218 Re a Company No.

006834 of 1988 (1989) 5 BCC

retention of the premises in Crouch Hill is essent.ial for the survival of the Imperial A
company as opposed to the Adcone company.
The decision of Peter Gibson 1. in Re Consumer & Industrial Press Ltd. (1988) -l BCC
68, is authority for the proposition that in considering whether to make an administration
order the interests of secured creditors weigh lighter in the scales than the interests of
other creditors. That is common sense. because they do not stand to lose so much.
The position, therefore, as it seems to me, is that the risk to Mercantile is not very B
great, if I do not make an order. but the effect on Mr. Dilaimi, if I do make an order. is
potentially disastrous. It is true that there have been some problems about the relationship
between Mr. Dilaimi and the Austin Rover Group. of which the company is a franchisee.
The Austin Rover Group have made it clear that they do not think very much of the way
Mr. Dilaimi carries on business and that they would rather that somebody else had the
Tottenham franchise. On the other hand, they do not want to lose an outlet in Tottenham
and the ideal solution for them would be for the administrator to sell the company to c
someone else. I do not in any way suggest that this is the purpose for which Mercantile
are presenting the petition - they are entitled to look after their own interests. But, on
the other hand, the Austin Rover Group are not creditors and I do not need to take their
interests or preferences into account.
On balance. therefore, I think it would be right to refuse to make an order in this case
and I will so do. I must thank Mr. Trower and Mr. Snowden for the extremely helpful o
arguments which both of them have put before me in a rather difficult case.
(Petition dismissed)

Re a Company No. 006834 of 1988.

Chancery Division (Companies Court).
HoffmannJ.
Judgment delivered 21 December 1988.
Petition - Unfair prejudice - Striking out application - Minority shareholder F
petitioned to buy out majority shareholder - Majority made open offer for
petitioner's shares - Whether petition should go to trial to decide who should
buy the other out - Whether alleged impropriety affected ~'aluation of shares
- Whether petitioner's shares should be discounted as a minority holding-
Companies Act 1985. sec. 459.
This was an application to strike out a petition under sec. 459 of the Companies Act G
1985 as an abuse of the process of the court.
The company organised ski holidays in France. It was started by the majority shareholder
in 1978. Its articles contained a common form pre-emption provision. In 1986 the
petitioner bought into the company, taking a one-third stake. However, the business
association between the majority shareholder and the petitioner was not a success, and by
August 1988 both parties were agreed that it should be dissolved. In November the
H
majority shareholder made an open offer to buy the petitioner's shares at their open
market value, to be determined by an independent valuer appointed jointly by the parties.
The petition was then presented, seeking an order for the majority shareholder to sell his
shares to the petitioner or to buy the petitioner's shares. The majority shareholder
applied to strike out the petition on the ground that having regard to the pre-emption
provisions in the articles and the open otTer, the petition was an abuse of process.

© 1989 CCH Editions Limited

 Ch.D. Re a Company No. 006834 of 1988 219
(Hoffmann J.)

A The petitioner submitted that the petition should go to trial to decide who should buy
the other out, because it was not obvious that it was the petitioner who should sell his
shares.
The petitioner further submitted, first, that the improper application of the company's
funds alleged in the petition, meant ~hat the offer of independent valuation was not fair;
secondly, that the independent valuer's terms of reference did not prevent him from
applying a discount to reflect the fact that the petitioner's was a minority shareholding.
B
Held, striking out the petition:
l. When it was plain that the appropriate solution to a breakdown of relations was for
the petitioner to be able to sell his shares at a fair price and the articles contained
provisions for determining a price which the respondent was willing to payor the
respondent had offered to submit to an independent determination of a fair price, the
presentation or maintenance of a petition under sec. 459 would ordinarily be an abuse of
C
the process. (Re a Company No. 003096 ofl987 (1988) 4 BCC 80, followed.)
2. It must be very unusual for the court to order a majority shareholder actively
concerned in the management of the company to sell his shares to a minority shareholder
when he was willing and able to buy out the minority shareholder at a fair price. In this
case, it was inconceivable that the court would order the majority to be compulsorily
expropriated.
D
3. The allegations in the petition carried no serious imputation of dishonesty: this was
an ordinary case of breakdown of confidence between the parties. Fairness required that
the minority shareholder should not have to maintain his investment in a company
managed by the majority with whom he had fallen out, but the unfairness disappeared if
the minority shareholder was offered a fair price for his shares.
4. There might be cases of impropriety on the part of a respondent which had so
E
affected the value of the shares in the company as to make it inappropriate for the matter
to be dealt with by a straightforward valuation. In this case, however, the effect of the
alleged improprieties on the valuation of the shares in the company was likely to be
minimal. In any event, the valuer could take any misapplication of the company's assets
into account in valuing the company.
5. The valuer was asked to determine a fair value and it was for him to decide whether
F to apply a discount or not. In most ordinary cases of breakdown the valuer would be
entitled to fix a value which reflected the fact that the majority shareholder was an
involuntary buyer as much as the minority shareholder was an involuntary seller.
The following cases were referred to in the judgment:
Bird Precision BelJows Ltd., Re [1984] Ch. 419, (1984) 1 BCC 98,992; [1986] Ch. 658,
(1985) 1 BCC 99,467 (CA.).
G Company No. 007623 of1984, Re a (1986) 2 BCC 99.191.
Company No. 003843 of 1986, Rea (1987) 3 BCC624.
Company No. 003096 of 1987, Re a (1988) 4 BCC 80.
XYZ Ltd. (No. 004377 ofl986), Re [1987]1 WL.R. 102; (1986) 2 BCC 99,520.
Mr. J .H.S. Arkush (instructed by Stein Swede Jay & Bibring) for the applicant.
Mr. Nigel Davis (instructed by D.J. Freeman & Co.) for the petitioner.
H
Hoffmann J.: This is an application to strike out a petition under sec. 459 of the
Companies Act 1985 as an abuse of the process of the court. The company carries on the
business of organising ski holidays at Meribel in Savoie. It was started in 1978 by Mr.
Kramer, the personal respondent, and Mr. Guyatt. Mr. Kramer held and continues to
hold two-thirds of the issued share capital and Mr. Guyatt held the other third. Mr.

