![]() |
[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback] [DONATE] | |||||||||
England and Wales High Court (Chancery Division) Decisions |
||||||||||
PLEASE SUPPORT BAILII & FREE ACCESS TO LAW
To maintain its current level of service, BAILII urgently needs the support of its users.
Since you use the site, please consider making a donation to celebrate BAILII's 25 years of providing free access to law. No contribution is too small. If every visitor this month gives just £5, it will have a significant impact on BAILII's ability to continue providing this vital service.
Thank you for your support! | ||||||||||
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Kulkarni v Gwent Holdings Ltd & Anor [2022] EWHC 1368 (Ch) (08 June 2022) URL: https://www.bailii.org/ew/cases/EWHC/Ch/2022/1368.html Cite as: [2022] EWHC 1368 (Ch) |
[New search] [View without highlighting] [Printable PDF version] [Help]
BUSINESS AND PROPERTY COURTS
OF ENGLAND AND WALES
BUSINESS LIST (ChD)
B e f o r e :
____________________
DR ROHIT KULKARNI |
Claimant |
|
- and - |
||
(1) GWENT HOLDINGS LIMITED (2) ST JOSEPH'S INDEPENDENT HOSPITAL LIMITED |
Defendants |
____________________
DANIEL LIGHTMAN QC and THOMAS BRAITHWAITE instructed by Veale Wasbrough Vizards LLP appeared for the First Defendant
ANDREW THOMPSON QC and ANDREW BLAKE instructed by Clarke Willmott LLP appeared for the Second Defendant
HEARING
12 and 13 April 2022
____________________
Crown Copyright ©
DEPUTY MASTER MARSH:
(1) The Company, in which the claimant was already the registered owner of one share, would be used as the vehicle to own and operate the Hospital.
(2) The Company would initially have one class of shares, described as A shares, limited to 3,370 A shares. Gwent would own 1,718 A shares, being 51% of the A shares, and the claimant would own the remaining 1,652 shares, being 49% of the A shares.
(3) A class of shares, designated as B shares, would be issued so that the consultants who practised at the Hospital could subscribe for those and thereby have a financial stake in the Hospital. On the basis that 3,235 B shares were issued and allotted, as was the plan, Gwent would retain its majority holding in the Company diluted to 26% and the claimant's holding would be diluted to 25%.
(4) The claimant was appointed one of the initial directors of the Company and had the right to appoint one additional A shares director. Gwent as the "Controlling Shareholder", as defined in the SHA, had a similar entitlement and it appointed Mr David Lewis' brother, Andrew Lewis, as it's A share director.
(5) Gwent had control of the board because the Controlling Shareholder's director was entitled to cast such number of votes as enabled him to carry or defeat any resolution of the directors.
(1) The transfer of the one remaining A share to Gwent;
(2) The issue of 3,368 Ordinary A shares;
(3) The Company entering into the SHA;
(4) The allotment of shares up to an aggregate nominal value of £3,368.
(1) Gwent for 1,717 Ordinary A shares of £1.00 each for £526,987.82 aggregate subscription money;
(2) The claimant for 1,651 Ordinary A shares of £1.00 each for £80,000 aggregate subscription money.
The SHA
"BACKGROUND
(A) The Company currently has an issued share capital of £3,370, divided into 3,370 A shares of £1.00 each, all of which are fully paid.
(B) Each Initial Shareholder is the registered owner of the number and class of Shares set out opposite his name in Part 1 of Schedule 1.
(C) The parties have agreed to enter into this agreement as a deed for the purpose of regulating the exercise of their rights in relation to the Company and for the purpose of making certain commitments as set out in this agreement."
"7.1 A Shareholder is deemed to have served a Transfer Notice under clause 6.4 immediately before any of the following events:
…
(d) the Shareholder committing a material or persistent breach of this agreement which, if capable of remedy, has not been so remedied within 10 Business Days of notice to remedy the breach being served by the Board (acting with Shareholder Consent)."[1]
(1) Clause 6.13 which provides that a shareholder who sells its entire holding of shares automatically ceases to be a party to the SHA.
