Petitioner: Party

Respondents: Miss Haldane; Tods Murray, WS

21 August 2007

[1] This is a petition under section 459 of the Companies Act 1985 at the instance of Alisdair David Burke in relation to the affairs of Bayne Services (Edinburgh) Limited ("the Company") for an order requiring the Company and certain of its shareholders to purchase the shares in the Company held by the petitioner at a price which represented, as at the date of presentation of the petition, that proportion of the value of the whole shares of the Company in issue which the nominal value of the petitioner's shares bore to the nominal value of the whole shares in issue. The petition also sought an order requiring the Company to refrain from holding an extraordinary general meeting or from considering a proposed resolution to sell the Company's heritable assets or from selling those assets. An interlocutor ordering the Company to refrain from holding an extraordinary general meeting was pronounced as long ago as December 1994 and that mater is no longer in issue..
[2] In the petition the petitioner avers that the Company was incorporated on 8 October 1973 and the share capital comprises 100 Ordinary shares of £1 each, of which the petitioner holds 24. Until 30 October 1994 the petitioner's brother Martin Burke, the second respondent, owned 24 shares, Ian Burke, the petitioner's father, the third respondent, owned 25 shares, Margaret Nicolson Burke, the wife of Ian Burke and the petitioner's stepmother, the fourth respondent, owned 25 shares, and Ian McPake, solicitor, the fifth respondent, owned 2 shares. On 30 October 1994 the shares held by Ian Burke, Margaret Burke and Ian McPake were transferred to Martin Burke who then held a total of 76 shares.

[3] The petitioner further avers that the Company was formed as a family company to deal in the acquisition and letting out of heritable property and that the properties held by the Company were always regarded by the members of the Company as family property. The petitioner was a director of the Company from 3 July 1977 until 1 December 1978. Martin Burke has been a director since 3 July 1977 and remains the sole Director. Ian Burke, was a director between 19 August 1982 and 21 September 1989, and Margaret Burke was a director between 8 October 1973 and 21 September 1989.

[4] The petitioner avers that since 1989 he has been denied access to any information regarding the Company apart from that made available to the public by the Registrar of Companies. He received no notification of general meetings. Relations between the petitioner on the one hand and Martin Burke, Ian Burke and Margaret Burke on the other hand broke down after the petitioner Ian Burke and Margaret Burke became engaged in litigation before the High Court of Justice in England in 1989 in relation to rights to properties in London, a part of which the petitioner was occupying.

[5] On 29 June 1986 the Company acquired Dalnaglar Castle, Glenshee, from Ian Burke and Margaret Burke. At the time, the petitioner was informed that the purchase price of the subjects was £250,000, funded by loans from Ian Burke and Margaret Burke of £125,000 each. The loans were said to be interest free, £75,000 of each being repayable on demand, and the remaining £50,000 at Whitsunday 1996. Dalnaglar Castle was run as a business, suites and rooms being made available on short term lets to the public. Guests were requested to make payment not to the Company but to Margaret Burke. Unknown to the petitioner, the property was sold at a declared consideration of £360,000 to Dalnaglar Estates Limited on 30 June 1994. The only directors and shareholders of Dalnaglar Estates Limited were Ian Burke and Margaret Burke. On 12 November 1994 the petitioner received notice of an extraordinary general meeting of the Company to be held on 28 November 1994, giving notice of a resolution that the heritable properties owned by the Company should be sold at a total price of £187,050 to a Company of which Martin Burke was the sole Director and holder of 301,000 of the 302,000 issued shares. The properties mentioned in the resolution were the only assets of substance owned by the Company. The petitioner was informed by Martin Burke that the reason for the sale was that the loans from Ian Burke and Margaret Burke were being called up as a result of which the Company required £150,000 in cash immediately. The petitioner enquired as to what had happened to the £360,000 said to have been received from Dalnaglar Estates Limited and was told by Martin Burke that he did not know what had happened to it. In December 1994 the petitioner was informed by the Company's solicitors that the sums owed to Ian Burke and Margaret Burke as at 30 November 1994 totalled £155,385. Sums received by the Company from M & B Investments between January and June 1993 amounting to £65,000 were wrongly credited to the loan accounts of Ian Burke and Margaret Burke. The petitioner believes that the proposed sale was not for full value.

