Scottish Court of Session Decisions

 

OUTER HOUSE, COURT OF SESSION   [2009] CSOH 36
P1881/07	OPINION OF LORD MENZIES   in the petition of   IAN ANDREW FOWLER   Petitioner;   against   MARK GRUBER   Respondent:   For   An Order under Section 459 of the Companies Act 1985   ­­­­­­­­­­­­­­­­­________________

 

 

Petitioner: Gillies, Solicitor Advocate; McGrigors, LLP

Respondent: Sandison; Maclay Murray & Spens

10 March 2009

 

Introduction

[1] The petitioner seeks an order under sections 459 and 461 of the Companies Act 1985. The petitioner owns 28.57% of the issued share capital in Completion Products Limited ("the company"). The respondent is the sole director of the company and owns 57.15% of the issued share capital in it. The other shareholders are Charles Moncur (who owns 9.52% of the issued share capital) and Aberdeen City Council (which owns 4.76% of the issued share capital). The petitioner avers that the respondent has conducted, and is conducting, the company's affairs in a manner which is unfairly prejudicial to the interests of the company's members, and in particular to the interests of the petitioner. (The statutory provisions on which this petition is based have now been superseded by sections 994 and 996 of the Companies Act 2006). The company was incorporated on 3 August 2000.

[2] By way of background, the petitioner and the respondent were each, together with Iain Murray, employed by Lasalle Engineering Limited ("Lasalle") for a period of some years during the late 1980s and early 1990s. Lasalle was engaged in inter alia the manufacture of cable protectors for use in the oil exploration and extraction industry. In about 1993 the petitioner left Lasalle to form his own company Well Management Systems Limited. In about 1996 the petitioner set up Cable Protection Systems Limited ("CPS"); CPS was established to manufacture cable protectors in direct competition with Lasalle. The respondent and Iain Murray each left Lasalle and joined CPS. The petitioner worked as managing director of CPS and was primarily concerned with management and sales; the respondent had design expertise and was primarily involved in designing specific products for customers; and Iain Murray was the operations manager, with responsibility for purchasing and production. The petitioner owned 30% of the issued share capital of CPS, as did Charles Moncur, and the respondent and Iain Murray each owned 20%.

[3] CPS was subsequently absorbed into the Polymer Holdings group of companies under a share exchange agreement, under the overall management of a Mr Graeme Speirs. By late 1999 the petitioner became dissatisfied at the way in which central overheads and running costs of the Polymer Group were being allocated to CPS. The petitioner found it increasingly difficult to work with Mr Speirs, and in about mid-1999 the petitioner began to put together plans to form the company. What ensued was the subject of some dispute in the evidence. What is clear however, is that the petitioner was the subject of a restrictive covenant in his contract of employment with CPS, which prevented him from being directly involved for a period of one year in a competitive business. Nonetheless, he involved himself in the planning of the new entity, whether by way of management buy out or formation of a new company. He left the employment of CPS, and subsequently persuaded the respondent and Iain Murray to leave CPS also and to join the company. Initially, before Iain Murray and the respondent left their jobs with CPS, there had been discussions in which it had been suggested that the petitioner, the respondent and Mr Murray should each own one third of the issued share capital of the company. The authorised share capital of the company was £100,000, made up of 200,000 ordinary shares of 50 pence each. In the event, the petitioner became the beneficial owner of 40,000 ordinary shares, and the respondent and Iain Murray each became the beneficial owners of 30,000 ordinary shares. Each man obtained a personal loan in order to purchase their shareholding. The respondent held the petitioner's shares as his nominee as the petitioner was concerned about the existence of the restrictive covenant in his contract of employment with CPS. For the same reason, the petitioner did not with to become a director of the company. Initially, Iain Murray became the managing (and sole) director of the company, but he did not wish to hold this position, and after a very short time the respondent became the sole director of the company. In December 2000 the petitioner sold 25% of his shareholding to Charles Moncur. Subsequently an additional 5000 ordinary shares in the company were issued and allocated to Aberdeen City Council as part of a loan agreement between Aberdeen City Council and the company. In August 2003 the respondent acquired the whole of Iain Murray's shareholding in the company. He funded the acquisition of these shares by means of a loan from the company which was subsequently written off. (The respondent has since repaid this loan to the company, together with interest thereon.)

[4] Since its formation the respondent has effectively been solely responsible for the conduct of the company's affairs. The petitioner avers that this has been unfairly prejudicial to his interests. He avers that his rights as a member of the company are governed primarily by the agreement among the Founders and secondly by the Articles of Association of the company.

[5] The petitioner avers that the respondent's conduct of the company's affairs was unfairly prejudicial to his interests in several distinct respects, as follows:-

(i) Contrary to the Founders' Agreement, the petitioner has been wholly excluded from the management of the company. This is also averred to be contrary to the terms of the trust in which the respondent held the petitioner's shares in the company. In addition, it is averred that the respondent has not co-operated with the petitioner's attempts to determine the true financial position of the company; that the respondent has failed to consult with the petitioner in terms of the Trust Deed in favour of the petitioner, and by excluding the petitioner's input, the respondent has acted in violation of his obligation as director of the company to operate it in the best interests of its shareholders.

(ii) In August 2003 the respondent borrowed £20,000 from the company (which loan the respondent caused the company to write off in October 2004 without any capital or interest having been repaid). This loan was in breach of sections 151, 330 and 342 of the Companies Act 1985. At the time that this loan was made, the company had only £2,053 in cash in its bank account and its net current assets were minus £95,070. No dividends had been paid (nor have they ever been paid). The purpose of this loan was to enable the respondent to purchase Iain Murray's 30,000 shares in the company, which gave him control over the company and fundamentally altered the original voting structure of the company agreed between the Founders. The petitioner avers that in taking this loan in order to control the company and in writing it off, the respondent endangered the already vulnerable finances of the company, in violation of his obligation to operate the company in the best interests of its shareholders such as the petitioner.

(iii) Between 2001 and 2005 the company met legal and administrative costs incurred by the respondent in connection with court proceedings against him by Polymer Holdings Limited totalling about £95,000. This litigation did not relate to the respondent's discharge of his duties as director of the company nor was it litigation for company purposes. The company did not record any profit in any of the years ending September 2001, 2002 or 2003. The payment of these costs is averred to have been contrary to sections 330 and 342 of the Companies Act 1995 and furthermore endangered the vulnerable finances of the company, contrary to the respondent's duty to operate the company in the best interests of the shareholders.

(iv) In the financial years ending September 2003 and September 2004 the company made payment into the respondent's pension scheme of £5,430 and £6,360 respectively. In the financial years ending September 2005 and 2006 these payments increased to £159,672 and £137,956 respectively. No dividends were declared. The payment in the year to September 2005 is averred to be disproportionate and excessive given the financial position of the company. Furthermore, the company's accounts for the year ended September 2005 stated that the director's emoluments amounted to £69,405 whereas they were in fact £229,077, which error was liable to mislead any party reading the accounts and in particular the petitioner. These payments endangered the finances of the company contrary to the respondent's duty to operate the company in the best interests of the shareholders. Furthermore, the respondent's remuneration for the 19 month period ended 30 April 2007 totalled £438,000, which was excessive and took up sums which might otherwise have been available for the declaration of dividends.

(v) In 2005 the company purchased a car valued at £36,736 for the respondent's exclusive use. In that year the company recorded a retained profit of £137,956 and declared no dividends. It is averred that the purchase of this vehicle was excessive and disproportionate and that this endangered the finances of the company contrary to the respondent's duty to operate the company in the best interests of the shareholders.

(vi) In the financial year ending September 2006 the respondent borrowed a further £10,000 from the company in breach of sections 330 and 342 of the Companies Act 1985.

(vii) In around May 2007 the respondent issued additional share capital in the company for £400,000 for the purpose of his purchasing a property and in any event with the intention of diluting the petitioner's interest in the business. In around November 2007 the respondent intended to issue a further £600,000 of additional share capital for the same purpose and intention. In arranging for these shares to be issued the respondent acted solely for his own benefit and in violation of his duty to operate the company in the best interests of its shareholders.

[6] In reliance on these instances of alleged unfairly prejudicial conduct of the company's affairs the petitioner seeks various orders of the court, including an order against the respondent to pay to the company excess remuneration and pension payments given the Founders' Agreement, an order that the respondent should repay the loans in his favour from the company, an order that the respondent should repay to the company sums expended on his litigation, an order that the respondent should utilise his majority shareholding to have the petitioner or his appointed nominee appointed as a director of the company, or alternatively an order that the respondent or the company should purchase the petitioner's shareholding of 30,000 ordinary shares in the company.

[7] The respondent's position was that the company's affairs had not been conducted in a manner which was unfairly prejudicial to the interests of the shareholders or the petitioner, and that if there had been any Founders' Agreement, this was based on the expectation that each of the petitioner, the respondent and Iain Murray would devote substantially the whole of their time and effort in working for the company. By his failure to implement this essential element of what had been envisaged, the petitioner was disabled from founding on any Founders' Agreement. The company had been built up to be a profitable business very largely as a result of the hard work and enterprise of the respondent, and after the initial setting up of the company the petitioner had not contributed to the increase in the company's fortunes. Against this background, the sums paid to the respondent by way of remuneration and pension were reasonable. So far as remedy was concerned, it was unrealistic to expect the respondent to work with the petitioner; in the event that the court was satisfied that the petition was well-founded, the only appropriate remedy was for an order for the purchase of the petitioner's shares. The price at which these should be purchased ought to be discounted to reflect the petitioner's minority shareholding.

 

The evidence
[8] Parties were ordered to lodge witness statements of all witnesses. They complied with this order, (although one witness, Iain McDougall, did not give a written statement) and these statements (with, in some cases, supplemental statements) are in the court process. Each witness supplemented his statement by parole evidence. I took account of all of this evidence, and seek to set out here only the salient points of each witness's evidence. In the course of the proof, parties were agreed that the evidence of their respective valuation experts should be treated as a discrete chapter at the conclusion of the rest of the evidence; I will turn to this evidence later in this opinion. I deal now with the evidence of the eight witnesses who spoke for or against the merits of this application. The petitioner gave evidence on his own behalf, and in addition called five witnesses. The respondent gave evidence on his own behalf and in addition called one witness.

[9] The petitioner was aged 47 and employed as a global product champion with Halliburton Energy Services Ltd. After graduating with a broadly engineering and management based degree, he worked in several jobs before working with Lasalle for about seven years. With Lasalle he rose from being a sales engineer in the cable protector division to sales manager and then divisional manager. He left Lasalle in about 1993 to form his own company, Well Management Systems Limited, of which he was managing director and 50% shareholder, with Charles Moncur owning the remaining 50% of the shares. About two years later the petitioner set up CPS in order to manufacture cable protectors. He had worked with both the respondent and Iain Murray at Lasalle, and hand-picked them to work with him at CPS. He matched their current salaries and offered them each 20% shareholdings in CPS, with Charles Moncur and himself retaining 30% each. CPS was subsequently absorbed into the Polymer Group under a share exchange agreement, with the shareholders of CPS becoming minority shareholders in a newly formed company (which continued to trade as CPS). The managing director of Polymer Group was Graeme Speirs.

[10] Each of the petitioner, the respondent and Mr Murray put their best efforts into building up CPS. The petitioner conceded that the respondent made a great contribution to CPS because of the quality of his design work, but the biggest contribution was the petitioner's, because the petitioner managed the business and controlled the team. The petitioner was the managing director, the respondent was in charge of drawings and designs and Mr Murray was in charge of production and purchasing. Gradually, the petitioner found it increasingly difficult to work with Mr Speirs, who persisted in allocating an unduly high proportion of the administrative overheads of Polymer Group to CPS (or, more accurately, to Protector Systems Limited, the company within the Polymer Group which traded as CPS and for which the petitioner, the respondent and Mr Murray worked). The petitioner became increasingly dissatisfied and despite continuing to work for Protector Systems Limited, and despite the existence of a restrictive covenant in his service agreement, by about mid-1999 the petitioner was actively making plans to form a new company. By about mid-1999 he was preparing draft financial projections and business plans which proceeded on two alternative bases, either a management buy out of CPS or the formation of a new company. The petitioner worked closely with Mr Roy Summers, and together they put a substantial amount of work into proposals for the new business and into seeking sources of finance for the new business. They explored the possibility of a loan from National Westminster Bank using the Small Firms Loan Guarantee Scheme ("SFLGS") and they prepared lengthy projections to support their funding applications. An example is No 6/35 of process which was dated 10 February 2000 and which included a profile of the key personnel in the management team which showed the petitioner as managing director, the respondent as engineering manager and Mr Murray as operations manager. In April 2000 the petitioner was discussing with the Bank of Scotland a loan of £150,000 to the company, and in due course this loan was forthcoming. The respondent was not involved in any of the preparatory work prior to the setting up of the company, nor was he involved in producing business plans or meeting potential lenders. The petitioner also discussed a loan from the Aberdeen City Council Business Enterprise Scheme, and explored other sources of funding such as Scottish Enterprise.

[11] The company was incorporated on 20 August 2000, but the petitioner regarded this as a formality to enable him to make progress in obtaining funding for the company; it did not begin to trade until late September 2000. The petitioner, the respondent and Iain Murray had discussed the restrictive covenant in the petitioner's contract of service; whilst no concluded view had been reached as to whether this was enforceable, all three considered that it was safest to avoid a possible breach of the covenant and this is why Iain Murray was made managing director of the company. All three also discussed the possibility that Graeme Speirs might make one or all of them a counter-offer, but they were agreed that no such offer would be accepted and that they were committed to the new company. They shook hands, and as far as the petitioner was concerned, there was no turning back.

[12] In about late August or early September 2000 the petitioner suggested to Graeme Speirs that the petitioner, the respondent and Iain Murray would be interested in a management buy out of CPS. For a few days Mr Speirs appeared interested in discussing this proposal, but on 9 September 2000 the petitioner and Iain Murray were made redundant. Mr Speirs then offered the respondent a more attractive financial package if he were to stay with CPS. After some days the respondent visited the petitioner and told him that he had decided that he was going to accept Mr Speirs' offer and would not be joining the company. The petitioner told the respondent that he was leaving Mr Murray and the petitioner unemployed and reminded him that he had shaken hands on the new venture. Some days after this, the respondent told the petitioner that he had changed his mind and that he would indeed be giving up his job with CPS and joining the company. The petitioner stated that there was no discussion as to what roles the three individuals would play in the company - it was understood that they would have the same roles as they had with CPS, with the petitioner managing the company, the respondent being responsible for engineering design, and Mr Murray being responsible for operations and manufacturing. The three did however discuss what their salaries would be. They agreed that these would be essentially the same as they had been in CPS, but with an additional amount to cover interest payments on the loans which they had taken out to purchase their shareholdings. Salary increases would be restricted in line with inflation, and they would take their earnings in the form of dividends rather than salaries. The principal of the loans which each had taken out was to be repaid from dividends, which were to be payable as soon as the company could afford to do so. It was always envisaged that Aberdeen City Council would be a shareholder, and that all shareholders would receive dividends. Neither the respondent nor Mr Murray wanted Mr Moncur to be a shareholder as he was not going to be part of the business. The petitioner felt loyalty to Mr Moncur as a friend and supporter of Well Management Systems. The shareholdings in CPS had been divided in the ratios 30% to the petitioner, 30% to Mr Moncur, 20% to the respondent and 20% to Mr Murray. The petitioner wished the same division to apply to the company, but in light of opposition from Mr Murray and the respondent he agreed that Mr Moncur's proposed interest of 30% should be divided equally between the remaining three. The petitioner pointed out to the others that he had formed CPS and had brought them into it. He had been managing director of CPS and he had put all the work into forming the company; he wanted to be the major shareholder. The result was that the petitioner held 40% of the shares in the company and the respondent and Mr Murray held 30% each. Because of the restrictive covenant, it was agreed that the respondent should hold the petitioner's shares in the company as his nominee.

[13] During the first few months of the company's trading, the petitioner had no income and was living off his savings. In about December 2000 he sold 25% of his shareholding to Mr Moncur for £10,000. At about this time Mr Murray resigned as managing director of the company and the respondent took over this position. (Mr Murray also intimated that he did not wish to continue to be a shareholder at about this time). The petitioner stated that the respondent must have been aware that he was taking over the role of managing director in a caretaker capacity, and that it was always the petitioner's intention to assume that role as soon as this was possible. However, it was not possible at this time, for two reasons. First, the restrictive covenant prevented the petitioner from being openly involved in the running of the company until about October 2001, and Mr Speirs had already caused his solicitors to write a warning letter (No 6/212 of process) to the petitioner threatening legal action if he breached his covenant. By this time the petitioner considered that Mr Speirs was a manipulative and vindictive man and took this threat seriously. Second, the company was not in a financial position to pay a salary to the petitioner commensurate with his salary at CPS or with the salaries being paid to the respondent or Mr Murray. For these reasons, the petitioner did not become a director of the company, but continued to be actively involved in its management and the conduct of its affairs. He was involved in appointing McDougall & Co as the company's solicitors and secretary; Mr McDougall prepared a declaration of trust governing the respondent's holding of shares as nominee for the petitioner (and sent a fee note to the company dated 19 July 2001 for this work - No 6/126 of process). This declaration of trust was apparently thereafter mislaid, and a fresh declaration of trust date 8 February 2006 was executed (No 6/5 of process). The petitioner met regularly with the respondent at the petitioner's house, and was actively involved in directing the efforts and activities of both the respondent and Mr Murray. Although he did not want to risk being seen at the company's office, he told the respondent where to direct his sales efforts, which potential customers he should approach, and discussed the company's monthly management accounts and financial performance. In short, the petitioner did all of the functions that would normally be expected of a managing director. He was involved in discussions with the Wood Group regarding their possible acquisition of the company and he prepared check lists and written action lists and guides for the company's employees, several examples of which were lodged as productions. For the first few months of the company's trading the petitioner was effectively (although because of the restrictive covenant not openly) controlling and managing the company.

[14] In January 2001 the petitioner started working with another company, Shut Off Solutions Limited, but he continued to manage the company, and frequently visited its offices (which were only about 400 metres from his place of work) at lunch breaks. He continued to prepare action lists and agendas for management meetings and continued to direct the affairs of the company.

[15] The restrictive covenant ceased to have effect on 8 October 2001, but at that time the company's financial circumstances were such that there was no realistic possibility that it could afford to take on the petitioner as managing director. It had made losses of about £130,000 in its first year's trading, and there was no suggestion from anyone that the petitioner should join the company as a director at that time.

[16] In about December 2001 or early 2002 the petitioner joined Progenetive Services Limited ) "PSL" which was based in Portlethen. This made it more difficult for the petitioner to visit the company's offices as frequently as he had previously done, but he continued to meet regularly with the respondent and discussed the company's affairs with him by telephone. He continued to give managerial and marketing advice to the respondent. He remained with PSL until he was made redundant in about August 2003. At that time the company's financial circumstances were still such that it could not afford to take the petitioner on as a director or indeed in any managerial role.

[17] In about March 2004 the petitioner commenced working for his present employers. For the first few months it was difficult for him to maintain regular contact regarding the company's affairs, but after June 2004 when the company moved to new premises close to the petitioner's office he resumed contact and frequently met with the respondent to discuss the management of the company. From the information which the respondent gave him, it was clear that the company was still not making sufficient profits to enable it to meet the additional financial commitment of the petitioner becoming involved full-time in its management. Despite the fact that the oil industry was generally very profitable at this time, the respondent painted a picture to the petitioner of the company performing poorly. If the petitioner had known the true state of the company's finances at this time, which was that the company was becoming profitable and its finances were much stronger, he would have sought to become actively involved. However, the respondent did not make him aware of this and painted a false picture of the company's fortunes, and also did not disclose immediately to the petitioner that he had purchased Iain Murray's shares.

[18] The respondent purchased Mr Murray's shares in August 2003. He financed this purchase by means of a loan from the company of £20,000. At that time the company's liabilities exceeded its assets by more than £95,000. The petitioner stated that it was very definitely not in the company's interests for the respondent to use the company's money for this purpose; in taking £20,000 out of the company's cash reserves, he left the company with only £2,000 in the bank. At this time the company might spend up to £100,000 per month on purchases. It was not in the interests of any of the shareholders that company funds should be loaned to the respondent for this purpose at that time - the petitioner observed that this could have been the straw that broke the camel's back. The respondent did not discuss the purchase of Mr Murray's shares with the petitioner before he purchased them; he merely told the petitioner in about August 2004 that he had done so about a year earlier. He never mentioned how he had financed this purchase, nor did he tell the petitioner that he had caused the company to write off the loan without any of the principal or interest having been paid. The petitioner was similarly unaware that the respondent had borrowed other sums of money from the company at a later stage. None of these transactions were discussed with the petitioner, and none of them were in the interests of the company or of the shareholders. No dividend has ever been declared by the company.

[19] When the respondent stopped working for Polymer Group in order to start working for the company, he removed all the detail from the drawings which he had prepared when employed by Polymer, and also removed the drawing references, in order to make it difficult to use these drawings. The petitioner stated that he had advised the respondent against doing this, but the respondent persisted in doing this. Thereafter Mr Speirs and Polymer raised an action for damages against the respondent; this was subsequently settled extra-judicially, and the costs of settlement and of the litigation were paid by the company. There had been no provision for legal fees in the business plans which he had drawn up for the company and it was not in the interests of the company that these fees should have been paid by it. The petitioner had never been given details of the amount of these fees and costs but estimated that they might be about £95,000.

[20] In the period between about January and April 2004 the respondent offered to purchase the petitioner's shares in the company at a price of £20,000. The respondent had told the petitioner that as it was he who was doing all the work for the company and he was taking all the risks he should own all the shares. The petitioner did not accept this position - he had started the company up and it was always his intention to work for the company. The personal loan which he had taken out in order to purchase his shareholding was still outstanding, as no dividends had been paid; the amount which the respondent offered was not enough to repay this loan together with interest accrued thereon.