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220 Re a Company No. 006834 of 1988 (1989) 5 BCC
(Hoffmann J.)

Kramer was responsible for the London end of the company's business, its administration, A
finances. promotion. dealing with airlines and the Civil Aviation Authority. Mr. Guyatt
was the man on site at Meribel. He worked during the winter season only, maintaining
social contact with customers and dealing with their problems.
In 1986 Mr. Guyatt decided to sever his connections with the company. He sold his
shares to the petitioner, Mr. Kay. The price was £80.000. Mr. Kay was then 20 years old
and the son of a successful businessman. He had, after leaving school, been employed
B
by the company in Meribel. When he bought Mr. Guyatt's shares he was appointed a
director and given a salary of £8.000 a year. It was contemplated that he would be trained
to take a greater part in the company's activities and would work in London in the
summer as well as in Meribel in the winter. Mr. Kramer, who is 51. was then drawing a
salary of £12,000 a year.
The business association was not a success. By August 1988 both parties were agreed
that it should be dissolved. Mr. Kay complained that Mr. Kramer was patronising e
towards him. and refused to accord him the status and responsibilities to which he was
entitled. He also complains that Mr. Kramer has charged certain personal expenses to
the company and allowed members of his family and friends to have holidays at the
company's expense Mr. Kramer denies these charges and says that Mr. Kay was idle
and frequently drunk.
On 11 November Mr. Kramer's solicitors wrote, making an open offer to buy Mr. D
Kay's shares at their open market value. to be determined by an independent valuer
appointed jointly by the parties. They said that this was going further than Mr. Kay's
entitlement under art. 7 of the company's articles which contains a common form pre-
emption provision as follows:
"A member desiring to transfer shares otherwise than to a person who is already
a member of the company shall give notice in writing of such intention to the
directors of the company, giving particulars of the shares in question. The E
directors as agents for the member giving such notice may dispose of such shares
or any of them to members of the company at a price to be agreed between the
transferor and the directors or failing agreement at a price fixed by the auditors of
the company as the fair value thereof."
The petition was presented on 23 November. It prays in the first instance that Mr.
Kramer may be ordered to sell his shares to the petitioner or, alternatively, that he may F
be ordered to buy the petitioner's shares. The application to strike out is made on the
ground that having regard to the provisions of the articles and the open offer, the
presentation of the petition was an abuse of the process of the court.
The principle to be derived from the cases is that when it is plain that the appropriate
solution to a breakdown of relations is for the petitioner to be able to sell his shares at a
fair price and the articles contain provisions for determining a price which the respondent G
is willing to payor the respondent has offered to submit to an independent determination
of a fair price, the presentation or maintenance of a petition under sec. 459 will ordinarily
be an abuse of the process: see Re a Company No. 003096 of 1987(1988) 4 Bee 80, and
the earlier cases therein referred to.
Mr. Davis said that this principle did not apply because it was by no means obvious
that the appropriate solution was for the petitioner to sell his shares. On the contrary,
what the petitioner most wanted was to buy Mr. Kramer's shares. He had said in H
evidence that in his opinion Mr. Kramer had lost interest in the company and that he
could run it better. He had the necessary money. Therefore, the petition should be
allowed to go to trial to decide who should buy out the other.
I think it must be very unusual for the court to order a majority shareholder actively
concerned in the management of the company to sell his shares to a minority shareholder

© 1989 CCH Editions Limited

 Ch.D. Re a Company No. 006834 of 1988 221
(Hoffmann J.)

