Whillock v Henderson (AP) & Ors [2007] ScotCS CSOH

"deceitful and surreptitious diminution of the business of the company, and its replacement by Sorn in the contract or contracts for the supply of water to the customer, was all devised and implemented by the first respondent, without consultation with the petitioner, and by excluding her from management decisions by, concerning and within the company."

She goes on to say that she was unable to participate in the business of the company; that the actings of Sorn, in establishing a business relationship with the customer, were for all practical purposes the acts of the first respondent; and that he acted so that the company relinquished its contract with the customer in favour of Sorn, whose actions he also controlled. She avers that the

"running down of the business of the company and its transfer to [Sorn] in the circumstances hereinbefore condescended upon is conduct which is unfairly prejudicial to the petitioner's interest in the company. The company has thereby been deprived of its sole customer and its entire existing trade and the making of profit."

In consequence, she seeks relief under sections 459-461 of the Companies Act 1985.

Submissions

[8 ] Mr Robertson invited me to dismiss the petition, which failing to exclude substantial parts of it from probation. Under reference to the terms of section 459, Mr Robertson emphasised that the petition must be presented by the petitioner asserting rights qua member of the company; that the conduct complained of must be prejudicial to the interests of the petitioner in that capacity; and that such prejudice must be unfair. Unfairness must be judged in a commercial context. Even in that context, something might be unlawful without being unfair or unfair without being unlawful. But in order for a member of a company to complain about lawful conduct, i.e. conduct permitted by the articles of association, there must be something in the relationship between the parties which entitles one party to expect that the other will not act in a particular way. In this regard, the court exercises its jurisdiction on the basis of established equitable principles. The test of unfairness is objective. It equates with a visible departure from the standards of fair dealing. In support of these general propositions he referred me to Re Saul Harrison [1995] 1 B.C.L.C. 14, 17-20, Re Noble [1982] 2 B.C.L.C. 273, 290-292, O'Neill v Phillips [1999] 1 WLR 1092, 1102-1104, Anderson v Hogg 2002 S.C. 190 at paras.[16] and [17] and Re London School of Electronics [1986] 1 Ch. 211. The petitioner must set forth what act or omission is complained of. Section 461 of the Act sets out the range of remedies available only if grounds in section 459 are established.

[9] Against that background, he took me through a number of passages in the petition and submitted that three crucial matters had not been properly focused by the petitioner. These were: first, the nature and extent of the petitioner's involvement in the company; second, the contract, if any, which existed between the company and the customer; and, third, the existence and terms of any lease entitling the company to continue to use and occupy the lands at the farm and to have access to the supply of water. As to the first point, he submitted that on the petitioner's own case it was agreed from the beginning that the first respondent would be in sole charge of the day to day running of the company, and there was therefore no basis for the averment made in a petition that at some stage the petitioner was "excluded" from the running of the company. As to the second point, the averments did not show that the company had any binding agreement with the customer which would have ensured its ability to continue supplying it, particularly after the customer was taken over by a third party. As to the third point, the averments in the petition were not sufficient to instruct a lease, and therefore it could not be said that the company had any right to continue taking water from the farm. The importance of the second and third points was that unless the petitioner could show that the actings of the first respondent had deprived the company of something thing of value, it could not be shown that those actings had caused anything prejudicial or unfair to the respondent. Mr Robertson further submitted that the complaints made by the petitioner were not relevantly made by her qua member of the company, nor were they complaints about the actings of the first respondent qua member of the company. Insofar as the first respondent had acted contrary to the interests of the petitioner, he had done so as a partner in the partnership running the farm and/or in his capacity as a director of Sorn. It was Sorn who made the profits from the new arrangement, not the first respondent. He invited me to sustain the first respondent's plea-in-law and dismiss the petition.

