This
is a petition under
section 205 of the
Companies Act 1963 which was filed on 15
June 1995. Subsection (1) of
section 205 provides that any member of a company
who complains that the affairs of the company are being conducted or that the
powers of the directors of the company are being exercised in an oppressive
manner or in disregard of his interests as a member may apply to the Court for
an order under the section.
Subsection
(3) of
section 205 provides:
"If,
on any application under subsection (1) . . . the court is of opinion that the
company's affairs are being conducted or the directors' powers are being
exercised as aforesaid, the Court may, with a view to bringing to an end the
matters complained of, make such order as it thinks fit, whether directing or
prohibiting any act or cancelling or varying any transaction or for regulating
the conduct of the company's affairs in future, or for the purchase of the
shares of any members of the company by other members of the company or by the
company and in the case of a purchase by the company, for the reduction
accordingly of the company's capital . . .".
In
this petition a number of reliefs were claimed originally, including a claim
requiring the Company to purchase the shareholding of the Petitioner for a fair
market price. In the alternative, there was included a claim for an order
requiring the other members of the Company to purchase the shareholding of the
Petitioner for a fair market price. There is also a claim made in the petition
for an order, if necessary, under
section 203 of
the Act winding up the Company.
For
reasons which will appear later, what I am now concerned with in relation to
this petition is the claim that Mr George McNulty, who is a director of the
Company and who is by far the major shareholder in the Company, should buy the
shares of the Petitioner.
On
17 July 1995 Kinlen J ordered that Points of Claim and Points of Defence be
filed within three weeks of one another. An order for discovery was also made,
it being ordered that discovery be made within six weeks of the close of
pleadings and that the affidavit was to be sworn by Mr George McNulty. Points
of Claim were delivered on 23 September 1995 and lengthy Notices for
Particulars and Replies (two in all) were served by the parties.
By
order of McCracken J of 6 November 1995 time was extended for filing a Defence
to the 27 November 1995 and on that day the Defence was filed. The Defence
contained a complete denial of all that is pleaded in the Points of Claim. A
Reply was served on 1 December 1995 and the Petitioner's affidavit of discovery
was sworn on 12 January 1996. There was no affidavit of discovery sworn on
behalf of the Company or by Mr George McNulty, as directed by the order of 17
July 1995.
A
Notice of Motion dated 26 February 1996 was brought by the Petitioner and it
came on for hearing on 25 March 1996. The order made by Geoghegan J on that
Motion is an important order in the case. It appears from that order that the
Company was represented by Counsel and it recites "And it appearing that the
Respondent Company does not propose to defend these proceedings or make
discovery . . . the Respondent's Defence herein be struck out". As appears
later, the reason for the fact that the Company was not going to defend the
petition or make discovery was that two weeks previously it had sold all its
assets. The legal effect of the order of Geoghegan J is, however, clear. There
is now no denial of the acts of oppression pleaded in the petition and in the
Points of Claim and there is no denial of oppression before the Court.
In
order to decide what remedy is appropriate in the circumstances of the case I
should briefly refer to the relevant history. The Company has carried on
business since 1988. The Petitioner was one of its promotors together with
James Barry, Martin Barry, Martin Waters and Alex Wilson. The Petitioner was
not a businessman and had no experience of commerce. He was an operative
employed by Tara Mines and was persuaded by his nephew to invest £15,000
in the Company in March 1988 in return for 20 per cent of the capital of the
Company. The other promotors were each only to own 20 per cent of the Company's
capital. In order to devote himself to the new company and to raise the capital
the Petitioner took redundancy from Tara Mines and with his redundancy payment
he made his investment.
At
that time the Company's business was to exploit the patents owned by it and to
manufacture metal boxes for holding newspapers for sale in retail outlets and
to hire advertising space on the boxes and maintain them. The Company, as I
have said, owned the patent rights to the units which it was manufacturing.
The
Petitioner worked without receiving any wages for a period of time but in
August 1988 a breakthrough occurred in that Mr Martin Barry indicated that he
was in a position to acquire a valuable contract for the Company over three
years from Coca Cola for advertising at 250 sites.