[21] With regard to the respondent's remuneration package, the petitioner agreed that this had increased very substantially between 2004 and 2005, from about £65,000 in 2004 to about £230,000 in 2005 and to about £315,000 in 2006. These increases had never been discussed with the petitioner nor was his approval sought. The petitioner's understanding was that the respondent's remuneration would not be very different from his starting salary, because the understanding between the petitioner, the respondent and Mr Murray was that they would take profits from the business by means of dividends rather than salaries. The petitioner conceded that the respondent had worked long hours (as did the petitioner himself) but this was in the nature of things when starting up a small company. The level of salary which the respondent received in the first two or three years of the company's trading was not unduly low for the post which he held - the petitioner referred to an annual salary survey by the Society of Petroleum Engineers (6/61 of process) which showed that the total median salary for a managing director in the engineering sector in 2007, including pension was 76,000 Channel Islands pounds. The petitioner was never told about the large increase in the respondent's remuneration package; he did not see either the management accounts or year end accounts in 2005 or 2006, and all the knowledge that he had of the company's affairs was gleaned from verbal reports from the respondent. The petitioner's understanding even in early October 2006 was that the company was still struggling and could not afford to have him working for it. Only later did he realise that the figures which the respondent had given him were the company's profits after remuneration, including the respondent's salary and pension. When the petitioner discovered this, in about late October 2006, he spoke to the respondent by telephone and told him that he now understood the company's financial position, that the respondent had been taking excessive remuneration and that he should pay this money back to the company. The respondent's position was that he had taken advice and had done nothing illegal. The petitioner observed that whether or not that was correct, what the respondent had done was morally wrong. The respondent said that he could not pay a dividend as this would mean paying a dividend to the petitioner, and he had no intention of ever paying the petitioner any dividend. The petitioner had lost all trust in the respondent and Ian Murray. The respondent ran the company solely for his own benefit and for his own purposes, to the prejudice of the petitioner and other shareholders. In recent years the oil business has been booming, and the engineering sector (including providers of cable protectors) has been very profitable, but the shareholders in the company have seen no return on their investment. However, despite his loss of trust in the respondent, the petitioner believed that it was realistic for him to assume a major role in the company. He would like to become managing director of the company; he had started up CPS and had been managing director of that company, and he had started up this company and ought to be managing director of it, as he had always intended to do. Although he would find it quite difficult, and not enjoyable, to work with the respondent and Iain Murray, it would not be impossible to do so.

[22] In cross-examination it was put to the petitioner that when he was managing director of Protector Systems Limited (trading as CPS) he signed off the management accounts and annual accounts, and he agreed that this was correct. He was asked why he did this if they did not reflect accurately the proportion of group overheads attributable to CPS; he stated that although he may not have agreed with the figures, he signed the accounts in order to continue his relationship with Graeme Speirs and to carry on working in CPS. Mr Speirs would have made life very difficult for him if he had not signed these accounts. The petitioner accepted that the respondent was key to the success of CPS, and carried out new designs of cable protectors and bespoke parts. However, he was not involved in much more than drawing and designs - although the petitioner took him with him on a sales trip to Norway and the respondent may have met customers, the respondent was not involved in making presentations to customers nor did he get involved in other aspects of the business apart from design. By contrast, the petitioner stated that he himself did get involved in design, and was also involved in seeking to reduce the cost of manufacture, and also in increasing sales and meeting potential customers. Notwithstanding all of this, the petitioner agreed that he regarded the respondent's involvement in the new company as key to its success and he had the greatest respect for the respondent's abilities. This was clear from the business plans which he had prepared in anticipation of the company's formation.

[23] The petitioner confirmed that he joined Shut Off Solutions in January 2001, where he received a salary of £55,000 per annum, a car allowance, company pension contribution and he may have also received private medical insurance. He was made redundant from that company in November 2001 and joined Progenitive Services Limited in December 2001 on a salary of £60,000 per annum with a car allowance, a company contribution to his pension (after the first six months) and private health insurance. He observed that he was products manager in that company, which had a turnover of about £100m per annum, and his remuneration package was not out of the ordinary for that size of organisation. He was made redundant from that company in January 2004 when it went into receivership, and he started his present employment with Halliburton in about March 2004. His starting salary was £65,000 and had grown so that it was now about £78,000 per annum, together with a company pension contribution and a private medical plan.

[24] Regarding the restrictive covenant in the petitioner's contract with CPS, this was discussed with both the respondent and Iain Murray before he left CPS. The solicitors who advised the petitioner told him that it might be enforceable, but that it was likely that a court would find in his favour and refuse to enforce it. However, this could not be guaranteed and the only way to be sure would be to avoid breaching it. The petitioner did not accept that he had enticed the respondent away from CPS; he had discussed the new project with the respondent and Iain Murray, and all three had agreed to leave CPS and set up the company. After the petitioner left CPS he reminded the respondent of this agreement and of the fact that they had shaken hands on it. With regard to Mr Moncur's possible shareholding in the company, it was not the case that the respondent and Mr Murray were adamant that only those working full time in the company should be shareholders; rather, they considered that Mr Moncur was not going to contribute to the company at all and so should not be included. There was never any discussion about restricting the ability of the original

shareholders to sell their shares to each other or to a third party. The petitioner sold one quarter of his shareholding to Mr Moncur some three or four months later, because he was not in employment and he required the funds the meet mortgage payments and to support his family. There was no detailed discussion between the founders about the roles that they would play, but the petitioner took the view that it was implicit that they would continue to do what they were doing in CPS. There was however a detailed discussion between the three of them during the six month period before they left CPS regarding salaries, in which it was agreed that they would take broadly the same salaries in the new company as they were receiving at CPS, with an additional amount to cover the interest on the personal loans which they had taken out in order to purchase their shareholdings. They also agreed that dividends would be payable when the company could afford to pay them, and would be used to repay their personal loans and then as the means of distributing profits. The petitioner remembered this discussion, although it was never reduced to writing; none of the three founders expressed any disagreement with these proposals.

[25] The petitioner reiterated that it was he who prepared business plans and who negotiated the funding arrangements with the Bank of Scotland and Aberdeen City Council. He was shown a loan offer from the Bank of Scotland dated 2 March 2001 (No 6/159 of process) which he accepted was made after he had started work with Shut Off Solutions and the respondent was the sole director of the company, but while the respondent may have had to provide an update to the business plan, and to prepare updated projections, the majority of the work was done by the petitioner and Mr Summers. The petitioner was not however actively involved in the details of the final deal with Aberdeen City Council, which was not signed until February 2002, nor with the further borrowings from Bank of Scotland in early 2003, although he was aware that a further loan was being negotiated to keep the company solvent. Although he never signed any personal guarantee in respect of the company's loans, it was always agreed between the founders that liability for the company's borrowings would be shared proportionately in relation to their shareholdings. When the respondent purchased Iain Murray's shares, the petitioner agreed that he would share Mr Murray's liability for company loans with the respondent. Nothing was ever reduced to writing, because that was the way that matters had been dealt with in both CPS and the company: he gave the respondent his word on this matter and that should have been sufficient (although it clearly was not sufficient for the respondent, who instructed Mr McDougall to seek a written undertaking or guarantee).

[26] The petitioner reiterated that he was closely involved and controlled the management of the company in its first few months of trading, and gave directives about action to both the respondent and Iain Murray, as could be seen from Nos. 6/43 and 6/44 of process. The parties would meet in a bar rather than at the company's offices. The petitioner drafted a letter for the respondent to send to a client in Norway, he prepared production matrices for Iain Murray to use, and he did not accept that his involvement in the company's affairs decreased after he began to work at Shut Off Solutions. If anything his involvement increased, as he attended the offices of the company very regularly at lunchtimes, usually every week. The petitioner did not remember any discussions with the respondent about his coming to work for the company after he was made redundant from Shut Off Solutions, but the petitioner's assessment was that the company's financial position was not strong enough to enable this to happen. The purpose of the additional loan from the Bank of Scotland was not to take on an additional employee (although an additional employee was required because the respondent was not carrying out any sales function but was concentrating solely on design drawings). The additional loan of £70,000 was decided upon by the respondent and Seamus Farren, the company's accountant, as additional funding to keep the company solvent. He accepted that he had never worked full-time for the company whereas the respondent and Mr Murray had worked full-time for the company since September 2000; he also accepted that he had not signed any guarantees of company loans and the respondent had done so, and that he had sold one quarter of his shareholding to Mr Moncur who had no active involvement in the company and who had been vetoed at the outset by the other two. However, he maintained that he had remained involved in the company. After he started working with Halliburton he had meetings with the respondent every month or every two months, usually in the respondent's car at lunchtime. This continued throughout 2004, 2005 and much of 2006. However, he never looked at financial data on a computer in the company's offices, but relied on what the respondent told him (although he accepted that he never asked for written confirmation and was never refused access to any information). As a shareholder he was not shown the annual accounts prepared by the company's accountants PFS. The accounts which were lodged with Companies House did not reflect the true position regarding the respondent's pension and remuneration package. The petitioner never saw the accounts for the year to 2005 until after this petition was raised.

[27] With regard to the specific complaints in the petition, the petitioner stated that he would not have accepted any post in the company other than that of managing director. The lack of frequency of his involvement in the company was his choice, but was based on information given to him by the respondent. With regard to the sum paid by the company to enable the respondent to purchase Mr Murray's shares, he disputed that this was ever intended to be a loan - there was nothing in the company's accounts or books to suggest that the respondent ever had any intention of repaying this money to the company. With regard to the costs of the litigation between Polymer and the respondent and the settlement thereof, the petitioner did not accept that he encouraged the respondent in the steps that he took regarding CPS's drawings. Ultimately however, the petitioner accepted that he agreed with the respondent and Mr Murray that the company would meet the costs of this litigation and the extra-judicial settlement thereof. With regard to the pension payments made in favour of the respondent by the company, these did not appear in the publicly available accounts of the company. Although the respondent put in a tremendous effort to the company, the petitioner also worked many hours at home and many of the company's customers had previously been customers of CPS who had been found by the petitioner and who transferred to the company.

[28] With regard to the allegation of the company purchasing a car for the respondent, the petitioner accepted that it seemed to be the case that this car was leased. The petitioner could not give further evidence about any motor allowance paid to the respondent, and he accepted that further loans by the company to the respondent had since been repaid. He also accepted that the averments regarding the issue of additional share capital of £400,000 and £600,000 were not true, and that he had not instructed the pleadings should be changed in this respect. The petitioner stated that he would be prepared to have Mr Murray and the respondent on the board of the company, but he wanted to be managing director. He could understand if the respondent took the view that he could not work with the petitioner, and he would be delighted if Mr Murray took that view. If they worked together, it would not be a good working environment and there would be some acrimony and resentment, but he believed that the company could move forward in that situation.

[29] In re-examination the petitioner was asked about his signing off accounts for CPS when he did not agree with them. He stated that he had raised his concerns with Graeme Speirs over many months but got no satisfaction from him. No members of the public were shareholders and he saw these accounts as an internal matter. As an example of the petitioner's continuing management role in the company he referred to No 7/55 of process which he had prepared and which was an analysis of the company's trading and cash position, gross margins and overheads prepared shortly after 17 July 2002. He prepared this because the company was going through a difficult time, and because the respondent was not capable of preparing such a document. The respondent did not have enough financial understanding to do this, and in any event it was the petitioner's role.

[30] With regard to the email from Mr McDougall seeking a written guarantee of the company's loans, the petitioner had spoken to Mr McDougall and told him that he would speak to the respondent. He did indeed speak to the respondent and said that he was disappointed that he had raised this matter through Mr McDougall, and that he had expected this to be a matter of trust between the petitioner and the respondent. He heard nothing further from either the respondent or Mr McDougall on this issue.

[31] Mr Seamus Farren was a director of PFS, a firm of chartered certified accountants in Northern Ireland. He had worked as an accountant for some 26 years, including working with a firm of accountants in Aberdeen some time before. He had a mixed range of clients, ranging from small businesses and individuals to limited companies with a turnover of £30-40 million. He was the company accountant for the company from its incorporation until July 2006. In the first two or three years of the company's trading he was very involved in its affairs, but thereafter its trading conditions improved and his input was not required so much. He knew both the petitioner and the respondent when they were working with CPS; he described the petitioner as the driving force, who ran the business and obtained the orders. He first had discussions with the petitioner about a new company in about early 2000, and introduced him to Roy Summers as someone who could assist the petitioner in obtaining funding for the new enterprise. In the early years of the company's trading there were times when Mr Farren did not think that it was going to survive; he met the petitioner on at least a monthly basis, and described these meetings as crucial to the company's affairs. The additional loan obtained from the bank in about January 2003 was obtained to allow the company to continue trading. At this time the company could not afford to employ the petitioner. Until it obtained this loan it was insolvent. Despite this, in early August 2003 the respondent sought advice from Mr Farren as to his obtaining a loan from the company to enable him to purchase Iain Murray's shareholding. At this time, the company had no reserves, so it was not open to the company to declare a dividend. However, there was no such restriction on the company making a loan. The letter dated 7 August 2003 (No 6/193 of process) was the advice given by Mr Farren's firm to the respondent. It did not purport to be legal advice; Mr Farren was not a lawyer and the respondent knew this. Mr Farren observed that the respondent was not keen to pay a dividend to other shareholders. It was never intended that the respondent should repay the loan to the company; Mr Farren stated that the respondent did not have the money to pay for this himself. It was Mr Farren's view that it was still impossible in 2004 for the petitioner to have rejoined the company, because of the company's financial position.

[32] Mr Farren stated that the respondent definitely did not seek his views or advice before making substantial pension payments from the company in his own favour. Mr Farren was quite sure that he did not give any advice about such pension arrangements; if he had been asked he would not have advised that this should be done. The respondent would have known that Mr Farren would not have approved of a pension payment of £160,000 in favour of the respondent, partly because this was "pretty much one-sided" and partly because the respondent knew that Mr Farren did not believe in pension schemes.

[33] The company was in a financial position to pay a dividend by June 2004 at the earliest, although Mr Farren would have advised against paying a dividend at that time. It could easily have paid dividends in 2005 or in any months up to July 2006, when Mr Farren's firm ceased to act for the company.

[34] In September 2006 the petitioner telephoned Mr Farren and in the course of the telephone conversation it became clear that the petitioner had not been receiving accurate financial information about the company's circumstances from the respondent. The petitioner told Mr Farren that the company was not performing as well as it should have been, and Mr Farren observed that it had turned a corner and that its performance had improved significantly. The petitioner was still under the impression that the company was struggling badly, and was not aware of the large pension payments made to the respondent. It was clear to Mr Farren that the petitioner had not seen the full company accounts. Mr Farren regarded the petitioner as trustworthy and observed that the petitioner had no reason to say that he did not know of the company's full circumstances in September 2006. The respondent told Mr Farren that he did not want to share the company's profits with anyone else, because he had worked very hard for the company and it was only fair that he should reap the rewards now.

[35] In cross-examination Mr Farren stated that he was aware of the restrictive covenant in the petitioner's contract of employment, but he never saw it. He was aware that the respondent's role in CPS was to carry out drawings and design. After the company was formed, Mr Murray and the respondent worked for it full-time, but met with the petitioner to discuss where the company should go. Mr Farren knew of these meetings from his discussions with both the petitioner and the respondent. He estimated that these meetings occurred approximately monthly in the early years of the company's trading. During these early years Mr Farren discussed the company's affairs with both the petitioner and the respondent, and the petitioner made it clear during these discussions that he wanted to join the company when its financial circumstances permitted.

[36] In the early years of the company's trading, Mr Farren was involved in providing forecasts for the bank, because the company needed funding. At this time he dealt primarily with the respondent and the Bank of Scotland. His firm was not involved in the loan from Aberdeen City Council. His firm was however subsequently involved in the further loan from the Bank of Scotland in January 2003; this loan was required primarily to enable the company to continue trading, but it also enabled the company to employ a new member of staff. However, it would not have made economic sense for the company to employ someone of the petitioner's experience, and at the salary he would command, until 2004.

[37] With regard to the loan from the company to the respondent to enable him to purchase Mr Murray's shares, Mr Farren was always aware that the respondent did not intend to repay this and that he wanted to use it to purchase Mr Murray's shareholding. The question of any illegality or impropriety in his doing so was not considered by Mr Farren or his firm at this time. If it had been considered, Mr Farren conceded that he probably would not have realised that this was illegal. On 8 September 2004 Mr Farren prepared calculations to show what the total dividend cost to the company would be at that time if the respondent received a £10,000 dividend (6/93 of process). On 5 November 2004 Mr Farren advised the respondent that it would be prudent not to pay dividends until the company had at least a further £150,000 retained profits. Mr Farren confirmed that the company had contributed money to the costs of litigation between Mr Speirs and the respondent, and that this was recorded in the company's books. Mr Farren was not asked by anybody whether it was proper that this should be paid for by the company.

[38] With regard to the pension payment of about £160,000 made by the company to the respondent in September 2005, Mr Farren knew nothing of this until he reviewed the management accounts for that month. The company had suffered a gross loss of approximately £170,000 for the month on top of this figure. When Mr Farren asked the respondent about this payment, the respondent told him that he had been advised by someone else in Aberdeen. Mr Farren felt that the respondent was draining the company. A year previously the company was on its knees. Although it had done pretty well in the year to 30 September 2005, Mr Farren felt the payment was "horrendously high" and had the potential to adversely affect the company's further performance. His firm did not have one director of any company on its books who had received a pension contribution even one-tenth of this payment. The respondent was the only benefactor of this payment, which was to the detriment of all other shareholders in the company. This pension payment was not stated in the abbreviated accounts for the company - it was necessary to see the full accounts to understand the monetary value of what was paid. Mr Farren assumed that the respondent was giving the petitioner the full accounts at the meetings which the two men had. Mr Farren accepted that it may have been remiss of his firm not to ensure that the petitioner was given fuller information about the company's finances. In May or June 2006 the respondent was considering the issue of further shares in the company because he wished to increase his shareholding and dilute the shareholding of other shareholders. Mr Farren advised him that he would have to make an offer to the existing shareholders as well. The respondent also asked Mr Farren if he could pay a dividend to himself, and Mr Farren explained that if a dividend was paid it would have to be paid to all shareholders. A dividend could have been paid in 2005 and in 2006.

[39] Mr Andrew Stephen was aged 55 and was the business development executive for Aberdeen City Council. He worked in the same department when the company's application for a loan was received, although he was not principally involved in this transaction. The application was for a loan of £50,000, £5,000 of which was funded by an acquisition of shares in the company by Aberdeen City Council. This was to provide a package of financial support for the company, and to provide some reward to the Council for the risk which it was taking. Mr Stephen confirmed that the Council has never received any dividend from the company. He assumed responsibility for the management of loans by the Council in 2005; by this time the loan to the company had been repaid. The Council had no record of the company sending any annual accounts to it, certainly since Mr Stephen took over in 2005, and he had no idea of the profitability of the company. (He accepted in cross-examination that the Council had never asked for annual accounts to be sent to it.) By letter dated 4 May 2006 Messrs McDougall & Co on behalf of the company offered to purchase the Council's shareholding in the company, which was not acceptable to the Council. The price being offered was discounted by 65% due to the Council being a minority shareholder. Having discussed the matter with the Council's finance and legal departments no-one in the Council could find any justification for such a discount. No reason was provided for the company wishing to buy the Council's shareholding, nor was any financial information provided with the offer.

[40] Mr Roy Summers was involved in advising the petitioner and the company in raising finance for the company. He stated that the petitioner's initial plan was to promote a management buy out of CPS, in about 2000. Together with the petitioner he prepared financial forecasts which started in October 1999 (6/33 of process) and proposals for a management buy out of CPS in February 2000 (6/35 of process). He remembered having quite a number of meetings with the petitioner, and could not remember anybody else assisting with this work. It took several months to carry out this work. He left the writing of the narrative to the petitioner, and the proposals contained the alternative routes of a management buy-out or a fresh start up company. Lenders were generally more comfortable with a management buy-out. The petitioner worked with him in applying to potential lenders such as Bank of Scotland, Scottish Enterprise and Aberdeen City Council; he thought that it was only the petitioner that was involved with him and did not remember the respondent being involved. The petitioner made no secret of the restrictive covenant in his contract, and he would have expected the respondent to be aware of this. He remembered that there were discussions between the petitioner, the respondent and Mr Murray about salaries in the new company, and these discussions were reflected in the forecasts which the petitioner and Mr Summers prepared. His understanding was that the petitioner would start on a salary of £45,000 per annum and each of the respondent and Mr Murray would start on a salary of £38,000 per annum, and that these figures would be adjusted for inflation in each of the first three years of the company's trading. This was a normal way in which forecasts of salary costs were treated in such documents, and the increases merely reflected estimates for three years' inflation. He did not remember discussing dividends; once funding for the company was in place, that was really the end of his role. Under reference to No 6/159 of process he confirmed that the SFLGS loan from the Bank of Scotland was secured by a floating charge in the bank's favour but not by any standard security; a guarantee was provided by the Secretary of State.

[41] In cross-examination Mr Summers accepted that the proposals for the new business proceeded on the basis of the petitioner's full-time participation in the business from day one. However, the respondent tended to manage the company in the early stages after it was set up. He was unaware of what discussions there had been as to who would be managing director of the company, but he regarded the respondent as having technical design expertise and he remembered that the petitioner valued him. Mr Summers understood that the petitioner was going to return to the company after the expiry of his restrictive covenant and that he would resume his leading position. He confirmed that there was a short period before the funding was available, and there was a delay in obtaining money from Aberdeen City Council. However, in re-examination he stated that it was not necessary to start from scratch when finally seeking funding from the bank and the Council after the delay; it was a relatively short procedure to "freshen up" the applications and to re-package them. He estimated that of the time that he spent working on funding for the company, 80% of the time was spent with the petitioner and 20% was spent with the respondent.

[42] Mr Charles Moncur was aged 59, and managing director of a consulting firm specialising in production engineering and based in the Netherlands. He had experience in working in oil and gas production engineering for over 30 years. He met the petitioner in 1988 and they became friends. They founded Well Management Systems Limited together in about 1992 or 1993; Mr Moncur was principally involved in designing the control system, and the petitioner was principally involved in the running and funding of the business although he had input into the design as well. CPS was founded from the offices of Well Management Systems Limited. He met the respondent and Iain Murray after they began to work for CPS. They each became 20% shareholders, although there was no shareholder agreement form and everything was done on trust. In order to improve the financial base of CPS Graeme Speirs (through Polymer Holdings) took 51% of the shareholding and had control of the company. Until that time, the petitioner had built CPS into a successful business. The petitioner was in charge of managing the business, Iain Murray was in charge of operations and the respondent was in charge of design. The three men appeared to Mr Moncur to work together reasonably harmoniously.