[10 ] For the respondents, Mr Campbell, Q.C., reminded me of the test of relevancy under reference to Jamieson v Jamieson 1952 S.C. (H.L.) 44, 50. Taking the petitioner's averments pro veritate, it could not be said in this case that the action was bound to fail. He characterised the first respondent's argument as comprising, essentially, two main points: first, that the petitioner had not relevantly averred her involvement in the management of the company, so as to be able to complain about having been excluded; and second, even if that were wrong, that the actings of the first respondent were not to do with the management of the company but were entirely divorced from it. In countering these submissions, Mr Campbell referred me to the terms of section 459 and to the averments in the petition of the context in which the parties developed their business relationship. There was no doubt about what the petitioner was alleging. She was alleging that the first respondent had carried out a subterfuge, setting up his own company (Sorn) to siphon off the business of the company in which he and the petitioner were 50% shareholders. That was a relevant case under section 459. He referred me to Anderson v Hogg (supra), Re London School of Electronics (supra) and Scottish Co-operative Wholesale Society Limited v Mayer [1959] A.C. 324. The petitioner was offering to prove, by reference to these averments, that the company's affairs were being managed by the first respondent in a manner which was both unfair and prejudicial to her interest as a director and shareholder.

[11 ] The petitioner's amendments after the second day of the discussion introduced further averments, particularly about the arrangements pursuant to which the company could be said to have had a lease of relevant parts of the farm for the purpose of its bottling operation. Mr Robertson made further criticisms of the petitioner's pleadings. It was now clear from the pleadings that the petitioner was not saying that the company had ever leased the well-head itself. There was ambiguity, he said, about which of the outbuildings were the subject of the alleged lease - this was important to the petitioner's case of an oral agreement which continued by tacit relocation, which would founder unless the particular buildings could be identified. It was said that the lease was agreed by Mr Whillock as agent for the company, but there were no averments as to how this agency was constituted. He had his own interest as director of the customer at the beginning of the relationship, and had his own reason for entering into discussions with the first respondent - it was important, therefore, that there be some identification of the basis on which it was said that he had been acting on behalf of the company in connection with the lease. Under reference to a number of authorities, including John Gilmour Gray v University of Edinburgh 1962 S.C. 1257, Scottish Residential Estates Development Co Ltd v Henderson 1991 S.L.T. 490, Erskine v Glendinning (1871) 9 M 656, Mann v Houston 1957 S.L.T. 89 and Shetland Islands Council v BP Petroleum Development Ltd 1990 S.L.T. 82, as well as Gordon, Scottish Land Law and Gloag and Henderson, The Law of Scotland, Mr Robertson emphasised the cardinal features of any lease, namely the subjects, the parties, the period and the rent. There was uncertainty as to the subjects. There was uncertainty about the period, although he accepted that it might be implied that the lease continued on a year by year basis. Of greater significance, there was uncertainty about the rent. The petitioner averred that the company paid the partnership a sum per bottle - 40p per bottle by around 2000 - and that part of this sum was de facto rent for the premises, the remainder being by way of a "royalty" for the water. These averments were insufficient to instruct any agreement as to the rent payable by the company for the premises and were therefore insufficient to instruct a relevant case that there was a lease.

[12 ] In a brief reply, Mr Campbell submitted that there was sufficient in the averments to entitle the petitioner to seek to prove a lease. In any event, it did not ultimately matter whether the arrangement by which the company made use of the premises had all the attributes of a lease. It was sufficient that it used the premises and took and bottled water from the farm pursuant to an arrangement under which it paid a composite sum. Although the petition made averments anent a lease, it was open to the petitioner on the facts averred to contend for some other arrangement falling short of a lease.

Discussion

[13 ] The cases to which I have been referred make clear that the words "unfairly prejudicial" are deliberately imprecise; and that it is both impossible and undesirable to define the circumstances in which there will be some equitable restraint on the actings of a director of the company having the day to day conduct of its affairs. In those circumstances it will be particularly difficult, though not impossible, for a respondent at a discussion on the procedure roll to exclude a complaint under section 459 altogether from probation. Whether the particular conduct complained of can properly be categorised as unfairly prejudicial will usually depend on an assessment of the whole evidence; and it will be difficult in advance of a proof to exclude particular averments on relevancy grounds. It is, to my mind, therefore generally undesirable for such a case to be discussed on the procedure roll unless the respondent can identify a clear legal point which would, if successful, dispose of the whole action. This is not such a case. The procedure adopted here has not been conducive to an efficient resolution of the dispute. I cannot help thinking that the parties would have been better off proceeding swiftly to a final hearing.

