Re 36 Bourne Street Ltd, Brierley v Howe: A clear illustration of the test for unfair prejudice claims

The dispute in Brierley v Howe concerned a section 994 petition filed by the minority shareholder, Ms Brierley, against the majority shareholder, Mr Howe, of a company called 36 Bourne Street Ltd. Mr Howe made an application to the court to strike out two sub-sections of Ms Brierley's petition.

Under CPR 3.4(2) the court has the power to strike out a statement of case, or part thereof, if it appears that (a) the statement of case discloses no reasonable grounds for bringing or defending the claim; (b) the statement of case is an abuse of the court process or is otherwise likely to obstruct the just disposal of the proceedings; or (c) there has been a failure to comply with a rule, practice direction or court order. Limbs (a) and (b) were relied on in this case, both cumulatively and in the alternative. In reaching its decision, the court had to consider whether the jurisdictional threshold of section 994(1) CA 2006 was met.

Mr Howe was the owner of a well-known interior, furniture and fabric design company which conducted business from two premises: 36 Bourne Street and a showroom in Pimlico. Ms Brierley, an employee of the company, was based at the 36 Bourne Street premises and focused on developing Mr Howe's leather fabrics and wallpaper business, whilst Mr Howe worked from the Pimlico showroom and focused on the rest of his business. It was agreed by Mr Howe and Ms Brierley that the part of the business operating out of 36 Bourne Street would be separated into a new company (the "Company"). Upon incorporation, Mr Howe was the Company's sole director and shareholder, and a year and a half after the Company's incorporation, Ms Brierley was appointed as a second director and continued to be paid a salary.

Ms Brierley asserted that she and Mr Howe had come to an oral agreement whereby, if the Company achieved annual revenue targets set at the beginning of the trading year, Ms Brierley would be entitled to a 5% shareholding in the Company each year for the following five years, up to a maximum 25% shareholding (the "Initial Agreement"). A year after the Company began trading, Ms Brierley achieved the agreed revenue target, and it was common ground between the parties that Ms Brierley was then entitled to a 5% shareholding in the Company. A year later, Mr Howe transferred 10% of his 100% shareholding in the Company to Ms Brierley. It was not agreed as to the basis upon which this transfer took place (i.e. by variation of the Initial Agreement, or by gift). 

Ms Brierley later alleged the existence of a further agreement with Mr Howe under which he would immediately transfer 49% of the total shareholding in the Company to her, along with the corresponding dividend entitlements (the "49% Agreement"). Mr Howe disputed the existence of the 49% Agreement and refused to transfer Ms Brierley more than the previously transferred 10% shareholding, or to pay her dividends beyond 10%. Mr Howe sought a court-ordered meeting with a quorum of one member and removed Ms Brierley as a director from the Company. These events led to Ms Brierley bringing an unfair prejudice claim under section 994 CA 2006 which Mr Howe countered with a strike out application.

In deciding whether section 994(1) CA 2006 was engaged, ICC Judge Barber focused on the cumulative nature of the requirements under section 994(1). She drew specific attention to Arden LJ's (as she then was) judgment in Re Coroin Limited (No 2) which emphasised that the requirements of section 994(1)(b) are cumulative. If the first requirement (an act or omission of the company) is not satisfied, the second requirement (whether that act or omission was unfairly prejudicial to the petitioner) does not arise. ICC Judge Barber also clarified that, according to the judgments in Primekings and Graham v Every, the requirements of section 994(1)(a) are similarly cumulative. Mr Howe thereby successfully argued that since Ms Brierley's petition did not complain about matters involving the conduct of the company's affairs (as distinct from the personal conduct of Mr Howe himself), this meant the question of unfair prejudice did not arise. ICC Judge Barber agreed that the acts complained of were of a personal nature between Mr Howe and Ms Brierley, such that the petition did not clear the first jurisdictional hurdle of section 994. 

Per Graham v Every, and as confirmed by the Court of Appeal in Primekings, there is an exception to the cumulative requirements of section 994 when it can be shown that there is a causal connection between the personal actions of a shareholder or third party and some other act or omission constituting conduct of the company's affairs. Ms Brierley argued that a causal link could be shown between the 49% Agreement and the conduct of the Company’s affairs, because it was Ms Brierley's insistence that Mr Howe honour the agreement that led to her exclusion from the Company. Ms Brierley argued that exclusion from management falls within the category of "conduct of the company's affairs" in quasi-partnership cases. ICC Judge Barber rejected this argument on the basis that Ms Brierley's exclusion was pleaded under a separate section of the petition that was not the subject of the strike out application. Furthermore, ICC Judge Barber could not see that any direct causal link was pleaded in the petition between Ms Brierley's insistence that Mr Howe honour the 49% Agreement, and Ms Brierley's exclusion from the Company.

The judgment in Brierley v Howe underscores that unfair prejudice claims must be grounded in the conduct of a company's affairs, rather than in personal grievances. In this case, a legal dispute over the transfer of shares from one shareholder to another was held to be a private contractual dispute that did not involve the company. The judgment also emphasises the need for causal connections to be clearly made in section 994 petitions (where they are relevant) and the importance of precision in a petitioner's pleadings.