[43] When the company was set up, Mr Moncur was not involved. At this time he was based in the Netherlands. He considered that he should have been involved, as he was one of the original founders of CPS and provided office space, salaries and help with the start up of CPS. However, although he would have invested in the company if he had been asked to do so, he was not asked. The petitioner told him that the respondent and Iain Murray did not want him to be a shareholder. He was aware that there was a restrictive covenant in the petitioner's contract with CPS; but for this Mr Moncur would have expected the petitioner to assume the role of managing director of the company. The petitioner spent four or five months setting up the company without any payment; it was Mr Moncur's understanding that when the restrictive covenant expired the petitioner would become managing director of the company. In about March 2001 Mr Moncur bought 10,000 shares in the company from the petitioner because the petitioner needed the money as he had received no salary since leaving CPS. Mr Moncur bought the shares at a price of £1 per 50p share, because he was convinced that the company would grow and succeed and would ultimately deliver dividends. The respondent was in Mr McDougall's office together with Mr Moncur when the share transfer took place, and he signed the transfer form. He gave no indication that he was unhappy about the transfer. There was never any suggestion that Mr Moncur would be taking an active role in the company. He invested in it because he understood that the profits of the company would be distributed to the shareholders by means of dividends. The company was set up on the basis that the directors would receive a salary, but profits would be distributed by dividends.

[44] Mr Moncur understood that the petitioner was supporting the company and providing management advice by means of regular meetings with the respondent. The petitioner gave verbal reports to Mr Moncur that the company was not doing well and that its profits were poor. It was for this reason that Mr Moncur declined to buy Iain Murray's shareholding in about 2003. He always believed that the petitioner would ultimately become managing director of the company. He was aware that the initial salary package was intended to be modest, with an additional element to cover the loan interest payments on personal loans obtained to purchase shareholdings, and that profits would be distributed by dividend. He was never asked to approve the respondent's remuneration package, and only discovered through the petitioner in 2006 how much the respondent was paying himself by way of salary and pension contribution. He was very surprised when he discovered this and found it hard to believe. He did not consider the size of the respondent's remuneration package as reasonable or justifiable; although the long hours which he worked might have entitled the respondent to some increase on his original salary package, the amount which he actually received was excessive. The customer base of the company now is roughly the same as when it was incorporated in 2000; any profits of the company should have been reflected in dividends.

[45] Mr Moncur understood that the petitioner did not become a salaried employee of the company after the restrictive covenant expired because the company was not strong enough financially to enable him to do so. To his knowledge the petitioner never refused to join the company, but rather was excluded by the respondent in the latter years when the company was profitable. The respondent did not want the petitioner back in the company and wanted to buy all of the shares in the company. He understood that in about 2005/2006 the respondent was interested in purchasing his shares in the company, but he was not prepared to sell because the offer was too low. He thought the offer was for a total of £36,000. Mr Moncur confirmed that the petitioner worked virtually full-time for the company in its first four or five months of trading. Thereafter he told Mr Moncur that the company was not making a substantial profit and could not afford the cost of further salaries.

[46] In cross-examination Mr Moncur confirmed that he never saw annual accounts for CPS but relied on the petitioner for information about that business. Neither the respondent nor Iain Murray told him that the petitioner would become managing director of the company - the petitioner told him this. Mr Moncur accepted that the respondent never made any misrepresentations about the company's financial position to him directly and he never asked for the accounts of the company but rather relied on information received from the petitioner. The petitioner would telephone him quite frequently in the years between 2000 and 2004, and told Mr Moncur that he was giving advice to the respondent on the strategy of the company, its direction, marketing and management. Mr Moncur's view was that the respondent had no management experience and needed someone to manage the business. In 2003 the petitioner told Mr Moncur that the company was technically insolvent, and Mr Moncur believed this to be true. All the information which Mr Moncur received about the company came from the petitioner.

[47] Mr Iain McDougall was a solicitor and sole partner of McDougall & Co. He had been a sole practitioner for some nine years and qualified as a solicitor in 1977. He was company secretary between 4 March 2001 and 28 July 2008, and gave legal advice to the company. He met with the petitioner, the respondent and Iain Murray early in 2001; he had not been involved in setting the company up. He remembered that all three men were to be involved in the company but that the respondent was to be designated as the only shareholder. Mr McDougall's principal point of contact was the respondent. Although all the shares were nominally in the respondent's name, Mr McDougall was aware that all three men were involved - he thought that the petitioner held 40% of the shares, that the respondent held 40% and Mr Murray held 20%. It was not Mr McDougall's function to advise them as to whether to prepare a shareholders agreement, nor was he asked to do anything to regulate their interests in the company. He did however raise the issue of the need for Declarations of Trust if one person was holding shares on behalf of others, and looking to his fee note dated 19 July 2001 (No 6/126 of process) he would have drafted these. He could not remember having had a meeting to sign these Declarations of Trust, but he had done the work. He was not involved in correspondence or any other work relating to a loan from the Bank of Scotland. He did however recall the litigation involving Polymer Holdings and the respondent, and that the company paid for all costs and met all invoices in relation to this litigation. He thought that this had been deemed to be a company matter. He had no knowledge of any agreement reached between the shareholders regarding dividends; this was never mentioned to him by anybody. The issue of sharing liability for guaranteeing loans to the company was however raised, and he sent an email to the petitioner on 28 June 2002 about this. He did not know whether any agreement had been reached as to apportionment of liability for guaranteeing loans and undertakings. He did not remember the petitioner responding to him on this matter, and nothing further happened about it - nobody got back to him about it.

[48] When Mr McDougall first met the three founders in early 2001 he was aware that the petitioner was not working with the company, and he was aware of the restrictive covenant, but he did not see the restrictive covenant and he did not know if the petitioner was involved in the affairs of the company at all in 2001. The respondent was the sole director of the company and was his principal point of contact. However, Mr McDougall was not himself involved in the day to day running of the business; he gave legal advice and assistance regarding specific supply agreements, but was not involved in the management of the company. The respondent did not seek his advice about taking funds from the company in order to enable him to purchase Iain Murray's shareholding. He was not aware that the respondent took substantial pension payments from the company in 2005 and 2006 nor was he asked for advice on this matter. He did however give advice to the company in late 2006 about a possible loan to the respondent to enable him to purchase shares in the company. This caused him to look at the advice which the company had received from its accountants regarding a previous loan from the company to the respondent. He regarded this original advice as suspect and considered that it was appropriate for the company to recover these funds from the respondent. Mr McDougall confirmed that there had been talk about fresh issues of shares in the company in recent years, but nothing ever happened in this regard.

[49] Mr McDougall drafted a Declaration of Trust dated 8 February 2006 (No 6/5 of process). This document was prepared after the petitioner contacted Mr McDougall to enquire who held the Declaration of Trust and enquiring about the nominee status of his shareholding in the company. He did not remember any reluctance on the part of the respondent to execute this document, and there was certainly no suggestion that the respondent held the shares beneficially.

[50] In cross-examination Mr McDougall was sure that all three men were present when he attended a meeting at the company's offices in March 2001. As the petitioner was present, Mr McDougall presumed that he had an interest in what was going on, but there was nothing to suggest that he was acting as managing director of the company. In about July 2001 it became necessary to submit a fresh application to Aberdeen City Council for funding because they believed that they were investing in a management buy-out; although Mr McDougall was not directly involved in any further application, his instructions came from the respondent or maybe Mr Murray and he had nothing to do with the petitioner.

[51] With regard to the loan from the company to the respondent to enable the respondent to purchase Iain Murray's shares, Mr McDougall remembered receiving a fax from the respondent dated 12 August 2003 (No 6/194 of process). He did not take this as a proposal that the company might lend the money to the respondent but as a statement that it would be doing so. He understood that the accountants' advice had been accepted, so he had no comment to make and gave no advice that this transaction should not take place. No challenge was made to this loan until the petitioner's solicitors challenged it. After this, he was shown the letter from PFS to the company marked for the attention of the respondent (No 6/193 of process), and he advised the company to demand repayment from the respondent. Both principal and interest was paid, and the respondent showed no reluctance to do this.

[52] In re-examination, Mr McDougall observed that it was strange that Aberdeen City Council stated that the funding application process would have to start all over again, as the loan had already been approved; he did not know whether this might have arisen from some confusion within Aberdeen City Council. With regard to the sharing of liabilities for the company's indebtedness, the respondent insisted that Mr McDougall commit the request to the petitioner to writing, rather than telephoning it. It was possible that the petitioner told him that he would speak to the respondent directly.

[53] The respondent owned 60,000 shares in the company, being almost 58% of the issued share capital. He met the petitioner in 1992 when working for Lasalle, but he did not know what the petitioner's position there was. The respondent was in charge of all designs, testing of all parts and deciding what should or should not proceed to production; he also dealt with suppliers and oversaw that production was cost effective. He also met Iain Murray there, who was the purchasing manager. The respondent did not report to the petitioner in any way, but would speak about things in general with him. He liked the petitioner and regarded him as a very clever, articulate, forward-thinking and decent sort of person.

[54] The respondent began designing plastic cable protectors in about February 1994. He left Lasalle to join CPS in 1996, having discussed with Iain Murray and the petitioner in the previous year the possibility of their setting up their own business. The petitioner and Charles Moncur each held 30% shareholdings in CPS, and the respondent and Iain Murray each held 20% shareholdings. The petitioner held the respondent's shares in CPS as his nominee. In CPS the respondent was in charge of design and methods of manufacture and also had dealings with customers. At first CPS was run only by the petitioner and the respondent. Thereafter the workshop foreman Alan Brown joined the business, and after about one year Iain Murray also joined. The petitioner was managing director of CPS. On one occasion the respondent went to Norway with the petitioner but on other occasions he visited customers on his own. The respondent never received any payment for his shareholding in CPS nor did he ever see any accounts for that business. He was happy enough in the business; he was working hard, he had no fears of redundancy and he felt needed. Iain Murray also reasonably felt secure in CPS, but the petitioner felt vulnerable - for example, when the respondent and Iain Murray received new company cars, the petitioner's car was not replaced and he took this as an indication that he might be made redundant.

[55] After the petitioner and Iain Murray were sacked by Graeme Speirs from CPS in 2000, the respondent stayed off work for a while. When he returned to work at CPS, Mr Speirs asked him not to be too hasty and not to join in the new company as he was not involved in all of this. The respondent discovered from Mr Speirs that the petitioner had signed off the accounts for CPS to indicate that he was content with them, and also that he was earning more than he had told the respondent. Everyone recommended to the respondent that he should stay where he was. Graeme Speirs offered him an improved remuneration package, with a salary of £50,000, a commission of 1% of the turnover of CPS (which was about £1.2m), a Mercedes Benz company car and free healthcare. However, after the petitioner spoke to him and asked him to reconsider and pointed out that the three had shaken hands on their agreement to set up the new company, the respondent did indeed reconsider and resigned from CPS. This was on the basis that the petitioner assured him that there would be a three way split in the new company, and promised that the restrictive covenant was not an issue and he would work full-time in the new company. The respondent understood that there would be an equal three-way split in the shareholding of the company and all three would work full-time in the company. Salaries were not discussed. He never saw the business proposals prepared by the petitioner and Mr Summers, although he knew that these proposals existed. The parties did agree that dividends would be paid to enable them to pay off their personal loans incurred to enable them to purchase their shareholdings, but he assumed that everyone would be working for the company. There were no discussions about dividend payments after the personal loans had been paid off. It was assumed that each would have the same job title as they held in CPS. There was no discussion about who would have the title of managing director - the petitioner was involved in sales, and the respondent was involved in design, manufacturing techniques, quality control and testing, while Iain Murray was in charge of purchasing, maintenance and the production staff. The respondent accepted that the petitioner was managing director at CPS, but he thought that they would all be equal in the new company. With regard to the restrictive covenant, the petitioner told the respondent some 3 to 6 months before he left CPS that this would be no problem, and he re-iterated this when the respondent visited the petitioner at his home after the petitioner was made redundant. If the restrictive covenant had been an issue at all, the respondent would have stayed at CPS. Although he could not remember any meeting at which they discussed that they would have equal liabilities for the company's debts, the respondent assumed that this would be the case. Within about two weeks of the company starting trading on 1 October 2000 however, the petitioner told the respondent and Iain Murray that he would have to look at the restrictive covenant, and it soon became clear to them that the petitioner would not be starting to work full time with the company. The respondent felt very let down by this; he would have liked to have focused his attentions on design and manufacturing and leave sales to the petitioner, but instead he required to shoulder responsibility for everything. The petitioner's absence had an adverse effect on the business, making it slower to get going.

[56] The respondent described the petitioner's involvement in the company as "very very small, almost insignificant"; he would visit the company occasionally for about 30 or 45 minutes once every week or two weeks. In the first year of the company's trading, the respondent only had one meeting with the petitioner outwith the office, when he visited him at his house. There were no other meetings and very little telephone contact because the petitioner did not want to communicate over the phone. In those early days it was the respondent who was directing the company. The petitioner's contact did not increase when he started working with Shut Off Solutions Limited - he would visit the company's office once or twice a week and then there might be an absence for one or two weeks. The respondent did remember that he and the petitioner went out for a walk once and discussed business. However, it was the respondent who made contact with clients and obtained orders from them, and the petitioner played no part in this. Although the petitioner may have prepared checklists (such as No 6/43 of process), the respondent barely remembered these, and he would have remembered them clearly if they had been prepared regularly by the petitioner. The petitioner was not involved enough in the running of the company to prepare useful checklists. The respondent did not remember seeing action lists prepared by the petitioner (such as No 6/44 of process); the respondent had his own action lists which were much longer than these. He accepted that the petitioner may have drafted letters to some clients (such as No 6/48 of process) but this was modified by the respondent before he sent it out. He accepted that he occasionally received help from the petitioner in the early days of the company, and this was an example of such help. He did not remember seeing financial projections for the company prepared by the petitioner, such as No 6/49 of process, but he did remember the petitioner drafting management sheets for the foundry which supplied them, and a letter to Aberdeen City Council about funding (Nos 6/46 and 6/47 of process). The respondent needed as much help from the petitioner as possible, and asked him to do some things, which the petitioner agreed to do. However, this help was quite inadequate for the respondent to depend on the petitioner to drive the company forward; if the respondent had not been proactive the company would not have survived. The respondent was working for about 12 hours each day in the office and then working long into the night at home, and one day each weekend, throughout the first year or so of the company's trading.

[57] When the petitioner's restrictive covenant expired, the respondent met with him and asked him to join the company. The petitioner said that he would rather stay away for a bit longer as Graeme Speirs might suspect that he had been involved during the period of the restrictive covenant. At this time the company was doing badly, it had lost about £140,000 in its first year of trading, and it was short of resources and staff. The petitioner and the respondent discussed whether the company could support the petitioner's salary, and the respondent suggested that each of the three founders should accept a low salary and by the petitioner joining the company, this would enable it to turn around faster. The respondent stated that he was willing to drop his salary, and Iain Murray's salary, but this did not get discussed. This discussion took place about November 2001. When the company obtained a further bank loan in early 2003 this was to enable it to employ an additional draftsman, to free the respondent up to deal with sales and engineering. By this time the respondent believed that the petitioner did not want to join the company and was never going to start to work for it. He formed this view in about early 2002. Thereafter the respondent had infrequent meetings with the petitioner, approximately once every three to six months. Some of these occurred in the company's offices, others in a car in a lay-by. It was the petitioner who requested these meetings, and the respondent agreed to his request. The petitioner would ask how the business was doing, and asked what the company's turnover, net and gross profits and expectations for the next year were. The respondent gave him this information honestly. The respondent did not accept that he had misled the petitioner intentionally about the performance of the company, and he had not told him anything that was not completely true. Iain Murray gave Seamus Farren all the information until Mr Farren ceased to be the company's accountant to enable management accounts and final accounts to be prepared. Mr Farren was a friend of the petitioner. The petitioner visited the company in 2005 and asked to see the accounts; the respondent opened the full detailed accounts on his computer, and let the petitioner sit in his own seat to look at the detailed accounts for as long as he wished. The petitioner was never prevented from entering the company's offices or accessing any area, and all his questions were answered honestly.

[58] With regard to the agreement about how many shares each of the petitioner, the respondent and Iain Murray would own, the respondent's understanding when he left CPS was that the shareholding in the company would be divided three ways equally. However, when he met the petitioner at the petitioner's house together with Iain Murray after he had resigned, the petitioner raised the question of salaries, and shareholdings. He wanted a higher salary and a larger shareholding than the others; Mr Murray and the respondent objected, but the petitioner said that he had started the company. The respondent did understand that the petitioner would get a larger shareholding than him and did not object. The petitioner was to have a 40% shareholding and the respondent and Mr Murray were to have 30% each. The respondent and Mr Murray agreed to this, but put their feet down at the introduction of Charles Moncur as a shareholder as he was not going to work in the company. The respondent's vision was that the shareholders would each work full-time in the company, and they would get their rewards later, on condition that they worked in the company. He made this plain at the meeting. The petitioner accepted the position adopted by the respondent and Iain Murray regarding Mr Moncur, although not willingly. When the petitioner later sold some of his shares to Mr Moncur the respondent was unhappy about this and objected, but the petitioner said that he desperately needed cash and the respondent reluctantly agreed. The respondent accepted that he held shares in trust for the petitioner and Mr Murray; this was because the petitioner did not want Graeme Speirs discovering his involvement in the company, so at a very early stage in the company's trading the petitioner met with the respondent and Iain McDougall to set up an agreement that the respondent would hold the petitioner's shares on his behalf. Although the respondent signed a Deed of Trust in 2006, he had already signed something similar shortly after the company was created.

[59] When the three founders met shortly after the respondent resigned from CPS they discussed their salaries. He expected the petitioner to be working full-time for the company when this discussion took place. He did not remember any discussion about salaries in the longer term nor about any inflationary rises in salaries. There was a discussion about dividends, but only to the extent that they agreed that dividends would be paid to enable them to pay off their personal loans. There was no discussion about the longer term.

[60] The respondent granted personal guarantees in respect of the company's indebtedness (for example, Nos 6/161, 6/176 and 6/177 of process). He understood that he was personally liable for 100% of all of these loans. He asked the petitioner to guarantee his share of the company's liabilities but he never got a positive response. The petitioner evaded this and changed the subject, and never really gave an answer. Initially the respondent expected the petitioner to guarantee loans pro rata with his shareholding, so that he would guarantee 40% of the company's liabilities. When Iain Murray made it clear that he did not wish to be a shareholder or guarantor, the respondent assumed that the petitioner would take liability for half of Mr Murray's shares, so that he would guarantee a total of 55% of the company's liabilities, with the respondent guaranteeing 45% (although he would have accepted a 50/50 split). There were several discussions between the petitioner and the respondent about guaranteeing loans, but the petitioner never gave a clear answer. This was why the respondent asked Mr McDougall to raise the matter in writing with the petitioner in June and July 2002. He did not hear anything from the petitioner for a long time after that. The respondent stated that this was confirmation to him that the petitioner did not want to have anything to do with the company, and that the petitioner had used him. It was a turning point in his attitude towards the petitioner.

[61] The respondent stated that he took a much larger part in arranging the funding of the company than the petitioner had suggested. The offer of a loan from Aberdeen City Council was based on a management buy-out; when this did not proceed, the application had to be submitted afresh, and the respondent had meetings with Mr Summers and Mr Goode. The petitioner's involvement in arranging a loan from the Bank of Scotland was also based on a management buy-out, and again the respondent had to have meetings with Mr Summers and Mr Barbour of the Bank of Scotland to negotiate a new start up loan. The respondent estimated that the petitioner's contribution to the present success of the company was less than 2%. Although he was instrumental in setting the company up, after it started he had very little input and such input as he had was not proactive but recording. Although some of the former customers of CPS transferred to the company, many did not and the respondent found many new customers.

[62] The respondent denied that he had excluded the petitioner from the management of the company: the petitioner had never asked to be a director of the company nor had he ever asked for a shareholders' meeting, nor did he ever tell the respondent how he wished his voting rights to be exercised. The respondent had no trust or confidence in the petitioner now; over the last 14 years all the petitioner's promises had been broken, and the petitioner had failed in just about everything.

[63] The respondent accepted that he had borrowed money from the company to enable him to buy Iain Murray's shares, and that he had never had any intention of paying this back. Iain Murray wanted to sell his shares to him, and the respondent felt that his position was undermined and that he had less than 30% of the company but 100% of liability for its loans and he was doing all of the work which the petitioner should have done. He contacted Seamus Farren to ask how he could obtain funding to purchase Iain Murray's shares, and Mr Farren suggested that the money could come from the company. The respondent was sure about this. The respondent sought advice from Mr Farren on all financial issues, including issues which had a legal element to them. He understood from Mr Farren's letter of 7 August 2003 that it would be "legal and above board" for him to obtain a loan from the company for this purpose and then write it off. About one week after Mr Farren's letter, the respondent discussed the matter face to face with Mr Farren in the company's offices, and Mr Farren confirmed that the transaction could go ahead and that the company could afford it. The respondent then sought advice from Mr McDougall, who did not advise against the transaction. Mr McDougall was wrong when he stated that this was presented to him as something that was going to happen in any event - the respondent wanted Mr McDougall's approval and was looking for his advice. It was never suggested to him that this transaction was illegal or improper in any way. In answer to a question from the court, the respondent stated that he also considered the interests of the shareholders as a whole; he needed more to incentivise himself, otherwise he might lose interest in the company and if that happened the company would fail. The first time that he was told that there might be anything illegal or improper in this transaction was after the petitioner indicated that he was intending to bring this petition before the court; in the latter part of 2006 both Mr McDougall and Mr Taylor (who was by then the company's accountant) advised the respondent that this transaction was unlawful and that the money should be repaid to the company with interest. The respondent did this.