The
Company needed further capital to develop its business and Kieran Hayes, an
accountant, put the shareholders in touch with Mr George McNulty. Mr McNulty
agreed with the five original investors that he would invest £50,000 in
the Company in return for a 50 per cent holding and in December 1988 he entered
into a shareholders' agreement by which he agreed that neither he nor the five
original shareholders would own more than 50 per cent of the Company at any
time. The five original shareholders and Mr McNulty were to be equal partners
in the venture. Mr McNulty later denied the existence of this agreement but it
is clear that his denial is incorrect because he later discovered the
agreement. The evidence establishes that Mr McNulty breached his contract and
failed to invest £50,000 in the Company. Gogan Properties Limited, a
company controlled by Mr McNulty, subscribed £100 and received 100 £1
shares in the Company and the share capital of the Company was increased to
£200.
The
accounts for the year ended December 1989 were approved by the directors at a
meeting on 21 September 1990. Those accounts show that the called-up capital of
the Company was £200 only and that £49,900 was paid into the Company
by Mr McNulty in addition to the £100 paid in by Gogan Properties Limited,
but this sum was treated by Mr McNulty as a loan to the Company. The payment in
was made by different companies and a record exists of the payment in of this
sum of money on Mr McNulty's behalf by these companies which were obviously
controlled by him. The minutes of the meeting of the directors of 7 December
1988 disclose that 100 £1 shares were issued to Gogan Properties Limited
but there is no resolution of any sort in relation to the investment of Mr
McNulty in the Company other than to this sum.
About
a year later, on 17 October 1989, a second company called Newspaper Security
Services Limited (NSS) was formed at Mr McNulty's instigation. It was agreed
that NSS would manufacture and maintain the boxes under licence from the
Company and that NSS would pay the Company £3.20 per month in respect of
the units it manufactured and sited and a fee of £25 for each box
manufactured and used. In effect, from that time the Company held the patent
rights of the units which were to be manufactured by NSS and the Company's
income was to be the agreed royalties payable by NSS. In addition the records
establish that two further companies were established to market the boxes, one
in Northern Ireland and one in the United Kingdom (Newspaper Security Services
(Northern Ireland) Limited and Newspaper Security Services (United Kingdom)
Limited), licensing and royalty agreements being entered into with these
companies. It is of considerable significance to note that these companies were
also controlled and apparently owned, more or less completely, by Mr McNulty.
In
October 1990 Mr McNulty claimed that a capital injection was needed in both NSS
and the Company. In breach of the shareholders' agreement he insisted that he
get 51 per cent control of the Company before the capital could be obtained. He
persuaded Mr Alex Wilson of the need to transfer to him one share so that he
could control the Company. Mr Wilson agreed to this course and sold one share
to Mr McNulty. As a result, from that time Mr McNulty controlled the Company
and over a period of time obtained a greater shareholding in the Company. He
also, as I have said, controlled the Northern Ireland and United Kingdom
licensee companies.
Mr
McCormack, an experienced accountant employed on behalf of the Petitioner,
established in evidence that the information contained in the accounts of the
Company, accounts which had been approved in September 1990, cannot have been
correct. He found that he could not believe these accounts, nor the later
accounts produced by the Company Notwithstanding the serious deficit shown in
these accounts, on 11 November 1990 Mr McNulty offered to purchase from the
Petitioner for £40,000 the Petitioner's 10 per cent shareholding in the
Company. This put a value on the Company's one hundred per cent shareholding of
£400,000. Shortly afterwards Mr McNulty, through a company of his,
purchased from Mr Alex Wilson his £1 share in the Company using an Isle of
Man company called Oakhill Consultants Limited, another company which Mr
McNulty apparently controlled. The records show that Mr Wilson was paid
£1,000 by Oakhill Consultants for his £1 share, thus putting the
value of the Company at that time at £200,000. However, the records are
incorrect. The evidence recently given by Mr Wilson under oath before the
Master and the documentary proof given by him to the Petitioner establishes
that the figure given in the transfer form was not correct and that, in fact,
Mr Wilson was paid £4,000 for his one share, thus putting the value of the
Company at that time at £800,000.
In
April 1991 the Petitioner and the other shareholders were informed by Mr
McNulty that NSS was insolvent and that there was a large deficit in the profit
and loss account of the Company. In that month at a meeting of the Company Mr
McNulty informed the petitioner and the other shareholders that £30,000
was needed and that it was proposed to issue shares and make calls on the
shareholders for this amount. The Petitioner was very perturbed at this
development. However, as the Petitioner did not wish his holding to be diluted
he borrowed £3,000 and took up new shares in the Company. In fact, the
Company received £30,000 in new capital and this sum was lodged to the
Company's bank account. However, instead of being used by the Company as
capital, the £30,000 was paid out the next day by Mr McNulty to NSS. There
appears to be no justification for this payment as NSS was then, according to
Mr McNulty, unable to pay any royalties to the Company.
