Frederick Geraint Hawkes v (1) Michael Cuddy (2007)
The implementation of an offer by the respondent was the appropriate way of resolving a petition asserting unfairly prejudicial conduct on his part.
The petitioner (H) brought a petition against the first respondent (C) alleging unfairly prejudicial conduct in relation to the third respondent company (N). C issued a cross-petition. H and C were both successful Welsh businessmen with a strong interest in rugby. The Welsh Rugby Union announced that, for the 2003-04 season, it wanted to establish five regional professional teams which would be owned and supported by existing local clubs. C wished to acquire Neath Rugby Football Club (Neath RFC) as a vehicle to enable him to participate in the formation and management of a new regional side. In early 2003, H and C reached an oral agreement whereby (i) they would set up a new company, of which they would be the directors, to buy the assets of Neath RFC; (ii) H would concentrate on the management of Neath RFC; (iii) C would concentrate on the management of the regional side and for that purpose would be nominated by the new company to act as one of the two directors of the new entity being established to own and manage the regional side, namely Neath-Swansea Ospreys. The new company (N) and the new entity (S) were duly incorporated. As C had been a director of a company which was expected to go into liquidation, a decision was made that his wife, not he, would become a director, along with H, of N. C's wife, however, was merely a front for C, who participated in the management of N. In due course, tensions built up between H and C, leading to a breakdown in relations in 2006 and the issuing of the petition and cross-petition. H's main complaint was that, in performing his duties as a director of S, C had failed to promote N's interests. During the hearing, S and C's wife made an offer whereby the number of S's board members would be increased to four, two being appointed by N and two by Swansea, with C being one of the directors; C's wife would have the right to nominate one director of N, being neither herself nor C; subject to that, the composition of the board of N would be in H's control; C's wife and H would have the right to nominate one director each to the board of S.
(1) C had asserted that H's petition was an abuse of process in that it was being used as a vehicle for a smear campaign against him and his wife. That was not so. The petition was the only legal machinery by which H could achieve his ultimate aim, namely to obtain C's exit from the affairs of N and with it his exit from the affairs of S. (2) Some of H's allegations of unfair prejudice had not been established. H had to show, among other things, that the acts or omissions complained of consisted of the management of the affairs of N, N being the relevant company. However, C had not been conducting the affairs of N in respect of several allegations, namely the failure of the regional side to play games at Neath RFC's ground, the withdrawal of certain players from Neath RFC and the issuing by S of trade mark proceedings following the sale by N of unapproved merchandise. The remedy afforded by the Companies Act 2006 s.994 was essentially a remedy for the unfair management of the internal affairs of a company. It was not designed to deal with the situation where one company dealt with another on an arm's length basis, as had occurred with the withdrawal of the players, Nicholas v Soundcraft Electronics Ltd (1993) BCLC 360, Gross v Rackind (2004) EWCA Civ 815, (2005) 1 WLR 3505, R v Board of Trade Ex p St Martin Preserving Co Ltd (1965) 1 QB 603 and Grandactual Ltd, Re (2005) EWHC 1415 (Ch), (2006) BCC 73 considered. In conducting himself as a director of S, C had acted in what he considered to be the best interests of S. In so doing, he had not been in breach of any duty owed either to N or to H. However, certain allegations of unfair prejudice had been established. C had failed to consult H in connection with an important matter relating to the stadium at which the regional side played its matches and with negotiations for a new "rugby charter". Further, C had used N's internal confidential information when concurring in the decision to launch trade mark proceedings against N. Those allegations, however, were the less serious ones. (3) One solution proposed by C was that there should be a "demerger", whereby H would have complete control of N and N would give up its share in S, thereby severing the corporate connection between the two companies. Although such an order was probably theoretically possible on a petition under s.994, it was one that should very rarely be made. In the instant case, it was not an appropriate remedy. On the other hand, the offer put forward by S and C's wife was a suitable solution to the problems that had arisen. Among other things, it would give H eyes, ears and a voice on the board of S; it would cure the lack of consultation found to have been established; and it would give H effective control of N while not imperiling C's position on the board of S, thus preventing any future deadlock in the affairs of N.