[64] The respondent disputed the petitioner's version of the events which gave rise to the litigation between Polymer Holdings and the respondent. When the respondent decided to leave CPS and go to work for the company, the petitioner asked him if there was anything that he could do to slow down CPS; the respondent replied that he could delete section views from his computer drawings, so that Polymer would not have these to copy and illustrate designs in future. The petitioner agreed that this would be useful. It was not correct for the petitioner to state that he advised the respondent against doing this; rather, the petitioner encouraged this. When court proceedings were raised against the respondent, there was a specific discussion between the petitioner, the respondent and Iain Murray about what should be done, and they agreed that the costs of the litigation and any settlement would be met by the company. The respondent's deletion of the section drawings was for the benefit of the company, and all three agreed that the company should meet the costs. In the action Polymer sought return of all files in the respondent's possession; Mr McDougall advised the respondent that he should deny everything, with the result that the action was prolonged for longer than the respondent wished. (It should be noted in passing that this allegation was never put to Mr McDougall for his comment). The cost of defending and then settling this litigation was in the region of £50,000-£60,000. The company had also paid for the petitioner's legal expenses relating to his restrictive covenant.

[65] In the year to 2005 the company was doing very well, and the respondent sought advice as to what he should do with the profits of the company. He received advice from the manager of the Bank of Scotland (whose name he could not remember) and from Mr Walter McCann and Mr Jim Taylor that he had not received much remuneration to date and that it would be a good idea to put some of the profits into his pension scheme. He told them that 30,000 of the shares nominally in his name were held by him as nominee for the petitioner, and Mr McCann assured him that it was all right to put this into his pension plan. The respondent then sought confirmation from Seamus Farren, who confirmed that it would be all right to take £155,000 out of the company and put it into a pension fund; Mr Farren was positive about this and supported it. The respondent stated that he sought Mr Farren's advice by telephone before the transaction, and that he would not have taken this step without Mr Farren's approval. The respondent did not think that he was taking too much out of the company, and he deserved to receive this because the amount that he had taken in remuneration over the previous five years had been very low. His starting salary had been £20,000 less than he would have received if he had stayed with Polymer, and he had an almost unbearable workload and responsibilities in the company. The statutory accounts for the year to 30 September 2005 showed that the company had a retained profit of £137,956 after the payment to the respondent's pension fund. The company's performance in 2005 was much better than in 2004, and it was better still in 2006. When the respondent was considering this payment into his pension fund he was aware of the company's strong order book for 2006. The respondent did consider declaring a dividend at this time, but rejected this because the other shareholders were not eligible to receive dividends because of the understanding that all shareholders would work for the company full-time. He accepted that this understanding had never been explained to Aberdeen City Council or Mr Moncur. The respondent felt morally justified in taking this remuneration package and did not feel that he was doing anything wrong at the time, but since these petition proceedings were raised he has realised that this was an inappropriate act having regard to the duty which he owed to the shareholders. He would deal with such matters differently in the future, and would seek legal advice from the company secretary before awarding himself remuneration and pension payments.

[66] The company leased a car for the respondent's use; all the cars used on behalf of the company are leased, and Iain Murray used such a car, as did the sales engineer and the project manager. The respondent received no motor allowance from the company, and used his car for work and to visit customers.

[67] The respondent took two further loans from the company in the year ended September 2006, in the sums of £10,000 and £5,000. He was not aware that this was illegal, and sought advice from Mr Farren on both occasions. He did not discover that this was illegal until after these proceedings were raised, and he has since paid back the money. The respondent has not issued additional share capital and had no plans to do so in 2007. If he decided that further share capital should be issued in future he would discuss this with all the shareholders.

[68] If the petitioner came to work for the company, the respondent stated that he could not work with him, even if the respondent was managing director. He could not maintain a satisfactory business relationship with him because he could not trust him. The only feasible option to resolve the present dispute was for the company to buy back the petitioner's and Charles Moncur's shares. Having taken advice from independent accountants as to the proper valuation of the petitioner's shareholding, in May 2007 the respondent offered £175,000 for the petitioner's shares, and also offered to buy Mr Moncur's shares. The respondent was asked how much the company could afford to pay for the petitioner's shares, and he pointed out that borrowing at present was very difficult and that the most which the company could afford to pay within the next six months would be approximately £250,000. Oil production was slowing down, oil prices were reducing, and the respondent anticipated a slow down in the oil economy over the next year or so.

[69] In cross-examination the respondent accepted that at CPS the petitioner was managing director and in charge of the business aspects of CPS, dealing with financial matters, sales and marketing; the respondent was engineering manager and Iain Murray was purchasing and production operations manager. His starting salary in CPS in 1996 was £24,000 per annum together with a 5% pension contribution. By 1999 his salary had risen to £32,000; he could not remember whether there was an increase in salary in 2000. He had nothing in writing to show that Mr Graeme Speirs had offered him a salary of £50,000 per annum to stay, and he had not asked Mr Speirs for such documentation. He accepted that £50,000 was a large increase on his salary to that date. Mr Speirs told him that the turnover of CPS was £1.5 million at that time, but he did not know if this was correct. The respondent never told Mr Anderson that the turnover of CPS (or Tube Tec) was some £4.5 million as at May 2007. The respondent was demoralised at the thought of leaving Polymer after years of building CPS up, and decided that it was too big a risk to move to the company. Before he moved to the company it was agreed that the three of them would run the company and carry out the same tasks as they had carried out at CPS. Originally the petitioner was going to be the main shareholder, but when he discussed matters with the petitioner just before he resigned from CPS he understood that there would be an equal three-way split. Each of the three would take out personal loans to provide the start up capital of the business, so the petitioner would borrow £20,000 and the respondent and Iain Murray would borrow £15,000 each, and these loans would be paid back by means of dividends. The respondent never heard anything discussed about Aberdeen City Council receiving dividends. He accepted that they may have expected to receive dividends. He remembered that it was agreed that dividends would be paid to enable the loans to be paid off, but he did not remember any discussion about dividend policy thereafter. The petitioner considered it absolutely ridiculous to have shareholders who invested in the company and did not work in it. He would not have resigned from CPS if he thought that the petitioner would not be working for the company. The respondent could not explain how Graeme Speirs could refer in his letter of 4 October 2000 (No 6/158 of process) to the respondent having secured the position of managing director of the company; he did not think that this had been discussed at that time, nor had he told Graeme Speirs even if it had. His starting salary was £38,000 per annum and a company car. He did not remember any discussions about annual increases in salary, nor did he see the petitioner's proposals for increases in line with inflation, which were provided for the Bank and Aberdeen City Council but not shown to him. He remembered that it was agreed that their salaries would be higher than they had been at CPS to enable interest on their personal loans to be paid, and he thought that there would have been agreement that they should increase in line with inflation.

[70] The petitioner definitely said that the restrictive covenant would not be an issue before the respondent left CPS; however, about two weeks after starting with the company, the respondent realised that the petitioner was not going to join the company full-time. He was sure that he would have voiced his disappointment about this to the petitioner, but he accepted that he did not tell him that he was not going to proceed with the project unless the petitioner worked full-time. Although Graeme Speirs had offered him the opportunity to return to the position of product manager with Polymer should he have second thoughts within one month of his resignation, he did not feel that he could accept this offer. He did not think that he told the petitioner that if he was not going to be working for the company full-time he should have a smaller shareholding (or none at all): the respondent just got on working for the company. He hoped that the petitioner would give as much help to the company as he could, but he did not do so. Mr McDougall told the respondent that the petitioner should not be involved in the company as he was doing nothing for it. In the period between 1 October 2000 and 31 December 2000 the petitioner visited the company on a couple of occasions and had discussions about what was going on, but the respondent considered that most of his visits were not really useful. The petitioner was making very insignificant efforts on behalf of the company, when he could have been in daily communication; however, the respondent did not raise this with the petitioner. Nonetheless, the respondent did accept that the letter to Aberdeen City Council written shortly after 21 August 2001 (No 6/169 of process) was prepared by the petitioner. He accepted that the petitioner did add value to the business at first, when he was visiting "frequently" and some of his advice was quite useful. On occasions the respondent asked the petitioner for help, and he provided this. The petitioner received no salary and was never paid for anything which he did for the company - he did this work because he was expecting to work for the company, but the respondent did not consider that he was committed to the well-being of the company and the work which he did was of little value. The respondent told the petitioner that he should get a job somewhere else. When the petitioner obtained a job with Shut Off Solutions in early 2001 the respondent did not complain about this - it was the right thing to do. He did not ask for any change to the shareholdings in the company.

[71] The respondent stated that it was in the company's interests to meet the cost of the litigation between Polymer and himself, so that it could be concluded quickly and he could get on with the business of the company. The petitioner had asked him what he could do to slow down CPS after he left, and he had said that he could delete section views from drawings. The petitioner said "that would be great, if you could", and the respondent took that as "please go ahead". The respondent had done a lot of work well over what was expected of him at CPS; he felt ownership over this work and had not been paid for it, and felt justified in doing what he did. If he had thought it was completely wrong he might not have done it, and he would not have done it unless the petitioner had phoned him up and suggested it. (The respondent then accepted that he made the suggestion, but the petitioner more or less told him to go ahead. It was not correct that the petitioner had advised him not to do so). When the court action was raised, all three founders agreed that it should be disposed of as quickly as possible and that the company should pay, although it was a strain on the company's finances.

[72] The respondent disagreed with Seamus Farren's evidence that the company could not afford to employ the petitioner until 2004. Although the company incurred losses for the year to September 2001 of about £140,000, it could have afforded to have the petitioner working for it if the petitioner, the respondent and Iain Murray each took a cut in pay and everyone worked very hard; however, he accepted that he did not get as far as discussing salaries and pay cuts with the petitioner. He did tell the petitioner that he should be in the company, and that there was a huge risk of the company failing as there were not enough people in it. Seamus Farren's evidence about this was quite different from the views which he expressed at the time; Mr Farren never told the respondent that the company could not afford to have the petitioner "on board". The respondent did not think that any consideration was ever given to arranging further finance to allow the petitioner to join the company in 2001, and he thought that this would have been more difficult to obtain in 2001 than in 2003. The respondent put every possible effort into keeping the company going, and did occasionally continue to meet the petitioner, who gave him some assistance. The respondent was not aware of any formal obligations on him as the sole director of the company - he took it for granted that he was acting in the best interests of the company. He was not aware that he should not put himself in a position where his interests conflicted with those of the company, although he had become aware of this since the present proceedings were raised. Nothing had ever been put to a vote, and there had never been a meeting of shareholders.

[73] The respondent was concerned that he was the only person guaranteeing the company's loans; although he was not as concerned about this in 2002 as he had been in 2001, he had still considered that the petitioner should underwrite his share of the liabilities. He did not remember any agreement whereby the three founders agreed that they would share liability for the company's loans, but this was just assumed. When Iain Murray indicated that he did not wish to remain a shareholder nor to have any liability for the company's loans, the petitioner and the respondent had a discussion and decided that they would each retain their existing liabilities and split Mr Murray's liability between them; however, no formal agreement was executed. He instructed Mr McDougall to write to the petitioner on this matter, but he never heard anything in response. He was disappointed at the form of Mr McDougall's emails, but he did not raise this with Mr McDougall, nor did he take the matter any further with the petitioner. However, this was a turning point in the respondent's attitude towards the petitioner; the petitioner had given his word to the respondent that the restrictive covenant would not prevent him working for the company, and also that he would work for the company, and had broken his word on both of these matters. As a result, the petitioner's word was not good enough for the respondent and he required a written agreement. However, he accepted that these were his own thoughts and that he never communicated them to the petitioner.

[74] The extra loan of £70,000 which the company obtained in 2003 was partly to enable it to employ a new draftsman, at a salary of about £23,000. It was not possible for the company to obtain further funding at that time beyond £70,000. In the same year the respondent took a loan of £15,000 from the company to enable him to purchase Iain Murray's shares. He did this after obtaining advice from Seamus Farren who suggested that he take the money from the company. The respondent had a niggling doubt that this was not right; logically he did not think it was right "as far as legalities go" and could be challenged, but Mr Farren said "it was absolutely ok". Mr Murray knew about this loan, but the respondent did not discuss it with the petitioner or Charles Moncur or Aberdeen City Council. The respondent was asked whether the company sought advice on this matter and his answer was "how do you mean the company? I was the person who sought advice". Mr McDougall was wrong in stating that the decision to go ahead with this loan had already been made before he was told about it - the respondent would not have gone ahead until it had been approved by the accountant and the lawyer. Mr Farren said that the company could afford it, and although the company was not doing fantastically well, the respondent thought that having regard to the order book the company could afford it. He accepted that the company could have put this money to other use, and that the result of the transaction was that he became the majority shareholder in the company and the petitioner became a minority shareholder.
[75] In about the spring of 2005 the respondent made an offer on behalf of the company to purchase the petitioner's shares. He was asked why he thought that it would be fair to the company to buy the petitioner's shares, and his response was that the petitioner had nothing to contribute to the company and that the respondent did not think that it was right that the company should have to give out dividends to people who were not working in the company. It was completely inappropriate to give out dividends to a person who had made no (or very little) contribution to the company. The respondent's view was that what he got out of the company should reflect more accurately what he had put into it. For this reason he decided to put all the profits which might have been declared as a dividend into his pension plan.

[76] The respondent accepted that the articles of association might have required him to ask shareholders about his remuneration package. However, he did not regard his remuneration package as excessive, because it was in the company's interest to incentivise him. His holding of almost 60% of the shares in the company was not enough to do this, and his remuneration package helped to compensate him for years of lower pay. Even though this meant that the petitioner received no payment, he considered that this was fair. The respondent asked Seamus Farren about taking this money out of the company and putting it into his pension scheme, and although Mr Farren mentioned the shareholders, he supported the respondent's action in putting the money into his pension plan. Mr Farren's evidence on this matter was totally untrue. The respondent had spoken to Mr Farren after Jim Taylor, Walter McCann and the respondent had reached the figure of £159,000 by way of pension contributions, of which £130,000 was for the respondent and £25,000 was for Iain Murray. In the financial year to September 2006 £200,000 was put into pension provision. This was fair, because the respondent's remuneration package when he started with the company was £20,000 less than he had been offered by Graeme Speirs to stay at Polymer. Mr Speirs had offered him £50,000 per annum and 1% of the turnover of CPS. When he moved to the company, his overall remuneration package was £50,000 and he received about one-third of the shares in the business. He accepted that he would not expect to receive more than this in a start up business, but this was not a normal company with normal shareholders - the other shareholders should not have been shareholders in the business and their shareholding was illegitimate. He accepted that the remuneration package which he received when he started with the company was more than he received at CPS before Mr Speirs' improved offer to retain him, but he had been underpaid at CPS as well. He also stated that it was discussed at the outset that as soon as the company became profitable a dividend would be paid so that the personal loans obtained by the three founders could be paid off. He accepted that his total remuneration package in the year to 30 September 2005 was £229,000, in the year to September 2006 it was almost £315,000, and in the year to September 2007 it was over £180,000 but he considered that this was fair to the other shareholders. He was asked if it was fair to Aberdeen City Council, to which he replied that he did not know and "we should clarify this". However, there was no good reason for retaining the profits in the company and he considered that it was fair on the petitioner and Mr Moncur. He also accepted that there was a difference between his entitlement to be paid for work done for the company, and his entitlement to share in the profits of the company.

[77] The respondent was provided with a BMW 525 diesel car which was new in 2005. The company paid a monthly payment of £780 for the lease of this car; this was affordable and reasonable.

[78] The respondent stated that the petitioner had full access to the company's financial information and that the respondent had nothing to hide. The petitioner had sat in the respondent's chair in the company's offices and looked at his computer in 2005. However, the respondent did not give the petitioner the management accounts nor did he give him any reason not to trust his word. He answered any questions which the petitioner put to him, but he did not feel that the petitioner should remain as a shareholder in the company. He accepted that the abbreviated accounts for the year ending 2005 (No 7/50 of process), which were the accounts available to the petitioner, did not disclose the turnover, gross or net profits of the company. The full accounts for that year (No 6/10 of process) disclosed a turnover of about £2.7 million, a gross profit of about £659,000 and a net profit after taxation of about £91,000; however, the respondent accepted that this did not show the company's profits excluding pension payments, and he never told the petitioner of his pension payments. He accepted that the petitioner would not have had a true picture of how the company was performing, but he did not ask any more questions. He could have asked the respondent for full accounts and he would have been given them. The respondent could not see how the petitioner could have expected him to carry on working as he was and receiving such a low salary.

[79] The respondent accepted that he was party to the preparation of cash flow forecasts (No 6/110 and 111 of process) which anticipated that the company would issue an additional £400,000 of share capital in May 2007 and £600,000 share capital in November 2007; this was in connection with the possible purchase of new premises for the company, but nothing materialised and the proposal was abandoned when the present proceedings were raised. The respondent tried to buy Mr Moncur's shares in May 2007, and the company offered to buy Aberdeen City Council's shares in 2006; the purpose behind these offers was to increase the respondent's shareholding. It was put to the respondent that he did not want the petitioner to share in the success of the company and he agreed, stating that he thought that it was appropriate that the petitioner does not benefit from his (the respondent's) hard work. He wanted the petitioner out of the company altogether, and if he remained a shareholder he did not know whether the company would ever declare a dividend. He observed that "they should not be shareholders" and that he had no intention of paying a dividend.

[80] In re-examination the respondent accepted that if the petitioner had relied on the figures for turnover, net profit and gross profit in the accounts, he would not have had a true picture of the company - the figures were correct but did not give full information. However, the respondent never gave the petitioner incorrect figures; the petitioner always got what he asked for, and he never asked for more.

[81] Turning to the future, in an ideal world the respondent agreed that he did not want to pay any dividends. However, the company now has a new company secretary and new legal advisers, and he proposed to follow their advice as to what amounted to proper remuneration, how this should be fixed and whether dividends should be paid.

[82] Mr Iain Murray was aged 61 and had been operations manager of the company since October 2000. He had worked at Lasalle as purchasing manager and then manufacturing operations manager. His work for the company was more involved in finance and sales than it had been with Lasalle or CPS. He had worked closely with both the petitioner and the respondent at Lasalle; the respondent had been in charge of the drawing office and the petitioner had been in charge of sales and customer services. He disputed that the petitioner had left Lasalle "on a high" - he had attended a disciplinary hearing at Lasalle perhaps nine months to one year before the petitioner left regarding the petitioner not achieving targets. In about June 1997 the petitioner offered him a job as operations manager with CPS, and he joined CPS. He was a shareholder in CPS although he never held a share certificate, and in hindsight he should not have become a shareholder because this was contrary to his religious belief. He never received any dividend from his shares nor did he attend shareholder meetings at CPS. He was content working at CPS, and the respondent also appeared content, but the petitioner was discontented because he had differences with Graeme Speirs regarding monthly accounts. Mr Murray was aware that the petitioner was making plans to set up the company, and that he had meetings with Roy Summers regarding financing this, but he never saw any business plans and was not involved in the financial aspects. He understood that the petitioner, the respondent and he would have equal shareholdings and would each be directors of the company. However, after the petitioner and he had been made redundant from CPS, there was a meeting between the three men at the petitioner's house at which the petitioner said that he should receive 40% of the shares and that the respondent and Mr Murray should receive 30% each, to reflect the work which he had put into starting up the company. Mr Murray was not happy about this, but he was out of a job and so did not push the matter. The petitioner suggested that Charles Moncur should be a shareholder, but the respondent and Mr Murray would not accede to this, as the idea was that the three shareholders should each be involved working in the company.

[83] The petitioner had been managing director at CPS, but there was no discussion as to who should be managing director of the company. Before Mr Murray left CPS it was clear that all three men would work in the business. He knew of the existence of the restrictive covenant in the petitioner's contract, but the petitioner stated that he had taken legal advice and assured them that there would be no problem as these things were never enforced. When the petitioner did not in fact start working for the company, this placed further responsibility on the respondent and Mr Murray.

[84] With regard to salaries, the initial idea was that all three men would receive the same salary, namely £38,000 per annum. However, at the same meeting at the petitioner's house the petitioner stated that he would receive a salary of £45,000 and that the respondent and Mr Murray would receive £38,000. These figures included an element to pay interest on their personal loans obtained to purchase the shareholdings, and the intention was that the loans would be repaid by means of dividends. There was no discussion regarding increases in salary nor about dividend policy after the loans were repaid.

[85] Mr Murray was named as managing director of the company when it was formed because the petitioner did not want to be identified as such owing to the existence of the restrictive covenant. Almost immediately Mr Murray wanted to resign as a director. Very soon after the company began to trade on 1 October 2000 he did so, and his wife resigned as company secretary. There was a delay in paying for his allotted shareholding because his wife was unhappy about him doing so. He never received any share certificate, and thought that the shares were held by the respondent as his nominee. The petitioner did not work behind the scenes directing the company; he was not directing Mr Murray nor did he appear to be directing the respondent. He did come to the office from time to time but did not want to do so frequently as Mr Speirs might catch him. On odd occasions he would come in with a piece of paper with suggestions as to what they should do, but Mr Murray had infrequent contact with the petitioner between October 2000 and March 2001. He sent infrequent emails to Mr Murray, although he might have sent more to the respondent. He did remember seeing the checklists (No 6/43 of process) prepared by the petitioner, and agreed that references therein to "Iain *" referred to the petitioner. He also remembered the petitioner giving him an action list such as No 6/44 of process, but not on a regular basis and only very early in the company's trading. The petitioner also produced the production sheets for castings (No 6/46 of process) but Mr Murray did not use these and did not find them helpful.

[86] After the petitioner got a job with Shut Off Solutions in early 2001, he would come to the office twice a week on some weeks, but then they might not see him for a month or so. However, his involvement was greater than it had been, he would ask how things were going, and would give his opinion and input.