In
1991 further steps to control the Company and NSS were taken by Mr McNulty. Mr
McNulty purchased the shares held by James Barry and Martin Waters in the
Company and in NSS and he entered into an agreement by which NSS would enter
into a maintenance contract with a company being formed for this purpose by Mr
Barry and Mr Waters called Outdoor Billposting Services Limited. Subsequently
this company and Mr Barry sued NSS and Mr McNulty and a hearing lasting 14 days
was held in the High Court.
On
3 February 1992 Mr Martin Barry was removed as a director of the Company and Mr
Alex Wilson was appointed in his place. Mr McNulty and Mr Wilson were the only
directors of the Company and Mr McNulty became the major shareholder, owning
shares in his own name and in the names of the companies controlled by him. In
effect, Mr McNulty ran the Company.
In
February 1992 Mr McNulty's company Oakhill Consultants Limited transferred to
another Isle of Man company (a company owned by Mr McNulty or certainly
controlled by him) called Edney Investments Limited his 50 per cent share of
the issued share capital for £125,000, thus putting at the very minimum a
value on the Company at that time of £250,000. It is obvious that at this
time the shares of the Company were valuable as on 8 September 1992 Mr McNulty
again offered to pay the Petitioner £40,000 for his shareholding, thus
putting a value at that time of £400,000 on the Company's capital.
I
now turn to the concerns which the Petitioner began to express in relation to
the accounts of the Company and to the manner in which its affairs were being
conducted. On 9 December 1992 the Petitioner began his efforts to obtain
information about the Company and pressed Mr McNulty for accounts. The
Petitioner than started to have very considerable concerns about the manner in
which the Company was being operated and made inquiries about another company
called Sales Point Limited, whose registered offices were the same as those of
the Company. On 5 February 1993 Mr McNulty replied to the Petitioner explaining
that the Company had difficulties and pointing out that it had suspended
trading since 1989. This was an inaccurate and incorrect statement as the
Company had not been trading at all after the establishment of NSS, the
Company, in effect, being a patent- owing company obtaining royalties. The
Company should have obtained royalties from NSS as well as from its licensee
companies in Northern Ireland and in the United Kingdom but no adequate
explanation was given as to why royalties were not forthcoming or why steps
were not taken to obtain payment, should payment have been neglected, or to
obtain other licensees should the existing ones prove defective.
Serious
disputes arose between Mr McNulty and Mr Barry and Mr Waters and their Company
Outdoor Bill Posting Services Limited and Mr McNulty countered by taking steps
to wind up NSS and the Northern Ireland and United Kingdom companies. In July
1993 injunction proceedings were instituted to stop the winding up of NSS and
by coincidence I heard that application. It was as a result of the injunction
proceedings and the hearing of the substantive action that the Petitioner's
suspicions were confirmed. Unknown to the Petitioner, the Company entered into
a new licensing agreement relating to the use of the patents in Northern
Ireland with a company called Wellington Advertising Limited with registered
offices in London. The notepaper of Wellington Advertising describes Mr McNulty
as its executive chairman and it appears from Mr McCormack's investigation that
Wellington Advertising paid on behalf of Mr McNulty part of the sum of
£50,000 which was put into the Company in 1988 by Mr McNulty. It also
appears that Wellington Advertising is controlled by Mr McNulty.
In
the course of evidence given in the High Court proceedings in June 1994 Mr
McNulty informed the Court that a company called Sales Point (UK) Limited was
the licensee of the patent in the United Kingdom. There is no record of that
company being invoiced with royalty payments or with the amount of the
royalties due by it or paid by it to the Company New-Ad Advertising Limited.
As
to the Northern Ireland operations, there are minutes of meetings of the
directors of the Company in July and August 1994 in which the Company waived
royalties payable to it in respect of the Northern Ireland business.
In
the Republic of Ireland there is evidence of a company called Sales Point
Limited. Sales Point Limited was described in a letter of 2 July 1993 from Mr
McNulty to the Petitioner as a non-trading company and as a subsidiary of NSS.
But from a brochure which was obtained by the Petitioner it appears that Sales
Point Limited is actively carrying on business operations in this part of the
country, as is Sales Point (Northern Ireland) Limited and Sales Point (United
Kingdom) Limited.
As
I have already indicated, the assets of the Company were sold in March 1996 by
Mr McNulty to a company called Parchment Limited for the sum of £20,000.
