Reclaiming Motion by Allan Davidson and others against Pinz Bowling LTD and others (Court of Session) [2025] CSIH 6 (18 February 2025)

FIRST DIVISION, INNER HOUSE, COURT OF SESSION

[2025] CSIH 6

P401/23

Lord President

Lord Pentland

Lord Tyre

OPINION OF THE COURT

delivered by LORD TYRE

in the Reclaiming Motion

(FIRST) ALLAN DAVIDSON, (SECOND) SARAH DAVIDSON,

and (THIRD) ARGYLE ASSET MANAGEMENT LIMITED,

Petitioners and Reclaimers

against

(FIRST) PINZ BOWLING LIMITED, (SECOND) DARREN MARGACH,

and (THIRD) ROSS ANDERSON,

Respondents

Petitioners and Reclaimers: Brown; DAC Beachcroft Scotland LLP for Levy & McRae LLP

Respondents: Ower KC, Horn; Davidson Chalmers Stewart LLP

18 February 2025

Introduction

[1]

The issue for determination in this reclaiming motion (appeal) is whether the

circumstances, which are largely undisputed, amount to unfairly prejudicial treatment of the

petitioners as members of a company called Angus Park Limited ("the company"). The first

and second petitioners and the first respondent are the whole members of the company.

The first and second petitioners and the second and third respondents are the directors of

the company. The petitioners seek an order under section 996 of the Companies Act 2006

that the first respondent purchase their shares at fair value. The Lord Ordinary refused to

grant an order and the petitioners now reclaim that decision.

Factual background

[2]

The primary facts are largely undisputed. On one disputed issue of fact mentioned

below, the Lord Ordinary made a finding in favour of the petitioners and that finding is not

challenged.

[3]

The first respondent ("Pinz") is owned by the second and third respondents,

Mr Margach and Mr Anderson, who are also its sole directors. It was built up from a single

ten-pin bowling site to the holding company of a group of indoor leisure businesses using

inflatable equipment. During the Covid-19 pandemic, the group accumulated considerable

debt. Mrs Davidson had experience of operating a soft play centre in Glasgow;

Mr Davidson was an experienced businessman in the hotel industry and latterly in the

provision of student accommodation. Mr Margach and Mrs Davidson met as members of a

pressure group lobbying the Scottish Government for better treatment of the soft play sector

during the pandemic. The four individuals agreed to go into business together, and to form

the company as a joint venture, initially to operate a new indoor inflatable leisure business

at a site in Monifieth, trading under the "Innoflate" brand owned by Pinz.

[4]

In August 2021 the parties agreed to set up another company, DRS Leisure Ltd,

which would provide services to Pinz and the company and charge fees for those services.

Seven DRS shares were allotted to Pinz and three to Argyle Asset Management Ltd

("Argyle"). Mrs Davidson was to work unpaid as operations director for Pinz. By

agreement among the parties, DRS was struck off in December 2021 without having traded,

and a new company, DRSA Leisure Ltd, was incorporated in January 2022 to fulfil the same

role as DRS and with the same proportionate shareholdings. Initially Argyle held one share

in the company and Pinz held the other, but as a result of a reorganisation instructed by

Mrs Davidson in April 2022, Mr and Mrs Davidson came to hold one share each and Pinz

two.

[5]

The company opened for trading in leased premises on 2 April 2022 and was

immediately successful and profitable. Shareholder loans were repaid by September 2022

and dividends were declared. However the seeds of subsequent discord had been sown.

Mr Anderson became dissatisfied with the way in which Mrs Davidson was carrying out her

role as operations director for Pinz, and towards the end of August 2022 she was told to

leave (in effect sacked) with immediate effect. Messrs Margach and Anderson began to

doubt the wisdom of their venture with the Davidsons. The cash flow difficulties that had

encouraged Mr Margach to enter into a business venture with Mrs Davidson were in the

past. Going forward, no agreement had been reached regarding Pinz charging for

management services. The DRSA model turned out not to be acceptable to Messrs Margach

and Anderson. It was agreed that DRSA would be dissolved and that Pinz would present

proposals for charging directly for its services.

[6]

Matters came to a head in mid-October 2022. Without any agreement, Pinz raised a

number of invoices against the company and took payment of £10,000 plus VAT in respect

of one of them from the company's bank account. A virtual meeting took place while the

Davidsons were on holiday, in the course of which Mr Anderson proposed a charging

structure and stated that he would go and remove Innoflate signage and branding from the

site if agreement was not reached immediately. Under protest, Mr Davidson proposed an

alternative charging structure which was agreed in its essentials. It was intended that this

would be set out in writing but that did not happen, despite a "chasing" email from

Mrs Davidson on 19 December 2022. Invoices were thereafter rendered by Pinz on a

monthly basis. The Davidsons regarded the charges as excessive but the business continued

to make profits.

[7]

The next flashpoint occurred on 20 March 2023. At a meeting between Mr Davidson,

Mr John McGee, a business consultant who was chairman of the Pinz group, and

Mr Christopher McQuade, financial director of the Pinz Group, Mr McGee asked questions

about the reorganisation of share capital that had resulted in the transfer of shares from

Argyle to the Davidsons in 2022, stating that Messrs Margach and Anderson had known

nothing about it. This was the major disputed fact. The Lord Ordinary accepted

Mrs Davidson's evidence that Mr Margach and Mr Anderson did know about it at the time

and agreed to it.