[87] Mr Murray remembered that the petitioner's restrictive covenant ended in October 2001. The reason that the petitioner did not start working for the company then was that at that stage the company could not afford to pay anybody else. The company only had a turnover of £500,000 and they were eating into the money which they had. He did not think that the question of the petitioner joining the company arose at that time. In 2003 the company borrowed a further £70,000 from the Bank of Scotland in order to take on another employee; Mr Murray did not understand the rationale of this. He was aware that the petitioner and the respondent had discussions about the financial performance of the company, but he did not remember the petitioner coming to the office often after 2001. Mr Murray was not a party to these discussions. After the company moved to an office in Dyce, in about 2003 or 2004, he saw the petitioner looking at the respondent's computer in the office. He was not aware of any ongoing contact between Mr Farren and the petitioner regarding the company's financial affairs.

[88] Before the company was set up the three men had agreed that they should be equally liable for guaranteeing the company's loans. However, as the respondent was the only director of the company, it was he who signed these guarantees; Mr Murray was aware that the respondent was unhappy about this, but he did not hear or see the respondent raising the issue with the petitioner. At the start, the petitioner was very involved in the company and put a lot of work into getting the company off the ground and obtaining finance for it. Since then, he had not done a lot to contribute to the company. Mr Murray did not think that the company's customers were simply inherited from CPS, and the respondent had played a major role in getting the company to where it now is. To begin with the respondent worked very long hours.

[89] Mr Murray sold his shares to the respondent in August 2003 for £15,000, which was what he had originally paid for them. Mr Murray was present when the respondent had a conference call with Seamus Farren to enquire how he could raise the funds to pay for these shares. This enquiry related to all sources of potential funding, not just funding by the company; Mr Farren said that this could be funded by the company declaring a dividend, or by the respondent taking a loan from the company. He said that the company could write off the loan at a later stage. The respondent asked if this was all legal, and if the company could afford this, and Mr Farren said that it could. Mr Murray knew about this because he was present at the discussion, although he could not remember if the discussion was over the phone or took place in the office. He was sure that the respondent had also taken advice from Mr McDougall before he obtained the loan from the company, and Mr Murray was not aware of anything improper or illegal in the transaction. In 2006 Jim Taylor advised the respondent that the loan and interest should be repaid to the company, and Mr Murray confirmed that this was done (7/38 of process).

[90] Mr Murray understood that the respondent had deleted files belonging to CPS, although Mr Murray did not know that this was going to happen. The respondent told Mr Murray that the petitioner had told him to delete the files to cause as much trouble to CPS as possible. The company paid the costs of defending and settling the action by Polymer against the respondent, because all three men agreed that the company would pay for it. The company had also paid for the petitioner's legal expenses arising from the restrictive covenant.

[91] Mr Murray was aware of the pension payments being made by the company to the respondent and to himself in the financial year ending September 2005 and subsequent years. These payments were made on the advice of Mr Taylor and Mr McCann; the respondent made them aware of the share structure of the company, including the shares held by the petitioner, Mr Moncur and Aberdeen City Council, and Mr Taylor and Mr McCann assured the respondent that the company's cash flow was strong enough to enable these payments to be made. Mr Murray was positive that Mr Farren had no involvement at all in any discussions about setting up personal pension plans or pension payments from the company to the respondent or to him. The respondent never sought advice from Mr Farren on this matter in Mr Murray's presence. Mr Murray accepted that the pension payment in the year to September 2005 was a large amount, but Mr McCann and Mr Taylor had said that the company could afford it and that it was a fair reward for the respondent's work, and Mr Murray had no personal view on this matter. He was present when discussions took place in subsequent years between the respondent, Mr Taylor and Mr McCann regarding pension payments. They said that the respondent could have taken more from the company and they were involved in other companies where larger sums had been taken, but the respondent took less than they advised him to take.

[92] The respondent told Mr Murray that he was going to take further loans from the company and that these were short term loans; one was for £10,000 and the other was for £5,000, and they were duly recorded in the company's accounts.

[93] If the petitioner became managing director of the company, Mr Murray would not be prepared to continue working for the company, because he regarded the petitioner as responsible for some of the stress which he and his family had experienced over the lifetime of the company.

[94] In cross-examination Mr Murray agreed that he had never held a share certificate for his shareholding in CPS, and that his shares had been held by the petitioner as his nominee. He agreed that before the company was formed, the three men had worked together for some years, they were a good team, they respected each other and there was mutual trust and confidence. The petitioner first mentioned the idea of setting up the company to Mr Murray in 1999. The whole idea of setting up the company was the petitioner's, and it was his brainchild. If everything had gone smoothly Mr Murray would have been happy to continue working for CPS; in July 2000 Mr Speirs had increased his salary to £32,800 per annum, together with a company car, a 5% contribution into his pension fund, and a bonus of 4% of the profits of CPS before taxation. The petitioner told him not to sign this as he was working on a management buy-out. Mr Murray was aware of the petitioner's restrictive covenant, but the petitioner assured him that it would be no problem and that he had taken legal advice that it would not be upheld. The three men agreed that they would all be directors before the company started trading. However, because his wife was unhappy about his involvement, Mr Murray told her that he would dispose of his shareholding and resign his directorship. The respondent took his place as sole director very soon after the company started. There was no doubt at that stage that the petitioner would be working in the company. Only the petitioner was involved in starting up the company and arranging funding for it. Mr Murray was made redundant from CPS on 8 September 2000, and the three men had a meeting before the company started trading on 1 October 2000. It was at this meeting that the petitioner insisted on a 40% shareholding, and the others agreed to this. Mr Murray did not remember seeing Mr Summers' proposals for salaries (No 6/205 of process) and did not remember whether salary increases were discussed. It was possible that they agreed that salaries would increase in line with inflation; it was certainly agreed that their personal loans should be paid off by dividends, but there was no discussion about dividends after that had been done. Pension payments were discussed and it was agreed that they would be no worse off than they were at CPS, so company contributions would be about 5%. After he sold his shares to the respondent, he understood that his liability for guaranteeing company loans would be shared equally between the petitioner and the respondent. The respondent told him that he was not happy because he could not get the petitioner to agree to this, but Mr Murray was not party to any discussions on this matter between the petitioner and the respondent.

[95] Mr Murray agreed that the company was not in any financial position to afford to take the petitioner on in November 2001, and there was no suggestion that this should happen. However, when the company obtained a further loan of £70,000 in 2003 he thought that this would have been a suitable time for the petitioner to start working for the company. The company could have taken him on instead of the new draftsman. Mr Murray was not aware what information the respondent gave to the petitioner, and Mr Murray himself never gave any financial information to the petitioner. He did not think that the petitioner and the respondent could or should work together again, and it would be better if they did not do so. The mutual trust and respect which had previously existed between them had completely disappeared.

Submissions for the parties
[96] Both parties helpfully provided the court with an outline of their submissions in writing, which form part of the court process, and which they elaborated on in their oral submissions to the court. I took into account both oral and verbal submissions, and seek to summarise these as briefly as possible here for the benefit of the uninvolved reader. I do not rehearse here those parts of the submissions which related to expert valuation evidence and the proper approach to valuation, which is a matter to which I shall turn in due course.

Submissions for the petitioner
[97] Mrs Gillies began by outlining the legislative framework underlying this petition, and then emphasised the importance of the two features in the context and background to which Lord Hoffman referred to in O'Neill v Phillips [1999] WLR 1092 at 1098 et seq. It was necessary to look to the agreement between the three founders which underpinned the company, and if the court was satisfied that the respondent had acted in breach of that agreement or had relied upon his strict legal powers unfairly and contrary to good faith, the petitioner was entitled to a remedy. The test for unfair prejudice was objective not subjective (re Bovey Hotel Ventures Ltd quoted in Palmers Company Law (Vol. 2), paragraph 8.3812; re R A Noble & Sons (Clothing) Ltd [1983] BCLC 273). It was therefore not necessary for the petitioner to show that the respondent acted in the conscious knowledge that this was unfair to the petitioner or acted in bad faith. I was also referred to Wilson v Jaymarke Estates Ltd 2007 SC(HL) 135, [2007] UKHL 29, and in particular to the report of that case when it was before the First Division at 2006 SCCR 510 (particularly at paragraphs [19], [24] and [26]).

[98] Mrs Gillies drew my attention to the factual background to the company, and in particular that the three founders had worked together at CPS, and that the petitioner was responsible for the setting up and formation of the company and for arranging funding for it. It was agreed that the three men would work as a management team together - indeed, the business could easily have been a partnership rather than a company. Each obtained personal loans to purchase their shares, and it was agreed that dividends would be paid as soon as possible to enable these loans to be repaid. Thereafter the shareholders would share in the success of the company by way of dividends. Their salaries would increase in line with inflation (and so the remuneration packages taken by the respondent in 2005, 2006 and 2007 would not have been in the reasonable contemplation of the parties). Neither the respondent nor Mr Murray objected when the petitioner proposed to sell some of his shares to Mr Moncur. Indeed, the respondent accepted that the petitioner needed the money at that time. The business was then a quasi partnership. When the business started trading, both the respondent and Mr Murray accepted that the petitioner would abide by the restrictive covenant and would not work directly for the company for the first year. Mr Speirs had given the respondent the option to return to Polymer if things did not work out; if the petitioner's involvement in the company was so central to the respondent's view of the whole project, the respondent could have returned to Polymer or required an adjustment to parties' shareholdings. There is no suggestion in the evidence that he did so. When the restrictive covenant expired the company was not in a financial position to take on the petitioner. Thereafter the petitioner was not aware that the company was sufficiently profitable to enable him to be taken on by it, because the respondent did not tell him this.

[99] Mrs Gillies invited me to accept the petitioner's evidence. His evidence about his involvement in setting up the company and obtaining funding coincided with and was supported by that of Mr Summers. Even the respondent and Mr Murray accepted that the petitioner continued to visit the company relatively frequently when he was working at Shut Off Solutions. He was made redundant from that job at about the time of the expiry of the restrictive covenant, and it would have been ideal from his viewpoint to join the company then, but this was not a financially viable proposition from the company's point of view. It was clear from Mr Farren's evidence that the respondent did not want to pay a dividend to all the shareholders in 2003 when he wanted to buy Mr Murray's shares. Mr Farren was also quite clear that he did not advise the respondent or the company with regard to the payments into the respondent's pension fund in 2005 and 2006, and that he would not have done so (a) because he did not approve of pensions and (b) because when he later found out about these payments he considered them to be grossly excessive. Mr Farren supported the petitioner's evidence that until the latter part of 2006 the petitioner did not have a clear picture of the company's performance and financial circumstances.

[100] The evidence of Mr Stephen from Aberdeen City Council showed the respondent's conduct of the company's affairs as being both unfair and prejudicial. The purpose of the Council taking a shareholding in the company was to reward it for its risk, but it never received any accounts, it never received any dividends, it was never informed by the respondent of his intention not to pay dividends, and the offer made to the Council to purchase its shares was heavily discounted and did not provide sufficient value. It was indicative of the respondent's strategy to obtain 100% of the issued share capital of the company. Mr Summers' evidence about the petitioner's involvement in the early stages of the company supported the evidence of the petitioner himself, and he estimated that 80% of the work on funding was done by the petitioner, with the remaining 20% being done by the respondent. Any work involved as a result of changing the proposal from a management buy-out to a fresh start business involved only repackaging and did not require starting afresh. The evidence of Mr Moncur also supported that of the petitioner; he bought some of the petitioner's shareholdings in the expectation that he would be rewarded by dividends if the company was profitable, he confirmed that the respondent was aware of the transfer of these shares to him in 2001, and he was of the view that the company's customer base was largely the same as it was when the company started trading. Mr McDougall had a clear recollection of meeting with all three founder members in early 2001, when he knew that the petitioner was not working for the company but the conversation was not guarded and the intention was that all three would be working together. This provided independent evidence of the quasi partnership at that time.

[101] By contrast, the respondent was neither wholly credible nor wholly reliable. He clearly harboured animosity towards the petitioner, and he accepted that he was not happy when he offered to pay the petitioner £170,000 for his shares. It was clear from the letter of 4 October 2000 that Mr Speirs knew that the respondent was going to be managing director of the company; this was consistent with the petitioner's evidence but not with the respondent's. Not only was the respondent's evidence conflicting with that of the petitioner in places, it also conflicted with that of Mr Farren and Mr McDougall, and on occasions with Mr Murray. He played down the important contribution which the petitioner made to the setting up and funding of the company. The petitioner did not dispute that the respondent had worked long hours, but he received remuneration for that work. This did not justify the respondent's view that he was the only person entitled to receive profits from the business to the exclusion of other shareholders. The respondent should not be believed in his evidence that he asked the petitioner to join the company at the expiry of the restrictive covenant. The company's finances would not have permitted this (as Mr Murray and Mr Farren stated in their evidence), the respondent accepted the company was making substantial losses at that time, and the petitioner had no reason not to join the company if it could have afforded to take him on, because he was then redundant.

[102] The respondent's position regarding the financial information which he gave to the petitioner regarding the company was that he gave this honestly and did not intentionally mislead the petitioner. However, it was clear that the figures given to the petitioner did not show the company's true profitability in 2005 and 2006 nor did they show the extent of the pension and salary being paid to the respondent. The respondent made much of the petitioner's failure to respond to Mr McDougall's emails regarding guaranteeing liabilities, and described this as being the turning point in his relationship with the petitioner, but he was being over dramatic in stating this, and accepted that he did not convey this view to the petitioner. His estimate that the petitioner's contribution to the company was less than 2% clearly understated the petitioner's contribution in the first few months. The respondent's excuse that he took the loan of £20,000 from the company in order to purchase Mr Murray's shares in order to incentivise himself and so took account of the company's interests should not be accepted - it was quite clear that he was acting in his own interests. The costs of litigation between Polymer and the respondent were clearly for the respondent's own benefit and their payment by the company was not in the interests of the shareholders as a whole. Mr Murray's evidence was vague and unreliable in several respects. In his written statement, which he adopted in evidence, he claimed that he was surprised to be made a director of the company, but in evidence he agreed that all three were to be directors. His evidence about his shareholding and his directorship was confused. However, he did state that the respondent felt that he had all the liabilities and did all the work, which was the underlying motivation for the way on which the respondent conducted the affairs of the company.

[103] Mrs Gillies submitted that the evidence supported the proposition that the respondent did not give the petitioner the information to which he was entitled regarding the affairs of the company, and particularly regarding the company's financial ability to take on the petitioner. The respondent did nothing to alert the petitioner to the company's increased profitability, nor to the extent of his own remuneration package. This information was not publicly available and the respondent accepted that the petitioner could not reasonably have foreseen the levels of the respondent's salary and pension payments. The respondent's depriving the petitioner of his legitimate expectation of involvement in the company was sufficient to amount to unfair conduct prejudicial to the petitioner - Re Saul v Harrison & Sons plc [1995] 1 BCLC 14. The respondent might argue that the petitioner changed his position about the restrictive covenant and did not come to work for the company; even if the petitioner could be criticised for this, which Mrs Gillies disputed, there was no requirement for the petitioner to come to court with clean hands (in re London School of Electronics Ltd [1996] 1 Ch. 211 per Nourse J at 222.) The facts of the present case were quite different from those in R A Noble & Sons (Clothing) Ltd, in which Nourse J held that the petitioner's disinterest in the company was a decisive factor which might cause a reasonable bystander to say that he had partly brought the majority shareholder's conduct upon himself: in the present case, the evidence did not support the view that the petitioner was disinterested, and his position was caused by the respondent's unfairly prejudicial conduct.

[104] The use of the company's funds to enable the respondent to purchase Mr Murray's shares in 2003 was not only illegal but also both unfair and prejudicial to the petitioner. The company's finances were in a fragile state at that time; it had recently obtained a further bank loan for £75,000 and the loan to the respondent to enable him to purchase Mr Murray's shares could have no possible benefit to the company or to the other shareholders; the only benefit was to the respondent, who became the majority shareholder as a result. The fact that this was a single act would not of itself prevent the court from holding this to be conduct of the company's affairs in a manner unfairly prejudicial to the interests of the petitioner - it was an important act and had long term consequences (re March Day Group plc [1998] BCC 800 at 816E). The fact that this loan, and subsequent loans from the company to the respondent, have since been repaid is irrelevant - re Kenyon Swansea Ltd [1987] BCLC 514 at 521B. Furthermore, the unauthorised and excessive payments of salary and pension to the respondent out of the company's funds constituted unfairly prejudicial conduct to the other shareholders - Wilson v Jaymarke (supra); Re a company (No 004415 of 1996) [1997] 1 BCLC 479 at 481 and 487. The facts of the present case were analogous to those of Grace v Biagioli [2005] EWCA civ 1222, [2006] BCC 85, in which failure to pay a dividend and distribution of profits under the guise of management expenses was held to constitute unfair prejudice to a minority shareholder. The question whether the respondent's remuneration package was excessive or not was one which the court had to determine when deciding if there had been unfairly prejudicial conduct - Irvine v Irvine (No 1) [2006] EWHC 406 (Ch), [2007] 1 BCLC 349 at paragraph [267]. Against the background of the petitioner's continuing outstanding personal loan and the fact that no dividend had ever been declared, Mrs Gillies submitted that this was clearly unfairly prejudicial to the petitioner.

[105] The primary remedy which the petitioner sought was an order against the respondent to utilise his majority shareholding in the company to have the petitioner appointed as a director of the company. She submitted that it would also be open to the court to order that the respondent's shareholding should be reduced by 30,000 shares, which would have the effect that each of the respondent and the petitioner would hold 30,000 shares, Mr Moncur would hold 10,000 shares and Aberdeen City Council would hold 5,000 shares. This would avoid any exercise in valuation of the shares. The company could then recover any excess remuneration paid to the respondent. However, Mrs Gillies accepted that the petitioner and the respondent had lost all trust and confidence in each other, and that both the respondent and Mr Murray had stated in evidence that they would resign from the company if the court ordered that the petitioner should become a director. The alternative remedy was that the court should order either the company or the respondent to purchase the petitioner's shareholding at a fair price - a fair price being the value which the shares would have had at the date of the petition if there had been no oppression (Scottish Co-Operative Wholesale Society Ltd v Meyer [1959] AC 324 per Lord Denning at 369).

Submissions for the respondent
[106] Counsel for the respondent first addressed the petitioner's averments in Statement 8.1 of the Petition (which are summarised briefly at (i) in paragraph [5] above) to the effect that the petitioner has been excluded from the management of the company. He referred me to the six principles identified in Grace v Biagioli (supra) at paragraph [61]. The respondent had agreed to join the company on the basis that all three of the founders would work full-time for it; the petitioner did not work full-time for it, and has never done so, and it is therefore not fair of the petitioner to hold the respondent to an agreement which he maintains provided for his inclusion in the management of the company. The point may be formulated in various ways - that in the circumstances which actually transpired, nothing has been done in relation to the general management of the company's business which affects the conscience of the respondent, or that the respondent did not permanently and unconditionally commit himself to involve or consult the petitioner in relation to the affairs of the company come what may, or that it was not fairly within the respondent's contemplation when he agreed to involve himself in the company that the petitioner would do what he subsequently did, or that the petitioner made a constructive election to sever his connection with the company and so "partly brought it upon himself" (in re Bird Precision Bellows Ltd [1984] 1 Ch. 419 at 431; re R A Noble & Sons (Clothing) Ltd (supra), at page 292).

[107] Counsel accepted that when the respondent realised that petitioner was not going to work for the company he did not tell him that the deal was at an end, but it was because of this that he decided not to involve the petitioner. This was not a case of the petitioner turning up at the company's office and being refused information; whenever he asked for information it was provided. This was not a case of a shareholder actively seeking involvement in the affairs of a company and being refused; the petitioner did not show any real interest in the company for years. He "faded away" and the respondent allowed him to do so. The petitioner grossly exaggerated his assistance to the company in the first few months of its trading - his involvement was minimal. In any event, the agreement was that the petitioner would work for the company full time, from the moment it started trading, and he did not do so. Counsel accepted that the court was entitled to take account of the fact that the respondent did not raise this alleged breach with the petitioner, but the petitioner's breach was nonetheless a factor to be taken into account by the court. Moreover, on the petitioner's own evidence he never asked to join the company's management, and every piece of information which he sought he received - how can one be shut out of something to which one has never sought access? The petitioner accepted in evidence that he has never asked for a position as part of the management of the company, and this concession is fatal to this aspect of the claim. There was no basis in the evidence for the suggestion that the respondent had misled the petitioner - the respondent gave the petitioner all the information which the petitioner sought. No fair notice had been given in the pleadings of the suggestion that the respondent had somehow been dishonest towards the petitioner or misled him. Any suggestion to this effect should be ignored.

[108] Turning to the averments in statement 8.2 of the Petition, the respondent had never denied that he obtained a loan of £20,000 from the company, which was then written off by the company, and that he used this loan to purchase Mr Murray's shares. He was unaware that it was contrary to the provisions of the Companies Acts for such a loan to be made, and he was not advised to the contrary by Mr Farren or Mr McDougall. He repaid the sum, with interest, as soon as he was told that the loan was illegal. There was no restriction on shareholders selling or purchasing their shareholdings, and the respondent bought Mr Murray's shares so that he could be incentivised to make the company do well, which was a legitimate purpose. Furthermore, counsel submitted that there were two separate (although linked) transactions - first, the respondent borrowed the money from the company, and second, he used it to purchase Mr Murray's shares. What the petitioner alleges is prejudicial to him is the purchase of the shares - but that was not prohibited by the founders' agreement and furthermore purchase of these shares did not amount to conduct of the company's affairs. (re Unisoft Group Ltd (No. 3) [1994] 1 BCLC 609; re Leeds United Holdings plc [1996] 2 BCLC 545 at 559/560). On Mr Farren's evidence, the respondent never sought to conceal either the loan or the purchase of the shares, and the loan was immediately recorded in the company's books. The fact that the respondent had repaid the loan with interest was relevant to the question of remedy. The normal remedy for such a situation would be for the court to order repayment with interest; that has already happened in this case. If there was any unfair prejudice, it has been cured by repayment to the company of principal and interest.

[109] There was nothing in the averment at statement 8.3 of the Petition that the company met the respondent's legal and administrative costs in relation to the action against him by Polymer. In cross-examination the petitioner eventually accepted that he had agreed with the respondent and Mr Murray that the company would meet these costs, just as it had met his own legal costs in relation to the restrictive covenant issue.