Most of this purchase price was then paid to the Company's solicitors as
apparently fees were due to them in respect of professional services rendered
to the Company.
At
the present time there are little or no assets of any sort in the Company. I
have already drawn attention to the fact that the decision to sell the assets
of the Company was taken two weeks before Counsel on behalf of the Company
appeared before Geoghegan J and informed him that the Company was not defending
the proceedings and did not propose to make discovery.
I
now turn to the conclusions which I have reached. The Petitioner is clearly
entitled to relief under
section 205 of the
Companies Act 1963. Mr McNulty,
both as a director and as a majority shareholder, acted oppressively towards
the Petitioner. The definition of oppression as adopted by Keane J in the
Greencore case (an unreported judgment of 28 March 1980) is of conduct which is
"burdensome, harsh and wrong", and it seems to me that the conduct of Mr
McNulty towards the Petitioner can be so described. In addition, Mr McNulty
acted in disregard of the interests of the Petitioner as a member of the
Company and he is also entitled to relief under that part of the section.
The
usual order in a case of this kind is that the company or the oppressor should
buy out the minority shareholder at a value the shares would have had but for
the oppressive conduct. Alternatively, an order to wind up the Company can be
made. However, in this case it would not be just to order the winding up of the
Company because no relief would be given to the Petitioner. Similarly, I see no
point in ordering that the Company should buy the Petitioner's shares because
the Company has no assets with which to purchase them. In order to ensure that
justice is done, it seems to me that the wrongdoer -- in this instance Mr
McNulty -- should buy the Petitioner's shares at the value which they would
have had but for the oppressive conduct to which I have briefly referred.
I
am aware of the fact that Mr McNulty has not been joined as a notice party but
he must have known that such an order might be sought, particularly in view of
the fact that he, as a director, was instrumental in selling all the assets of
the Company. He must have been aware that it was highly likely, as claimed in
the petition, that an order would be made against him personally. However, Mr
McNulty did not seek separate representation. He could have brought a Motion
seeking to be separately joined but he did not do so. It would therefore be
unjust not to order that Mr McNulty, who was the person who committed the acts
of which complaint is made, should remedy the injustice. And as Mr McNulty
decided to sell the Company's assets and not to contest the petition, it seems
to me that it would be wrong for the Court not to make the order sought by the
Petitioner.
I
should add that there is nothing in
section 205 of the
Companies Act 1963 or in
the Rules of Court prohibiting the Court from making the order which I propose
to make. The decided cases indicate that in some circumstances an order can be
made without adding the oppressor as a third party, or as a party to the
proceedings, and in some cases such an order has been made. In my view the only
way justice can be done in this case is to direct that Mr McNulty buys the
Petitioner's shares.
My
decision concerning the oppressive conduct can be briefly summarised as follows:
In
the Petition and in the Points of Claim there are many wrongful acts pleaded
against Mr McNulty. The result of the striking out of the Defence is that the
Court is entitled to accept that there is no denial that Mr McNulty acted in an
oppressive manner. However, the evidence heard by me during this trial in
addition to the legal consequences make it clear that the Petitioner's case has
been properly made out.
Briefly,
my view in the light of the evidence is as follows:
Mr
McNulty conducted the affairs of the Company in disregard of the interests of
the Petitioner as a shareholder. He treated the Company and the other companies
established and controlled by him NSS (Northern Ireland), NSS (United Kingdom),
Wellington Advertising Limited -- as his own business and he ran these
companies as one business for his own benefit. This was to the detriment of the
Petitioner and was, in my view, oppressive conduct.
Mr
McNulty failed in his duty as a director to the shareholders in his handling of
the Company's interests in Northern Ireland and in the United Kingdom. He
failed to collect royalties due by NSS (Northern Ireland) and to terminate its
licence when revenue was not obtainable from that company. He gave a licence to
another company called Wellington Advertising Limited, a company in which he is
executive chairman and which he controls. He then waived the payment of
royalties by Wellington Advertising Limited to the Company New-Ad Advertising.
Presently he has allowed another company called Sales Point (Northern Ireland)
to market units using the patent but no records exist to show that that company
has paid any royalties to New-Ad Advertising, the Company the subject matter of
this petition. He dissipated the Company's assets and was not justified in
doing so.