[6] Certain payments made to the Company which was said to be connected with the London properties already referred to were credited to the loan accounts of Ian Burke and Margaret Burke. The London properties were never owned by the Company and no explanation was ever provided for these payments. Certain payments made for the benefit of Ian Burke and Margaret Burke were not put to reduce the Company's indebtedness to them when they should have been.

[7] The petitioner avers further that throughout the history of the Company Ian Burke and Margaret Burke treated it as a vehicle for their personal finances and projects with no regard for the interests of the petitioner and the effect on the value of his shares. He avers that Martin Burke acquiesced in these activities which materially reduced the value of the petitioner's shares to his prejudice and without his knowledge or consent. The Company was deprived of income from property owned by it at 10 and 11 Belford Road, Edinburgh which was reserved for the use of Ian Burke and Margaret Burke from 1976 and for which no rent was paid. The Company was tenant of commercial property in London of which the freehold was in the name of Ian Burke and Margaret Burke. The Company paid mortgage interest in lieu of rent. In turn the Company let the property to tenants at a rent of approximately £90,000 per annum. The Company did not receive all of the rental income. The property repaid a balance of the loan over that property amounting to £96,000 which should properly have been paid by Ian Burke and Margaret Burke.

[8] The petitioner avers that from 1986 to 1992 one wing of Dalnaglar Castle was reserved for the private use of Ian Burke and Margaret Burke. They paid no rent. Dalnaglar Castle Estate was purchased by Michael Burke in 1992 and sold by him back to the Company twelve months later. The sale price of £400,000 in respect of the sale to Michael Burke was never paid by him to the Company. The Company received no interest on the unpaid purchase price during Mr Burke's ownership. The Company transferred the heritable title to him. Michael Burke committed suicide shortly after redisposing the Castle to the Company. During his period of ownership the Company paid maintenance and repair bills for the property to the value of approximately £90,000. The assets of the Company were therefore reduced by this amount without any gain to the Company. The actings of the Company in transferring title to Michael Burke represented a serious mismanagement of the assets of the Company

[9] The petitioner also avers that the directors paid themselves excessive remuneration and bonuses in breach of the Articles of Association. Those payments materially diminished the assets of the Company as did all the foregoing activities of the Company and of Ian Burke and Margaret Burke. The assets of the Company and the value of the petitioner's shares thereby were materially reduced. The petitioner concludes that the Company's affairs were conducted in a manner which was unfairly prejudicial to his interests.

[10] So far as the procedural history of the petition is concerned, in February 1995 a proof was allowed on the petition and answers. In April 1995 the petitioner was granted diligence for the recovery of documents. On 4 January 1996 the proof was discharged on the motion of the petitioner. In June 1996 the petitioner was ordered to intimate whether he intended to proceed with the petition. In September 1997 a Minute of Amendment for the petitioner was allowed to be received. On 2 October 1997 the petitioner was again granted diligence for the recovery of documents, and a proof fixed for 7 October 1997 was discharged on his motion. On 28 January 1998 the petition was allowed to be amended in terms of the petitioner's Minute of Amendment and the respondents' Answers. On 20 May 1998 a diet of procedure roll was discharged on the petitioner's motion and of consent and a further Minute of Amendment for the petitioner was allowed to be received. On 29 October 1998 a proof was again allowed. On 21 January 1999 the Record was amended in terms of the second Minute of Amendment and answers to it.

[11] Subsequently the parties through their agents entered into heads of agreement in the following terms:

"The parties hereby agree that they will co-operate in the appointment of an appropriate expert, for the purposes of remitting to him the undernoted matters. Such agreement will be made within four weeks of the later date of execution of these presents, failing which the President from time to time of the Institute of Chartered Accountants in Scotland may be requested by other party to select and appoint an appropriate forensic accountant.