[110] Turning to the averments in statement 8.4 of the petition regarding allegedly disproportionate and excessive remuneration paid to the respondent in the years ending 2005 and 2006, counsel submitted that these payments were made on the advice of independent advisers to whom full disclosure of the company's shareholdings and finances was made. Mr Farren's evidence that the amount of any pension payments to the respondent was not discussed with him should not be accepted. There was no evidence to support the allegation that the accounts of the company for the year ended September 2005 were incorrect and misleading - the accounts were prepared by the company's accountants, and in any event the petitioner's position was that he never saw them. He could not therefore have been misled by them. The suggestion that these payments were made when the company's finances were still vulnerable was not supported by the evidence, and is in any event inconsistent with the petitioner's argument that had these payments not been made the sums available for the declaration of dividends would have been £297,628.

[111] There was no evidence about an agreed salary, nor anything by which the court could test whether the respondent's remuneration was excessive. The petitioner's evidence was that each of the three founders would have the same salaries as they had received at CPS, with a supplement to meet the interest payments on the loans taken to buy their shares, and subsequent increases limited to inflation only. The respondent's evidence was that initial salaries were discussed on the basis that the three founders would each be working full-time for the company, and there were no discussions about inflation only increases. Neither he nor Mr Murray saw the business plan, and Mr Murray could recall no discussions about inflation only salary increases. By his failure to work for the company and his receipt of remuneration from other employment since the company started trading, the petitioner has received a significant financial benefit by his failure to implement the founders' agreement.

[112] Counsel submitted that the appropriate test for the court to apply in considering whether remuneration was excessive was to be found in Irvine v Irvine (No 1) at paragraphs [267] to [270]. The test stated there is whether, applying "objective commercial criteria", the remuneration was within the bracket that executives carrying the sort of responsibility and discharging the sort of duties that the respondent was would expect to receive. Counsel accepted that the respondent's remuneration package was outwith that bracket and excessive, but the excess amounted only to £109,000, on the basis of Mr Anderson's expert evidence (No 7/51 of process at paragraph 2.6) which Mr Webster, the petitioner's expert valuer, could not challenge. The appropriate remedy in this regard was for the court to make an order for the respondent to pay this excess back to the company. If the court took the view that the respondent acted foolishly and not maliciously in paying himself this excess, it might be proper to reach the conclusion that any unfair prejudice to the petitioner would not continue in the future given that the respondent stated in evidence that he would take the advice of the company's present secretaries and present accountants as to remuneration.

[113] With regard to the respondent's failure to comply with the requirements of the Companies Act by ensuring that an annual general meeting was held in each year and to lay before the company in general meeting copies of the company's annual accounts and reports on the accounts, counsel urged me to take the same view as that taken in Irvine v Irvine (No 1) at paragraph [346], ie that these matters, reprehensible though they are, cannot fairly be said to have caused the petitioner any material prejudice, because if the various statutory requirements had been observed and the relevant meetings held, the respondent could have used his position as majority shareholder to vote in his own interests and to ensure that the divisible profits of the company were dealt with, whether as remuneration or as a dividend, in the way that he wished.

[114] Turning to the averments about the company car in statement 8.5 of the Petition, there was no merit in this allegation at all. The petitioner accepted in cross-examination that he knew before the proof began that there was no truth in the allegation that the company had bought a car for the respondent, and Mr Farren stated that the cost of the leasing arrangement was not extravagant.

[115] With regard to the averment in statement 8.6 of the Petition, the respondent accepts and has always accepted that he obtained these loans from the company but he was unaware that he was doing anything wrong and as soon as this was brought to his attention he repaid the loans. No remedy in this regard was necessary.

[116] Similarly there was no merit in the allegation at statement 8.7 of the Petition regarding the respondent's alleged intention to issue additional share capital of £400,000 in about May 2007 and a further £600,000 in about November 2007. The petitioner accepted in cross-examination that he knew that these averments were in fact untrue but had not withdrawn them, and the respondent stated that no additional share capital had been issued. I was referred to re Astec (BSR) plc [1998] 2 BCLC 556 at 577/8 in support of the proposition that there must be a definite proposal by or on behalf of the company which can arguably be characterised as unfairly prejudicial for the purpose of section 459, and that even if a petitioner has legitimate concerns about the future these are not enough by themselves to found a section 459 petition. There was no definite proposal or final decision in this regard.

[117] Counsel submitted that the company was not at any material time being operated as a quasi partnership within the description of such an entity given by Lord Wilberforce in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 at 379. Although the three founder members already knew, trusted and respected each other, these elements were no more prominent or significant in this case than they would be in the ordinary run of cases where a private company is formed. Their prior relationship was not one of partnership, but was partly social and partly because they were co-employees and shareholders in CPS. Although there was an agreement that each of the three founders would participate, that agreement was almost immediately departed from by the petitioner's failure to work for the company and by his sale of part of his shareholding to Mr Moncur who was never going to work for the company. Thereafter, there was no continuing agreement that all shareholders would be involved in the management of the company. The status of quasi partnership is not fixed once and for all; companies which once had that status can lose it - re A Company (No 005134 of 1986) ex parte Harries [1989] BCLC 383 at 398/9. Moreover, there were no relevant restrictions on the transfer of shares in the company. For these reasons the respondent maintained that this was never a quasi partnership; in any event, it had ceased to be a quasi partnership before any of the events complained of in the Petition.

[118] Counsel submitted that the primary remedy sought by the petitioner, namely an order that he should be appointed to the board of the company, was unworkable - there was nothing that the court could do to prevent the respondent from calling a shareholders' meeting and voting the petitioner off the board. Counsel had found no authority in which the court had granted such a remedy. The only respect in which it might possibly be argued that the respondent has conducted the affairs of the company unfairly to the prejudice of the petitioner is in his taking excessive remuneration. There was no reason to suppose that he would take excessive remuneration in the future. The appropriate remedy would be an order for the respondent to repay to the company such sum as the court found to be excessive remuneration. Failing that, the remedy was an order for the purchase of the petitioner's shares, on the basis of a valuation to which I shall return in due course.

 

Discussion
[119] Some of the evidence in this case was not in dispute, and I formed the impression that generally the witnesses were doing their best to be truthful. There was an element of "wishful thinking" in the evidence of each of the three founders; each gave evidence about what they assumed would be happening or what they expected to happen, but it appeared to me that their expectations or assumptions were not always founded on discussions or agreements. However, there were some clear conflicts between the evidence of the petitioner and that of the respondent. Where such conflicts occurred, I preferred the evidence of the petitioner to that of the respondent. The petitioner gave his evidence in a clear, careful and restrained fashion. He was prepared to give credit to the respondent for his expertise in drawing and designs, and for his hard work and the long hours which he put into building up the company. I did not form the impression that he was exaggerating his evidence nor that he was motivated by malice towards the respondent. His evidence found support in the evidence of Mr Farren and Mr Summers, both of whom were independent professional advisers who had no interest in lying and whose evidence I found to be credible and reliable. The petitioner's evidence also found support in much of the documentary evidence. By contrast, it was clear that the respondent bore ill-will towards the petitioner. I formed the view that the respondent genuinely believed that the petitioner had let him down, and that he had lost all trust and confidence in the petitioner. I did not find his evidence to be wholly credible or reliable. For example, he maintained that the petitioner's contribution towards the establishing and initial funding of the company was minimal; I am persuaded that the petitioner did much more for the company in its establishment and early stages than the respondent was prepared to concede. While it is apparent from the evidence that the company has flourished largely as a result of the ability and hard work of the respondent, this (together with the respondent's loss of trust and animosity towards the petitioner) has caused him to overlook the fact that there is a distinction in law between himself and the company. His evidence conflicted in important respects not only with that of the petitioner, but with that of all of the other witnesses including Mr Murray.

[120] On the basis of the evidence, I am satisfied that the relationship between the three founders of the company as at the date of its formation and as at the date of its starting trading was one of unusual trust and good faith. The three men had worked together for many years, first at Lasalle and then at CPS. Their relationships had not been the subject of detailed written agreements because of this high level of trust. The respondent's and Mr Murray's shareholdings in CPS were held by the petitioner as their nominee, but it appears that no share certificates were ever actually issued nor was any deed of trust executed at that time. When the petitioner began to develop the idea of forming the company in the latter part of 1999, there were discussions between the three men about the plans, but these discussions were never reduced to a formal written agreement. When the petitioner and Mr Murray lost their jobs with CPS in 2000, the respondent agreed (despite initial doubts) to join them in the company, although he had been offered an improved remuneration package by Mr Speirs. Again, there was no formal written shareholders' agreement, and the respondent held the others' shareholdings as their nominee.

[121] There had been initial discussions between the three men during which it had been suggested that they would each hold equal one-third shareholdings in the company. However, I accept the evidence of the petitioner to the effect that by the time that the company was incorporated, and certainly before it started trading, it had been agreed that the petitioner would own 40% of the issued share capital of the company and that the respondent and Iain Murray would each own 30%. This was to reflect the fact that the company was the petitioner's "brainchild" and he had spent a considerable time and effort in establishing and arranging funding for it. The intention was that each of the three men would fulfil broadly the same roles as they had fulfilled with CPS. The petitioner was managing director of CPS, the respondent was responsible for engineering design and Mr Murray was responsible for operations and manufacturing. However, all three men were aware of the restrictive covenant in the petitioner's contract with CPS. I am satisfied on the evidence that although initially it had been hoped that this restrictive covenant would be ineffective, by the time that the company was incorporated, it had been agreed that it was safest to avoid a possible breach of the restrictive covenant, and this was why Mr Murray was named as managing director of the company. Although the respondent stated in evidence that when he took the decision to leave CPS the petitioner had assured him that the restrictive covenant would not be an issue, and although Mr Murray gave evidence broadly to the same effect, they gave no explanation in evidence as to why Mr Murray had been made managing director of the company when it was incorporated on 20 August 2000, about three weeks before the petitioner and Mr Murray found their employment with CPS terminated, and rather longer than this before the respondent left CPS. The only explanation for making Mr Murray the sole director of the company rather than the petitioner was the existence of the restrictive covenant in the petitioner's contract. Certainly neither the respondent nor Mr Murray walked away from the deal when it became clear that the petitioner would not be starting to work for the company immediately because of the restrictive covenant. If the respondent considered that the petitioner's full-time working with the company from the outset was an essential element of the founders' agreement, I should have expected him to have told the petitioner that he was not prepared to proceed with the project unless the petitioner worked full-time for the company from the outset, or to have accepted Mr Speirs' offer of the opportunity to return to work for Polymer at an enhanced salary. Moreover, if the respondent took the view that only those working full-time for the company should have shareholdings in it, it might be expected that he would have said to the petitioner that if the petitioner was not going to work for the company full-time he should have a smaller shareholding (or indeed none at all). The respondent accepted in cross-examination that he did none of these things.

[122] I am satisfied on the basis of the evidence that there was indeed a founders' agreement between the three founders at the date of the incorporation of the company, which still persisted at the date on which it started trading, albeit that this agreement was never reduced to writing. The terms of that agreement were that the petitioner should subscribe for 40,000 shares in the company, and that each of the respondent and Mr Murray should subscribe for 30,000 shares. Each would pay for these shareholdings by means of a personal bank loan, which would be repaid by means of dividends declared by the company as soon as it was in a strong enough financial position to do so. On the basis that all three men would be working full-time for the company, it was agreed that they would receive broadly the same remuneration as they received at CPS, but with an uplift to take account of the interest on their personal loans. I accept Mr Murray's evidence that the parties agreed that the petitioner would receive a salary of £45,000 and that each of the respondent and Mr Murray would receive £38,000, and that there was no discussion about increases in salary or dividend policy after the loans were repaid. However, as I have indicated, the original idea that all three would work full-time for the company was superseded by the time that it was incorporated because of the advice which the petitioner had received about the restrictive covenant. All three parties envisaged that the petitioner would join the company and work full-time for it when he was free to do so.

[123] Of course the petitioner never joined the company, never worked full-time for it and never received a salary from it. I am satisfied that the reason that he did not do so in the period until October 2001 was the advice that he had received about the restrictive covenant. However in the first few months after the company began trading the petitioner continued to involve himself to a material extent in the affairs of the company. After the restrictive covenant ceased to have effect in October 2001, the finances of the company were not sufficiently strong to enable it to afford to pay anybody else. Mr Murray accepted that the company was not in any financial position to afford to take the petitioner on in November 2001, and there was no suggestion that this should happen. The respondent stated that at this time the company was doing badly and had lost about £140,000 in its first year of trading. I did not accept his evidence that he and the petitioner discussed whether the company could support the petitioner's salary and the respondent suggested that they should each accept a low salary; both the petitioner and Mr Murray stated that no such discussion took place, and Mr Farren confirmed that the company was not in a financial position to employ the petitioner at this time.

[124] I accept the evidence of Mr Farren that the company was not financially strong enough to employ the petitioner until 2004. The additional loan obtained from the bank in about January 2003 was obtained to allow the company to continue trading; until it obtained this loan it was insolvent. Although part of this money was used to employ a new draftsman, the company was not in a financial position to employ the petitioner at a salary which would reasonably reflect his experience and abilities at that time.

[125] In the course of the year to September 2004 the company's fortunes improved, and I am satisfied that the company could have afforded to employ the petitioner at a reasonable salary towards the end of the calendar year 2004, that is in the early part of the company's financial year ending September 2005. However, I accept the evidence of the petitioner (supported by that of Mr Farren and, to some extent, by that of Mr Moncur) that although the petitioner remained keen to join the company when it could afford to allow him to do so, the financial information which the respondent gave the petitioner continued to indicate that the company was not sufficiently profitable to allow this to be done. It is possible that the respondent did not intend to mislead the petitioner in this regard, and I accept that the petitioner did not request sight of the full company accounts or management accounts, nor did he explicitly ask the respondent if the company was sufficiently profitable to enable him to join it. However, the respondent must have known that the information about the company's financial position to which the petitioner had access did not give a full or true picture of the company's underlying profitability. The respondent accepted as much in cross-examination. It might have been prudent for the petitioner to have requested sight of the full company's accounts; however, standing the basis of mutual trust and confidence on which the company was founded, and standing the fact that all of the information which the petitioner received about the company's finances came from the respondent, I do not consider that the petitioner can be blamed for expecting the respondent to disclose that the company's finances had improved significantly in the course of the year ending September 2005. On the basis of Mr Anderson's evidence, the respondent's total remuneration from the company in the financial years ending 30 September 2001 and 2002 was £50,000 per annum; in the year to 2003 this increased to £56,000, and in 2004 it increased to £66,000. In 2005 it increased to £229,000 and in 2006 to £307,000. I do not consider that the petitioner can be faulted for assuming, on the basis of the relationship between the parties, that the respondent would have told him that his remuneration package had increased so markedly in the course of the year to September 2005. If the petitioner had known the true state of the company's finances in 2005, I consider that he would have sought to join the company and work for it full-time as soon as he realised that it could afford to employ him. This was the effect of the evidence of the petitioner himself, and it received support from the evidence of Mr Farren and, so far as it went, the evidence of Mr Moncur. I am satisfied that the petitioner did not know about the true state of the company's finances until about September or October 2006.

[126] This state of affairs arose because of the respondent's perception that he had been let down by the petitioner, that the respondent was the only one of the three founders who had granted written personal guarantees in respect of the company's loans, and that the improving fortunes of the company were entirely attributable to his efforts and abilities and that other shareholders did not deserve to share in the company's profits. It was this perception which caused the respondent not to provide the petitioner with the company's full accounts. It was this perception which caused him to decide that the company would not declare any dividends. It was this perception which caused him not to call any annual general meetings of the company and to refrain from showing the accounts to any of the other shareholders. Indeed, he appears to have lost sight of the distinction in law between the company and himself, and was not aware of any duty on him to avoid a conflict of interest between his own interest and that of the company as a whole. This led to a confusion in some of his evidence - for example, he was unable to say whether the advice which was obtained from Mr Farren and Mr McDougall (and indeed other advisers such as Mr Taylor and Mr McCann) was obtained by the company or by the respondent as an individual. He conducted the affairs of the company as if they were his own affairs, and when deciding how much he should pay himself by way of salary, or how much should be paid into his pension fund, he did not have any regard to the interests of the other shareholders. Despite the initial agreement between the three founders that the personal loans which each had taken out in order to purchase shares in the company would be repaid by way of dividends as soon as the company was able to do so, he decided that no dividends would be paid. He accepted in evidence that he did not tell any of the other shareholders of this decision. He borrowed money from the company in contravention of sections 330 and 342 of the Companies Act 1985, and used the money which he had borrowed to purchase Iain Murray's shares, thereby transforming his minority shareholding into a majority shareholding. His explanation for doing this, namely that he needed to be "incentivised" to run the company profitably, and so the decision was in the interests of the shareholders as a whole, was not one which I found persuasive. There was little, if any, benefit to the other shareholders in the company in the granting of this loan to the respondent for this purpose, at a time when the company's finances and cash reserves were still not very strong, and in the same year that the company had required to obtain an additional bank loan of £70,000 in order to become solvent. I consider that the respondent had regard to his own interests in obtaining this loan for this purpose, but did not have regard to the interests of any other shareholders. The loan was shortly thereafter written off, and the respondent accepted that it had never been his intention to repay it to the company. He has of course, on advice, since repaid all loans which he obtained from the company, together with interest on them. However, the obtaining of this loan in 2003 for the purpose for which it was obtained and its subsequent writing-off give a clear indication of the respondent's attitude towards the conduct of the company's affairs.

[127] Of course, once the respondent had acquired a majority shareholding in the company, criticisms about the company's dividend policy, or the failure to call shareholder meetings, or decisions as to the level of the respondent's remuneration package, may be said to be of a technical nature, because the respondent was in a position to impose his will on the other shareholders. Indeed, this was one of the arguments advanced by the respondent's counsel in submissions. While it may be factually correct, nonetheless all these factors appear to me relevant in reaching an objective assessment of whether the manner in which the respondent conducted the company's affairs was unfairly prejudicial to the interests of the petitioner (and of the other minority shareholders).

[128] I have reached the view that the respondent has indeed conducted the company's affairs in a manner which is unfairly prejudicial to the interests of the petitioner and of the other minority shareholders, and that the petitioner is accordingly entitled to an order in terms of section 459 and 461 of the Companies Act 1985. Although the petitioner sets out (quite properly) in the Petition the various specific respects in which it is maintained that the respondent has conducted the affairs of the company in a manner which is unfairly prejudicial to the interests of the petitioner, and the respondent has responded to these in turn, 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. However, as I have been addressed on each of these complaints in turn, it is appropriate that I should give my views on each of them. I do so as follows.

[129] Statement 8.1 - Exclusion of the petitioner from the management of the company. I consider that the respondent did indeed exclude the petitioner from the management of the company. He did so not by giving the petitioner false accounts, but by failing to disclose the true state of the company's finances. The petitioner relied on the respondent to give him a full picture of how the company was performing. He did so on the basis of the mutual trust which underpinned the formation of the company. The abbreviated accounts to which he had access, and the information provided to him by the respondent, did not give a full picture of the company's profitability. No doubt it would have been prudent for the petitioner to have requested sight of the full annual accounts, but as indicated above, I do not consider that he could reasonably have anticipated that the respondent would increase his remuneration package so markedly in 2005 and 2006. Against the background that the founders had agreed that dividends would be paid as soon as the company was in a position to pay them, to enable personal loans to be paid off, I consider that the petitioner acted reasonably in inferring from the absence of any dividend payments that the company was still not in a strong financial position. The respondent's failure to keep the petitioner fully and accurately informed of the company's trading performance, his purchase of Mr Murray's shareholding using funds obtained as a loan from the company which he subsequently wrote off, his failure to call a shareholder's meeting and his failure to table accounts at any such meeting are all indicative of the respondent's decision to exclude the petitioner from the management of the company. I am satisfied that the company would have benefited from the skills and experience of the petitioner if he had joined the company, and that he would have joined the company if he had known that it could afford to take him on at a salary commensurate with his skills and experience. The respondent's actings in this regard were contrary to the founders' agreement and were unfairly prejudicial to the interests of the petitioner and the other shareholders in the company.

[130] Statement 8.2 - Taking a loan from the company in 2003 in order to acquire a majority shareholding in the company. This was clearly contrary to the provisions of sections 151 and 330 of the Companies Act 1985. It was in the interests of the respondent, who stated in evidence that he could not have afforded to have purchased these shares from his own resources without obtaining funding from the company. It enabled him to increase his shareholding in the company from almost 30% of the issued shared capital to almost 60% of the issued share capital, and so to control the company. He obtained the loan without any intention of repaying it, and thereafter caused the company to write it off. The company's financial circumstances in 2003 were not such that any reasonable person could have regarded this loan and its subsequent writing off as being in the company's interests. It had been insolvent until it obtained a further loan of £70,000 earlier that year, its cash reserves were low, and the state of its net current assets was not strong. I am not persuaded that the respondent obtained this loan in order to "incentivise" himself and in doing so had regard to the interests of the company. Viewed objectively, this was conduct of the company's affairs which was unfairly prejudicial to the interests of the petitioner and the other shareholders, and only in the interests of the respondent himself. He has repaid this loan, together with interest, but only after the petitioner had discovered it and his solicitors made representations about it.

[131] Statement 8.3 - Payment of the costs of litigation between Polymer Holdings and the respondent. This might have been objectionable were it not for the fact that in his evidence the petitioner accepted in cross-examination that he had agreed that the company should meet these costs. The company had already met the petitioner's costs in relation to his restrictive covenant. Standing the petitioner's acceptance that all three founders agreed to this expenditure being met by the company, whatever might be the position regarding other shareholders, I do not consider that the petitioner can found on this aspect of the respondent's conduct of the company's affairs.

[132] Statement 8.4 - Payments by the company to the respondent as remuneration. Counsel for the respondent did not dispute that the amount of remuneration taken by the respondent after the financial year ending 30 September 2004 was excessive. This concession was in my view well made. The respondent's remuneration rose from £50,000 per annum in the year to 2001 to £66,000 per annum in the year to 2004. The increases in the following two years to £229,000 and £307,000 cannot be justified. I shall turn to the amount of the excess later in this Opinion; for present purposes it is sufficient to note that, applying objective commercial criteria, the respondent's remuneration package was outwith the bracket that executives carrying the sort of responsibility and discharging the sort of duties that the respondent was would expect to receive.