(2) Clause 15 which provides that the SHA shall terminate in three circumstances: (i) upon either a resolution to wind up the Company being passed or a winding up order being made; (ii) the appointment of a receiver, administrator or administrative receiver and; (iii) when as a result of transfers of shares only one person remained the legal and beneficial holder of the shares.
(3) Clause 19.1 which contains an entire agreement provision and clause 19.2 confirmation of non-reliance upon representations, assurances or warranties.
(4) Clause 20.2 which provides that the waiver of any right or remedy is only effective if it is in writing.
Events after 13 February 2020
"… to terminate (or cancel) [the SHA] with immediate effect.
Our termination is on the grounds that [the SHA] is based upon a fundamental flaw, namely, that the Initial Shareholders included [the claimant] owning 1,652 A Shares in the Company. By contrast, [the claimant] only owned 1 A Share and he did not properly subscribe for, nor was he issued with, an additional 1,651 A Shares."
33. The letter recorded that the claimant had sent a cheque for £80,000 to the Company and on the basis that it cleared "… the issue of non-payment will cease to be longer relevant." [sic] As to ownership of the 1,651 A shares the letter stated:
"23. The Hospital accepts that Mr Kulkarni is the rightful legal and beneficial owner of 1 A share. Further, the Hospital will treat him as the beneficial owner of the remaining 1,651 A shares which should have been allotted to him and were instead allotted to Gwent on 4 June 2020.
24. The Hospital has therefore invited Gwent to return the A shares to the company, so that they may be properly registered in Mr Kulkarni's name.
25. The Hospital will liaise with Gwent in order to restore the consideration paid by Gwent for the shares to be returned at the full price.
26. The process is likely to take a number of weeks, because as part of any buy-back, the Form SH03 will have to be sent to HMRC Stamp Office to be stamped before Mr Kulkarni's A shares can be allotted to him. Any delay in having the Form stamped will then be out of the Hospital's hands."
36. On 28 September 2021 the Company wrote to the claimant to withdraw his right to practise at the hospital with immediate effect relying upon the effect of the Private Healthcare Market Investigation Order 2014. The letter asserted that the claimant was the beneficial owner of 1,652 A shares in the Company "… with legal ownership to pass to you once the shares have been formally re-allotted and registered." Mr Thompson, who appeared for the Company, submitted that this statement was simply wrong because at the time the 1,651 A shares were registered in Gwent's name and could not be owned beneficially by the claimant until he (i) had paid £80,000 to the Company (his earlier cheque had by then been cancelled), (ii) the shares had been transferred to the Company by Gwent and (iii) the provisions of section 727(1)(a) of the Companies Act 2006[2] ("the Act") being implemented. The claimant would only become the legal owner of the shares upon registration of the shares in his name.
The Particulars of claim
(1) The allotment of 1,651 A shares to Gwent.
(2) The allotment of 2,000 B shares to Gwent.
(3) The purported summary termination of the SHA by the letter dated 28 August 2020.
(4) The failure to appoint Mr Hussain as the claimant's nominee director.
(1) At paragraph 21, the claimant relies upon a combination of recitals (A), (B) and Part 1 of Schedule 1 as stating that the claimant was the owner of 1,652 A shares. At the hearing, Mr Chambers who appeared for the claimant, disavowed reliance upon Recital (A).
(2) At paragraph 22, the claimant refers to an agreement made between the parties on 7 February 2020 to the effect that from execution of the SHA on 13 February 2020 he was entitled to be registered as the owner of 1,652 A shares.
(3) At paragraph 33 the claimant denies he is required to pay £80,000 for the 1,651 A shares relying upon an agreement made on 7 February 2020 to the effect that the shares would be gifted to him by Gwent.
(4) At paragraphs 35 to 37 the claimant asserts a contractual entitlement to be registered owner of the 1,651 A shares. At paragraph 37 he says the sum of £80,000 has been paid by him under protest and he is entitled to the return of that sum in restitution, or in debt or as damages for breach of contract. The claim in this paragraph was made against both Gwent and the Company. Furthermore, the prayers for relief included relief sought against the Company. In the course of the hearing, and without a formal application being made, permission was given to amend paragraph 38 and prayer (6) to add the words "from Gwent" so as to remove the claim against the Company.