[8]

Also on 20 March, a formal letter was sent by Messrs Margach and Anderson on

behalf of Pinz stating that it would be withdrawing all franchise products from the market

and would cease to provide its services or brand to the company on 20 April 2023. A further

letter dated 23 March 2023 from Messrs Margach and Anderson on behalf of Pinz demanded

the resignation of the Davidsons as directors of the company and the transfer of their shares

to Pinz for their nominal value of £1 each, on the ground that the transfer had been

unauthorised and prejudicial to Pinz. In their pleadings and at least initially in evidence, the

respondents sought to justify this stance on the groundless basis that they could as a

consequence of the share transfers find themselves in business with an insolvency

practitioner appointed to administer the affairs of Argyle. The letter of 23 March wrongly

stated that the booking service run by Pinz for the company had been shut down for

bookings after 20 April 2023 and reiterated the intention to remove the brand and

management from the site on that date.

[9]

A further dispute broke out in April 2023 as to whether the company could be

treated as a going concern for the purposes of its statutory accounts for the year ending

31 December 2022, if Pinz's services and brand could be withdrawn at short notice. The

issue was first raised by Mr McQuade, who sought advice from Mr Scott Dunbar, a business

advisory partner with Johnston Carmichael CA who were Pinz's accountants and who were

also engaged to prepare the company's accounts. Mr McQuade introduced the matter to

Mr Dunbar in an email dated 20 April 2023, in which he described the share transfers as

"[s]ome interesting transactions" (emphasis in original). On 24 April Mr Dunbar sent a letter

to Mr Margach stating:

"Further to our recent telephone conversation I write to confirm that when a

company is preparing a set of statutory Accounts under the FRS102 1A standard, the

company must assess whether it will continue on a going concern basis for a period

of 12 months from the date of approval of the Accounts. Companies are required to

adopt the going concern basis of accounting, except in circumstances when the

directors have determined at the date of approval of the Financial Statements either

that they intend to liquidate the entity or to cease trading or have no realistic

alternative to liquidation or cessation of operations.

Therefore, on the basis in the near future the above-named company will have its

franchise licence removed, which will result in the company no longer being able to

trade, the Accounts of Angus Park's [sic] Limited should be prepared on the basis

that the company will not continue as a going concern..."

The letter was forwarded to the Davidsons by Mr McQuade, with the comment that "due to

the planned removal of the Innoflate franchise and management contact [sic] that the

statutory accounts due to be filed by 20th May 2023 cannot be prepared on a Going Concern

basis". Mr McGee proposed a meeting to discuss the issue between himself, Mr McQuade

and the Davidsons in Johnston Carmichael's Elgin office; the Davidsons did not respond but

instead intimated, via their solicitors, their intention to raise proceedings under section 994.

[10]

In May 2023, the Davidsons commenced the present proceedings. Interim orders

were sought in relation to withdrawal of services by Pinz and a series of short-term

undertakings were given. The deadline for withdrawal was extended until the end of June

and then the end of July. Unrealistic counter-offers for the purchase of shares were made by

both sides. The Davidsons, through their solicitors, proposed steps by which the company

could continue to trade after withdrawal of Pinz's services and brand. Requests by the

Davidsons' solicitors to Mr Dunbar to provide the draft company accounts went

unanswered until 2 August 2023, when a draft which still contained the going concern

qualification was provided. The draft accounts also contained a major error in relation to

the company's future liabilities under its lease, which were stated at a grossly excessive

figure of £5 million. In a telephone call to the Davidsons on 18 August 2023, Mr Dunbar

stated that the going concern qualification had been inserted on Pinz's instructions and that

he had not at any time given advice that it was necessary or appropriate. He acknowledged

that the lease liability figure was wrong. Eventually the accounts showed the lease liability

as £187,500.

[11]

The deadline for submission of the company's statutory accounts was 20 August

2023. That deadline came and went with no movement from Pinz on the going concern

issue. By late September Pinz conceded that the accounts should be lodged on the basis that

the company was a going concern; the accounts were lodged on 3 October 2023.

[12]

As a direct consequence of Pinz's delay in agreeing to the submission of the accounts

on a going concern basis, a problem arose with the premises' insurance. The broker was

aware of the going concern issue and had informed Mr Margach that cover could not be

renewed unless the management accounts were up to date. Mr Margach delayed in

bringing this to the Davidsons' attention. The company's insurance cover lapsed and the

premises had to be closed for three weeks from late September 2023 until the matter was

resolved. Thereafter the respondents agreed to give at least three months' notice of the

withdrawal of Pinz's services, and in practical terms to await the outcome of this litigation

before doing anything further.

The law

[13]

So far as material, sections 994 and 996 of the Companies Act 2006 provide as

follows:

"994 Petition by company member

(1) A member of a company may apply to the court by petition for an order under

this Part on the ground

(a) that the company's affairs are being or have been conducted in a manner

that is unfairly prejudicial to the interests of members generally or of some

part of its members (including at least himself), or

(b) that an actual or proposed act or omission of the company (including an

act or omission on its behalf) is or would be so prejudicial...

...

996 Powers of the court under this Part

(1) If the court is satisfied that a petition under this Part is well founded, it may make

such order as it thinks fit for giving relief in respect of the matters complained of.

(2) Without prejudice to the generality of subsection (1), the court's order may

...

(e) provide for the purchase of the shares of any members of the company by

other members or by the company itself and, in the case of a purchase by the

company itself, the reduction of the company's capital accordingly."

[14]

As regards the concept of unfairness, the guidance of Lord Hoffmann in O'Neill v

Phillips [1999] 1 WLR 1092 at 1098-99 remains authoritative:

"...[A] member of a company will not ordinarily be entitled to complain of

unfairness unless there has been some breach of the terms on which he agreed that

the affairs of the company should be conducted. But... there will be cases in which

equitable considerations make it unfair for those conducting the affairs of the

company to rely upon their strict legal powers. Thus unfairness may consist in a

breach of the rules or in using the rules in a manner which equity would regard as

contrary to good faith."