A when he is willing and able to buy out the minority shareholder at a fair price. I am not
going to exercise my imagination to suggest circumstances in which this might happen.
but I am quite sure this is not such a case. Mr. Kramer founded the company and has at
all times been the person principally concerned in its management. Mr. Kay's contribution
to the company's growth measured in both time and degree of responsibility has been
relatively smalL I think it is inconceivable that a court would order Mr. Kramer to be
compulsorily expropriated.
B
Mr. Davis said that the petition made allegations of mismanagement and
misappropriation of funds by improper payments against Mr. Kramer and that, if these
were established at the trial, the court might think it right to order Mr. Kramer to sell his
shares. Taken at their face value. these allegations amount at most to high-handed
conduct in certain matters. There is nothing in them which can carry a serious imputation
of dishonesty. This is an ordinary case of breakdown of confidence between the parties.
e In such circumstances, fairness requires that the minority shareholder should not have
to maintain his investment in a company managed by the majority with whom he has
fallen out. But the unfairness disappears if the minority shareholder is offered a fair
price for his shares. In such a case, sec. 459 was not intended to enable the court to
preside over a protracted and expensive contest of virtue between the shareholders and
to award the company to the winner.
D Mr. Kay has two other objections to Mr. Kramer's offer. The first is that his petition
contains, as I have said, allegations of improper application of the company's funds. For
example, it is said that Mr. Kramer procured the company to pay his personal telephone
bill and certain personal motor car expenses. Mr. Kramer denies this. He says that the
expenses were incurred in the course of the company's business and that, on the
contrary, he has provided assets for the company at his own expense over a number of
years.
E
In stating the principle to which I have referred, in Re XYZ Ltd. (No. 004377 of 1986)
(1986) 2 Bee 99,520, at p. 99,527, I said:
" ... it seems to me that if the articles provide a method for determining the fair
value of a party's shares, a member seeking to sell his shares upon a breakdown of
relations with other shareholders should not ordinarily be entitled to complain of
F unfair conduct if he has made no attempt to use the machinery provided by the
articles. I say nothing about cases in which there has been bad faith or plain
impropriety in the conduct of the respondents or about cases in which the articles
provide for some arbitrary or artificial method of valuation."
Mr. Davis says that this is a case of impropriety in the conduct of the respondent and
that. therefore, that principle should not apply. I think that is giving too extended a
construction to what I said. The remark was made in the context of the use of the
G
valuation provisions in the company's articles, and what I meant was that there might be
cases of impropriety on the part of the respondent which had so affected the value of the
shares in the company as to make it inappropriate for the matter to be dealt with by a
straightforward valuation. In this case, however, the effect of the alleged improprieties
on the valuation of the shares in the company is likely to be minimaL What the valuer
will be concerned with is applying a suitable multiple to the profits which the company
H appears to be likely to earn in the future. Furthermore, Mc. Kramer has said that the
valuer should be free, if he felt it fair to do so. to write back into the accounts any sums
which he considered to have been improperly disbursed.
A similar contention was made to MilIeu 1. in Re a Company No. 003843 of 1986
(1987) 3 Bee 624, where the judge said that counsel had argued that, because there was
suspicion of misfeasance and misappropriation, it was not possible that the petitioners,

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222 Re a Company No. 006834 of 1988 (1989) 5 BCC
(Hoffmann J.)

