A recent UK High Court case, Re Greenfrost Ltd; Davies v O’Keeffe [2023] EWHC 5 (Ch), provides an excellent example of what not to do when managing a company after the breakdown of a personal relationship. The case highlights the importance of directors’ duties, proper communication, and compliance with legal obligations. It also underlines the significance of effective testimony and cooperation during legal proceedings.
The case involved two directors and equal shareholders in two companies. The companies had been operated as quasi-partnerships based on mutual trust and confidence. The directors’ relationship broke down during a period of financial difficulty, and they decided to sell a valuable quarry lease held by one of the companies. After settling some debts, the directors transferred the remaining proceeds to the company’s bank account and made several withdrawals. Subsequently, the relationship between the directors broke down further, leading one of them to dispose of their share in the companies and secure loans against one of the companies without the other director’s knowledge.
The director who was left out, Davies, filed a petition with the court under s994 Companies Act 2006, alleging that the companies’ affairs were being conducted in an unfairly prejudicial manner and that her interests were being harmed. The court heard evidence from both directors and analysed their transactions to determine the alleged wrongdoing.
The court identified three instances of unfairly prejudicial conduct by the other director, O’Keeffe. Firstly, he withdrew £180,000 from the company’s bank account without a proper explanation, thereby misusing company funds and excluding Davies. Secondly, he tried to sell Davies’s share in one of the companies to a third party and replace her as a director, both of which were deemed conduct relating to the affairs of the company and were prejudicial to Davies’s interests. Thirdly, O’Keeffe secured personal loans against the other company without Davies’s knowledge or consent, misusing company assets and excluding Davies from managing the other company.
The court found that these actions amounted to unfair prejudice against Davies and ordered a buy-out of her shares at a fair valuation, with legal costs to be awarded. The court noted that O’Keeffe’s approach to disclosure had hampered the proceedings, with important documents not being provided to the valuer or the court.
The case offers practical lessons for managing the separation of business interests following a personal relationship breakdown. Directors must remember their duties to the company, follow proper processes, and communicate effectively. The case also emphasizes the importance of complying with legal obligations and cooperating during legal proceedings, particularly with regard to disclosure and testimony.
In conclusion, the Re Greenfrost Ltd case illustrates the serious consequences of unfairly prejudicial conduct in company affairs and the importance of conducting business ethically and transparently. The case shows how effective communication and compliance with legal requirements can prevent disputes and costly legal proceedings. Directors must take their responsibilities seriously and ensure that they act in the best interests of the company and its shareholders, regardless of any personal relationships.
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Please note that this blog is not intended to be legal advice. This material has been prepared for informational purposes only and as general guidance. Is not intended to provide, nor should it be relied on for, legal or tax advice. You should consult your own advisors or seek professional independent advice before engaging in any transaction.