The petitioner must prove both prejudice and unfairness; one without the other is not

sufficient: see eg Jesner v Jarrad Properties Ltd 1993 SC 34; Rock (Nominees) Ltd v RCO Holdings

Plc (In Members Voluntary Liquidation) [2004] BCC 466; Re Neath Rugby Ltd [2008] BCC 390,

Lewison J at paragraph 202. In this regard the court disagrees with the observation of the

Lord Ordinary at paragraph [229] of his opinion that the statutory concept of unfair

prejudice is a unitary one; the authorities are clear that both aspects must be separately

satisfied.

[15]

When applying the test of unfairness, the court is applying an objective standard of

fairness: Re Saul D Harrison & Sons plc [1994] BCC 475, Hoffmann LJ at 488; Neill LJ at 501.

In that case Hoffmann LJ observed that the starting point for determining fairness will

generally be the terms of the articles of association. He continued (ibid):

"...the powers which the shareholders have entrusted to the board are fiduciary

powers, which must be exercised for the benefit of the company as a whole. If the

board act for some ulterior purpose, they step outside the terms of the bargain

between the shareholders and the company."

The Lord Ordinary's opinion

[16]

At paragraph [229], the Lord Ordinary identified the issue as being whether the

company's directors relevantly breached their duties to it, or whether the affairs of the

company were conducted contrary to shared understandings and expectations which equity

required in all the circumstances to be observed. He had no reason to doubt the credibility

or reliability of any of Mr and Mrs Davidson, Mr Margach or Mr Anderson. He found

Mr Dunbar's evidence to have an overall unsatisfactory quality but was not convinced that

he could be characterised as either a conspirator with the respondents or at least their useful

idiot.

[17]

The Lord Ordinary made certain findings which were favourable to the petitioners'

case:

By August 2022 the Pinz directors had come to see the Davidsons as a dead

weight best shrugged off (paragraph [240]).

The raising of the 2022 share reorganisation in March 2023 was part of a

premeditated plan to identify and prosecute a fresh casus belli against the

Davidsons (paragraph [243]). It was more plausible that Mr Margach and

Mr Anderson chose to make such an issue of it because they had been given to

understand by someone involved in the affairs of Pinz or advising it that it could

be weaponised against the Davidsons, and they were prepared to use it as such

(paragraph [244]).

The ultimate lapse in the company's insurance cover, which undoubtedly

prejudiced it, was entirely a product of the going concern issue and the

consequent failure of the company timeously to lodge its statutory accounts

(paragraph [250]).

Nevertheless, the Lord Ordinary held that the petitioners had failed to demonstrate unfairly

prejudicial conduct by the respondents.

Events of March and April 2023

[18]

The Lord Ordinary addressed first the events of March and April 2023 and their

consequences. As regards the share reorganisation issue, he did not consider that

Mr Margach or Mr Anderson had thought of it or even understood it. There was no legal

substance to it, and in court the focus shifted to how the supposedly secret reorganisation

(which as the Lord Ordinary found had not been secret at all) had finally undermined any

trust which Pinz had in the Davidsons. The letter demanding the resignation of the

Davidsons as directors and the transfer of their shares for £1 each was legally inaccurate and

was not understood by Messrs Margach and Anderson. The overall tone and content were

risible, and the Davidsons did none of what was demanded. In the event the letters of

March 2023 contained nothing that made any difference to the course of the company's

affairs.

[19]

The Lord Ordinary acknowledged that it might be said that the repeated threat to

withdraw the Pinz services resulted in uncertainty as to the company's ability to continue

trading in an orderly manner, but the reality was that all parties were aware that the threat

was a hollow one. The respondents had received legal advice that such action would

probably have been prevented by the court; that advice was well-founded. When this

litigation commenced and interim orders were sought, the respondents gave and renewed

an undertaking and the matter was never ruled on by the court. If the emptiness of the

threat was obvious to the respondents, it must have been equally obvious to the Davidsons.

Had they taken the threats seriously they would have taken more definite and vigorous

steps to protect the company's interests. The Lord Ordinary did not accept that those

representing the Pinz interest set out deliberately to destabilise or devalue the company;

their target was the Davidsons.

[20]

As regards the going concern issue, the Lord Ordinary observed that this could, with

hindsight, be interpreted as a deliberate attempt to manufacture an apparent existential

crisis for the company, enlisting the assistance of Johnston Carmichael to that end.

However, he decided without much difficulty that the whole episode fell to be regarded as

one of "bumble and blunder" rather than anything more sinister. His assessment of

Mr Dunbar was that, despite a lack of circumspection and an infelicitous mode of

expression, he was not someone prepared knowingly to compromise his professional

integrity. Mr McQuade might have been inclined to ingratiate himself with Mr Margach,

and over-enthusiastic in seizing upon and reacting to the careless statements being made by

Mr Dunbar, but he genuinely thought that the issue was a real one which had to be taken

seriously. Neither Mr Margach nor Mr Anderson had any real grasp of the nuances of the

going concern issue; they took advice from professionals and acted upon it. The Davidsons

were not beyond criticism: they ignored the invitation to discuss the issue at a meeting in

Elgin. As regards the lapse of the insurance cover, neither side intended that to happen, and

when it did the respondents put the undertaking not to remove the Pinz services on a more

long-term footing. The core problem lay in the failed personal relationship amongst the

corporators.

