Grace v Biagioli [2005] EWCA Civ 1222

Mr Grace, a 25% shareholder in Telpro UK, petitioned under s.459 Companies Act 1985 after being denied his declared dividend and removed as director. The Court of Appeal held the non-payment was unfairly prejudicial and ordered the respondents to purchase his shares, reversing the trial judge's limited remedy.

Facts

Mr Lawrie Grace and three respondents (Mr Biagioli, Mr van Loggerenberg, and Mrs Johannessen) formed Telpro UK as part of a joint venture in the cathodic protection industry, each holding 25% of shares. The parties agreed at an AGM in December 2002 that an £80,000 dividend would be declared and distributed equally. However, on 3 April 2003, the respondents decided without Mr Grace’s consent to distribute the profits amongst themselves as ‘management fees’ rather than paying the agreed dividend. Mr Grace was also removed as a director on 9 May 2003. He petitioned under s.459 of the Companies Act 1985, alleging unfair prejudice.

Background to the Dispute

Relations between the parties had deteriorated over disputes concerning Telpro SARL (a French company Mr Grace managed) and its losses. The respondents introduced a 75% majority voting system in November 2002, enabling decisions without Mr Grace’s consent. Mr Grace had also secretly negotiated to acquire a Corrpro business, which the respondents discovered and used to justify his removal as director.

Issues

1. Whether Mr Grace’s removal as a director of Telpro UK was unfairly prejudicial to him as a member.

2. Whether the non-payment of the 2002 dividend constituted unfair prejudice.

3. What was the appropriate remedy for any established unfair prejudice.

Judgment

Removal as Director

The Court of Appeal upheld the trial judge’s finding that Mr Grace’s removal as director was not unfairly prejudicial. Mr Justice Patten stated:

“When Lawrie, without informing the others, began negotiating with Corrpro, it seems to me inevitable that he could not continue as a director of Telpro. The others could, in my judgement, quite legitimately take the view that it was in the best interests of Telpro not to be seen to have any connection with a potential competitor…”

The Court held that Mr Grace’s secretive conduct in negotiating with Corrpro, placing himself in a position of conflict with his duties as director, justified his removal.

Non-Payment of Dividend

The trial judge found that the non-payment of the 2002 dividend constituted unfair prejudice, and this was not appealed. The Court of Appeal emphasised the seriousness of the respondents’ conduct:

“The unfair prejudice which he found to have been proved, consisted of a deliberate refusal to pay the dividend and the mis-stating of the 2002 accounts. The fees paid were not due and could not properly have been included in the accounts as liabilities of the company to be deducted before tax.”

Remedy

The trial judge had ordered only that Telpro UK pay the £20,000 dividend with interest, declining to order the respondents to purchase Mr Grace’s shares. The Court of Appeal disagreed, finding the judge had exercised his discretion too narrowly. The Court stated:

“Taking everything into account, it seems to us obvious from the lengths which the Respondents were prepared to go to avoid payment of the 2002 dividends, that nothing short of a buy-out order will ensure that Mr Grace’s rights are respected in the future.”

The Court rejected the trial judge’s reasoning that fault on both sides, the international nature of the venture, lack of a history of repeated prejudice, or that this was not a case of exclusion from management justified refusing a buy-out order.

Legal Principles

The Court applied principles from O’Neill v Phillips [1999] 1 WLR 1092, including:

• Unfairness must be assessed against the legal background of the corporate structure, including articles of association and collateral agreements.
• Conduct need not be unlawful but must be inequitable.
• A useful test is whether exercise of powers would breach an agreement or understanding which it would be unfair to ignore.

On remedy under s.461, the Court confirmed:

“In most cases, the usual order to make will be the one requiring the Respondents to buy out the petitioning shareholder at a price to be fixed by the court.”

Implications

This case reinforces that where unfair prejudice is established in small private companies, a share purchase order is typically the appropriate remedy to achieve a clean break. Courts should take a broad view of circumstances when determining remedy, not limiting consideration to the specific act of prejudice alone. The case also confirms that conduct placing a director in conflict with duties to the company can justify removal even in quasi-partnership situations, and such removal will not constitute unfair prejudice where properly justified.

Verdict: Appeal allowed. The Court of Appeal ordered that the respondents purchase Mr Grace’s shares at a price to be determined by the court, remitting the case for valuation. The trial judge’s order for payment of £20,000 dividend was set aside as an inadequate remedy.

Source: Grace v Biagioli [2005] EWCA Civ 1222