The most common reason for shareholders being goaded into taking action under section 994 is exclusion from management in quasi-partnership cases. It is also relatively common in such cases for the petitioner to seek an order that his or her shares should be purchased by the other shareholders.

This is one such case, dated 28 May 2015, which has just been reported.

There are profoundly personal aspects of quasi-partnerships: when these relationships break down it is perhaps not surprising that a stream of recriminations and bitterness is suddenly released. This can then affect the parties’ conduct in court. Counsel for the respondents was in some difficulty in trying to defend a case when he had been provided with only modest materials with which to build such a defence.

The foundations

This was a business which commenced as a partnership of the three named individuals, and which originally operated a single care home. Mr Crowley was already engaged in the care home sector with St Anne’s, another care home which he owned personally, Mr Giles was a builder, and Mr Bessell was engaged in pallet hire.

The three partners all injected significant funds into the partnership so that it could acquire suitable premises. Mr Crowley was responsible for running the care home; Mr Giles undertook the original conversion work, and Mr Bessell’s involvement was that of financial oversight.

The business flourished so another care home was acquired and on the advice of their accountants the partnership was incorporated and at a later date it acquired the shares in another company which also operated a care home in Luton.

At the time of the trial, BCG Care Homes Limited (the company) operated two care homes directly and one through a subsidiary; each care home was situated in Luton.

Early cracks in the structure

There were some strains in the relationship between the partners before incorporation took place. These were centred on the employment by Mr Crowley of his wife and a sister in the care home without prior notification to the other partners. However, whatever strains this placed on relationships, they were not sufficient, in the eyes of the judge, to destroy the quasi-partnership relationship between the parties. His finding was that this relationship survived incorporation. It was also his finding that it was this relationship that continued to determine the rights and obligations between the parties.

In considering various allegations made by the respondents against the petitioner, the judge used suitably judicial language: 'I have treated Mr Bessell's allegations (in large part adopted by Mr Giles) of dishonest concealment and other improper conduct as requiring careful analysis and independent corroboration.'

The view of the judge with regard to these early cracks to the structure was clear: 'The key point is that the partnership continued on its previous terms as clarified and/or restated in 2000 and the relationship between the partners based on mutual trust and confidence, although tested, survived the test and continued thereafter.'

For whatever reason there were continuing and growing concerns in the minds of Mr Bessell and Mr Giles regarding the conduct of the business and indeed the conduct of Mr Crowley. One of the matters which they appear to have built into a solid edifice in their imaginations was that new clients were being directed towards Mr Crowley’s own care home.

Structural survey

A firm of private investigators was instructed by the respondents to establish if potential new residents to the care homes were being sold the merits of St Anne’s rather than those of the homes operated by the Company. Mystery shopper techniques were used by the private investigators in March 2012 but there was very little evidence before the court to suggest that the respondents’ suspicions were well founded.

Major structural changes

In August 2012 steps were commenced to have Mr Crowley removed as a director and employee of the company. However, he retained his one third shareholding and also remained liable under a personal guarantee to the company’s bankers in respect of borrowings by the company.

The decisions

The judge appeared to have no difficulty in finding for Mr Crowley. he made the point that is well recognised in such cases: unfairness will lie not in exclusion alone but in exclusion without a reasonable offer being made.

He therefore unsurprisingly found that the removal of Mr Crowley without an offer that his shares be bought out, was clearly prejudicial to Mr Crowley. He ordered that the shares of Mr Crowley should be purchased by the respondents:
'The first issue that arises is whether the valuation of Mr Crowley's shareholding should or should not include a discount for the fact that it is a minority holding. Usually in the case of quasi-partnerships a discounted valuation is not appropriate and I find that to be the case here.'

This case is therefore in strong contrast to that of Moxon v Litchfield: the failings of Mr Crowley were seen to be those of mere peccadilloes. Any failings in notification were effectively purged by the tacit subsequent acceptance of the situation by Mr Bessell and Mr Giles.

The next matter for the judge to consider was the effective date of the valuation: he stated that the date of the valuation should be 7 September 2012, the effective date of exclusion, and it was difficult for any of the parties to argue with this as Mr Crowley argued that the value of the business had gone down since his exclusion, whereas the respondents stated exactly the opposite.

Rather unusually the judge decided that Mr Crowley should be entitled to interest. This was on the basis that he had received no benefits from the company since his exclusion: "In all the circumstances I consider that in principle an order for payment akin to quasi interest should be made".

The last point to take away from this case is the interpretation of the phrase "arm’s length". In the view of the judge this did not merely mean that the consideration had to be the fair market rate: "…it is, in my view, clear that 'arm's length' means just that, namely that the transaction is (at the least) one made between independent and unrelated parties, each acting in his or her own interest, and without some special relationship (such as being a relative)."

Andrew Strickland, Consultant, Scrutton Bland
Valuation Group Newsletter, January 2016