(5) Paragraphs 38 to 46 set out the claim based upon the doctrine of estoppel by deed. It is said that at the time the SHA was executed the parties to the deed knew the statements of fact in Recital (B) were not accurate. The claim refers to Recital (A) and asserts that the original two shares in the Company were fully paid but makes no admissions about whether the statement about the remaining 3,368 A shares being fully paid was accurate. The heart of the estoppel by deed claim lies in paragraphs 41 and 42:
"41. Nevertheless, under the doctrine of estoppel by deed, just as [the Company] and the Claimant are bound by the statements of fact in Recital (A) and Recital (B) that Gwent is the registered owner of 1,718 fully paid 'A' shares as at 13 February 2020, so [the Company] and Gwent are bound by the statements of fact in Recital (A) and Recital (B) that the Claimant is the registered owner of 1,652 fully paid 'A' Shares as at 13 February 2020.
42. [The Company] and Gwent are estopped from denying the truth of those statements of fact, even if those statements of fact were not true either in whole or in part. The Claimant is entitled to, and hereby claims, a declaration to that effect."
(6) In the alternative, at paragraphs 47 and 48 the claimant seeks rectification of the register of members pursuant to section 125 of the Companies Act 2006 on the basis that he has, without sufficient cause, been omitted from the register. He seeks an order for rectification of the register with effect from 13 February 2020.
(7) At paragraph 89, the claimant asserts that the breaches (all four of them) were not capable of remedy and goes on to say that the breaches "… were so serious and had such a negative effect on the Claimant that they could not be remedied." No particulars of the negative impact upon the claimant are pleaded.
(8) At paragraph 90, the claimant asserts that the relationship between the parties was one of quasi-partnership and was underpinned by the mutual trust and confidence which existed between them. Although Mr Chambers' skeleton argument relied upon this element of the claim and developed submissions about it (and his submissions were dealt with extensively by Mr Lightman who appeared for Gwent in his skeleton argument), it was not pursued at the hearing. Indeed, the revisions to the claimant's case in oral submissions led Mr Lightman to request time to consider his response to them. I considered this was a reasonable request and Mr Thompson proceeded to make submissions on behalf of the Company. This enabled Mr Lightman to make his submissions on the second day of the hearing.
(1) The court is asked to make an order under section 125 of the Companies Act 2006 to rectify the Company's register of members to show him as the proprietor of 1,652 A shares as from 13 February 2020. ("Issue 1") The issue remains live despite the fact that the claimant has become the registered owner of a further 1,651 A shares since the hearing.
(2) The court is also asked to grant relief in favour of the claimant pursuant to clauses 6.4 and 7.1(d) of the SHA which will have the effect of entitling the claimant to acquire Gwent's 1,718 A shares at the lower of the subscription price and the Fair Value of those shares. His case is that as a result of two breaches of the SHA by Gwent those provisions are triggered. The two breaches are those noted in paragraph 38(1) and (3) above, namely (i) Gwent procuring the Company to register it as the owner of 1,651 A shares without complying with the Shareholder Consent provisions of the SHA and (ii) the purported unilateral termination of the SHA by Gwent on 28 August 2020. For the purposes of the application, Gwent does not dispute (a) that these steps constituted breaches of the SHA, (b) that the breaches were "material" within the meaning of clause 7.1(d) and (c) that the breaches were repudiatory breaches. The remaining point in issue of substance is whether the breaches were "remediable" within the meaning of that term in clause 7.1(d) of the SHA. ("Issue 2")
Evidence
(1) Sets out all four breaches of the SHA that are pleaded in the particulars of claim;
(2) States that the claimant maintains his position that he is not liable to pay £80,000 for the 1,651 A shares although he acknowledges that the issue will have to go to trial;
(3) Puts forward a submission about whether the breaches could be remedied that is not pleaded in the particulars of claim, namely that because only the claimant could direct the board to serve notice to remedy and the Company has not served such a notice, the breaches are not remediable within the meaning of clause 7.1(d) of the SHA.