Mr
McNulty raised £30,000 from the shareholders in 1991 for new shares and
the following day paid the whole of this capital to NSS. He hid from the
shareholders the true value of the transfer of the £1 share obtained from
Mr Wilson by transferring it into a company which he controlled. It was shown
on the transfer agreement that the purchase price was £1,000 but in fact
£4,000 was paid for the share, thus giving a false valuation of the
Company by omitting the true consideration.
Mr
McNulty failed to keep proper books and records and failed to inform the
shareholders of the true position of the Company. The records that were kept
are obviously both inadequate and incorrect. His conduct in respect of the way
he treated the Company for his own benefit was such that it did not benefit the
shareholders. At the very beginning Mr McNulty agreed to invest £50,000 in
the Company but he did not. In a company which he controlled he invested
£100 and was given 100 £1 shares. The balance of the £50,000 was
treated as a loan in the Company's accounts in breach of his contract with the
founders of the Company and was also a wrong committed on the minority
shareholder the Petitioner. The conduct of Mr McNulty meant that he failed to
obtain the income which the Company should have obtained from its patents.
Finally,
I should say that it is not to be assumed that the other acts of oppression as
pleaded did not take place because it was not necessary for me to refer to them
in this judgment.
I
now turn to the evidence relating to the value of the Petitioner's shareholding
in the Company. The evidence of Mr McCormack, the accountant, is that, as he
explained in his report, ordinarily the value of a company is obtained by
reference to its net asset position at a given date together with a review of
its dividend policy over a period of three to five years. In this case there
was insufficient evidence to show what the assets of the Company were and no
dividends were paid. In the alternative, what has to be done is to establish
what the income of the Company ought to have been and from this to reconstruct
what the net asset position would have been if the income to which the Company
was entitled had been received.
In
a schedule to his report Mr McCormack set out the minimum income which ought to
have been received by the Company between the dates referred to in it. Over a
period of time royalty income varied as a percentage of the gross sales income
from 10 per cent in respect of the Republic of Ireland to 15 per cent in
respect of Northern Ireland and to 20 per cent in respect of the United
Kingdom. For the purpose of his calculations Mr McCormack took an average of
12.5 per cent. In addition, as I have already pointed out, the Company was
entitled to a fee of £25 for each unit it manufactured.
Mr
McCormack's opinion, which is a reasonable one, is that the average earnings of
the Company should be £84,000 per year. It is to be borne in mind that the
Company was a patent-owning company and would have paid no income tax. It would
have had virtually no outgoings because it was merely obtaining royalties under
licence agreements. In addition, the task of ascertaining its income was not as
difficult as initially thought because, in fact, there were two major
companies, namely, Coca Cola and Mars Bars, taking advertising spaces on the
units manufactured by NSS. In the circumstances, therefore, the task of valuing
the income which the Company should have received is not too great,
particularly as there were some records available in NSS, amongst others, which
Mr McCormack was able to examine. Mr McCormack's view is that a multiple of 8
times the Company's average earnings of £84,000 is not at all unusual, and
he gives the Company an overall value of £672,000. The Petitioner's share
of this is 10 per cent, being £67,200. In the circumstances it seems to me
to be a fair value of his 10 per cent holding in the Company.
It
was urged on behalf of the Petitioner that I should make an order declaring
that he is entitled to 20 per cent of the Company, not to 10 per cent of the
Company, because of the failure of Mr McNulty to invest £50,000, as he
agreed. This failure may give rights under the
Companies Act to recover against
Mr McNulty and it may give rise to a claim for damages for breach of contract
on the Petitioner's behalf, but it does not give the Petitioner the right to
rescind the share agreement. So I do not think that I can make an order that he
be entitled to 20 per cent of the capital of the Company. In my opinion he is
only entitled to the issued capital of 10 per cent.
I
draw attention to the fact that the valuation put on the shares of the
Petitioner by Mr McCormack gets support from Mr McNulty's offer in September
1992 to buy the Petitioner's shareholding for £40,000, thus putting a
value on the Company of £400,000. In addition, the transfer from Gogan
Properties to Edney Investments put a value on the Company of £250,000.
These are obviously minimum values but in my view they underline the validity
of Mr McCormack's valuation of the Company.
In
the circumstances I will make an order that Mr McNulty pay forthwith to the
Petitioner Mr Vincent Kelly the sum of £67,200 and that on payment as
aforesaid the Petitioner will execute a transfer of his shares in the Company
to Mr McNulty. I will order that the costs of the proceedings, including all
reserved costs, be paid by Mr McNulty when agreed, or taxed in default of
agreement.
