Last year one of Manchester’s biggest and most well-known Indian restaurants, Royal Nawaab, quietly changed its name to Merzee. This was not just a rebranding of the famous buffet and banqueting hall that had been an established part of the UK’s Halal restaurant scene for 20 years. It was the conclusion of years of bad blood and court battles between the founders and other shareholders, culminating in a sale, fraught with attempts to frustrate performance, that was finally sanctioned by the Court of Appeal. Fortunately not all sales of businesses are so spicy, but the story of Royal Nawaab provides several lessons for anyone involved in the disposal or acquisition of a commercial venture.
A partnership should have a written agreement
In early 2003 friends Tariq Malik and Mahboob Hussain opened Royal Nawaab, a large-scale buffet style establishment with wedding and banqueting facilities, at a property that they jointly owned. They ran the business through a company, RN Restaurant (Stockport) Ltd, in which they each held 50 of the 100 issued shares until 2008, when they each transferred 25 shares to their respective wives, Nusrat and Mirza.
The relationship between Tariq and Mahboob deteriorated, resulting in Tariq being removed as a director of the company. Tariq wanted to realise his share of both the property and company, but as there was no written agreement in place to governing their relationship, the parties ended up in Court proceedings[1]. As a matter of law, a legal partnership is established when people carry on a business together with a view to making a profit and exists with or without a formal written partnership agreement. The Court therefore held that the property and the initial 100 (and then 50) shares in the company were held by Tariq and Mahboob in a partnership. As this relationship had clearly broken down, a dissolution of the partnership was ordered.
Tariq and Mahboob could not agree on how the dissolution should proceed – neither was willing to sell his share to the other. So in further proceedings[2] the Court gave directions for a mechanism for the sale of the partnership assets by an independent selling agent.
LESSON: As many partnerships start informally without written agreements, the Partnership Act 1890 prescribes how such relationships may be dissolved and partnership assets dealt with. This may not be aligned with the wishes of the partners. A written agreement avoids the pitfalls of this by clearly defining partnership assets, how they are to be valued, circumstances giving rise to dissolution or a sale, and what should happen to the assets upon the same, including buy-out options for remaining partners wanting to continue the business. Partnership agreements help to avoid costly legal disputes by reducing unnecessary conflict.
Interpreting an agreement always starts with what the contract says
Following the Court’s order, the selling agent drafted what was termed as the ‘Sale Mechanism’. This was a contract between Tariq and Mahboob, the selling agent and anyone else who successfully bid for the assets, which defined how the sale would take place. Tariq and Mahboob were at liberty to make bids, as were other interested parties. This included Tariq’s son, Usman Malik, who had worked at the Royal Nawaab for many years and by this stage owned 2 shares in the company, which his mother, Nusrat, had given to both him and his brother from the 25 shares that she held. Usman saw the sale of the partnership assets as an opportunity to increase his interest in the business.
The Sale Mechanism specified that if the successful bidder for the assets was someone other than Mahboob, and that bidder was unable to complete the sale within the time specified, Mahboob was entitled to acquire the partnership assets at a reserve price. The successful bidder was initially required to pay a deposit, following which contracts for sale had to be exchanged within 7 days, with completion of the sale taking place 14 days thereafter, failing any of which the deposit would be forfeit and the bid would become invalid.
Usman successfully bid for the assets and paid the deposit. However, he was sent a draft sale contract a mere few hours before the expiry of the 7-day deadline. Within an hour of the deadline passing, Mahboob asserted that as the sale contract had not been signed by all parties within the time specified, he was entitled to purchase at the reserve price. Inevitably, once again the parties went to Court to interpret the relevant term in the Sale Mechanism and resolve the dispute.
The Court of Appeal[3] confirmed that the express terms of a contract must be interpreted before considering if any other meaning is to be implied. If a contract is required to be exchanged, it must mean that it is in a form capable of being signed. It was held that Usman was not provided with the sale contract in a form that could be signed. Usman should therefore have been given that time to sign the contract within 7 days of it being capable of being signed.
LESSON: It is important that the express terms of a contract are clear and what is intended by the parties. Courts will not imply a term into a contract simply because it has been badly drafted, or it would have been reasonable for the parties to have intended that. Usually terms are only implied if the term was so obvious to both parties that it went without saying or if the term was necessary to give business efficacy to a contract. A term cannot be implied if it was not expressly provided for within the contract.
Acting in good faith is not required, but co-operating may be
There was evidence provided to the Court that the reason Usman did not receive a sale contract in a form that could be signed within the stipulated deadline was that Tariq and Mahboob failed to co-operate with Usman. Mahboob, in particular, had an incentive to frustrate the sale as he directly benefitted from the same.
LESSON: Although English law does not require the parties to a contract to act in good faith, allowing them to pursue their own self-interest, one party cannot insist on the performance of an obligation which they have prevented the other party performing. If a contract cannot be performed without the co-operation of the parties, a court may imply a duty to co-operate.
A majority shareholding may not mean a successful business
By Usman purchasing the partnerships’ 50 shares in the company, he was set to become the majority shareholder as he already held 2 shares given to him by his mother. The other shareholders argued that he only held those shares in trust for his mother for tax purposes, which Usman denied; the parties returned to Court. In January 2024 the Court[4] confirmed that Usman was both the legal and beneficial owner of the 2 shares, which therefore meant he was the majority shareholder of the company.
However, the partnership assets did not include the name of the restaurant, “Royal Nawaab”. As Mahboob was no longer an owner of the company, Usman was forced to change the name of the restaurant: hence, it became Merzee Manchester.
LESSON: A business is more than its premises and a company. The name, reputation (goodwill) and intellectual property are also vital and should be part of any sale of business agreement.
Mahboob’s involvement in the restaurant trade has not ended: as well as taking the “Royal Nawaab” brand to 2 restaurants in London, he recently announced that later this year (Summer 2024) he would be opening a 1,500-seater (claimed to be Europe’s largest) Indian hospitality venue on the edge on Manchester. The story of the sale of Royal Nawaab continues.
[1] Malik V Hussain [2020] EWHC 2334 (Ch)
[2] Malik v Hussain [2021] EWHC 1405 (Ch)
[3] Malik v Hussain [2023] EWCA Civ 2
[4] Malik v Malik [2024] EWHC 69 (Ch)
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