The expert will be instructed to value Bayne Services (Edinburgh) Limited (hereinafter referred to as 'the Company') as at 30 November 1998 on the following basis. He will be required to investigate the affairs of the Company, by reference to the process in the present action, including the pleadings and documentary evidence especially the accounts of the Company and working papers, and by such means and with regard to such further evidence as he considers appropriate, taking into account, but not limited to, the following factors, namely:-

(1) the nature and extent of the costs incurred by the Company in connection with the sale and re-purchase of Dalnaglar Castle between 1992 and 1993;

(2) the nature and value of the benefits enjoyed by the directors of the Company from their occupancy, if any, of (i) Dalnaglar Castle or part or parts thereof from 1984 to 1994, and (ii) 10 and 11 Belford Road, Edinburgh from 1984 to 1998;

(3) The source of the funds identified as those sums constituting the directors' and shareholders' loan accounts, verification of payment and receipt and the sums paid to and from such accounts from time to time.

He will be asked to examine and report on the accuracy of the accounting and financial records relating to such entries, if any, and the effects of such entries, or failure to record or misrecording, if any, on the value of the Company and to comment on any ancillary issues of accounting practice or probity. He will be requested to ascertain the effect of such transactions, or benefits, on the value of the Company in order to arrive at a valuation of the Company as at 30 November 1998, and to contrast such figure with the valuation arising from existing accounting records.

The parties undertake to assist the expert in such manner as he may request. The parties agree to abide by the valuation of the Company arrived at in accordance with the foregoing, and to treat the same as a fair and accurate valuation. The parties agree that the expert shall be entitled to order that all or a part of the legal or other expenses of one party shall be paid by the other party. The expenses of appointment of the expert are the joint and several liability of the parties without prejudice to the rights of the parties thereafter to seek relief inter se in terms of any determination by the expert of a proportion in which each party shall pay his expenses."

[12] By engagement letter dated 29 July 2002 Messrs Chiene & Tait, Chartered Accountants, Edinburgh, were instructed jointly by the parties to prepare a valuation of the Company as at 30 November 1998 on the basis set out in the heads of agreement. Their valuation which was made available to parties on 10 October 2006 brought out a value for the Company of £154,237. On that basis they calculated that each of the 100 shares was worth £1,542. The petitioner's holding of 24 shares was therefore valued at £37,016, which, together with his loan balance of £15,757, brought out a total due to him of £52,773.

[13] Following receipt of Messrs Chiene & Tait's report a hearing was arranged and took place on 16 November 2006. At the hearing the petitioner appeared on his own behalf and Miss Haldane, Advocate, appeared for the first and fourth respondents. Miss Haldane submitted that the parties had agreed to be bound by the final valuation arrived at by Chiene & Tait, who had been able to reach a view on all salient points. Her clients accepted the valuation. They were in funds and willing to settle on the basis of it on condition that Mr Burke executed share transfer forms. The prayer of the petition sought:

".....an order ordaining the second, third and fourth respondents or nominees to purchase the shares held by the petitioner at a price to be hereafter determined which represents, as at the date of presentation of this petition that proportion of the value of the whole shares in issue which the nominal value of the petitioner's shares bears to the nominal value of the whole shares in issue, such value to be carried out adding back the items detailed in Schedule (ii) hereto and to allow the parties a Proof before Answer relative to the valuation of the petitioner's interest and quantification of the said items detailed in the said Schedule (ii) as at the said date; ..... and to decern; or to do further or otherwise as to your Lordships shall seem appropriate".

She submitted that the prayer of the petition, insofar as it sought a proof before answer relative to the valuation of the petitioner's interest and quantification of the items detailed in Schedule (ii) had been superseded by the heads of agreement. The parties would require to meet to enable share transfer forms to be handed over by the petitioner in return for the sum brought out in the report as due to him. Thereafter the Court could pronounce an interlocutor reflecting what had taken place.

