a greater degree of skill, time, labour and specialised knowledge of the solicitor than most cases. Accordingly I granted the petitioner's motion in terms of heads (a) and (b). However, I was not satisfied by the arguments on behalf of the petitioner in respect of heads (c), (e) and (f); I agreed with the respondent that the number and importance of documents prepared or perused, the importance of the cause or the subject matter of it to the client and the amount or value of money or property involved in the cause were not so unusual or exceptional as to justify the allowance of an additional fee under these heads.