Events of October 2022

[21]

The Lord Ordinary rejected the petitioners' contention that in relation to the charging

arrangements Mr Margach and Mr Anderson were in breach of their fiduciary duties as

directors of the company by advancing the interests of Pinz over those of the company. It

was plain that they had been acting in the capacity of directors of Pinz, presenting its

position to the Davidsons as representing the interests of the company. Decision-making on

behalf of the company was left to the Davidsons. The October 2022 negotiation was not at

odds with the company's articles or the statutory provisions regarding directors' duties.

[22]

The conclusion that Mr Margach and Mr Anderson did not act in breach of their

fiduciary duties to the company did not, however, necessarily result in a conclusion that its

affairs were not being conducted in a manner unfairly prejudicial to the petitioners. The

company's situation was in some respects analogous to that of the company in Meyer v

Scottish Co-operative Wholesale Society 1954 SC 381; 1958 SC (HL) 40. At the outset, at least,

the company had been a quasi-partnership within the meaning of Ebrahimi v Westbourne

Galleries Ltd [1973] AC 360, formed on the basis of a relationship of trust and confidence

which the individual participants conceived to exist amongst themselves at the time.

Although that relationship had ceased to exist by October 2022, as a consequence of the

decision of Messrs Margach and Anderson to withdraw from the original business plan and

to sack Mrs Davidson, Pinz was not entitled to rid itself brevi manu of the obligation which

had been implicit in its original business relationship with the company, and which in

October 2022 continued to oblige it to deal with the company fairly.

[23]

The question was whether it had been demonstrated that what occurred in October

2022 was relevantly unfair. The evidence as to whether the charges demanded by Pinz were

excessive was vague and inconclusive. Expert evidence was given on behalf of the

Davidsons by Mr Matthew Geale FCA that the amount demanded by Pinz fell within the

range of franchise fees which were, as a matter of fact, charged and paid in the market

(typically being 10% to 14% of gross sales). Mr Geale expressed doubts, however, about

what exactly Pinz was providing in return for its charges, which appeared to represent a

substantial imposition upon the company. In the absence of any detailed analysis of what

was provided and what the market rates might have been for equivalent services, the

Lord Ordinary considered that any conclusion that what was demanded was excessive

could not amount to anything more than speculation.

[24]

As regards the manner in which the October 2022 negotiation was conducted, there

was little doubt that a robust, even aggressive, approach was taken by Mr Margach, with

Mr Anderson threatening to remove the Innoflate signage from the premises if agreement

was not reached. The Davidsons did not however regard this as more than a very

substantial inconvenience. Although Mr Davidson had not had a free hand to negotiate as

he might have wished on behalf of the company, the arrangements agreed were not

sufficiently intolerable to cause the Davidsons to resort to legal action; that had come later.

The Lord Ordinary concluded that on the whole, the events of October 2022 also failed, by a

small but decisive margin, to qualify in law as unfairly prejudicial conduct.

[25]

For these reasons the Lord Ordinary declined to grant the order sought by the

petitioners for purchase of their shares by the respondents.

Argument for the petitioners

[26]

The majority of the grounds of appeal proceeded on the basis of acceptance of the

Lord Ordinary's findings in fact. The appellate court was accordingly less constrained in its

ability to reach a different conclusion from that of the Lord Ordinary than where primary

findings of fact involving questions of credibility and reliability were challenged. In relation

to certain matters, however, it was submitted that the Lord Ordinary had misunderstood or

omitted to consider material evidence. As regards the law, the case raised no novel issues

and parties were in broad agreement as to the test to be applied. The Lord Ordinary had

sufficiently focused the issue (at paragraph [229]) as being "whether the Company's

directors relevantly breached their duties to it, or whether the affairs of the Company were

conducted contrary to shared understandings and expectations which equity required in all

the circumstances to be observed".

[27]

The evidence was overwhelmingly to the effect that the respondents' interactions

with the petitioners between August 2022 and March 2023 were directed at achieving the

objective of forcing them out. Although the Lord Ordinary had held that the respondents

sought in bad faith to manufacture a grievance out of the share transfer, he declined without

explanation to attribute any similar intent to the extensive parallel course of conduct about

the statutory accounts and withdrawal of services. He erred in failing to analyse these

matters within the context of his overarching findings regarding the respondents' objectives

and motivation.

[28]

Prior to October 2022, a breakdown of relations was not inevitable. Arrangements

agreed in September were breached by the respondents imposing a management fee and

taking payment without discussion. That must have been done on the respondents'

instructions. There had been no urgent need for the remote meeting while the petitioners

were on holiday. Mr Anderson's threat to withdraw services had been intended to be, and

was, taken seriously. The Lord Ordinary erred in holding that the Davidsons did not regard

it as anything more than an inconvenience; objectively it was an existential threat. The

Lord Ordinary's characterisation of the negotiation as one conducted at arm's length

between Mr Davidson on behalf of the company and Messrs Margach and Anderson on

behalf of Pinz did not withstand scrutiny. The breach of fiduciary duty arose from the

respondents' use of an improper threat to cause Pinz to breach contractual obligations owed

by it to the company, against which breach Messrs Margach and Anderson had fiduciary

duties to protect the company. The Lord Ordinary had correctly recognised that Meyer v

Scottish Co-operative Wholesale Society provided valuable guidance as to the underlying

principle, but erred in holding that the application of that principle the existence of a

continuing duty to deal fairly with the company did not entitle the petitioners to a remedy

under sections 994 and 996. He had failed to recognise the restrictions on Messrs Margach

and Anderson's conduct due to their being directors of both Pinz and the company. The

company had been deprived of its ability to conduct a commercial negotiation. The

Lord Ordinary further erred in his evaluation of the level of the charges and the existence of

prejudice to the company.