[14] In response the petitioner said that he did not accept Miss Haldane's submission. So far as he was concerned the share valuation was adequate for the time being. Chiene & Tait were acting as an expert and not as an arbiter. His former agent had advised him that the reference to the expert was identical to a reference to a tribunal of fact. After the expert had issued a factual report the parties would come back to the Court to have the substance of the petition heard. Chiene & Tait were not forensic accountants. He had submitted written legal submissions to them but they had said that they were unable to deal with them. The heads of agreement were amended in October 2005 to take account of that.

[15] In terms of section 461(2)(c) of the Companies Act 1985 the Court could authorise proceedings to be brought in the name of the Company, for example, for damages against directors for breach of fiduciary duty. There were irregularities in the Company's borrowing activities in respect that no resolutions had been passed in relation to them, nor had any loan documents been executed. In the absence of a resolution in relation to any specific loan transaction, the Company would not be bound by that transaction. Accordingly loan transactions of between £300,000 and £500,000 were not enforceable against the Company. Chiene & Tait had glossed over these irregularities and were not willing to probe further. Evidential presumptions, of which Chiene & Tait would not be aware, would come into play in Court. When money came into the Company whether by gift or by loan, it was all taken out to pay for the personal expenses of Mr and Mrs Burke. That was a breach of fiduciary duty. All these issues were raised in the petition.

[16] The four properties which required to be investigated were: Dalnaglar, covering 50 acres including the Castle; eight flats at Raeburn Place, Edinburgh; and property at Belford Road, Edinburgh. There were also properties in London and in Spain which were funded by Company money but the titles to them were not held by the Company.

[17] Mr & Mrs Burke resigned as Directors in 1989 for tax purposes and went to live in Spain to avoid paying capital gains tax on the London property. At a meeting on 28 April 2003 between Chiene & Tait and Martin Burke, Martin Burke accepted that although not appointed Directors, Mr & Mrs Burke exercised influence and control as a consequence of being the largest creditors and majority shareholders. Mrs Burke had never been questioned or investigated.

[18] In their report Chiene & Tait said that Mr & Mrs Burke were shadow Directors. In terms of section 320 of the Companies Act 1985 the acquisition of a Director or a shadow Director of a non-cash asset was unlawful unless the arrangement was approved by a resolution of the Company's general meeting. In terms of section 322(3) a Director was liable to account to the Company for any gain which he had made by an arrangement struck at by section 320. The actions of Mr & Mrs Burke fell within the provisions of these sections. The Company required to be restored to the position it was in before that happened. There was no time limit and prescription did not run. Mr & Mrs Burke bought Dalnagar for £360,000 and sold the property, excluding an area retained by Mrs Burke, for £815,000. The petitioner referred to of a Law Commission Consultation Paper on Shareholder Remedies published on 31 July 1996 in which it was said at paragraph 1022:

"it is clear that by ordering the valuation to be carried out on a pro rata basis, and determining the date on which the valuation is to take place, together with any adjustments to take account of misappropriation, the Courts could be said to be compensating the petitioner for the unfairly prejudicial conduct of the respondent, as the petitioner will receive more than the market value of the shares. The Courts have acknowledged this and have considered it to be part of their discretion to do what is fair as between the parties".

He went on to submit that to require him to raise separate proceedings against Mrs Burke would be "bureaucratic". Chiene & Tait had picked up the fact that the Company had become burdened with large loan accounts which had never been authorised by resolution. The loan accounts represented the loan capital of the Company. It could have purchased further properties with that money but it had been prevented from doing so by Mr Burke's use of the money for his own private purposes. Part of the proceeds of Dalnaglar which was in offshore accounts should be paid into Court to compensate for Mrs Burke's use of those proceeds. Mr & Mrs Burke had been financing their own development in Spain with Company property.