45. The claimant says he confirms the contents of Mr Edwards' statement and that he limited his evidence to dealing with the nature of the relationship between the parties and how the four breaches of the SHA "… have in effect wholly undermined that relationship so that we have reached a position of irretrievable breakdown." He does not distinguish between the effect of the breaches that are relied upon for the purposes of the application and the other breaches. The claimant provides some background to the deal he made with David Lewis and Gwent and the events that followed in the initial months of the arrangement. He says after being told he would have to pay for his A shares and, in light of what he says was David Lewis' refusal to discuss the position with him, he felt he had moved away from a position of a trusted partnership and found himself on the outside. He says:
"35. … My trust and faith in Gwent, [David Lewis and the Company] was at its lowest ebb. I felt betrayed by someone that I considered a good friend. This betrayal had a huge impact on me and almost made me lose faith in human nature."
"40. The breaches of the SHA identified in Mr Edwards' witness statement have totally destroyed any (perhaps misguided) trust or confidence I had in [David Lewis] and Gwent. I will never be able to have any confidence or trust in [David Lewis] and Gwent to be able to work with them or their representatives. I will categorically state that there is nothing that can be done now to alter my opinion."
Part 24
Declaratory relief
Contractual interpretation
Issue 1
"(1) If—
(a) the name of any person is, without sufficient cause, entered in or omitted from a company's register of members, or
(b) …
the person aggrieved, or any member of the company, or the company, may apply to the court for rectification of the register.
(2) The court may either refuse the application or may order rectification of the register and payment by the company of any damages sustained by any party aggrieved."
(1) The Company withdrew the claimant's practising privileges on the basis that he was the owner of more than 5% of the issued share capital of the Company and it is right that the register of members reflects his true entitlement. The Company's letter dated 28 September 2021 was unequivocal in saying that as at that date the claimant was the beneficial owner of the shares although it now says the assertion was wrong.
(2) Rectification will give effect to Recital (B). If the register is not rectified the claim will proceed to trial on an unequal footing.
Estoppel by contract and Estoppel by deed
(1) He is not the owner of the A shares with effect from 13 February 2020;
(2) He is not entitled to be registered as the owner of the A shares with effect from that date;
(3) He owes the Company any monies in respect of the A shares.
"47. It is now firmly established at this level in the judicial hierarchy that parties can bind themselves by contract to accept a particular state of affairs even if they know that state of affairs to be untrue. This is a particular form of estoppel which has been given the label 'contractual estoppel'. Unlike most forms of estoppel, it requires no proof of reliance other than entry into the contract itself. Thus, as a matter of contract parties can bind themselves at common law to a fictional state of affairs … "
(per Lewison LJ)
"91. It is worth examining exactly what is meant in this context by describing a clause as a 'basis clause'. The term reflects language used in the cases which have recognised the principle of 'contractual estoppel'. The first of these was Peekay Intermark Ltd. v Australia and New Zealand Banking Group Ltd [2006] 2 Lloyd's Rep 511…
95. … The statements in the Peekay case and subsequent cases that the parties have agreed that a particular state of affairs is to form the 'basis' on which they are contracting use the word in a different sense to mean an assumption that it is agreed for the purposes of the transaction. Such statements are just another way of saying that the parties have agreed to assume that the relevant state of affairs is true, whether or not it is in fact true."
"The position, accordingly, is that, if a recital contains a statement which a party to the deed is to be taken to have agreed to admit as true, the statement is binding on him."
"Where a recital is intended to be an agreement of both parties to admit a fact, it estops both parties, but it is a question of construction whether the recital is so intended."
(1) Section 580(1) of the Act provides that shares must not be allotted at a discount. The claimant's case as pleaded relies upon both Recitals (A) and (B). It is not open to the claimant to ignore Recital (A) for the purposes of the Application. The estoppel would prevent the Company from contending that the claimant owes any money in respect of the shares which is contrary to section 580(1) and contrary to public policy. It is not open to the Company to arrange with its shareholders that they will not be liable for the amount unpaid on shares.[5] Estoppels by deed are subject to the same limitations so far as public policy is concerned as contractual provisions.[6]
(2) The doctrine of estoppel by deed may only be used in actions on the deed in which the statement relied upon was contained. The point is made in Spencer Bower: Reliance Based Estoppel 5th ed. at 8.86:
"The operation of an estoppel by deed is limited to actions founded on the deed because the agreement of the parties made by assent to the relevant recital is interpreted as agreement to admit the proposition recited only for the purposes of the deed and the transaction effected thereby …".