[29]

As regards the events of March 2023, the only possible characterisation open on the

evidence was that the respondents had determined to try to force the petitioners out, to

acquire their shares at a gross undervalue, and to do so by improper means, including

threats of disorderly cessation of trading. The Lord Ordinary appeared to have accepted

that the entire course of conduct was intended to force the petitioners out but erred in

concluding that it was not to be characterised as unfairly prejudicial because of the

respondents' ineptitude. But there was no inconsistency between a course of conduct being

wholly improper and motivated by malign intent, and at the same time lacking subtlety or

being ineptly executed. The respondents did not desist when challenged, but only when

court proceedings were initiated. The ability of the petitioners to defend their interests and

those of the company only by means of litigation was properly to be seen as an indicator of

the unfairly prejudicial character of the respondents' conduct. The reason no draft written

agreement had been produced by the respondents was because they wanted the Davidsons

out.

[30]

The "going concern" issue had been a part of the respondents' overall purpose.

None of Messrs Margach, Anderson, McQuade or Dunbar had been able to justify in

evidence the view that termination of the franchise agreement with Pinz would necessitate

the company ceasing to trade. The draft accounts had been prepared on the basis that the

company was not a going concern without any work having been done to support that

conclusion and without the directors having agreed to such a course of action. Mr Dunbar's

evidence about the advice he gave and his reasons for failing to provide the petitioners with

the draft accounts was patently dishonest. Mr McQuade's immediate forwarding of

Mr Dunbar's letter to the petitioners was a clear indication of the intended purpose of the

letter: to create the impression of imminent distress, bolstered by the view of Johnston

Carmichael, to encourage the petitioners out of the company and to drive the price down.

The Lord Ordinary resisted that conclusion on the basis of his view that Messrs Margach

and Anderson lacked sufficient understanding or guile to pursue such a campaign, but it

was no different from their willingness to weaponise the share transfer issue. That they

embarked upon it clumsily and were ultimately forced to back down did not detract from its

unfairly prejudicial character. It was not necessary for them to understand the subtleties.

The Lord Ordinary had set the bar for access to the section 994 remedy far too high. When

the insurance problem emerged, Mr Margach delayed for more than a month before

informing the petitioners. The respondents removed the "going concern" qualification from

the accounts and withdrew their threats to withdraw services. But by then actual damage

had been done.

Argument for the respondents

[31]

On behalf of the respondents it was submitted that the reclaiming motion should be

refused. The nature of a petition under sections 994 and 996 is that it is inherently fact

dependent. The conclusions which the Lord Ordinary reached were based on the facts as

presented to him in evidence. He had the benefit of having seen and heard all the witnesses

give evidence and was best placed to assess the credibility and reliability of the witnesses.

The conclusions which he reached were clear and entirely reasonable. It could not be said

that any of his conclusions were plainly wrong in terms of the evidence. The petitioners

simply did not agree with various findings made. That was not a valid ground of challenge

to a decision of a Lord Ordinary following proof: Henderson v Foxworth Investments Ltd 2014

SC (UKSC) 203; McGraddie v McGraddie [2014] SC (UKSC) 12; Royal Bank of Scotland Plc v

Carlyle 2015 SC (UKSC) 93.

[32]

The petitioners' case was based on the notion that the respondents set out on a

premeditated, and somewhat complex, course of conduct to distress, destabilise and devalue

the company in order to remove the petitioners. The Lord Ordinary found that there was no

such premeditated plan. Whilst some of the events could, in the Lord Ordinary's words, be

categorised as risible, they were not unfairly prejudicial. The trust and confidence and

personal relationships between the parties simply broke down. In any event, even if any of

the conduct of the respondents had been unfair, the absence of actual prejudice to the

petitioners was fatal to their case.

[33]

The Lord Ordinary had been correct to hold that the events in October 2022 did not

amount to unfairly prejudicial conduct. The petitioners had asked for a meeting at short

notice. The arrangements for payments to Pinz were not forced on them but were a matter

of agreement. The petitioners were content to let the business run and to benefit from

dividends. No expert evidence was led by the petitioners to support the bald assertion that

the franchise or management charges levied by Pinz were excessive. The imposition of

reasonable fees could not be said to be unfair or prejudicial. As regards the alleged breach

of fiduciary duties by Messrs Margach and Anderson, the Lord Ordinary had correctly held

that it had been clear that they were not wearing two hats during the negotiations but were

representing the interests of Pinz, with the Davidsons representing the interests of the

company. As the Lord Ordinary noted, not every breach of fiduciary duty results in unfair

prejudice.

[34]

The Lord Ordinary had also been correct to hold that the respondents' conduct in

March 2023 did not amount to unfairly prejudicial conduct. The letter of 23 March 2023,

which had been prepared by the respondents' former lawyers, had not been fully

understood by them. The franchise and management services were never in fact removed.

It followed that the letters had no effect at all on the business of the company, and

occasioned no prejudice to the company or to the petitioners. In any event the Lord

Ordinary had found that by March 2023, all parties were aware that the repeated threats to

withdraw Pinz's services were hollow. The Davidsons took no steps to ascertain whether

alternative sources of services were available until June 2023.

[35]

Nor did the Lord Ordinary err in holding that the issue of the filing of the company's

accounts did not amount to unfairly prejudicial conduct. Mr McQuade had considered that

whether the company was a going concern was a real issue. Advice had been sought from

Mr Dunbar. The Lord Ordinary was correct to find that neither of Messrs Margach or

Anderson had a real grasp of what "going concern" meant and relied on professional

advice. The Davidsons had not taken up the offer of a meeting to discuss the matter.

