The vital importance of abiding by the correct formalities in setting up a company has been underlined by a High Court case in which an absence of documentation led to a bitter and costly falling out between former business partners over their respective shareholdings in a joint venture company.
The parties had worked together in a business importing goods from China but had almost completely disregarded the statutory and formal requirements when setting up a limited company as their trading vehicle so that the number of shares each of them owned could only be gleaned from extraneous evidence.
Following a break-down in business relations, one of the partners was removed from his post as a director. His claims of unfair and wrongful dismissal were subsequently upheld by an employment tribunal and he also launched High Court proceedings under the Companies Act 2006, claiming that the way in which the company was managed had unfairly prejudiced his position as a shareholder.
His former colleague defended the claim on the basis that he had never been a shareholder in the company and that she was its sole owner. In the absence of documents that should have made the position clear, the Court was required to go through the lengthy process of analysing correspondence and other evidence before reaching the conclusion that the business was a joint venture and that each of the partners had a 50% share in the company.
Upholding the dismissed partner’s claim, the Court found that his removal as a director and exclusion from the management of the company were clearly unfair and prejudicial to his interests as a shareholder. Remaining issues in the case, including an assessment of any compensation due, were left over for a further hearing.