[133] Statement 8.5 - The company car. There was no evidence to support the averments that the provision of the (leased) vehicle for the use of the respondent was excessive and disproportionate, nor that the respondent received a substantial motor vehicle allowance. I am not persuaded that there is any force in this complaint.

[134] Statement 8.6 - A further loan from the company to the respondent in the year ending September 2006. Again, I see no possible benefit to the company as a result of this transaction, which was also in contravention of section 330 of the Companies Act 1985. It was of benefit only to the respondent, and I consider that it was unfairly prejudicial to the petitioner and to the other shareholders of the company.

[135] Statement 8.7 - Intention to issue additional share capital in 2007. I agree with the submissions for the respondent that there is no merit in this allegation. There was no definite proposal or final decision in this regard. There was no evidence to support the averment that the respondent has issued additional share capital for £400,000 in about May 2007, nor was there any evidence of a definite proposal to issue a further £600,000 share capital in November 2007. The evidence does not support these allegations.

[136] In light of these findings, I am satisfied that the company's affairs have been conducted in a manner which is unfairly prejudicial to the interests of the petitioner and of the other shareholders of the company (apart from the respondent himself), and that this Petition is well-founded. Before turning to the question of what order should be granted to give relief to the petitioner, it is appropriate that I should deal with the question whether the company was a quasi partnership at the time at which the conduct in question occurred. Put shortly, I consider that when the company was founded and when it began trading it was indeed a quasi partnership, applying the considerations enunciated by Lord Wilberforce in Ebrahimi at page 379. When the company was incorporated, the three founders were friends and had worked together as a team for many years. They had each been shareholders in CPS, and their establishment of the company involved mutual confidence, and a greater degree of trust between themselves than would ordinarily be the case between shareholders of a company. It was also the understanding that all, or some, of the shareholders should participate in the conduct of the business. In light of the petitioner's restrictive covenant, it was understood that he would not be openly and fully involved to begin with, but he would become involved as soon as the company's finances permitted.

[137] However, within a few months after the incorporation of the company I consider that it ceased to have the characteristics of a quasi partnership, as a result of the sale by the petitioner of one-quarter of his shareholding to Charles Moncur and thereafter the acquisition of 5,000 shares by Aberdeen City Council. Once these two minority shareholders became involved in the company, I do not consider that it could properly be described as a quasi partnership. There was no suggestion that the terms of the founders' agreement had been explained to, or agreed by, either Mr Moncur or Aberdeen City Council. They held their shareholdings on a normal commercial basis, in the expectation that they would share in the profits of the company by means of dividend payments. I therefore consider that counsel for the respondent was correct in his submission that the company had ceased to be a quasi partnership before any of the events complained of in the Petition.

[138] I turn to the question of remedy. The primary remedy sought by the petitioner is that he should be appointed as managing director of the company. However, as Mrs Gillies recognised in her submissions for the petitioner, "it is certainly difficult to entertain a peaceful reunion of the parties following the end of these proceedings". Both the respondent and Mr Murray stated in evidence that they would resign from the company if the petitioner was appointed as a director. The petitioner himself accepted that if they worked together it would not be a good working environment and there would some acrimony and resentment, but he believed that the company could move forward in that situation. I regard this as unduly optimistic. I do not consider that an order requiring the petitioner to be appointed as a director of the company would be a sensible or practicable remedy. It would be impossible to prevent the company from convening a general meeting at which the respondent could exercise his majority interest in the company to remove the petitioner. I do not consider that the subsidiary remedies suggested on behalf of the petitioner, such as reduction of the respondent's shareholding and subsequent recovery by the company of excess remuneration paid to the respondent are appropriate in the circumstances, nor are they specifically sought in the prayer of the petition. I am satisfied that the alternative remedy, namely an order that either the respondent or the company should buy the petitioner's shareholding, is the only practicable and appropriate remedy in this case. I now turn to the question of the basis of valuation of the petitioner's shareholding.

 

Valuation
[139] Expert evidence was led on behalf of each of the parties as to the value of the petitioner's interest in the company. On behalf of the petitioner, Mr Iain Webster gave evidence. He was a chartered accountant and head of corporate finance for Johnston Carmichael, Chartered Accountants, Edinburgh. He prepared two reports, the first dated 29 April 2008 (No 6/21 of process) and the second being a supplementary report dated 3 October 2008 (No 6/220 of process). Mr Webster's qualifications and experience are set out in Appendix 1 to the first of these reports. For the respondent, Mr Robert Anderson gave evidence. He too was a chartered accountant and senior partner of Anderson Anderson & Brown LLP, Chartered Accountants, Aberdeen. He provided three reports, the first dated 31 May 2007 (No 7/3 of process), the second dated 24 April 2008 (No 7/4 of process) and the third dated 6 October 2008 (No 7/51 of process). As his qualifications and experience are not set out in documentary form, it is appropriate to note that he had practised as a chartered accountant since qualifying in 1972; he dealt mainly with audits and share valuations and was personally responsible for advising on the majority of share valuations relating to matrimonial disputes which were referred to his firm. About 50% of his firm's work related to the oil sector of the economy, and his own practice involved approximately the same percentage involved in the oil sector. As brought out in their final reports, Mr Webster valued the petitioner's interest in the company at £1,262,374, and Mr Anderson valued it at £228,400.

[140] Despite this wide discrepancy in valuation, by the end of their evidence there were some areas of agreement between the two expert witnesses. Both used the earnings basis to reach their valuation, and in doing so reached their earnings figures using Earnings Before Interest, Tax, Depreciation and Amortisation ("EBITDA"). Each calculated EBITDA for the company for the years ending 2005, 2006, 2007 and 2008 and then made reasoned adjustments to these figures and considered whether there should be any weighting as between the four years, in order to determine a figure of future maintainable earnings for the company. They then applied a multiplier to the enterprise value of the company, and then made an adjustment to reflect the net cash or indebtedness of the company, in order to arrive at the equity value of the company. They then considered whether it was appropriate to value the petitioner's shareholding on a discounted basis or on a full pro rata basis.

[141] I do not consider that it would be helpful to seek to narrate at length the evidence of each of the valuers. Instead, I propose to consider each of the areas of disagreement in turn, and to explain my decision on each. In adopting this approach, I make it plain that I have taken into account all of the relevant evidence and the competing submissions for the parties.

[142] The following table may serve as a useful starting point, from which the areas of disagreement can be identified. This table is derived from Mr Webster's supplementary report (No 6/220 of process). A similar table (although not relating to exactly the same period and bringing out different figures in some cases) appears at paragraph 3.7 of Mr Anderson's supplementary report (No 7/51 of process). I do not set out Mr Anderson's report here merely to avoid confusion.

[143] The relevant table from Mr Webster's supplementary report is as follows:

Year end 30 September	Actual 2005 £	Actual 2006 £	Actual 2007 £	Pro forma 2008 £	Weighted £
Sales % change	2,726,803	2,879,551 5.6%	3,088,817 7.3%	2,423,000 -21.6%
Cost of sales	2,066,875	1,981,690	1,888,007	1,573,000
Gross Profit Gross profit %	659,928 24.2%	897,861 31.2%	1,200,810 38.9%	850,000 35.1%
Operating expenses % change	487,646	711,684 45.9%	740,280 4.0%	555,000 -25.0%
Other operating income	-	4,126	20,020
Operating (Loss) Profit	172,282	190,303	480,550	295,000
Depreciation	33,911	47,726	45,540	45,000
EBITDA	206,193	238.029	526,090	340,000
Adjustments Director's salary and pension Insurance Advertising Repairs and Renewals Accountancy Fees Professional Fees Inventory write down	149,077	224,299     20,000	80,596 10,000 16,000 20,000 16,000 8,000 36,900	20,000 32,800
	149,077	244,299	187,496	52,800
Adjustment EBITDA	355,270	482,328	713,586	392,800	528,181
Weighting	10%	30%	35%	25%

 

EBITDA Multiple³	Corpfin	Discount	Adj Multiple	Enterprise Value £	Net Cash (debt)³ £	Equity Value £
	7.45	-10.0%	6.70	3,538,809	497,169	4,035,978

 

[144] Although Mr Anderson set out his figures in a different way (and I shall turn to the material differences below), I did not understand there to be a significant difference of opinion between the two experts as to most of the figures in the top half of this table. Both experts agreed that the figure of £20,020 under other operating income for 2007 should be deleted and the resulting operating profit adjusted accordingly. Counsel for the respondent accepted that the "raw" EBITDA figures for each of the four financial years ending 30 September 2005 to 2008 were as follows:

2005: £206,193

2006: £238,029

2007: £506,070 (to reflect the conceded deduction of £20,020)

2008: £340,000.

There were however areas of disagreement in the figures and approach in the lower part of the table. I deal with each of these in turn:

Excessive remuneration
[145] Mr Anderson dealt with this matter in paragraph 3.2 of his first report (No 7/3 of process) and section 2 of his supplementary report (No 7/51 of process). As noted at paragraph [69] above, the respondent stated that his starting salary at the company was £38,000 per annum and a company car; his remuneration in the company's annual accounts in each of the years to 30 September 2001 and 2002 was stated to be £50,000. In 2003 this rose to £56,000, and in 2004 to £66,000. In 2005 it rose to £229,000, in 2006 to £307,000 and in 2007 it was £168,000. In assessing whether these sums were reasonable or excessive, Mr Anderson compared them to what he described as an "assessed remuneration package". He based this on what the respondent told him that he had been offered prior to his resignation from CPS. The respondent told him that Mr Speirs offered him a package comprising a basic salary of £50,000, 1% of turnover as commission with turnover at that time being some £1.5 million, a Mercedes car, private medical insurance and a company pension contribution. Mr Anderson assessed the total salary package at some £60,000, with an initial commission of £15,000. Given the respondent's additional responsibilities within the company and the hours worked by him, he considered that it was not unreasonable to uplift the salary package figure by 20% to £72,000; with £15,000 commission, this gave a total remuneration of £87,000. He then assumed that the basic salary would have increased by some 5% per annum. He understood that the turnover of CPS as at May 2007 was about £4.5 million; this information must have been given to him by the respondent. (It should be noted that the respondent in his evidence did not consider that the turnover of CPS was as high as this in 2007, and denied giving this information to Mr Anderson). A comparison of the respondent's actual remuneration with this "assessed remuneration package" showed that the respondent actually received less than the assessed remuneration package in the four years from 2001 to 2004, and more than the assessed remuneration package in the following three years. Comparing his actual remuneration over the seven year period from the year ended 30 September 2001 to the year ended 30 September 2007, the difference between his actual remuneration of £926,000 and the assessed remuneration package of £817,000 was the amount of his cumulative excess salary, being £109,000.

[146] Mr Webster did not agree with Mr Anderson's methodology. In his letter dated 19 June 2007 (No 6/14 of process) he observed that it is often the case that individuals who are on salary packages take a reduction in salary when entering into a new venture which allows for substantial equity participation. It is therefore not reasonable to deem there to be an uplift in the salary package figure by 20% in the first year of a new start up business. Shareholders in a private company normally get remunerated on the basis of market rates for the job they perform; any remuneration above that is treated as a distribution. In a private company which is not wholly owned by a single family, particularly one where there are non-working shareholders, it would normally be the case that remuneration and any annual increases and bonuses should be agreed upon by the board. He considered that it was fallacious to use the enhanced offer by Mr Speirs to the respondent as the basis for constructing an assessed remuneration package. He had seen no documentation to show that this offer was ever made, but in any event it was clearly intended to be a sufficiently attractive offer to persuade the respondent to stay with CPS, because Mr Speirs wanted to retain him in his employment. The offer might therefore have been above market rate. He emphasised that remuneration should be for the executive responsibility of running a business on a day to day basis, and should not be confused with a return on risk for investing in the company. Although Mr Webster did not operate extensively in the Aberdeen remuneration market himself, he worked extensively with private companies and had some experience himself of remuneration packages for executives in the Aberdeen market. Having regard to the historical growth and profitability of the company and the market in which it operated, he considered that the respondent's salary (including bonus) and pension would be reasonably stated at £80,000 in the year to September 2005, £90,000 in the year to 2006 and £100,000 in the year to 2007. In reaching these figures he had regard to the age of the company, the size of its turnover, its profitability and the sector in which it operated. He had also discussed the matter with his partners in Aberdeen, who had wide experience of remuneration in the oil related sector. He considered that their views were preferable to those of a recruitment consultant, and he therefore did not consult a recruitment consultant.

[147] In his submissions, counsel for the respondent criticised Mr Webster for not having consulted a recruitment consultant, and pointed out that Mr Anderson had validated his figure of £147,000 for the year to 2007 from his own experience of recruiting a managing director for another client, and discussions with a named recruitment specialist, who agreed with his view. He also pointed out that Mr Webster accepted in cross-examination that it was difficult to dispute the reasonableness of the figures given by Mr Anderson for an "assessed remuneration package" in paragraph 2.4 of his supplementary report (No 7/51 of process) - although he did not agree with these figures, Mr Webster could not say that they were outwith the reasonable range. Counsel submitted that following the test in Irvine v Irvine (No 1) [2007] 1 BCLC 349 the extent of the excess remuneration could not be shown to be more that £109,000 as stated by Mr Anderson. The annual salary survey by the Society of Petroleum Engineers (6/61 of process) to which the petitioner made reference in his evidence had no evidential value and was of no assistance to the court.

[148] For her part, Mrs Gillies for the petitioner submitted that Mr Anderson's assessed remuneration package was founded on figures which bore no resemblance to the actual facts of the case and which were unsupported in evidence. The fact that Mr Anderson had spoken to a recruitment specialist about salaries in 2007 (although not about salaries in 2000) was no more persuasive than Mr Webster having spoken to his partners.

[149] In considering this issue I should first indicate that I attach no weight to the Society of Petroleum Engineers' 2007 Annual Salary Survey (No 6/61 of process). The document was very generally stated, it was obtained from a relatively small sample batch, and salaries were stated to be in Guernsey or Jersey pounds. I was not given any evidence as to the rate of exchange with Sterling. I did not find this document to be helpful.

[150] However, I agree with the criticisms made by Mr Webster of Mr Anderson's methodology in calculating an "assessed remuneration package". First, there was no documentary evidence to support the respondent's evidence that Mr Speirs made an enhanced offer to the respondent to induce him to stay with CPS, nor was Mr Speirs led as a witness. If such an offer was made, it was substantially more than the respondent had been earning at CPS. It was in my view not indicative of the market rate for that job, but was only indicative of Mr Speirs' desire to prevent the respondent from leaving his employment and setting up with the company in competition. There was no evidence about the turnover of CPS in 2000, and the estimate of £4.5 million for CPS's turnover in 2007, which Mr Anderson stated must have come from the respondent, was disclaimed by the respondent in his evidence. I see no justification for a 20% uplift in the salary figure, nor do I consider that the figures for increases in commission can be relied upon. There is no evidence before me which persuades me that the remuneration package which the respondent actually received in the four years from 2001 to 2004 was below the market rate for the job which he was doing, having regard to the financial status of the company, its age, its profitability and the sector in which it was working. The sums which the respondent received in these years were greater than the sums provided for in the business plans prepared by the petitioner, and greater than the salary of £38,000 which the respondent stated that he received when he started with the company. Furthermore, I am not persuaded that Mr Anderson's methodology of looking at what the respondent received over a seven year period and comparing it with an "assessed remuneration package" over the same seven years is appropriate. When considering what is excessive remuneration for purposes of adjustment to EBITDA in the four years 2005 to 2008, I consider that it is necessary to look to any excess in those years, and not to have regard to any alleged under remuneration in previous years. On the basis of the evidence I am not satisfied that there was under remuneration in the years 2001 to 2004, but even if there was, I do not consider that this justifies excessive remuneration in the years in question.

[151] Counsel for the respondent was correct to observe that Mr Webster conceded that he found it difficult to dispute the reasonableness of the figures in Table 2.4 of Mr Anderson's report (No 7/51 of process), and counsel understandably relied on the statements in Irvine v Irvine (No 1). However, it must be borne in mind that excessive remuneration may fall to be considered in different contexts - on the one hand, it may (as it is in this case) be one of the factors on which a petitioner relies in alleging unfairly prejudicial conduct and so justifying an order, and it may (again as it is in this case) be a matter which falls to be considered when reaching a valuation of a petitioner's shareholding. The two exercises may involve different considerations. In the present context, for the reasons which I have given, I do not feel able to accept the methodology or the figures presented by Mr Anderson. I see no reason not to accept the figures advanced by Mr Webster, which show a rate of growth in the reasonable remuneration of the respondent which is not ungenerous when compared to inflation in the intervening years, and is also not ungenerous by comparison to the evidence about the founders' agreement and the fact that the respondent received a remuneration package of £50,000 in the first two years of the company's trading. I therefore accept the adjustments for director's salary and pension shown in Mr Webster's table set out above.

Insurance and advertising
[152] Mr Webster added £10,000 for insurance to EBITDA for 2007, and £16,000 for advertising in the same year. He explained that he was unable to say that these sums were not spent on insurance and advertising, but there was no evidence to explain why so much more was spent on these items in 2007 than in earlier years. For example, the accounts for the year to September 2005 showed £4,000 spent on advertising, and in the following year this sum was £6,000. In 2007 this increased to £22,000. He had been given no explanation for such large increases in 2007. It was important when calculating the future maintainable value of the company by means of EBITDA to exclude purely "one-off" expenditure.

[153] Mr Anderson accepted that an adjustment was necessary if a payment was a "one-off" payment. However, although the sums spent on insurance and advertising in 2007 were higher than in previous years, he was satisfied that these sums were in fact expended by the company for the purposes shown. If these were valid business expenses (and Mr Webster was not suggesting otherwise) Mr Anderson saw no reason why they should be added back by adjustment, even though the benefit of the payments might be spread over other years.

[154] I consider that it is inevitable that the expenditure of a company on items such as insurance or advertising may fluctuate from year to year. Mr Webster was unable to assert that these sums were not expended for the purposes claimed in the year to 2007, and in this regard I prefer the evidence of Mr Anderson to that of Mr Webster. I do not consider that any adjustment should be made in respect of insurance or advertising in the year 2007. This will have the effect of reducing the figure for adjusted EBITDA for that year by £26,000.

Repairs and renewals
[155] Mr Webster made an adjustment in each of the years 2006 and 2007 by adding a further £20,000 in each year. He did so on the basis that the figures for repairs and renewals in each of these years were much higher than expenditure in previous years. He made it clear that he was not suggesting anything suspicious in this expenditure, but reiterated that it was important to distinguish between a one-off item of expenditure, and recurring items.

[156] Mr Anderson accepted that in an ideal world one would provide for expenditure on dilapidations over the whole period of the lease of a company's premises. Most companies do not make such annual provision in their accounts. The company did not do so. The expenditure of £40,000 on dilapidations was incurred for this purpose. It should be spread over the eight year period of the lease, resulting in expenditure of £5,000 per annum. This should be reflected in adjustments to Mr Webster's table; £5,000 should be deducted from each of the years to September 2005 and September 2008, and Mr Webster's additions of £20,000 in each of the years 2006 and 2007 should be reduced to £15,000.

[157] I am satisfied that Mr Anderson's approach to this adjustment is correct. Mr Webster was to some extent hampered in giving evidence on these matters by having less information than Mr Anderson had. He made it clear that he did not regard these amounts of expenditure as suspicious, but treated them as "one-off" payments. Although the expenditure may have been concentrated in two years, I am satisfied that it related to a necessary expenditure which the company might have been wise to make provision for in each year of the lease of the premises which it occupied. I shall therefore allow a deduction of £5,000 in each of the years 2005 and 2008, and a reduction in the figures for 2006 and 2007 from £20,000 in each year to £15,000 in each year.

Accountancy fees
[158] Mr Webster considered that the figure of £26,000 for accountancy fees for the year ended September 2007 was markedly out of line with previous years. In the year ended 2005 the figure was £12,000 and in the year to September 2006 it was £15,000. He believed that some of the fees in 2007 related to advice from Mr Anderson in relation to the present petition. For these reasons he proposed an adjustment of an additional £16,000. Mr Anderson stated that he had seen no evidence to this effect but he knew that some of Mr Taylor's work had been carried out on behalf of the respondent and not on behalf of the company. In light of this evidence, I consider that some adjustment requires to be made for accountancy fees, but there is no clear evidence as to the precise amount of such adjustment. I regard the adjustment made by Mr Webster as excessive. He has reduced the figure of £26,000 for the year to September 2007 by £16,000 "to reflect historical levels of expenditure"; however, this would amount to a reduction to £10,000 which is significantly lower than the figure of £15,000 in the year to September 2006. On the basis of the very sparse information before me, I consider that it would be reasonable to allow for an increase in accountancy fees between 2006 and 2007 of £3,000 (which was the annual increase in the previous year, and which does not appear to have caused Mr Webster any concern). This would result in accountancy fees of £18,000, which would mean that Mr Webster's adjustment of £16,000 should be reduced to £8,000.

Professional fees
[159] Mr Webster stated that professional fees in the year to September 2007 were £24,000, and this compared to sums of less than £10,000 in each of the two preceding years. He proposed an adjustment in the table shown above of £8,000 for the year to 2007, but in evidence accepted that some reduction in this adjustment was appropriate because some expenditure had been made on non-destructive testing, although he could not tell from the information with which he had been provided how much this was. Mr Anderson stated that the sums provided in the accounts in 2007 and 2008 included chemical testing fees, and he was not aware of anything wrong with the figures for professional fees in either 2007 or 2008. I am not satisfied on the evidence before me that any adjustment requires to be made in respect of professional fees in respect of 2007 or 2008, and accordingly I deduct the sums of £8,000 and £20,000 from Mr Webster's table above.