Requests for the draft accounts had not been pressed, and they were provided on 2 August

2023. Mr Davidson did not engage with the respondents thereafter and the filing deadline

was missed. The Lord Ordinary had found that Mr Dunbar was not someone who would

compromise his professional integrity, and that there had been no form of conspiracy to

fabricate a crisis in the company in order to destabilise it. The actions of the Davidsons in

relation to the going concern issue were not beyond criticism, having failed to attend the

meeting at an early stage. Mr Davidson was an experienced businessman who could have

addressed the problem of the draft accounts himself, but he had taken no action. Although

the Lord Ordinary had correctly held that the temporary closure of the business due to the

lapse of insurance cover prejudiced the company, he was also correct to note that none of the

parties had wished this to happen. The directors bore collective responsibility. The closure

of the business was the only instance of actual prejudice. When Mr Davidson engaged with

the respondents, the issue was resolved on a more long-term footing.

Decision

The role of the appellate court

[36]

The circumstances in which an appellate court can interfere with the decision of a

judge at first instance have been subject to considerable scrutiny in recent years and may

now be regarded as well settled. As regards primary findings in fact, the circumstances

were summarised in Woodhouse v Lochs and Glens (Transport) Ltd 2020 SLT 1203 (opinion of

the court delivered by Lord President Carloway) at paragraph [31]:

"...In reviewing [primary findings of fact], an appellate court must exercise

appropriate caution, especially where the Lord Ordinary's decision has been based

on determinations on credibility or reliability. Where this occurs, the appellate court

must be satisfied that the findings of the Lord Ordinary were `plainly wrong' (Clarke

v Edinburgh and District Tramways Co, Lord Shaw 1919 SC (HL) 35, at p.37; (1919) 1 SLT 247, at

p.249, approved in Thomas v Thomas, Lord Thankerton at 1947 SC (HL), p.55; 1948

SLT, p.6, Lord Macmillan at p.59 (p.8)). These words mean that, in the view of the

appellate court, the Lord Ordinary reached a decision which no reasonable judge

could have reached (Henderson v Foxworth Investments Ltd, Lord Reed 2014 SC (UKSC) 203, at

p.219; 2014 SLT 775, p.784, para.62). This in turn is explained as meaning that

the decision cannot reasonably be explained or justified (ibid p.220 (p.785) para.67)."

[37]

In the present case the petitioners invited the court to reject the Lord Ordinary's

assessment of Mr Dunbar as a credible and reliable witness, and to find instead that he had

been patently dishonest. We reject that invitation. Although, as the Lord Ordinary

recognised, Mr Dunbar's evidence was unsatisfactory, this court has no basis upon which to

be satisfied that the Lord Ordinary's finding that Mr Dunbar was neither a conspirator nor a

useful idiot was "plainly wrong". The same applies to various submissions made on behalf

of the petitioners that the Lord Ordinary misunderstood or disregarded material aspects of

evidence.

[38]

The position is, however, otherwise where the court is not reviewing primary facts

but rather inferences from them (secondary facts). In that situation the court can more easily

reverse a first instance conclusion: Woodhouse v Lochs and Glens (Transport) Ltd, above,

para 33, where the court went on to observe:

"This is even more so when what is under review is the application of the law to the

facts; whether primary or inferential (SSE Generation v Hochtief Solutions 2018 SLT

579, LP (Carloway) at para [282]; Anderson v Imrie 2018 SC 328, Lord Drummond

Young at para [44]). In that situation, it may be that the benefits of the larger

appellate bench can play a significant part in arriving at the correct decision (ibid,

citing Appellate courts parts 1, 2 and 3 2015 SLT (news) 125, 130 and 138 at 127). When

engaging in the intellectual process of applying the law to the facts, or in drawing

inferences from primary facts, an appellate court may be more objective in its

approach and be less influenced by the Lord Ordinary's perception of, and maybe

even sympathy for, the witness (AW v Greater Glasgow Health Board [2017] CSIH 58,

LJC (Dorrian) at para 44)"

[39]

In the present case the court understands parties to be in agreement that the

Lord Ordinary had correctly focused the issue as being whether the company's directors

relevantly breached their duties to it, or whether the affairs of the company were conducted

contrary to shared understandings and expectations which equity required in all the

circumstances to be observed. These are inferences from the primary facts, which as already

observed are not in dispute, and the issue as thus focused requires the application of the law

to those inferences. That being so, this court is in at least as good a position as the

Lord Ordinary to address the questions raised.

Events of October 2022

[40]

In assessing the fairness or otherwise of the actions of Mr Margach and Mr Anderson

in October 2022, it is important to bear in mind that as well as being the sole owners and

directors of Pinz, they were also two of the four directors and, through Pinz, 50%

shareholders of the company. Mr and Mrs Davidson could not, on their own, take binding

decisions on behalf of the company. When Messrs Margach and Anderson negotiated on

behalf of Pinz, they created an irresoluble conflict of interest as regards representation of the

company, to which they owed fiduciary duties.

[41]

As the Lord Ordinary observed, the circumstances of the present case are in some

ways analogous to those of Meyer v Scottish Co-operative Wholesale Society Ltd (above). In that

case a company was formed to enable the society to obtain licences to manufacture rayon

cloth. The petitioners were directors of and minority shareholders in the company, and it

was their connections and qualifications that had facilitated the granting of licences. Three

other directors were nominated by the society. After an unsuccessful attempt to buy out the

petitioners' shares at less than their market value, the society embarked on a policy of

diverting the company's trade to itself, with a view to destroying the company's trade and

devaluing its shares. This policy was known to the society's nominee directors on the

company's board, who actively promoted it. The petitioners sought an order for purchase of

their shares by the society at their value before the conduct complained of had commenced,

on the ground (in terms of the then current legislation) that the society's conduct was

oppressive. The court granted the order sought and the House of Lords dismissed the

society's appeal. Lord President Cooper, in a passage at 1954 SC 391 approved and adopted

by Viscount Simonds and Lord Keith of Avonholm in the House of Lords, stated:

"The truth is that, whenever a subsidiary is formed as in this case with an

independent minority of shareholders, the parent company must, if it is engaged in

the same class of business, accept as a result of having formed such a subsidiary an

obligation so to conduct what are in a sense its own affairs as to deal fairly with its

subsidiary."

