The driving force fallacy

23 October 2020

The Court of Appeal has overturned an injunction in favour of a son who sought to restrain his family from participating in the management of their caravan park business - Loveridge –v- Loveridge [2020] EWCA Civ 1104.

The decision in Loveridge –v- Loveridge demonstrates that the Court does not recognise any special rights in favour of dynamic, “driving-force” business owner-managers which might enable them to exclude their fellow owner-managers from management of the business when a conflict arises.

The Court will first and foremost have regard to the constitutional arrangements of the business in question (whether it is a company or a partnership), e.g. Articles of Association, any shareholders agreement, when determining the rights of parties to a business dispute.

Practitioners should therefore be cautious not seek interim remedies, such as injunctions preventing other parties from participating in the management of the business, that might exceed their client’s constitutional rights, notwithstanding that their client might be the driving force of the business in question.  

The Court did however recognise the possibility of obtaining an injunction placing one party in charge of a business to the exclusion of others where the interference of those others might do serious harm that could not be compensated for by an award of money.

Background

The Loveridge family had built a successful caravan park business with sites across the Midlands. The business was started by Ivy and Alldey Loveridge, and expanded by their sons, Michael and Audey.  

The business was structured through five companies and three partnerships at will (i.e. partnerships that could be dissolved by one partner giving notice to that effect). Michael and Ivy were shareholders in all five companies, while Alldey held shares in two. Ivy was a director of all five companies, Michael was a director of all but one (in which Audey was a director), Alldey was a director of 3 companies. In respect of the partnerships, Michael, Ivy and Alldey were partners in all three, Lesa Loveridge also had a stake in the third. The accountancy firm Cognitor managed the accounts of all of the companies and partnerships.

In May 2019, Michael and Audey had an extremely heated argument, causing Michael’s wife to call the police. Ivy felt that calling the police was not consistent with the family ethic of resolving matters internally, and the relationship between Michael and his family soured from then on.

In the second half of 2019, Michael wanted to purchase a new caravan park in his own name. To fund this purchase he withdrew £1.25m from the account of one of the companies of which he was a director (“Sales”) to which he had access. Michael claimed that he did so because Ivy had, without good reason, refused to release funds due to him from the partnerships, so as to prevent him from pursuing this new opportunity.

First Instance Injunctions

Partnerships

On 17 March 2020 Michael applied for an urgent injunction without giving notice to his family, seeking sole control over all three partnerships. He had already served notices to dissolve two of the partnerships. His application was supported by, amongst other things, video footage of encounters between family members which showed Ivy and members of her “faction” in particularly a bad light, which had an appreciable impact on the judge. The injunction was granted.

Michael’s family took part in the follow up hearing and opposed the continuation of the injunction. Nevertheless,  the judge upheld the injunction, discounting the possibility of appointing a receiver to manage the partnerships on the basis that this would involve unjustified expense and that there was no time for that to be done. In coming to his decision, the judge had felt it necessary to decide “who was the driving force behind [the] business”, and to put that party in charge, because if he did not do so the risk of damaging the business was even greater than if he allowed the parties to run it together.

 

Companies

On 29 April 2020 a general meeting of Sales was called with a view to removing Michael as a director, based on his unilateral withdrawal of the £1.25m from that company. On 4 May 2020, general meetings of Sales and another company were called with a view to terminating the appointment of Cognitor as accountants. The shareholders’ meeting notices were received by Michael on 5 May, for meetings to take place the next day. On the same day another company passed a resolution to terminate the appointment of Cognitor, signed by its only directors, Ivy and Audey, and a statutory demand was served on Michael on behalf of Sales demanding repayment of the £1.25m.