[19] Miss Haldane submitted that the petitioner was asking the Court to deal with a number of complaints arising out of the management of the Company and to carry all of those complaints into a single process. What the petitioner was asking was not possible in this process. Those complaints were not the subject of live claims in the sense of proceedings having been raised in respect of them. Nor could they be dealt with standing the terms of the prayer of this petition. The petitioner did not fully understand the exercise carried out by Chiene & Tait. In fact Chiene & Tait had taken all the petitioner's complaints into account and had indexed up the sale price of Dalnaglar Castle to reflect open market value as that had been assessed by an independent valuer as shown in Appendix A to Chiene & Tait's report. They had carried out the same exercise in relation to the loss of rental income in relation to the Belford Road property. The petitioner's claims for restitution for sums not paid into the Company had been taken into account by Chiene & Tait in arriving at the sum due to him. The parties had agreed to be bound by the exercise carried out by Chiene & Tait. The Court could do no more than to give effect to the order which the petitioner sought in the prayer. His desire to have other matters explored could not be fulfilled in this process. There was nothing to prevent him from pursuing such claims as he saw fit. The respondents accepted that the petitioner was entitled to the sum of £52,773 brought out in Appendix A to Chiene & Tait's report. The heads of agreement had been entered into to avoid a lengthy proof. The exercise was now complete and there was nothing left in the petition that required the leading of evidence. Miss Haldane moved for a short continuation to allow for the execution of share transfers and payment of the consideration to the petitioner. Thereafter a hearing would be required in order to pronounce the appropriate interlocutor.

[20] As I have already recorded the principal element of the prayer of the petition which remains outstanding is the request for an order ordaining the second, third and fourth respondents to purchase the petitioner's shares at a price which represents that proportion of the value of the whole shares in issue which the nominal value of the petitioner's shares bears to the nominal value of the whole shares in issue. The petitioner also prays that the valuation be carried out adding back the items detailed in Schedule (ii) to the petition. Schedule (ii) contains a list of factors which the petitioner alleges diminished the Company's assets and the value of his shares. In addition the prayer seeks a proof before answer in relation to the value of the petitioner's interest and of the quantification of the items detailed in the schedule.

[21] In terms of the Heads of Agreement entered into by the petitioner and the respondents, the parties agreed to co-operate in the appointment of an expert who was to be instructed to value the Company as at 30 November 1998. They also agreed that the expert would be required to investigate the affairs of the Company by reference to the process in the petition including the pleadings and documentary evidence, in particular the accounts of the Company and working papers, and by such means and with regard to such further evidence as the experts considered appropriate, taking into account, but not limited to, the three numbered factors set out in the Heads of Agreement which were quoted earlier in this Opinion. Further, the parties agreed to abide by the valuation of the Company arrived at in accordance with the terms of the Heads of Agreement and to treat it as a fair and accurate valuation.

[22] It is clear from the terms of the Heads of Agreement that the parties were binding themselves to relieve the Court of the task of valuing the whole shares in issue of the Company and to remit the task to the expert who was empowered on the basis of that valuation to determine the price to be paid for the petitioner's shares. The remit to the expert accordingly covered the only remaining live issue in the case. It was left to the expert to decide what evidence, in addition to the pleadings and the documentary evidence referred to, was required to enable him to comply with his instructions. It was accordingly open to him to decline to take into account any additional material submitted to him by the parties.

[23] Messrs Chiene & Tait were appointed as the expert by an engagement letter of 29 July 2002 and the terms of their Report, made available on 10 October 2006 make it clear that they have carried out the investigation and provided the report which they were instructed to carry out and provide. In doing so they have made such allowance for such of the items listed in Schedule (ii) as they have found themselves able to identify and quantify on the basis of the information before them. In these circumstances Chiene & Tait have fulfilled the instructions given to them in terms of the Heads of Agreement. Since the parties have bound themselves to abide by the valuation of the Company arrived at by Chiene & Tait, it is not now open to the petitioner to seek further consideration of that valuation by the Court. Remitting the task of valuation to the expert was a practical course of action engaging, as it did, the accountancy expertise of the expert, and eliminating the very considerable cost of a lengthy adversarial hearing before the Court. In these circumstances, in accordance with the motion for the respondents, I shall continue the cause to allow the execution of share transfers to be completed by the petitioner and the payment of the consideration to him by the respondents in terms of Chiene & Tait's valuation. Thereafter a further hearing will be required in order to pronounce the appropriate final interlocutor.