It is by no means certain that the claimant's case in relation to registration of shares (unlike the claim in respect of clause 7.1(d)) is properly regarded as an action on the SHA. The estoppel is not a claim made under the operative provisions of the SHA, or a response to a claim made against him under the SHA. In fact, he seeks to rely upon an estoppel by deed to prevent the defendants from relying upon the true facts regarding the allotment and payment for the A shares.
(3) There is uncertainty about the extent to which, if at all, the defendants are entitled to adduce evidence to contradict the recital. The issue is discussed in Spencer Bower at paragraphs 8.77 to 8.78 in light of the fact that the decision of the Court of Appeal in Close Asset Finance Ltd v Taylor [2006] EWCA Civ 788 was not cited to the Privy Council in Prime Time v Lavarello [2014] AC 436. In Close Asset Finance the mortgage deed acknowledged receipt of £54,000. Lloyd LJ concluded, relying upon Maitland v Upjohn (1889) 41 Ch D 126 and obiter dicta from Lord Maugham in Greer v Kettle, that evidence could be admitted to show the true position. At paragraph 8.78 of Spencer Bower, the editors say:
"The tension between the Privy Council and the Court of Appeal decisions is yet to be definitively addressed, but it is submitted that it may be resolved on the basis that prima facie a receipt in a contract or deed is understood as intended by the parties only to establish a presumption as to its accuracy, which may be displaced by evidence as to its accuracy sufficient to rebut the presumption, unless the parties … are precluded from adducing such evidence because it is established that they intended to contract or make their deed on the counterfactual basis that the money had been paid or was due, whether or not it was true …".
The qualification at the end of this passage brings the debate back to what evidence is admissible for the purposes of determining this point (if the Spencer Bower suggestion proves to be a correct interpretation of the law). On any view faced with considerable legal uncertainty and an uncertain factual platform, the point is unsuitable for determination on an application for summary judgment.
(4) The defendants have not yet served defences and it is not known whether they, or one of them, will counterclaim for rectification of the recitals. Indeed, it is not certain that such a counterclaim is needed in light Lord Maugham's view expressed in Greer v Kettle at 171-172 that in a simple case a counterclaim for rectification may not be needed. Nevertheless, the evidence that is admissible in a claim for rectification is much wider than that which is admissible when dealing with an issue of construction and of necessity includes evidence about the existence of a common continuing intention. There is therefore another basis upon which the court should require the claim to be tried to ensure that relevant and admissible evidence is available when determining the estoppel claim
Issue 2
(1) In all cases it is necessary to interpret the relevant remediability provision in its particular contractual and factual context. There is no one universal concept of remediability which applies in all cases.
(2) The answer to the question whether these two breaches are capable of remedy depends on the true interpretation of clause 7.1(d).
(3) The exercise in interpretation is affected by a whole range of different factors none of which were present in Schuler v Wickman [7]or the Force India [8]case or any other cases relied upon by Gwent and there are three particular factors which are relevant:
(i) The SHA is a relational contract between the two shareholders with a 51/49 split.
(ii) The express terms of the SHA, in particular clauses 2.2, 16.1 and 16.3 necessarily required Gwent and the claimant to work closely together to promote the Hospital for their mutual benefit and that necessarily required a certain minimum level of trust and confidence in one another.
(iii) The SHA cannot be terminated by an innocent shareholder under the common law for a repudiatory breach committed by the defaulting shareholder.
(4) The exclusive remedy for a repudiatory breach of the SHA is confined to the remedy in clause 7.1(d).
(5) The remedy in clause 7.1(d) is intended to give the innocent shareholder at least the same level of protection as he would have been entitled to under the common law.
