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Re Phoneer Ltd

Summary

Although not an act of the company, a director's conduct in withdrawing from the management of that company amounted to a breach of an agreement concerning the company's affairs and thus justified a winding-up petition under s.459 of the Companies Act 1985.

Facts

Trial of two winding-up petitions concerning a dispute over a company ('P'). The first petition was presented by Wang ('W'), a shareholder and director in P, for an order under s.122(1)(g) Insolvency Act 1986 that it was just and equitable to wind up P due to a deadlock in the management and control of P. A cross-petition was presented by Xu ('X') seeking the winding up of P under s.459 Companies Act 1985 on the basis that W had conducted the affairs of P in a manner that was unfairly prejudicial to X. X sought the winding up on terms that he was compensated for a loss of 42 months' profit due to W's alleged breach of an agreement of September 1999 or that he be treated as having a 70 per cent shareholding. P was incorporated on 20 December 1996 as Super Human UK Ltd, a general commercial company with a share capital of ten £1 shares allotted to W. In 1998, W decided to wholesale mobile telephones and X and his brother agreed, in January 1999, to loan to P £500,000 interest free and unsecured without a fixed period of repayment. In exchange, X received a 70 per cent shareholding and a seat on the board. X's brother started off as W's assistant. The share capital was increased to 1,000 £1 shares. The agreement was based on mutual trust and friendship and not recorded in writing. The advance was not received until February 1999 as a result of which W had to find some funds himself. P prospered and W was of the view that it was due to his efforts alone. W became dissatisfied with his shareholding of 30 per cent and indicated he wanted to increase that to 50 per cent and asked X to increase his efforts in P. X required a guarantee that W wouldn't leave P for five years. W agreed to that so long as P prospered and he got on well with X's brother. A 50:50 split was agreed and in August 1999, 13 more shares were allotted to W increasing his shareholding to 23 of 43 shares. In September 1999 a further agreement was reached in which Xu agreed to make further capital available to P if necessary. The £500,000 advance was repaid on 3 March 2000. W managed the affairs of P and developed the business, which continued to prosper. X's brother did not share W's business acumen. By December 1999, the annual turnover was £28 million. W thought X was not pulling his weight and in February 2000 sought to renegotiate the salary structure to reflect that, but X would not agree. The relationship broke down. W desired to sever the relationship as he could not envisage a future with X. X rejected W's offer to buy him out. Although P was substantially solvent, mutual trust and good faith had broken down and in March 2001 P ceased to trade. X contended that W had given an assurance in September 1999 that he would commit to P for five years and without that he would not have agreed to a reallocation of shares. W disputed that. X submitted that W had attempted to move the goalposts and he had engineered a management deadlock. W contended that those acts were not the conduct of P, they were his alone, and thus a s.459 order was not justified.

Held

(1) The September 1999 agreement was consistent with the parties proceeding as partners in a joint enterprise. It was made in good faith and W had committed himself to P for five years assuming all went well. W had breached that agreement by displaying that he wanted to renegotiate. Ebrahimi v Westbourne Galleries Ltd (1973) AC 360 considered. W's conduct was a departure from the agreement in which the affairs were agreed to be conducted. That was sufficient to bring the matter within s.459 as it was conduct that was prejudicial to X as a shareholder. W's departure would affect the value of X's shares and dividends. Re A Company (No.00709 of 1992) sub nom O'Neill v Phillips (1999) All ER 961 considered. (2) X received benefits for 18 months but did not fulfil W's expectations of him. That P prospered and was solvent was largely due to W. The court could not restore X's share to 70:30 as that was disproportionate and excessive. Justice was served by ordering the winding up of P on a 50:50 split.

Order accordingly.

Chancery Division
R C Kaye QC
Judgment date
13 December 2001
References

[2002] 2 BCLC 241