who had offered to submit to an independent valuation, had made a fair offer. The judge A
said (at p. 632):
"In my judgment, there is nothing in that point. The terms ofthe offer that I have
read ensure that both sides will have an opportunity to have access to all the
company's books and papers and to make whatever representations they wish to
make to the independent accountants. In case there is any doubt about it, I should
make it absolutely clear that. in my judgment, if the accountants have any reason
B
to think that there has been any misappropriation or misapplication of the
company's assets which would have the effect of depreciating the value of the
petitioners' interest, then they will have to take that into account in valuing the
company."
This seems to me to be just such a case.
Secondly, Mr. Davis objects that the independent valuer's terms of reference do not C
prevent him from applying a discount to reflect the fact that Mr. Kay has a minority
holding. The valuer is asked to determine a fair value, and it is left to him to decide
whether to apply a discount or not. Mr. Davis submitted that this would be contrary
to the decision of Nourse J. (as he then was) in Re Bird Precision Bel/ows Ltd. [1984]
Ch. 419; (1984) 1 BCC 98.992, affirmed by the Court of Appeal [1986] Ch. 658;
(1985) 1 BCC99.467
I think there may have been some misunderstanding about the effect of that decision.
o
First, Nourse J. decided that a valuation without a discount was appropriate on the facts
of that case, and the Court of Appeal said that his decision was within the limits of the
discretion conferred upon him by the Companies Acts. Secondly. that was a case in
which it was conceded that the petitioner was entitled to the statutory remedy on the
ground that the respondent had conducted the affairs of the company in a manner
unfairly prejudicial to his interests. In this case the question is whether. having regard to E
the offer, the petitioner is entitled to the statutory remedy at all. Thirdly. the principal
ground upon which Nourse J. decided that no discount was appropriate was that the
petitioner was an involuntary seller. He had been driven to sell his shares by the unfairly
prejudicial conduct of the respondent. Of course. it is true that in most ordinary cases of
breakdown of the relationship the petitioner is an involuntary seller, in the sense that he
would rather it had not broken down. But the respondent will usually be in the same
sense an involuntary buyer. He does not usually stand to gain any immediate benefit F
from the purchase of the petitioner's shares. As majority shareholder he already controls
the company and will usually derive his income from earnings rather than dividends.
The only advantage of the purchase to him is the possibility of a capital gain on a sale or
winding up at some future date. Nevertheless, on account of the breakdown, he has
unexpectedly to find the funds in order to payout the petitioner. It seems to me that in
an appropriate case the valuer should be entitled to fix a value which reflects the G
involuntariness of the purchase as well as the involuntariness of the sale: see Re a
Company No. 007623 of1984 (1986) 2 BCC 99,191, at p. 99,197.
Finally Mr. Davis said that the valuation by the independent valuer is not likely to be
a speaking valuation. If the independent valuer is well advised, he will do no more than
certify the figure which in his opinion is the fair value of the shares. In those circumstances,
the petitioner will have no way of knowing whether any adjustments have been made to H
the accounts for the misapplications of which he complains or whether there has been
any discount to reflect a minority interest. He will also not be able to challenge that
finding by an appeal. All that is perfectly true. The valuation has a rough and ready
aspect to it, and will not be nearly as fine-toothed as a valuation carried out before the
court. It will, however, as I have pointed out on earlier occasions, be far quicker and
cheaper. The question is whether it is unfair for a petitioner who has bought into a

© 1989 CCH Editions Limited

 Ch.D. Re Eastern Capital Futures Ltd. 223

A company with an article in the form of art. 7 to have to accept these aspects of the
valuation. In my judgment. it is not. Consequently, there appears to be on the petition
taken together with the offer which has been made, no reasonable grounds on which it
can be pursued, and it must, therefore, be struck out.
(Petition .,truck out)

Re Eastern Capital Futures Ltd.

Chancery Division (Companies Court).
C MorrittJ.
Judgment delivered 21 December 1988.
Liquidation - Trusts - Liquidators' remuneration - Application tar directions
- Futures trading company went into liquidation - Company held clients'
money in segregated bank accounts - Whether futures contracts and proceed.s
with brokers before payment into bank ,lccounts were trust assets - How trust
D moneys should be disbursed to clients - Whether liquidators should be
aI/owed remuneration out of trust assets.
This was an application for directions by the liquidators of Eastern Capital Futures
Ltd. ("the company"), as to how they should deal with moneys received from brokers in
respect of futures transactions carried out by the company on behalf of its clients.
The company was a futures trader which was in compulsory liquidation. It kept its
E clients' money in separate bank accounts, and it was accepted that money in those bank
accounts was trust money. Money was paid out of those accounts to brokers with whom
the company dealt, and the brokers paid the proceeds of futures contracts into those
accounts. The first question for the court was whether the contracts and the balance with
brokers prior to payment into the segregated accounts, were also trust assets. not
available for payment of the company's creditors.
F The second question was how the trust moneys should be disbursed to the client
beneficiaries. There was a deficiency, which arose because certain clients did not pay
margin calls due to the company, and because some of the futures contracts were
unprofitable. The company's records were such that it was not possible to identify the
defaulting clients, nor to attribute particular contracts to particular clients.
The third question was to what extent the court should aUow the liquidators remuneration
G out of the trust assets.
Held, giving directions accordingly:
1. The futures contracts were no more nor less than the authorised form of investment
of the trust moneys in the segregated accounts. As such, the benefit of the contracts and
the balances with brokers prior to payment into the accounts were trust assets not
available to pay the company's creditors.
H 2. No client or class of client was more or less innocent than any other, thus the equities
were equal between all client beneficiaries and they were entitled to the trust funds pari
passu. (Sinclair v. Brougham & Anor. [1914) A.C. 398, followed; Clayton's Case (1816) I
Mer. 572, not applied.)
3. The liquidators should retain remuneration out ofthe trust fund equal to what they
would have got if the trust moneys had been the company's own moneys. (Re Berkeley

British Company Law Cases