[14 ] It is not difficult to understand the case which the petitioner seeks to make. Her case is that the company was set up as a joint venture to exploit a market for bottled water. Her complaint is equally simple. It is that the first respondent set up his own company, Sorn, to take over the business of bottling water and supplying the customer to the exclusion and detriment of the company and therefore of the petitioner. And he did so without telling her what he was doing. It is in this context that the petitioner's complaint that she was "excluded" from any involvement in the management of the company must be understood. It does not imply an assertion that until then she was so involved; it simply means that although not concerned with the day to day management of the company, she was nonetheless entitled, and could reasonably have expected, to be consulted over any moves by the first respondent (through Sorn) to take over the business of the company and of any moves by him to cause the company to cease trading.

[15 ] Such a case, if it can be established, is clearly relevant. Mr Robertson submitted, as I understood it, that the acts of the first respondent of which the petitioner complained were his acts as a director of Sorn rather than as a director of the company; and that any prejudice to the petitioner was suffered by her not qua member of the company complaining about the acts of another person qua member of the company but simply because the company suffered as a result of the legitimate commercial activities of Sorn. This, he said, was outwith the scope of section 459. In my opinion this reflects too narrow a construction of that section. The section allows a complaint to be made on the basis that "the company's affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or some part of its members ...". That includes passive conduct. As Lord Keith of Avonholm said in Scottish Co-operative Wholesale Society Ltd v Mayer at p.362:

"Misconduct in the affairs of a company may be passive conduct, neglect of its interests, concealment from the minority of knowledge that it is material for the company to know."

He went on to say, at p.363:

"But I cannot think that where directors, having power to do something to save a company, lie back and do nothing, they are not conducting the affairs of the company, perhaps foolishly, perhaps negligently, perhaps with some ulterior object in view. They are certainly conducting the affairs of the company in breach of their duty as directors."

In the present case the complaint is not only that the first respondent set up Sorn in opposition to the company, but that, qua director of the company, he did nothing to prevent its business being taken by Sorn. Both complaints, if made good, fall within the proper ambit of section 459. I therefore reject that part of Mr Robertson's argument.

[16 ] The other main points of Mr Robertson's argument were directed to showing that the Company had neither a firm contract for the supply of water to the customer nor a firm agreement for the lease of the premises on, or the right to take water from, the farm. Before considering these points, it is important to see the context in which they arise. As I have indicated, Mr Robertson explained that they went to the question of whether the petitioner had been prejudiced and, if so, whether such prejudice was unfair. Even if it could be shown that the first respondent had acted in the manner complained of, this did not lead to any unfair prejudice unless by his actions he deprived the company, and therefore the petitioner, of something of value. Unless the petitioner could establish that the company had a firm agreement for the supply of bottled water to the customer, and had a firm agreement enabling it to take water from the farm and bottle it there, the petitioner could not show unfair prejudice in that sense. He submitted that the petitioner's averments on these matters were insufficient to instruct a case habile for proof. In my opinion this argument goes too far. Let it be assumed that the petitioner could not show any such firm agreements. She could still complain about the manner in which the first respondent conducted the affairs of the company so as, in effect, to put it out of business. That alone, if proved, would be sufficient to bring the petitioner within section 459. The question of whether or not the company had secure contracts would be relevant only to the measure of the detriment to the petitioner and, therefore, to the appropriate remedy under section 461. Even if Mr Robertson were correct on these points, therefore, it would not lead to the petitioner's case being excluded altogether from proof. And the petitioner would, at such proof, be entitled, on the averments of fact in the petition, to ask the court to form a view as to the extent of the prejudice suffered even if the company did not have firm contracts in place. So far as the company's contract to supply water to the customer is concerned, it is true that once Mr Whillock sold his company there was no longer a captive customer for the water. On the other hand, there is no reason to think that the customer would not have wanted to continue taking water from the company but for the intervention of Sorn, which the petitioner seeks to prove was part of the first respondent's unfairly prejudicial actings; and the petitioner would be entitled to ask the court to assess the likelihood of the company continuing to supply the customer on the assumption that Sorn did not interpose itself into the arrangements.