Lord Keith of Avonholm added (page 63) that

"...conducting what are in a sense its own affairs may amount to misconducting the

affairs of the subsidiary. It is difficult to say that misconduct in the affairs of the

subsidiary is not conduct in the affairs of the subsidiary and that, I think, is what

Lord Cooper had in mind. 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. That, in my opinion, is what happened here."

[42]

In the present case Pinz did not hold a controlling interest in the company, but its

50% interest rendered it impossible for the company's affairs to be conducted without its

approval. By negotiating with the Davidsons on behalf of Pinz without regard to the

interests of the company, including threatening summarily to remove the brand name,

Mr Margach and Mr Anderson breached their fiduciary duties to the company. Applying

an objective test, this conduct was unfair to the company and to its members, including the

Davidsons. In failing so to hold, the Lord Ordinary erred in his application of the law to the

primary and inferential facts. In having regard to the fact that the Davidsons did not regard

the arrangements agreed by them as sufficiently intolerable to cause them to resort to legal

action, the Lord Ordinary departed from the objective test that must be applied in assessing

unfairness.

[43]

Turning, however, to the question of prejudice, the court is not satisfied that

prejudice has been made out in relation to this aspect of the petitioners' case. The

Lord Ordinary found (paragraph [260]) that Mr Davidson's contention that the franchise fee

and management charge demanded by Pinz and largely agreed by Mr Davidson grossly

exceeded the market rate was not supported by the evidence. On the contrary, there was

evidence that the "franchise" fee fell within the range that could reasonably have been

demanded. Mr Geale, the petitioners' expert valuation witness, appears to have been of the

same view. There remained doubt as to whether the arrangement could properly be

described as a franchise, and also as to exactly what services were being provided by Pinz in

return for the management charge, but the court sees no reason to differ from the Lord

Ordinary's view that a conclusion that what was demanded was excessive amounted to no

more than speculation.

Events of March and April 2023

[44]

Assessment of the respondents' actings in March and April 2023, and thereafter,

must similarly take into account the fiduciary duties owed by Messrs Margach and

Anderson to the company. In two clear respects, the court considers that those duties were

breached: first, in relation to the persistent threats to withdraw Pinz's services on a timescale

that precluded an orderly transfer to an alternative service provider; and, secondly, by their

insistence on presenting the company's accounts with a going concern reservation despite

having carried out no proper, or indeed any, analysis of whether such a reservation would

be justified even in the eventuality that Pinz's services were withdrawn in a disorderly

fashion. The context of these actings, including the weaponisation of the share transfer

issue, was the respondents' desire to be rid of the Davidsons from the company. In terms of

section 994, both of these courses of action were objectively unfair, in the sense enunciated

by Lord Hoffmann in O'Neill v Phillips and previously in Re Saul D Harrison & Sons plc, to

the company and to its shareholders. As in October 2022, the Davidsons' 50% shareholding

and equal representation on the board of the company were not sufficient to allow them to

disregard the efforts being made to force them out, or to take remedial action on their own.

The observations of Lord President Cooper and Lord Keith of Avonholm in Meyer v Scottish

Co-operative Wholesale Society Ltd, cited above, are apposite to the respondents' approach to

the affairs of the company during this period.

[45]

As regards prejudice, it is readily apparent that an abrupt withdrawal of services

resulting in an interruption of the business would be prejudicial to the company and to its

shareholders. In order to counter the threats by Pinz, via Messrs Margach and Anderson, to

withdraw its services at short notice, the Davidsons required to resort to the expensive

course of action of litigation, including enrolling for interim orders which did not require to

be insisted in because an undertaking was given by Pinz to the court. The respondents'

continued adherence to draft accounts which contained an unjustified going concern

qualification ultimately resulted in actual prejudice to the company and its shareholders

when the business required to shut down temporarily when insurance cover was

withdrawn. On the face of it, therefore, the requirements of unfairness and prejudice are

both met.

[46]

The reasons for the Lord Ordinary's conclusion that none of the above matters,

objectively viewed, amounted to unfairly prejudicial conduct of the company's affairs are to

be found within paragraphs [243]-[251] of his opinion. Having found that the share transfer

issue was part of a premeditated plan to prosecute a fresh casus belli against the Davidsons,

the Lord Ordinary did not consider that either Mr Margach or Mr Anderson had really

understood it. He nevertheless acknowledged that they were prepared to try to make it an

issue in the relationship and signed the letters sent in March 2023 containing derisory offers

for the Davidsons' shares despite failing to understand much of what was contained in

them. In so far as the Lord Ordinary was influenced by his perception that Messrs Margach

and Anderson did not understand, or fully understand, the measures that were being taken

to remove the Davidsons from the company, he fell into error in failing to assess the

unfairness and prejudice objectively.