(6) This is achieved by interpreting clause 7.1(d) to mean that material breaches of the SHA which are repudiatory are not capable of remedy with the consequence that the notice to remedy provision does not apply to repudiatory breaches.
(7) Even if the notice to remedy provision applies to repudiatory breaches, a repudiatory breach will not be remediable when the breach has caused the innocent shareholder to lose trust and confidence in the defaulting shareholder.
(8) The question whether the innocent shareholder has lost trust and confidence in the defaulting shareholder does not depend on the state of the parties' relationship at the time of the breach; it depends only on the impact of the breach on the innocent shareholder.
(9) The court can draw the inference of a loss of trust and confidence by the action of the innocent shareholder enforcing his rights under clause 7.1(d).
(10) Evidence from the innocent shareholder that he has lost trust and confidence in the defaulting shareholder, consequent on a repudiatory breach, is conclusive in circumstances where the innocent shareholder has acted to enforce his right under clause 7.1(d) and he does so at a time when the defaulting shareholder remains in repudiatory breach and has made no attempt to remedy that breach.
"It could mean obviate or nullify the effect of a breach so that any damage already done is in some way made good. Or it could mean cure so that matters are put right for the future. I think the latter is the more natural meaning. The word is commonly used in connection with diseases or ailments and they would normally be said to be remedied if they were cured although no cure can remove the past effect or result of the disease before the cure took place. And in general it can only be in a rare case that any remedy of something that has gone wrong in the performance of a continuing positive obligation will, in addition to putting it right for the future, remove or nullify damage already incurred before the remedy was applied. To restrict the meaning of remedy to cases where all damage past and future can be put right would leave hardly any scope at all for this clause. On the other hand, there are cases where it would seem a misuse of language to say that a breach can be remedied. For example, a breach of clause 14 by disclosure of confidential information could not be said to be remedied by a promise not to do it again."
89. With the circumstances of this claim in mind, it seems to me that the discussion of the authorities in Telechadder is of limited assistance with two exceptions. First, reference is made to the judgment of Staughton LJ in Savva v Hussein (1996) 73 P & CR 150 at P150 where he says "… it is a remedy if the mischief caused by the breach can be removed." Secondly, Rugby School (Governors) v Tannahill [1935] 1 KB 87 concerned use of premises as a brothel in breach of a covenant in a lease. Despite the brothel being closed down, the Court of Appeal accepted that the stigma attached to the property rendered the breach irremediable.
"The general approach of the courts is that the existence of an express power to terminate in the contract in the event of a breach by the other party does not preclude that party from treating the agreement as discharged by reason of the other's repudiatory breach at common law, unless the agreement itself expressly or impliedly provides that it can only be terminated by exercise of the contractual right. The courts are in general reluctant to infer that a contracting party has agreed to give up a valuable right arising by operation of law "unless the terms of the contract make it clear that that was intended".[10] This being the case, the courts have typically inclined to the view that the express termination clause has not displaced the right to terminate at common law."
Conclusion
Note 1 “Shareholder Consent” is defined to exclude shares held by an “Excluded Shareholder” and the latter term is defined to mean a shareholder whose course of action is the subject of the relevant “Shareholder Consent”. [Back] Note 2 Section 727 deals with the transfer of shares held in Treasury by a company. [Back] Note 3 See also the judgment of Robin Vos QC sitting as a Deputy Judge of the High Court in Abaidildinov v Amin [2020] 1 WLR 5120 [47]-[49 [Back] Note 4 See Re Sussex Brick Company [1904] 1 Ch 598 [Back] Note 5 Orregum Gold Mining Co of India v Roper [1892 AC 125 at 133 and Randt Gold Mining Co v New Balkis Ersteling [1903] 1 KB 461 at 465. [Back] Note 6 Prime Sight v Lavarello [2013] UKPC 22 at [47] [Back] Note 7 L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 [Back] Note 8 Force India Formula One Team Ltd v Etihad Airways PJSC [2010] EWCA Civ 1051 [Back] Note 9 Lord Wilson [31]. Lord Toulson [52]. [Back] Note 10 Stocznia Gynia SA v Gearbulk Holdings Ltd [2009] EWCA Civ 75 at [23]. [Back]