[17 ] As regards the criticism of the averments concerning the lease of premises on the farm, I accept that in order to establish that there was a lease the petitioner will have to establish the four cardinal parts of a lease. There is no difficulty about the parties. Nor do I think there is any substance to Mr Robertson's complaint that the premises to which the lease relates are uncertain - on a proper reading of the averments in the petition, the lease relates to the new premises into which the company moved in about March 1996. Nor is there any real problem about the duration of the lease, since Mr Campbell did not seek to assert an agreement going beyond one year. The main criticism focused on the averments concerning the rent. I accept that there is no specific identification of what part of the sum per bottle was rent and what part was royalties. But I do not think that this matters. The petitioner's case is that in return for the use of the premises and the sourcing of the water the company would pay a sum per bottle to the partnership. If that sum has to be divided up, it may be that one cannot say how much of it was rent and how much of it royalties for the water. But there is no reason why rent, even in the strict sense, should not consist of something more than a fixed sum of money payable at certain times. It is possible on the averments in the petition to regard the rent in this way: that in return for the use of the premises the petitioner would (a) pay rent and (b) take water and pay a royalty for it. On that analysis, the whole sum payable per bottle would be consideration for the lease of the premises. The sum appears to have been fixed from time to time. In the year 2000 it was 40p per bottle. If it were not possible to infer that from year to year thereafter the sum per bottle would be a reasonable sum, then the parties would be fixed with the 40p as the continuing rate. But this is going further than is necessary at this stage. It is sufficient to say that I do not think there is any difficulty in holding that the petitioner has made sufficient averments anent the lease to go to proof. But if I am wrong as to whether the agreement, thus analysed, would constitute a lease in the strict sense, I see no difficulty in viewing the arrangements as a licence which is sufficient for these purposes. The averments of fact in a petition are sufficient to instruct a licence and it does not matter that the word "licence" is not used as an alternative to "lease".

[18 ] Mr Robertson raised some other points of detail. I do not think that they require me to refuse probation to any particular averments in the petition. The test is one of fair notice and I am satisfied that the first respondent has full notice of the case being made against him. This applies also to the criticism that the petitioner does not make averments as to the basis on which Mr Whillock acted for the company in discussions anent the lease. It seems to me that it is quite sufficient for the petitioner to say simply that he did act on behalf of the company. That causes the first respondent no difficulty in terms of fair notice

[19 ] One point was left to be dealt with. Part of the relief claimed is an order against the company. The company has not been named as a respondent. Mr Campbell indicated that he was prepared to offer an amendment to include the company as a respondent and to make averments relative thereto. Mr Robertson accepted that there was no prejudice in allowing that amendment at this stage since all interested parties are already before the court. It was agreed that I should put the case out By Order and that the amendment could be discussed at that time.

Disposal

[20 ] I propose to allow to the petitioner probation of her averments in the petition. Before doing so, however, and so that the point of the company's involvement in the petition can be dealt with, I shall put the case out By Order. Parties may wish to address me on that occasion as to further procedure, including what form of probation would be appropriate.

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	Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Whillock v Henderson (AP) & Ors [2007] ScotCS CSOH_175 (31 October 2007) URL: http://www.bailii.org/scot/cases/ScotCS/2007/CSOH_175.html Cite as: [2007] CSOH 175, [2007] ScotCS CSOH_175

Scottish Court of Session Decisions