On 5 May 2020 Michael successfully made another without notice application, this time for an injunction placing him in sole control of all 5 of the companies, restraining Ivy, Alldey and Audey from removing Cognitor as accountants from any of the companies, preventing Michael from being removed as a director, preventing Sales from pursuing its statutory demand against Michael, and preventing Ivy’s faction from interfering in the running of the companies. The injunction was made in support of an unfair prejudice petition (i.e. a petition brought by a minority shareholder against the majority on the basis that the affairs of the company are being run in an unfair way that is detrimental to their interest as a shareholder) and an application for a winding up order on the just and equitable basis (i.e. a petition to wind up the company, not because it is insolvent, but because it is right and fair to do so) brought by Michael, naming Ivy, Alldey and Audey and the five companies as defendants. The injunctions were upheld at a return hearing. The judge’s assessment of the relative commercial strengths of Michael, Ivy and Alldey was sufficient to persuade him that Michael must remain “solely at the helm”.

The Appeals

Companies Appeal

Ivy and Alldey appealed the decision to grant the injunction, arguing that the judge was wrong to find that Michael had an arguable case on his unfair prejudice petition (which was needed in order for the injunction to be granted), because nowhere was it alleged that he had right to sole control of the companies. In response, Michael submitted that this defect in the petition was being dealt with by application to amend in the Court dealing with the unfair prejudice petition, the effect of which was to plead that he did have legitimate expectations giving rise to special rights entitling him to sole management of the companies without interference from Ivy and Alldey.

In his leading judgment, Lord Justice Floyd rejected the existence of the type of special rights asserted by Michael. While Michael’s petition and evidence supported the claim that Michael was the driving force behind the expansion of the business and that he ran the companies on a day to day basis, they did not support the existence of special rights of the type alleged. His Lordship said “progressive and energetic managers” do not acquire the right not to be removed from office, if the constitution of the company permits their removal.   

It was further held that even if Michael did have an arguable case on his unfair prejudice petition, it was not just or convenient to grant the injunction. The unfair prejudice petition did not seek, as its end goal, that Michael should be left in control of the companies. As such, damages would be sufficient to compensate Michael had Ivy and Alldey caused him loss in the interim. Finally, given that the Court of Appeal found Michael’s unfair prejudice petition was bound to fail, the winding up petition on just and equitable grounds, which relied on the same factual and legal basis, was also bound to fail.  

 

The partnerships appeal

In respect of two partnerships, “Riverside” and “Redstone”, the winding up of those partnerships was a certain outcome of the proceedings (because Michael had served notices to dissolve them and this was not disputed). The court therefore had to decide how they should be managed pending their winding up. In respect of the third partnership, “Oversley Mill”, it was argued that Michael was not in fact a partner at all and that partnership was run on a day to day basis by Lesa.

In respect of Riverside and Redstone there was no question of their businesses expanding. Lord Justice Floyd found that the judge had been strongly influenced by the idea that the companies and partnerships had to be under the control of the same person and, in selecting that person, relied on the driving force fallacy. Instead, the judge should have had regard to the separate nature of the two partnerships. Had he done so, he would have given sole control of Riverside to Ivy and Alldey, and sole control of Redstone to Michael.

In the case of Oversley Mill, it too would be wound up if Michael established his case that he was a partner. As such, there was no reason to disrupt the status quo by taking all control away from Lesa, Ivy and Alldey. Nevertheless, in view of the available options, his Lordship considered the most attractive was to put Lesa in sole control pending trial of Michael’s claim.

 

However...

While it was considered that Michael’s claims were bound to fail, and with them the injunctive relief placing him in sole control of the relevant entities, Lord Justice Floyd acknowledged that certain circumstances might allow a petitioner to obtain injunctive relief placing him in charge of a business entity to the exclusion of the majority in an appropriate case. Such a case would likely entail irremediable damage to the petitioner’s interest that would be so great that it could not be compensated for by damages, even if the final relief sought was only money.

Further information

Further information is available on our Shareholder and Boardroom  Disputes web page.

If you would like to discuss any of the topics raised in this blog, please contact a member of our Shareholder and Boardroom Disputes team.

 

 

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