Inventory write down
[160] Although some time was spent in evidence on this matter, ultimately Mr Webster accepted the figures shown in the comparable table in Mr Anderson's supplementary report (at paragraph 3.7 of No 7/51 of process). These figures were larger than the figures contained in Mr Webster's table. Mr Anderson accepted an adjustment for stock provision of £81,000 in 2007 and an adjustment for surcharge levy of £23,000 in the same year, giving a total adjustment under this category of £104,000 in the year to September 2007 instead of the figure of £36,900 stated in Mr Webster's table. In the year to 2008 Mr Anderson's figures were £42,000 for stock provision and £2,000 for surcharge levy, giving a total of £44,000 instead of the figure of £32,800 shown in Mr Webster's table. As both experts were agreed as to these increased sums, I propose to increase the figures in Mr Webster's table accordingly.

Weighting
[161] Mr Webster agreed with the observation made by Mr Anderson (at paragraph 3.7 of No 7/51 of process) that the figures for the company's performance over the four year period 2005 to 2008 demonstrated a degree of volatility in the earnings of the company. However, he felt that he had not been provided with sufficient information about the company's performance in the year to September 2008 to enable him to be fully confident about the figures in that year. For this reason, when he prepared his report dated 29 April 2008 he attached no weighting at all to the figures for 2008, and placed weightings of 20%, 30% and 50% on the years to September 2005, 2006 and 2007 respectively. By the time that he gave evidence in October 2008 he had received more information about the company's performance in the year to 2008, and as a result of this he applied the weighting shown in the table reproduced above ie 10%, 30%, 35% and 25%. He observed in examination-in-chief he did not feel that he had "got to the bottom of" the 2008 figures, but many of his questions had been answered and he felt able to place some weighting on the 2008 figures. In cross-examination he accepted that the differences between himself and Mr Anderson on the question of weighting were not substantial.

[162] Mr Anderson discussed the appropriate weighting to be given to each of these years in paragraph 3.8 of No 7/51 of process, where he appeared to favour a methodology which applied a weighting of four, three, two, one with the higher number applying to 2008. In evidence, he stated that a simple average of the adjusted EBITDA figure was justified, but he could argue for the methodology described No 7/51 of process. In his closing submissions counsel for the respondent suggested that the appropriate approach would be to apply a simple average. Neither Mr Webster nor Mr Anderson suggested that this would be an unreasonable mode of proceeding. Mrs Gillies for the petitioner argued in favour of Mr Webster's view that where possible the greatest weight should be placed on the most recent year's maintainable profits, and that 2007 was not, when viewed objectively, an extraordinary year.

[163] It seems to me to be clear that the company's performance in the year to September 2007 was substantially better than it was in any of the other years between 2005 and 2008. Mr Webster's methodology placed the greatest weighting on this year, but this was largely because of his lingering doubts about the figures for the year to September 2008. These doubts were based only on what he perceived to be lack of information provided to him; however, these doubts had been substantially (although not completely) resolved by the time that he gave evidence, and he was prepared to place quite substantial weight on the figures for 2008. Neither of the expert witnesses appeared to regard the difference in their approach to weighting as a very significant issue, and each of them appeared to accept that a simple average was a proper and acceptable approach to this issue. I am satisfied that the figures for the year to September 2008 are sufficiently reliable that weight should be attached to them, and I propose to apply a simple average of the adjusted EBITDA figures for the four years 2005 to 2008.

Multiplier
[164] Mr Webster and Mr Anderson agreed that in order to arrive at an enterprise value for the company it was necessary to apply a multiplier to the adjusted average (or weighted) EBITDA. As explained in section 5.3 of his report (No 6/21 of process), Mr Webster reached the view that an appropriate multiplier in this case was 6.7. Mr Anderson reached the view, as explained at paragraph 4 of his supplementary report (No 7/51 of process) that an appropriate range for an EBITDA multiplier was 3.5 to 4.5.

[165] In reaching his preferred multiplier, Mr Webster had regard to five transactions relating to recent deals in the oil industry sector for equipment manufacturers in the period May 2004 to October 2007, as set out in figure 12 of his report (No 6/21). These showed a variation in the enterprise value/EBITDA multiplier from 5.2 to 51.1. He accepted that the five transactions shown in figure 12 were for much larger businesses than the company, and he accepted that a larger transaction would, all other things being equal, tend to result in a higher multiplier. However, he narrowed the selection to these five transactions as they were the most similar to the company itself, in terms of sector or sphere of activity. He accepted that, unlike the fifth company in figure 12, the company in the present case depended on a relatively small number of customers for most of its sales, and it had no significant intellectual property assets or blue chip customers. However, he had regard to the size of the company and the greater degree of risk and uncertainty arising from a small range of customers, and this was why he discounted the median multiplier from 7.45 to 6.7. Although the company was small, it was growing securely and its turnover was still sound despite having lost a major customer; he regarded 10% as a fair discount from the median to reflect the circumstances of the company. He was subjected to detailed cross-examination as to the circumstances of the various transactions contained in figure 12, but he was unable to make detailed comments about each of the companies. He remained of the view that a multiplier of 6.7 was appropriate even in the present uncertain economic times, because the oil and gas sector made its decisions on a long term basis, on an average price of $40 to $50 per barrel. He accepted that prices in the sector had reduced somewhat in the six months before he gave evidence (in October 2008) and that this softening of prices arose from difficulties in obtaining funding and from other financial problems, but he maintained that the appropriate multiplier remained above 6, and might return to 6.7 by March 2009. He accepted that if the company could not afford to buy the petitioner's shares at his valuation, he could not support that valuation, but it had cash, it had no borrowings and it had ample borrowing capacity which should enable it to gear up in order to buy the petitioner's shares. He was of the view that the company could afford to service interest of £100,000 per annum, and at interest rates prevailing when he gave evidence the company could afford to borrow up £1.2 million without affecting its need for working capital. He had obtained the information contained in figure 12 from a subscription database and had no reason to disbelieve it. Similarly he was not aware of any errors in the table contained in the tables in the last two pages of No 6/220 of process (except in relation to the Global Gas Supplies Limited acquisition in September 2007). He had not relied on these tables when reaching his multiplier of 6.7, but had provided them to show that his multiplier of 6.7 was relatively modest, and that Mr Anderson's suggested multipliers were not in line with the rest of the sector.

[166] Mr Anderson derived his information from his colleagues in the corporate finance department of his firm, who had been involved in about 31 transactions in the first half of 2008. His firm had acted in at least one of the transactions contained in Mr Webster's figure 12, and he had detailed knowledge of most of the other transactions. Not only were most of the companies not comparable to the present company, many of the figures contained in Mr Webster's figure 12 were incorrectly stated. For example, the acquisition of Cromar Limited by Hunting Plc, which had a multiplier of 7.45 in Mr Webster's table, was actually transacted on a multiplier of about 5. He regarded a 10% discount from the median multiplier of 7.45 as inadequate; having regard to the size of the company, its lack of intellectual property assets, its customer base and its employee dependency, he considered that the appropriate multiplier in the present case was probably less than 4.5. He then revised this to state that it must be below 4.5. He criticised the reference to the companies in the last page of No 6/220 of process. His firm had been involved in four of these transactions, and each of these was quite different from the company in the present case. All of the companies on the table were large by comparison to the company and not all of them were comparable in terms of sector. Moreover, the table contained an arithmetical error with regard to Global Gas Supplies Limited. Nothing in the information contained in either 6/21 or 6/220 caused him to change his opinion as to the appropriate multiplier. He was reinforced in his view by the uncertainty of the present economic climate, and the difficulty in obtaining funding at present, each of which would have a depressing effect on multipliers.

[167] For the petitioner, Mrs Gillies submitted that Mr Webster's evidence as to an appropriate multiplier should be preferred to that of Mr Anderson. For the respondent, Mr Sandison submitted that I should accept a multiplier of 4 and prefer Mr Anderson to Mr Webster because Mr Anderson knew more about the transactions referred to in figure 12 of Mr Webster's report, and the comparators relied on by Mr Webster were not truly comparable. He criticised Mr Webster's methodology and suggested that the starting point of 7.45 could not be relied upon, and that the discount applied to this of 10% was not founded on any rational basis.

[168] I found the evidence of Mr Anderson on this matter to be preferable to that of Mr Webster. I considered that Mr Anderson had a more detailed knowledge of the transactions contained in figure 12 of No 6/21 of process than Mr Webster had. Mr Anderson's firm was involved in the acquisition of Cromar Limited by Hunting Plc, and I am satisfied that the information contained in the table relating to that acquisition is not accurate. I do not consider that much assistance, if any, can be derived from looking at transactions involving companies with a very significantly higher turnover than the company in the present case. In order for comparisons to be of assistance, the comparator should normally be in the same sector, and of approximately the same size, and with broadly equivalent assets by way of IP assets or otherwise, and risk factors such as customer bases.

[169] In fairness, both experts accepted that the selection of an appropriate multiplier required the exercise of a professional judgment, and that it involved experience of similar transactions and what might be called a "feel" for what is appropriate. However, I formed the impression that Mr Anderson and his firm had a closer involvement in such transactions within the oil supply sector in Aberdeen than did Mr Webster, and that Mr Webster did not have answers to some of the specific criticisms of his figures, comparators and methodology which were put to him on behalf of the respondent. Moreover, I do not consider that he attached sufficient weight to the depressive effect of the current economic climate on multipliers. While I am prepared to accept that industries in the oil sector take a long term view as to investments and economic decision, the economic downturn and the difficulties of obtaining finance must in my view have depressed multipliers to a greater extent than Mr Webster was prepared to concede. He accepted that his original multiplier of 6.7 might fall to be reduced to 6.3 or 6.4 - a discount of only about 5%. I regard this as an unrealistically low discount. In fairness to Mr Webster, he was giving his evidence in early October 2008, when the full extent of the current financial and economic crisis was not perhaps as apparent as it now is. However, I do not consider that I can close my eyes to the fact that economies throughout the world are experiencing severe difficulties, and that the price of shares in oil companies and companies involved in the oil related sector have fallen considerably even since Mr Webster gave his evidence.

[170] In light of all of these factors, I consider that a multiplier of 6.7, or even 6, is too high. I consider that the appropriate multiplier is the upper end of the range suggested by Mr Anderson, namely 4.5.

Surplus cash
[171] Both experts were of the view that surplus cash required to be added to the enterprise value in order to achieve the equity value of the company. This surplus cash is comprised of two elements - (1) the net cash balances of the company and (2) the excess remuneration package paid to the respondent, on a net of tax basis.

[172] Mr Webster estimated the first of these, ie the net cash balances, at £497,169 in his table reproduced above. However, Mr Anderson, who had had sight of the trial balance of the company at 30 September 2008 stated in his evidence (and also at paragraph 6.2 of No 7/51 of process) that the net cash balances totalled £262,545. In cross-examination Mr Webster accepted that he could not dispute this figure, although he found it surprising. On the basis of the evidence, I accept the net cash balances of the company at 30 September 2008 amounted to £262,545.

[173] To this sum falls to be added the excess remuneration paid to the respondent, on a net of tax basis. Mr Anderson dealt with this at paragraph 6.3 of No 7/51 of process by using the figure of £109,000 brought out as cumulative excess salary in paragraph 2.6 of No 7/51 of process, and applying a deduction of approximately 30% to reach a net of tax figure of about £76,000. Mr Webster agreed with the methodology, but as discussed above, he disagreed with Mr Anderson's figures.

[174] I have explained above why I prefer Mr Webster's figures to those of Mr Anderson with regard to excess remuneration. I consider that the cumulative excess remuneration taken by the respondent is the sum of the three figures shown as annual adjustments for director's salary and pension in Mr Webster's table set out above. These figures total just under £454,000. Applying the same approximate percentage as Mr Anderson applied to obtain a net of tax figures results in a figure of £317,800.

[175] The total of these two elements of surplus cash is £580,345, which falls to be added to the enterprise value of the company in order to achieve the equity value.

[176] Before turning to the question of whether a discount should be applied to the equity value to reflect the fact that the petitioner owns a minority shareholding, and if so, how much that discount should be, it may be helpful if I summarise in tabular form the consequences of my decisions on the various areas of dispute discussed above. I do so using Mr Webster's table set out at paragraph [143] above, amended to reflect the decisions which I have made on these matters, as follows:

Year end 30 September		Actual 2005 £	Actual 2006 £	Actual 2007 £	Pro forma 2008 £	Weighted £
Sales % change		2,726,803	2,879,551 5.6%	3,088,817 7.3%	2,423,000 -21.6%
Cost of sales		2,066,875	1,981,690	1,888,007	1,573,000
Gross Profit Gross profit %		659,928 24.2%	897,861 31.2%	1,200,810 38.9%	850,000 35.1%
Operating expenses % change		487,646	711,684 45.9%	740,280 4.0%	555,000 -25.0%
Other operating income		-	4,126
Operating (Loss) Profit		172,282	190,303	460,530	295,000
Depreciation		33,911	47,726	45,540	45,000
EBITDA		206,193	238,029	506,070	340,000
Adjustments Director's salary and pension Repairs and Renewals Accountancy Fees Inventory write down		149,077 (-5,000)	224,299 15,000	80,596 15,000 8,000 104,000	(-5,000)   44,000
		144,077	239,299	207,596	39,000
Adjustment EBITDA		350,270	477,328	713,666	379,000	480,066
Weighting		25%	25%	25%	25%
EBITDA Multiple³				Enterprise Value £	Net Cash (debt)³ £	Equity Value £
	4.5			2,160,297	580,345	2,740,642

[177] In summary, Mr Webster valued the company (what he described as the "equity value") at £4,035,978. Mr Anderson valued the company (what he described as the "enterprise value") at £1,999,000. For the reasons given above, I consider that the proper value of the company is £2,740,642.

Discount
[178] Mr Webster was of the opinion that it was not appropriate to apply any discount to the above figures to reflect the fact that the petitioner owned a minority shareholding in the company. There was a difference between the open market of value of shares and the fair value of shares. An open market valuation might apply where the owner of a parcel of shares was attempting to sell them in the open market. If the parcel was a minority interest, and the purchaser was aware that another shareholder owned a controlling interest in the company, that purchaser might not be prepared to pay full value for the parcel of shares. Fair value on the other hand was the value of the whole business, pro rated amongst shareholders on an equal basis. This was generally appropriate where parties had entered into the business as equals. Mr Webster stated that he believed that this business was set up on the premise of mutual trust. He accepted that quasi partnership was a legal concept, but he regarded this company as exhibiting a particular degree of mutual trust and confidence between the founders, and he proceeded on the basis that there were restrictions on share transfers. He stated that discounting was generally appropriate in three circumstances - (1) when one was negotiating with H.M. Revenue and Customs over the price to be placed on a shareholding, in order to obtain as low a valuation as possible for probate or tax purposes, (2) where the company's articles provided for discounting, or (3) where there was a lack of liquidity in shares in a private company, which could not be traded as easily as a public limited company. He accepted that the present case fell into the third of these categories, but he had already taken account of this when applying a discounted multiplier.

[179] With regard to the amount of any discount, if a discount did indeed fall to be applied, Mr Webster observed that this was a very "judgmental" area, and if there were five accountants in a room, one would have five different views on the subject. He would not be surprised if HM Revenue and Customs sought to apply a discount to a shareholding of 28.57%. He regarded Mr Anderson's figure of a 60% discount as being at the top end of a minority discount, even if negotiating with HM Revenue and Customs, whom he believed would open negotiations about the quantum of discount at 35-40%.

[180] Mr Anderson expressed the opinion that shareholdings of 50% or less are normally valued at a discount with the level of discount increasing as the percentage holding reduces. He made reference to a textbook on the valuation of unquoted companies which indicated that where a minority shareholding is being valued and the articles do not stipulate the full pro rata value, the shares must be valued on the (discounted) minority basis. Mr Anderson accepted that it was for the court to decide whether the company was a quasi partnership, but suggested that there were factors to suggest that it was not. He referred to the HMRC Share Valuation Manual, and concluded not only that a discount was appropriate, but that given the disposition of the shareholdings in the company, an appropriate discount to arrive at the proper value of a 28% parcel of shares would be 60%. He observed that control was at the core of this issue, and even if one owned 50% of a company it would be appropriate to discount the value of these shares by 20-30% because one would not have complete control of the company. A lot depended on the other shareholders and on the terms of the articles. If the articles made no provision to disapply a discount, the presumption was that a valuer should discount to reflect a minority shareholding. In cross-examination he explained that he reached the figure of 60% in this case based on his judgement and on his experience of other valuations that he had been involved in. He accepted that 55% might be appropriate, but not less than this. The owner of 28.57% of the company has little control over the company. The discount of 60% reflects this factor, and also who holds the other shares and the terms of the articles.

[181] In her submissions on this point Mrs Gillies for the petitioner submitted that no discount should be applied. She referred me to the comments of Nourse J in re Bird Precision Bellows (supra). She also referred me to Virdi v Abbey Leisure Limited [1990] BCLC 342.

[182] Counsel for the respondent, having addressed me on the issue of quasi partnership (see above at paragraph [117]) observed that the applicable principle is that a discount to reflect the minority character of the shareholding is required. He relied on Irvine v Irvine (No 2) [2007] 1 BCLC 445 and to the cases cited therein.

[183] I have already expressed my view that although the company may have possessed the qualities of a quasi partnership at the outset, it had ceased to be a quasi partnership by the time that any of the aspects of the conduct of the company's affairs complained of occurred. Mr Webster proceeded on the basis that this was a company with an unusual degree of mutual trust, and in which there were restrictions on the sale of shares. It appears to me that it was largely because of these factors that he took the view that no discount was applicable in this case. The authorities which appeared to be most supportive of a pro rata valuation of a minority shareholding without any discounting are for the most part authorities concerned with quasi partnerships. For example, Mrs Gillies relied heavily on the observations of Nourse J. in re Bird Precision Bellows [1984] 1 Ch. 419 at 430, but these observations related to cases involving quasi partnerships. Virdi v Abbey Leisure Limited was concerned with a very different situation, but many of the authorities to which reference was made with regard to whether a discount should be applied or not were authorities relating to quasi partnerships. However, Lord Hoffman's observations in O'Neill v Phillips (supra at p. 1107D/E) appeared to be of wider import, albeit that case was concerned with whether the petitioner had refused a reasonable offer. He observed as follows:

"In the first place, the offer must be to purchase the shares at a fair value. This will ordinarily be a value representing an equivalent proportion of the total issued share capital, that is, without a discount for its being a minority holding. The Law Commission.... has recommended a statutory presumption that in cases to which the presumption of unfairly prejudicial conduct applies, the fair value of the shares should be determined on a pro rata basis. This too reflects the existing practice. This is not to say that there may not be cases in which it will be fair to take a discounted value. But such cases will be based upon special circumstances and it will seldom be possible for the court to say that an offer to buy on a discounted basis is plainly reasonable, so that the petition should be struck out."

[184] On the other hand, in Strahan v Wilcock [2006] EWCA civ 13, [2006] 2 BCLC 555, Arden LJ stated that:

"Shares are generally ordered to be purchased on the basis of their valuation on a non-discounted basis where the party against whom the order is made has acted in breach of the obligation of good faith applicable to the parties' relationship by analogy with partnership law, that is to say where a 'quasi partnership' relationship has been found to exist. It is difficult to conceive of circumstances in which a non-discounted basis of valuation would be appropriate where there was unfair prejudice for the purposes of the 1985 Act but such a relationship did not exist. However, on this appeal I need not express a final view on what those circumstances might be."

[185] Strahan was relied upon by Blackburne J. in Irvine v Irvine (No 2) [2006] EWHC 583 (Ch). [2007] 1 BCLC 445), in which he observed as follows:

"A minority shareholding, even one where the extent of the minority is as slight as in this case, is to be valued for what it is, a minority shareholding, unless there is some good reason to attribute to it a pro rata share of the overall value of the company. Short of a quasi partnership or some other exceptional circumstance, there is no reason to accord to it a quality which it lacks."

[186] In the present case, the company was not a quasi partnership at the relevant times. Even at its formation, the petitioner did not own a majority shareholding. Originally he held a 40% shareholding, but voluntarily reduced this by sale of one quarter of his shareholding to Mr Moncur. Thereafter his shareholding was further diluted by the acquisition of shares by Aberdeen City Council, in an arrangement of which the petitioner was aware and in which he played some part. To value his shares on a pro rata basis would be to give him a benefit to which he is not entitled. I consider that it is appropriate that his shares should be valued on a discounted basis. This is not a case of a quasi partnership, and there are no circumstances sufficiently exceptional as to justify no discount being applied.

[187] The question then arises as to the amount of an appropriate discount. I did not understand Mr Anderson to suggest that the calculation of an appropriate discount was a purely formulaic exercise: rather, it is an exercise in which professional judgment and experience is required, and in which regard must be paid to a variety of factors. In the present case clearly one such factor is the size of the petitioner's shareholding, namely 28.57%. However, I consider that another relevant factor is the manner in which the respondent converted his own minority interest in the company into a majority interest, namely by obtaining a loan from the company which he subsequently caused to be written off, and using the proceeds of this loan to purchase Mr Murray's shares, all at a time when he was aware that the petitioner was not fully informed about the company's financial circumstances, when no annual general meetings had been held, and when the company's finances were far from strong.

[188] I accept Mr Webster's evidence to the effect that if any discount is to be applied, a discount of 60% is very much at the top end, and that HM Revenue and Customs would be likely to open negotiations for a discount in relation to a 28.57% shareholding for purposes of probate or tax at around 35% to 40%. In all the circumstances of this case, I consider that a 60% discount is excessive, and that a discount of 40% is more appropriate to reflect the various relevant factors.

[189] The application of a 40% discount to the petitioner's 28.57% shareholding in the company which has an equity value of £2,740,642 results in a value for the petitioner's shareholding of £469,800.

Decision
[190] For the reasons given above, I propose to make an order that the petitioner's shareholding in the company should be purchased for the sum of £469,800. Both parties indicated in their submissions that it would be appropriate for this case to be put out By Order to enable parties to address the court as to the mechanics of putting this order into effect - for example, whether the order should be directed against the respondent to purchase these shares, or whether it should require the respondent to procure that the company purchase these shares, and what time might be required to enable the transaction to be concluded. The case will accordingly be put out By Order in early course to enable these matters to be addressed.