[47]

The Lord Ordinary accepted (paragraph [245]) that if the letter of 23 March 2023

represented unfairly prejudicial conduct of the company's affairs, Messrs Margach and

Anderson would have had to accept that they, and through them Pinz, were to blame for

that. His reason for holding that it did not represent such conduct was that the tone and

content of the letter were risible and that the Davidsons did nothing in response to it. In fact

Mr Davidson responded in an email dated 27 March 2023 that they were taking the matter

"very seriously indeed" and had taken professional advice. The primary facts found by the

Lord Ordinary do not support an inference that the Davidsons regarded the correspondence

from the respondents and those acting on their behalf as risible. Nor do those facts support

an inference that by March 2023 all parties were aware that the threat by Messrs Margach

and Anderson to withdraw Pinz's services was a hollow one. The response of the

Davidsons was not to ignore it but to instruct solicitors to intimate their intention to raise the

present action, including interim orders if Pinz's deadlines were not withdrawn. Viewed

objectively, the March 2023 correspondence was unfairly prejudicial in that it threatened to

create a situation in which the company, and the interests of the shareholders, were

significantly devalued, and it is not to the point to consider whether it was the intention of

those representing the Pinz interest to achieve that result.

[48]

In relation to the going concern issue, the Lord Ordinary observed that it could, with

hindsight, be interpreted as a deliberate attempt to manufacture an apparent existential

crisis for the company with the assistance, witting or otherwise, of Johnston Carmichael, the

Pinz accountants, but as already noted, he preferred to characterise the episode as one of

bumble and blunder rather than anything more sinister. Again he was influenced by his

conclusion that neither Mr Margach nor Mr Anderson had any real grasp of the nuances of

the going concern issue. Once more the Lord Ordinary erred in placing emphasis on the

personalities of the respective individuals and failing to address the matter objectively. The

salient facts were that draft accounts were prepared on a basis that was prejudicial to the

company in that the going concern qualification would be regarded with concern by anyone

to whom the accounts were exhibited; that legitimate requests by the Davidsons' solicitor for

sight of the draft accounts were not responded to; and that ultimately the failure timeously

to lodge accounts (by now containing no qualification) resulted in financial loss to the

company and consequently to its members including the petitioners. The fact that neither

side sought such an outcome is neither here nor there.

[49]

For these reasons we hold that the Lord Ordinary erred in law in deciding that none

of these matters amounted to the conduct of the company's affairs in a manner that has

unfairly prejudiced the company or the interests of the petitioners as its members. The

requirements of section 994 are met, and the court must consider what order to make under

section 996.

Order under section 996

[50]

The Lord Ordinary found it unnecessary to express any detailed views on how he

would have valued the petitioners' shares had an order for their purchase by the

respondents been appropriate. He did however indicate in general terms how he regarded

the valuation evidence and the legal issues which arose. In the light of the position adopted

by the respondents, this aspect of the case can be addressed fairly shortly.

[51]

In their note of argument, the petitioners translated the Lord Ordinary's conclusions

on the valuation evidence into a price by the following calculation:

Turnover

900,000

Gross Profit percentage 87%

783,000

Overheads:

Salaries at 29.4% of sales (£900,000 x 29.4%) (294,600)

Property costs

(93,000)

Electricity

(55,000)

Other overheads

(55,000)

Total overheads therefore

(497,600)

Profit before management and franchise fees

285,400

Franchise fee at 12% of revenue (900,000 x 12%)

(108,000)

Management charge at 20% of EBITDA (285,400 x 20%)

(57,080)

Maintainable Profit

120,320

Multiplier:

4.5

Adjusted earnings value

£541,440

The base value of 50% of the shares

£270,720

[52]

At the close of the hearing of the reclaiming motion it was accepted by the

respondents that if an order were to be made under section 996 for the purchase of the

petitioners' shares, £270,720 was the correct figure. However the petitioners' calculation

contains an arithmetical error: the figure for salaries at 29.4% of sales should be £264,600 and

not £294,600. Working that correction through the calculation, the base value of 50% of the

shares becomes £324,720.

[53]

On behalf of the petitioners it was submitted that certain adjustments ought to be

made to the figure for base value. The first, to reflect the passage of time, was an award of

interest from the date of the Lord Ordinary's opinion. We accept that submission. It was

further suggested that the company might also be required to declare a dividend, it not

having done so since the beginning of the dispute and having accumulated a material cash

balance. In the absence of any information as to what cash balance had been accumulated or

what level of dividend, if any, could reasonably be declared, this submission must be

rejected.

[54]

The petitioners reiterated their contention that the franchise fee and management

charge were excessive. As we have held that this contention was not supported by the

evidence we need not consider any proposed adjustment further. It was further submitted

that in calculating the management charge the franchise fee should first be deducted from

profit. We are not minded to make this adjustment either. The point is not addressed by the

Lord Ordinary. In any event the Lord Ordinary's figures appear to have been based upon

the methodology adopted by the parties and it is too late to raise the point now.

Disposal

[55]

The court will allow the reclaiming motion and recall the interlocutors of 14 May

2024, under exclusion of the expenses findings contained in paragraphs two and three

thereof, the associated remit in paragraph six and accompanying decerniture. We will grant

the prayer of the petition to the extent of ordaining the first respondent to purchase the

petitioners' whole shareholdings in the company at a price of £324,720 with interest thereon

at the rate of 4% per annum from 12 April 2024 (being the date of the Lord Ordinary's

opinion) until the date hereof, payment to be made within 28 days after the court's

interlocutor or within such other period as the parties may agree. Interest will run at the

judicial rate thereafter. Questions of expenses are reserved.

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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Reclaiming Motion by Allan Davidson and others against Pinz Bowling LTD and others (Court of Session) [2025] CSIH 6 (18 February 2025) URL: http://www.bailii.org/scot/cases/ScotCS/2025/2025csih6.html Cite as: [2025] CSIH 6

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